Siemens faces down the competition

15 Mar 2005

The once-vibrant mobile phone market is not likely to see spectacular growth rates in the future and is already a huge, saturated and extremely competitive market.

That was the view of Lothar Pauly, (pictured) president of the board of Siemens’ €18bn communications division, who last week revealed that the division’s mobile phone business is in trouble and would need to either be sold or merged with another manufacturer in order to remain viable.

The stark choice facing Siemens is even more grave considering the reality that established European mobile giants are losing market share to cheaper, more aggressive players from Asia such as LG and Samsung. Industry No1 player Nokia has had to slash prices in order to claw back share and for the past year has been battling against falling profits. And the option of merging Siemens’ mobile business with another manufacturer is not an attractive move either considering the fact that the Sony Ericsson alliance has so far yielded losses of more than €1bn.

At a pre-CeBIT press conference last week in Munich, Pauly would not comment on rumours that Siemens is in advanced negotiations with Chinese manufacturer ZTE to merge the business.

He said that €18bn communications division is performing well in several sectors bar two — its fixed-line carrier and mobile phone businesses.

Confirming that the mobile phone division is losing money and has posted losses for three quarters in a row, Pauly also revealed the company lost market share worldwide, with Lucky Goldstar passing the company out and occupying the No 4 position worldwide.

Pauly said: “We are not playing in the Champion’s League in terms of the average selling price of mobile phones — the average selling price of our mobile phones has steadily dropped to a dismal €86. This is well below that of other European and Asian competitors — and this is not because of product quality. Our products are as good or better than the products of our competitors. No. The reason for this is our slow time to market. Again and again, late market launches have damaged our market position.”

Pauly said there are options available to the company, either selling it off or merging it with another player. But he said that closing the mobile devices division is the most undesirable option because it would destroy a lot of value. “No matter what option we ultimately choose, whether we partner, whether we sell the business or engage in some form of co-operation, we will have to fundamentally fix the mobile phones division as a whole.”

Among the actions being taken include a €600m cost-cutting programme. Urging observers not to “bury the Siemens mobile phone just yet” because newer products were still being introduced at this week’s CeBIT event in Hanover, Pauly revealed that the company would be laying the foundation for a new Linux-based software platform for the next generation of Siemens mobile phones.

“[Our] analysis of the situation has clearly shown that measures to improve the average selling price will have the greatest impact on profitability. And the average selling price is closely related to the ability to launch the right product at the right time,” Pauly said. It subsequently emerged that the average selling price being targeted by Siemens will be €172.

“At the end of 2005, more than two billion people worldwide will use a mobile phone. But increasingly competitors, especially from Asia, are trying to capture a larger share of the mobile phone market. Overall growth in this market will be offset by price erosion in average selling price,” Pauly warned.

By John Kennedy