Telecomunications Equipment Manufacturing Industry Analysis

Andrew Herfurth

Andrew Schiewe

Thao Nguyen

Tanasha Smith



Executive Summary

This external environment analysis report delivers an assessment of the factors affecting the telecommunications equipment manufacturing industry. Our approaches to examination of this industry comprised of a PEST analysis and Porter’s five forces. Our PEST analysis covered the political, economic, sociological, and technological aspects of the industry. Our Porter’s five forces analysis, covered potential entrants, bargaining power of suppliers/buyers, threats of substitute products/services, and rivalry within this industry. From these two methods of analysis we identified opportunities and threats of the industry. Results of identifying opportunities revealed several of them: expand into new markets such as China and India, smaller innovative companies available for acquisition, iTunes availability to handset technology (such as smartphones) increasing demand, increase in demand of 3G and 4G smartphones, and tariff free trade of telecommunications technology. Our identified threats include: intense rivalry among existing firms, wireless handset securities issues, and economic downturn slowing adoption rate of newer handsets. Implications of threats and opportunities to the macro environment are that overall the industry is growing as the demands for handsets increase. Slowing down economies could hamper the expansion of the industry or redirect it into countries that are experiencing a growing economy. Our recommendations for companies operating within the telecommunications industry are:

• Keep up with rising demands for improved smartphones

• Expand into China and India

• Continue to provide low cost handsets in countries experiencing an economic slowdown.

• Engage in more stringent market research to avoid patent infringement lawsuits

1. 
   Title Page……………………………………………………………………………………...0
   
2. 
   Executive Summary…………………………………………………………………………...1
   
3. 
   Table of Contents……………………………………………………………………………...2
   
4. 
   Report Body………………………………………………………………………………..3-12
   
   1. 
      Introduction………………………………………………………………………………..3
      
   2. 
      Industry Description……………………………………………………………………….3
      
   3. 
      Research Methodology………………………………………………………....………....3
      
   4. 
      Analysis…………………………………………………………………………………4-9
      
      1. 
         Macro Environment…………………………………………………………………4-7
         
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            PEST Analysis…………………………………...………………………………..4
            
      2. 
         Industry Analysis……………………………………………………………………...7
         
         1. 
            Porter’s Five Forces…………………………………………………………….....7
            
   5. 
      Opportunities…………………………………………………………………………........9
      
   6. 
      Threats……………………………………………………………………………………10
      
   7. 
      Conclusions………………………………………………………………………………12
      
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   Sources……………………………………………………………………………………13-14
   
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   Figures and Tables………………………………………………………………………..15-17
   
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      Figure 1…………………………………………………………………………………..15
      
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      Table 1…………………………………………………………………………………...16
      
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      Table 2…………………………………………………………………………………...17
      

Our team analyzed the telecommunications equipment manufacturing industry macro environment. We analyzed the macro environment using two methods: a PEST analysis which covered the political, economic, sociological, and technological aspects of the industry, and Porter’s five forces, which covers the threat of new entrants, bargaining power of suppliers/buyers, threats of substitute products/services, and rivalry within this industry. Our focus during our analyses was the top five companies of the industry (who tend to dictate how the industry behaves): Samsung, Nokia, LG, Motorola, and Sony Ericsson. We then used the information from these two analytical methods to find opportunities and threats. The outcomes for any given strategic plan by companies within the industry can be inferred by the opportunities and threats our team uncovered.

We analyzed the telecommunications equipment manufacturing industry, and more specifically the wireless telephone handset manufacturing sub-sector. The SIC code is 3663 and the NAICS code is 334220. As defined by Hoovers “Companies in this industry manufacture mobile phones and related wireless communications devices primarily for the consumer market. Products include cellular phones and other mobile handsets used for voice calls and simple text messages, as well as advanced smartphones with data, multimedia and networking capabilities.”

Our research was conducted by gathering relevant information from websites and documents and compiling them in order to analyze the industry. Our study was focused on qualitative methodology. Qualitative information was collected from internet resources such as annual reports, industry information, and companies’ descriptions. We only used secondary research which involved summaries and compilations of information from other researchers. We used this information from our secondary sources to come up with our conclusions of the industry.PEST Analysis

One of the political factors for the telecommunications equipment manufacturing industry we found was legislation involving telecommunications, such as the Information Technology Agreement (ITA), which came into effect in July 1997 (Gaffney, 2010, p.29). For countries that signed this agreement, tariffs on telecommunication products were withdrawn. The ITA increases the incentive to work within the countries involved in the agreement, thus adding opportunities for trade. Trade tariffs are now significantly reduced as more than 72 countries have signed the ITA, accounting for over 95 percent of trade in high-tech goods (Gaffney, 2010, p.29). The major holdouts to this agreement are several Latin American countries, including Brazil, Argentina, Colombia, Ecuador, and Bolivia, who maintain tariffs ranging from 10 percent to 15 percent on handsets (Gaffney, 2010, p.29). Considering that the countries not involved are not major developing markets for the industry, companies manufacturing handsets are not greatly affected.

