1. 1 The Distribution Of Mobile Handsets Connecting Global And Local Distribution Per Andersson, Associate professor Stockholm School of Economic, CIC P.O. Box 6501, SE-113 83 Stockholm, Sweden voice +46-8-736 95 38 fax +46-833 43 22 e-mail: dpa@hhs.se Bengt G Mölleryd, Ph.D Evli Bank, Research TMT Kungsträgårdsgatan 16, SE-117 30 Stockholm, Sweden voice +46 8 407 80 38 fax + 46 (0)8 407 80 01 e-mail: bengt.molleryd@evli.com Presentation prepared for 15th Biennial ITS Conference Berlin September 4-7, 2004

2. 2 Aim The aim of the paper is to discuss a set of distribution challenges meeting suppliers of handsets, operators, and other channel actors in the global mobile telephony industry.

3. 3 Issues 1. What are the underlying changes and drivers leading to an increased focus on distribution issues in the global market for mobile handsets? 2. What are the distribution challenges for handset manufacturers as production increasingly is becoming global? 3. What are the distribution challenges when this global distribution has to be connected to regional and local distribution and consumption networks with often very local, specific characteristics? 4. What role do operators play in this globalization of distribution process, and what are the challenges for other actors in the global distribution system?

4. 4 Research Background “Distribution channel effects of institutional, technological and market changes in the rapidly growing market for mobile telecom equipment” (Andersson & Mölleryd 1994) “Distribution system and service consequences of technological convergence” (Andersson & Mölleryd 1998) “Increased polarization of distributor-customer relations and retailers’ strategies to cope with this” (Andersson & Mölleryd 1999) “Market system studies of changes in customers’ buying centers, buying organizations and buying behavior” (Andersson & Mölleryd 2001) “The internationalization of distribution” (Andersson 2002) “A global perspective on distribution channel changes in the mobile telephony industry” (Andersson & Mölleryd 2004)

5. 5 Empirical Background Changes in the Global Handset Market General rapid growth of new users A growing replacement market New entrants competing with the Big Six in the handset market Continued regional market variation despite globalization Internationalization of handset production and changes in the production value chain Internationalization of operators The increased importance of the Chinese market in global distribution

6. 6 The handset market is entering a dynamic phase… The handset market is prospering as the replacement cycle kicks in -extensive upgrades to color screens, camera handsets -commercial volumes of 3G are around the corner The big suppliers keeps a firm grip on the market -LG Electronics has now entered the core group But the Group other is a force to be recon with, primarily driven by strong activity in Asia -A Chinese handset industry is emerging -Extensive development is ongoing in Korea Reference designs (platforms) and new chipset pave the way for a partial disintegration, technology houses and ODMs are instrumental => Market volumes are growing strongly and the big ones are set to benefit as they have sufficient resources to master the entire production and distribution chain

7. 7 Replacement drives the handset market Increasing replacement ratio: 30% 2004, 31% 2005 Growing share of subs that have their 3-4-5 handset, drives demand for mid- and high end handsets Segment: SonyEricsson, Samsung, Motorola, sleeper

8. 8 Handset market is worth EUR 71bn 2004 We expect unit growth to be 23% 2004, and 8% 2005 Assumption: ASP (EUR) 2002: 153 2003: 132 2004: 111 2005: 109 Volume (m) 2002: 432 2003: 520 2004: 641 2005: 690

9. 9 Passing 1bn handsets 2010 Positive long term outlook with huge volumes will trigger industry dynamics with growing platform business…

10. 10 The big six delivered 74% of all handsets 2003 The leading six supplied 408m handsets 2003 LG Electronics passed SonyEricsson During Q4 We have identified 35 suppliers A consequence of total sell-in volume of 551m

11. 11 The ‘smaller’ suppliers will sell 160m 2004 Nec aim to grow considerable through international sales of WCDMA handsets

