Wireless Handset Glut Bodes Ill

By eweek  |  Posted 2001-03-19

Slower than expected cell phone sales toward the end of last year led to unusually high handset inventories and a backup in distribution channels, a phenomenon that is crippling cell phone manufacturers.

And that backup of phones in inventory and the supply chain may slow the progress of the wireless industry — which means users might have to wait even longer before their dreams of wireless data are realized.

Motorola is cutting 7,000 jobs in its cell phone business in addition to the 5,000 handset jobs slashed earlier in the year. Ericsson last week said first-quarter handset sales would be considerably lower than the same time last year, due in part to high inventory levels in the distribution chain and decreasing demand.

Those two arent alone. Alcatel issued a similar warning, as have chip vendors Siemens and Texas Instruments, citing declines in their semiconductor businesses as the handset manufacturers decrease orders.

"Were all about to shoot ourselves in the foot," said Hans Geyer, vice president at Intel. Phone vendors will likely drop the prices of those stockpiled handsets to get them out of inventory. That could lead to lower retail prices, encouraging users to buy new phones now instead of waiting for future upgraded handsets, which will be compatible with enhanced wireless data networks. The situation could delay the evolution toward mobile data services, Geyer said.

The presence of low-cost phones on the market could force some of the smaller handset vendors out of business because "they dont have the financial wherewithal" to compete against lowered prices, said Matt Hoffman, a senior analyst who covers Motorola at Wit SoundView Group.

Jose Sosa, vice president of marketing at NEC Americas wireless division, however, said service providers often give handsets away, so retail prices may not change.

Its unclear exactly how many unsold handsets sat in warehouses at the end of 2000, but estimates are unusually high. On the low end, Philips Electronics calculates there were 45 million leftover handsets at years end. That figure represents about two months of stock, compared with the typical four weeks that vendors stockpile, Philips said. Unsold phones could number closer to 120 million though, which is the difference between the 535 million handsets vendors hoped to sell and the 415 million they did sell, Hoffman said.

The handset crunch may have contributed to the trend toward outsourcing phone production as vendors attempt to trim extra costs. Ericsson stopped making phones entirely; Motorola closed its last U.S. factory; and Nokia shifted much of its manufacturing to countries where labor costs are low.

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