Year Of The Rat Could Be Mousy For Mobile Handset MakersYear Of The Rat Could Be Mousy For Mobile Handset Makers

A U.S. recession could dampen the exuberance of the global mobile handset business and perhaps even send it into the first year-over-year decline in unit sales since the 2001 tech bubble crashed.

Particularly vulnerable are vendors at the lower end of the market and those with big exposure to North America, such as Treo-maker Palm Inc., according to a research report from Citigroup analyst Jim Suva.

Overall, wireless device sales will likely increase by 10% this year over 2007, when manufacturers sold nearly 1.14 billion handsets worldwide, writes Suva. However in a worst-case recession scenario unit sales could actually decline by 5%, and specific vendors could be hit hard. (Research firm IDC earlier predicted that growth in mobile handset sales will slip into the single digits in 2008, recession or no.)

The Citigroup report looks in detail in three vendors and one cell-phone distributor, Brightpoint.

BlackBerry maker Research in Motion, which enjoys a dominant position in the smartphone market, actually has a "double-barreled risk" because it sells so many of its devices in North America and because its stock is relatively high-priced compared to its earnings results. RIM's share price has nearly doubled in value since the beginning of 2007.

RIM could be protected as consumers and enterprises move toward increasingly sophisticated devices, said analyst Carmi Levy, senior VP for Strategic Consulting at AR Communications Inc. "As a smartphone-only vendor, RIM is not as vulnerable to the falloff in demand for conventional handsets," Levy said.

Motorola, which said last week it is considering a spin-off of its handset business, also is heavily invested in the North American market -- but Suva writes that "a timely resolution" on the handset unit "is a bigger issue than the potential impact of a recession."

Hardest-hit could be Palm, which as Levy points out "was in freefall even before the economy started to turn toward recession." With 75% to 80% of its sales in the North American market, Palm could be more vulnerable to an economic slowdown than any other handset vendor. Palm's stock, currently trading in the $6 range, could drift toward $3 in a fullblown recession, Suva believes.

Not mentioned in the Citigroup report is the world's No. 1 handset maker, Nokia, which enjoyed a strong 2007, seeing its worldwide market share top the 40% level. Nokia is embarked on a long-term effort to both sell more high-end smartphones and to become a leading provider of Web-based applications and services for mobile devices. Given Nokia's entrenched position, its strength in Western Europe, and the weakness of some of its rivals, the Finnish powerhouse could actually gain market share a U.S. recession.

Nokia's market strength allows it to leverage economies of scale that no other vendor can match," notes Levy, enabling the company "to maintain margins through the year."

Any downturn will test the theory, held by some analysts, that mobile phones have become as indispensable as toilet paper and tires, making them recession-proof.

"We have to recall that if you go back in history, when the Japanese economy imploded is exactly when NTT DoCoMo and i-mode exploded," remarks Paul Nerger, VP of advanced applications at mobile domain-name provider dotMobi.

At any rate, as the Chinese New Year celebration arrives, handset vendors would do well to recall the prevailing conditions of a Year of the Rat, such as 2008: "Ventures begun now may not yield fast returns, but opportunities will come for people who are well prepared and resourceful."