Despite the ITA’s usefulness, it does not stop all countries from employing tariff. A prime example of this is China. In China “…New telecom standards and testing procedures are made available to foreign firms on an inconsistent and haphazard basis which imposes additional costs on foreign competitors, leading to the exclusion of foreign suppliers” (Gaffney, 2010, p.30). Considering that China is one of the main developing markets in the industry, the effect of China’s tariff is quite high for those wanting to enter that particular market.

Another major issue in the political sector of the macro environment is increasing numbers of patents being violated by competitors. Patent infringement investigations concerning imported products of mobile handsets and related parts, among a number of other factors, may reflect increasing market competition” (Gaffney, 2010, p.32). An increase in market competition is a significant challenge to companies operating within the industry. “During the period 2004–08, eight investigations were instituted with respect to handset imports by the Commission under section 337 of the Tariff Act of 1930” (Gaffney, 2010, p.32). Patent infringement cases indicate competitive behavior by companies as they try to come up with similar design features the target markets desire.

Economic factors affecting the telecommunications manufacturing industry are varied. The overall trend is an increase in sales of handsets, which have been almost doubling every six months (Abdul). Recession trends in nations such as the United States of America may harm this industry. If unemployment levels continue to grow, demand for handsets will drop as consumer confidence drops ("Pestel analysis,"). Emerging Asian markets are causing an increase in demand in Asia. Emerging markets in China and India are responsible for over sixty percent of global sales in 2007 (Gaffney, 2010, p.44). Due to a lower income level in Asian countries, the price of handsets must be low in order to reach a wider consumer base.

Sociologically, handsets are in demand. The main factors of demand for handsets within the U.S. include: price, functionality, service quality, and availability (Gaffney, 2010, p.39). With increasing demands for smartphones, there needs to be more innovation to be competitive across the market. The adoption rate of smartphones has been increasing in the United States of America by about 10% annually ("Pestel analysis,"). In 2010, smartphone adoption increased considerably across the U.S. and Europe (Radwanick, 2011). Overall handset market penetration is increasing worldwide; as more consumer markets develop, demand for this industry will increase, yielding several opportunities for growth. Demographic profiles of smartphone users have revealed differences in market adoption. The smartphone market is slightly more developed in some regions; in these the demographics of demand skew older (Radwanick, 2011). Within the US, the reverse is true, as younger demographics adopt smartphones at a greater rate than older demographics (Radwanick, 2011). Depending on target market, differing demographic demand is a factor to consider in marketing campaigns.

Technological factors in the telecommunications manufacturing industry have a major effect. An increasing demand for improved products is one of the reasons technology is the leading competitive edge companies strive for. Specifically, demand is for smartphones over other handset technology, leading to a decrease in “dumb” phone demand. “Consumer buying trends in the handset market have shifted toward powerful smartphone devices” (Moorman, 2012). The technologies in smartphones have provided much better service and replace older services as consumers demand better product capabilities. “The transition to bandwidth-rich fiber architecture is allowing the carriers to bundle IP television (IPTV) with voice and high-speed internet service to better compete with the cable operators” (Moorman, 2012). Constant increases in communication technology drive companies in this industry to innovate in order to compete. If a firm in the industry doesn’t keep up with the rise in technology, the firm will inevitably fail. “According to Digital TV Research, IPTV subscriber base in China will grow from 14 million in 2011 to 77 million by 2017, accounting for around 47% of the worldwide IPTV subscribers. S&P states that increased fiber and IPTV deployments will provide a competitive edge for vendors of broadband and fiber-optic equipment” (Moorman, 2012).

The threat of new entrants is low in the handset manufacturing industry, making industry profitability high. Barriers to entry are high because of the costs of technology, marketing, and research and development, as well as market control of existing firms. The technological competency required to compete in this industry is expensive to obtain and increases daily. Costs of production such as equipment and land are also high, making this industry difficult to enter.

