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EXECUTIVE SUMMARY

In this Industry Strategic Outlook, we review the handset sector’s 3Q.2008 results with a particular emphasis on the top-five companies as well as Apple.

3Q.2008 units shipped were flat QoQ as two-thirds of handset sales are now replacement, indicating that the handset sector is more geared to a global economic slowdown than it used to be. The smaller handset distributors look to be more impacted by the credit crunch. Apple’s market share gains combined with Motorola’s decrease due to a portfolio gap in 3G and smartphones indicate that the market is moving towards converged mobile devices and manufacturers without strong offerings in this segment will have to rectify the situation in order to compete as price competition intensifies.

3Q.2008 results were broadly in line with expectations for the five major companies in the sector, while we saw gains from Apple both in market share and in revenue terms. Nokia saw a decrease in smartphone market shares, while Samsung saw its operating margins fall into single digit for the first time since 2Q07. Motorola’s portfolio gaps led to a sequential decrease in market shares, while LG sustained its double digit operating margins. Sony-Ericsson’s market share remained steady while Apple was the big winner in market shares overall.

Markets are trending down as the recession is hitting developed markets. Western Europe was down 9% YoY in units sold. North America saw a 5% YoY growth in units, thanks in part to Apple’s good performance. The company had a 550bp market share gain in the region. APAC had a growth in units of 8% YoY as well as strong price competition in the low-end market. CEMA’s strong growth YoY at 15% was led by Africa’s good performance, while Central Europe did not exhibit material changes. Latin America and Japan both saw sequential declines in units sold, -14% and -29% respectively.

The companies covered in this industry outlook include Nokia, Samsung, Motorola, LG, Sony-Ericsson and Apple.

TABLE OF CONTENTS

3Q08 units shipped flat QoQ at 310 million

Handset sector is more geared to a global economic slowdown as two-thirds of handset sales are now replacement

Smaller handset distributors to be impacted by the credit crunch

Nokia share loss due to manufacturing problem for a high end phone and retreat from low end competition

Samsung and LG exhibit divergent strategies as LG protects prices and margins at the expense of a share loss while Samsung overtakes Motorola for the number one spot in North America

Apple gains in market share and revenue terms

Companies without strong offerings in converged mobile devices will continue to suffer

3Q08 results in line with expectations

·          Nokia results in line with expectations despite smartphone market share falling from 42% in 2Q08 to 37% in 3Q08.

·          Samsung results in line with expectations with operating margins at 8.1%.

·          Motorola’s handset division remains under pressure, leading to decline in market share from 9.5% in 2Q08 to 8.5% in 3Q08.

·          LG met its target of a double-digit handset margin with an 11.5% operating margin, despite higher marketing expenses.

·          Sony-Ericsson’s results in line with expectations as market share remains steady at 8%.

·          Apple is selling more phones than RIM in 3Q08.

Markets trending down in 3Q08 as the recession is affecting developed economies

·          Western Europe saw units fall -9% YoY.

·          North America growth YoY is running at +5%.

·          Latin America fell -14% sequentially, as this is a very volatile region.

·          CEMA saw the best year on year growth at +15%.

·          APAC is seeing price competition in the low end market.

·          Japan saw a -28% YoY and -29% sequential fall in units.

Charts:

Chart 1: Sequential unit growth in 4Q – market: 4Q08 sequential unit growth to be lower than usual due to economic slowdown

Chart 2: Top 5 unit growth YoY: Motorola and Sony-Ericsson continue to see their unit growth fall deeper in negative territory

Chart 3: Top 5 ASP ($): ASPs continue to fall across the board with only Motorola remaining somewhat constant

Chart 4: Top 5 operating margin: Nokia continues to enjoy the highest operating margin among the top 5

Chart 5: Top-5 operating margin versus ASP ($): Operating Margins going in the same direction as ASP

Tables:

Table 1:            Market Share of units (%), 1Q08 – 4Q08

Table 2: ASP QoQ (%), 1Q08 – 4Q08

Table 3: Operating Margin (%), 1Q08 – 4Q08

Table 4: Handset Revenues ($M), 2Q08 – 4Q08E

Table 5: Handset Units (M), 2Q08 – 4Q08E

Table 6: Handset ASP ($), 2Q08 – 4Q08E

Table 7: Handset ASP (€), 2Q08 – 4Q08E

Table 8: Handset Operating Margin (%), 2Q08 – 4Q08E

Table 9: 3Q08 units by region (Units in million, QoQ % and YoY %), 3Q08

Table 10: Growth in units implied in 4Q08, 1Q08 – 4Q08

Table 11: IEMR handset company forecasts (Handset units in million, Units QoQ in %, Units YoY in %, Market Share of units in %), 1Q06 – 2009E

EXCERPT

Motorola’s handset division remains under pressure, leading to decline in market share from 9.5% in 2Q08 to 8.5% in 3Q08.