12. 12 The Mobile handset production chain Nokia Siemens Suppliers Arima Benq DBTEL GVC Microcell Sewon Pantech Telson Ascomp Elcoteq Flextronic Solectron => Chipset suppliers go for reference designs to offer complete cellular systems => Know-how and technical competence is now widely spread in the mobile industry EMS ODM Builds up Design capabilities Growing business Response to OEMs ambition to provide wider portfolios Target operators

13. 13 A growing Chinese handset industry We have estimated volumes on 1) reported volumes, 2) reported sales divided with benchmark ASP, and 3) talked to the companies We estimated total sell-in volume to be 38m 2003 Amoisonic is primarily targeting the high-end market Chinese Electronic Corp works closely with Philips Dtang works with CDMA, TD-SCDMA Eastcom supplies GSM and CDMA phones under own brand, and has a JV with Motorola Haier is the leading white goods supplier in China, has teamed up with Sendo Keijan is a growing player on the Chinese market, collaborates with Samsung Konka produces both GSM and CDMA handsets Ningbo Bird is a leading supplier on the Chinese market Soutec sells GSM and CDMA hands TCL leading player on the Chinese market It uses platforms from Ericsson and Motorola ZTE manufactures and sells GSM and CDMA handsets, is also a infrastructure provider

14. 14 Strong activity in other parts of Asia Japanese suppliers primarily sell to domestic operators Fujitsu sells to NTT DoCoMo Kyocera focus on CDMA Hitachi sells small volumes to Japanese operators Mitsubishi primarily sells on the domestic market NEC is a leading supplier in Japan, growing export sales of WCDMA Panasonic sold ~10m handsets in Japan, growing export Sanyo supplies CDMA handsets to KDDI, Sprint, and PDC handsets to Vodafone Sharp spearheads camera phones, 2.2m units sold overseas Toshiba is a leading CDMA supplier South Korea spearheading CDMA LG is ambitious and is expanding rapidly Maxon primarily produces to other OEMs Standard sells under its own brand Nixxo in Korea, and produces handset for other OEMs VK Corp is a small player on the Korean market

15. 15 The Handset Distribution System Distributors Retailers Suppliers End customers Sell-in Sell- throug h Sell-in: handsets delivered to the distribution system Sell-through: handsets bought by end-customers Inventory : Normalized 6-8 weeks, á 10-12m/w, but it is a wide range in different regions

16. 16 General Drivers of Change Internationalization and structural change processes Technological changes/drivers New power-dependence relations and power shifts in the marketing channels New patterns of competition and cooperation between firms in and between channels

17. 17 Concluding Discussion Channel issues facing handset manufacturers, operators and other channel actors: 1. Important drivers leading to increased importance of distribution issues 2. Distribution challenges for handset manufacturers with increased globalization 3. Distribution challenges with global, regional and local distribution and consumption 4. Role of the operators and challenges for other channel actors

18. 18 1. Important drivers leading to increased importance of distribution issues Globalization of markets and growth of markets for handsets Technological changes in channels Changes in competition and cooperation in and between channels

19. 19 2. Distribution challenges for handset manufacturers with increased globalization Globalization and weaker brand loyalty Increased distribution complexity with more focus on efficient information systems: Ownership of handset consignments and channel control

20. 20 3. Distribution challenges with global, regional and local consumption Globalization in combination with apparent local variations Handling and changing local variations in demand

21. 21 Distribution is a regional business Europe: Fragmented distribution Sales to operators over 50% Retail 15% Distribution 35% US: Operator focus Sales to operators over 90% Retail 5% Distribution 5% APAC: Fragmented distribution Sales to operators over 30% Distribution more than 60% Retail 10% Close connections with operators essential, beneficial for both Nokia and Ericsson

22. 22 4. The role of the operators and challenges for other channel actors Branding issues and the battles for channel leadership Controlling user interfaces and relations with system integrators Increased focus on professional procurement in the channel Taking the Distribution Center role