Among the companies that spend the most on research and development are the handset manufacturing companies Samsung and Nokia. These companies spent roughly $7-9 billion on research and development in 2011 alone (The Economist, October 2012). The top five firms in the industry have approximately 56.1% of the market share (see Table 1). Only firms that are truly innovative are able to survive in this market.

Force 2: Bargaining Power of Suppliers

The bargaining power of suppliers is moderately high. The factors behind this are: importance of the market share of the firm, the large number of component suppliers, and few software suppliers for smartphones. Firms with a large market share have negotiation power with component suppliers, but software suppliers have power especially in the smartphone market.

Larger firms with more control of the market are able to choose suppliers more freely (see Table 1). In addition to that, there are many suppliers of the components of handsets. In the smartphone subsector, there are few software suppliers like Google (Android), Microsoft, and Apple that have power to control prices of their software (see Table 2). Therefore, profitability in the industry is moderate when this force is taken into account.

Force 3: Bargaining Power of Buyers

Buyers have a lot of power in this industry due to the large number of similar handset devices available and the restrictions of a cell phone plan for that device. Buyers will try to find the best value for their money, and with a large number of devices that can perform the functions they want, buyers have power to bargain.

The other factor as to why this force is high is that cell phone service companies attach large fees to switching plans or changing phones. This limits the amount of phones the buyers are willing to pay for, and lowers the demand for phones until phone plans expire or upgrades are necessary. Industry profitability is reduced by this force.

Force 4: Threat of Substitutes

With limited substitutes available and the increasing convenience of phones and smartphones, the threat of substitutes is low. Only recently have tablet PCs and small, portable laptops become available. The rate at which these technologies are developing has been much slower than that of mobile devices.

The development of multifunctional handsets such as smartphones, have increased the convenience of phones. Now people can have essentially a small computer in the palm of their hands. Phones have become a necessary tool for everyday life, and because of that, this force is low.

Force 5: Threat of Rivalry among Existing Firms

This force significantly reduces industry profitability. The existing firms in this market have intense rivalry between each other. Many of the existing firms have patents on the innovations that they have developed, which causes patent disputes among the firms. Just recently Samsung was sued by Apple for patent infringement with the development of the new smartphone, the Samsung Galaxy SIII (Forbes, August 2012).

These lawsuits inevitably happen because many smartphones have similar designs and features. Therefore, there is high price competition for similar devices with the same features. The large firms in this industry have a large amount of rivalry, which makes this threat very high and lowers industry profitability.

Opportunities

Since Nokia and Samsung have been in this business for a long time, it’s easier for them to expand internationally. China has been one of their largest markets for mobile services, which has approximately 640 million mobile phone subscribers, an increase of nearly 100 million since 2007. If wireless devices companies were to focus only on the China market, they could make one-fifth of the world’s population become their subscribers. There is also much attention paid to India, where there were 347 million people wireless handset users by the end of 2008. (Gaffney, S. 2010).

With a high level of technology and knowledge, and high investments in R&D and marketing, an existing firm can easily expand into the global market and fulfill the customers’ needs.

One more ideal opportunity for wireless manufacturers is to acquire smaller and innovative companies (Gaffney, S. 2010). For example, Nokia made acquisitions to increase the scope of services available to users of its mobile handsets, including data services. In 2007 it acquired Twango, Avvenu, and Enpocket specializing in content and advertising. In July 2008, Nokia finally absorbed Navteq, a provider of digital map systems. Several months later, Nokia bought Symbian, the leading mobile operating system for smartphones.

In addition, developing the 3G/4G and Bluetooth market also helps to broaden its services and gives wireless manufacturers a big boost in speed. These services tend to become part of social life because they are easy to use and more mobile than PCs. The mobile phone manufacturers took advantage of this to generate a new-step operation for its users, who spent $41 billion in 2009 on wireless Internet, up 28% from 2008. Figure 1 shows a real survey in which more than 40% of participants strongly showed their interest in 3G phones.

Moreover, people can now listen to iTunes music on many mobile handsets, not just through PCs, Macs or iPhones like before. Since 2004, Motorola users can transfer songs they’ve purchased from iTunes to Motorola mobile handsets, expanding the market reach of the system and driving new revenue for customers, delivering an amazing music experience to millions of wireless users (Joint Release, 2004). And Steve Jobs, Apple’s former CEO said this: “The mobile phone market—with 1.5 billion subscribers expected worldwide by the end of 2004—is a phenomenal opportunity to get iTunes in the hands of even more music lovers around the world and we think Motorola is the ideal partner to kick this off” (Joint Release, 2004). These strategic partnerships, not only between Apple and Motorola, but also Google's partnership with Motorola, Samsung, Asus, are increasing the benefits for users and also for manufacturers because now, customers can get enhancement to many services provided by different operators by just touching on one phone (Joint Release, 2004).

Rivalry is high due to the small differentiation between products being manufactured among companies. The wireless telephone handset industry has many competitors that are equally balanced. The price competition for manufacturing cell phones is also high. Samsung has lower prices, but consumers see that Samsung’s products are cheap, not quality like its competitors, whose prices are higher. There have been numerous cases of patent infringement among companies, such as when Apple sued Samsung for four infringed patents (Ramanathan, 2012). Since Samsung has a wide product line, failure of one product line will affect the other lines and will result in brand dilution, turning possible consumers away to another company.

Samsung’s new Galaxy S III has had many concerns with security issues occurring to consumers. Rundle (2012) found “that by linking a specific link in browsers, users of a number of Samsung Android devices could have their devices reset to factory settings.” This leaves users vulnerable to hackers, who can remotely tap into devices and wipe all of the personal data off the phones. Samsung assures users that the issue has been taken care of; a software update has been made and is ready to download. This flaw has left consumers skeptical to what issues are to come.

As stated by Tofel (2011) “Smartphone adoption in the U.S. continues to rise as the average cost of such devices is trending down.” The economic downturn means consumers are spending less money on smartphones by going with later models instead of new models. When the capabilities of lower priced phones are on par with high prices smartphones, first time smartphone buyers don’t want to spend $200 or more when they can spend under $100.

Smartphones are becoming a more prominent necessity and minor differentiation between smartphone products, the threat of substitutes is increasingly high. A simple discounted price tag or more capabilities could turn a consumer away from expensive products. Samsung is manufactured in South Korea, there is a threat of substitutes from other countries. An example being, China’s Huawei, who has ambitions of joining the U.S market according to Garside (2012). Huawei has a vast selection of products as does other telecommunications equipment manufacturing companies.

The telecommunications handset manufacturing industry is moderately profitable for large and innovative companies. Main external factors that affect this industry are patent and trade legislations. Many countries have differing policies on mobile devices. Within the industry, the main factors are rivalry between firms and price competition. The advantages and opportunities of the industry are that demand for new devices is growing despite the global recession, and strategic partnerships can be easily formed to produce new products. Overall this industry has been growing rapidly in recent years, and coupled with the technological advances of our time, this industry will continue to be profitable for large firms who are able to innovate and differentiate their products.

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Gaffney, S. (2010). Wireless headsets. Washington, DC 20436: United States International trade commission. DOI: http://www.usitc.gov/publications/332/ITS_5.pdf

Joint Release. (2004, July 26). Apple press info. Retrieved from http://www.apple.com/pr/library/2004/07/26Motorola-and-Apple-Bring-iTunes-Music-Player-to-Motorolas-Next-Generation-Mobile-Phones.html

Juliette Garside (2012, March 24) China’s Huawei moves out of the shadows to join technology race. Retrieved from http://www.guardian.co.uk/business/2012/mar/25/secretive-huawei-joins-technology-race?INTCMP=SRCH

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Kristin Bent (2012, September 26) Samsung Issues Software Update For Galaxy S III

Vulnerability. Retrieved from http://www.crn.com/news/security/240008023/samsung-issues-software-update-for-galaxy-s-iii-vulnerability.htm

Michael Rundle (2012, September 26) Samsung Issues Fix for Galaxy- Wiping Security Flaw. Retrieved from http://www.huffingtonpost.co.uk/2012/09/26/samsung-issues-fix-for-ga_n_1915297.html

Moorman, J. (2012). Communications Equipment. 55 Water Street, New York, NY 10041 S&P Capital IQ Industry Surveys. Retrieved from: http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?loadIndSurFromMenu=html

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Radwanick, S. (2011, February). Mobile year in review. Retrieved from http://www2.comscore.com/l/1552/core2010MobileYearinReview-pdf/R2OH8

Valli Meenakshi Ramanathan (2012, October 25) Apple vs Samsung: Samsung Infringed Four Apple Patents, Rules ITG. Retrieved from http://www.ibtimes.com/apple-vs-samsung-lawsuit-samsung-infringed-four-apple-patents-rules-itc-853640

Figures

Figure 1

Table 1: Sales and Market Shares

Table 2: Operating System Sales and Market Share