New technologies spur growth in wireless handset markets
According to analyst research reports on the wireless market by CIBC World Markets, most of the effects that caused problems in 2001 will be mitigated, if not eliminated, in 2002. The industry is expected to see a 14.4% compound annual growth rate (CAGR) from 2001 to 2004. The main growth driver will be existing subscribers acquiring replacement handsets to gain new features and services, such as color screens and data capability.
Handset sales Recent figures show that total handset shipments during 2001 were 399.6 million units. This represents a 3.2% year-on-year decline compared with the 413 million units shipped in 2000 (see figure 1).
For 2002 CIBC anticipates a return to positive unit growth of 15%, and predicts shipments of around 447 million units, within a range of 440-460 million units. Both Nokia and Motorola agree broadly with these estimates; Motorola has forecast shipments in the 420-460 million range, while Nokia s 2002 forecast is in the 420-440 million range.
CIBC believes that the handset market should retain double-digit growth through to 2004, reaching an estimated 584 million units. The largest contributing factor to future handset growth is existing subscriber hand-set replacements. 2001 was the first year in which replacements handset sales exceeded sales to new subscribers, and this trend is set to continue. Over the 2001-2004 period the CAGR for replacement purchases is forecast to be 31.8%, while the CAGR for new subscriber handset purchases will be -23.5%.
Subscribers At the end of 2001 there were just less than 900 million mobile subscribers worldwide, with approximately 34% of these in both Europe and Asia Pacific, and 25% in North and South America (figure 2). CIBC predicts that total subscriber numbers will reach 1.18 billion by 2004, of which 415 million will be in the Asia Pacific region and 372 million in Europe.
A penetration of around 70% is sufficient to saturate most markets, and with the overall penetration figure in Europe possibly exceeding 70%, limited growth is expected in this continent. However, Europe could see a strong replacement market with GPRS through 2004. In Asia Pacific the overall penetration reached only 9% in 2001 and strong growth is expected.
Japan is still dominated by PDC, which has around 51 million subscribers, compared with 9 million CDMA subscribers. Initial subscribers for NTT s FOMA 3G service totaled 11,000 at the end of October 2001. With the exception of this service, all Internet-based services in Japan are available on 2G networks, such as PDC and cdmaOne, and with 2G and 2.5G handsets. As W-CDMA and 1XRTT services gain momentum in 2002, subscribers will upgrade their older 2G Internet-enabled handsets to higher speed versions with expanded multimedia capabilities. While just over half the handsets sold in Japan in 2001 had full-color displays, virtually all those sold in 2002 will be color, which has important implications for the high-brightness LEDs used as backlights in these displays.
China represents the largest single opportunity for both wireless infrastructure and wireless subscriber growth. At the end of 2000 China had 85.4 million subscribers and a penetration of 6.8%. The number of subscribers reached more than 140 million by the end of 2001, and could top 200 million by 2004. However, if CIBC s more aggressive forecast proves to be correct, this will result in an additional 97 million new subscribers, which also means the same number of shipments of new handsets.
Technology GSM continued to dominate handset shipments in 2001, accounting for 239 million units. Around 69 million CDMA handsets and 41 million TDMA handsets were shipped last year (see table 1). GSM and GSM/GPRS phones are expected to represent the majority of handset shipments through to 2004, while CDMA will continue to gain market share based on strong growth in Asia Pacific and the Americas.
Data will be an important technology catalyst, driving an increased rate of replacement phone purchases and various technology transitions. The first platforms that will show the potential of data will be GPRS and cdma2000 1XRTT. Around 10 million GPRS handsets and slightly more than three million cdma2000 handsets were shipped in 2001, while around 70 million 2.5G (GPRS and 1XRTT) handsets could ship in 2002.
The vast majority of current GSM operators are expected to make the transition to GPRS (2.5G) and then to W-CDMA (3G). A strong acceleration in commercial GPRS network deployments is likely to happen in the first half of 2002, with an associated increase in subscribers and in handset shipments in the second half of the year. Enabling a GPRS network is relatively easy, and usually only requires minimal hardware modifications to the existing GSM base stations along with a software upgrade. In contrast, W-CDMA requires an entirely new network buildout, and will be initially limited to densely populated regions. 3G deployment will proceed at a relatively slow pace until 2003, with acceleration in 2004. Replacement handset market For the first time in the mobile-phone industry, new subscribers are no longer driving the demand for wireless handsets. Instead, existing subscribers are replacing their handsets for a variety of reasons. These include replacing lost, stolen or damaged handsets, acquiring a new handset design that is smaller, lighter or has a full-color display, or even moving location, which could require a new service operator. The most compelling reason is to obtain new features such as multimode or multiband capability, Internet access, or enhanced SMS capability.
Data-capable handsets are already available, and have strong penetration in Japan. The rest of the world is likely to follow suit, although it will take until 2004 before 2.5G and 3G data-capable handset shipments overtake 2G voice handsets (see figure 3). Data-capable handsets will experience a CAGR in excess of 200% in the 2001-2004 period.
Infrastructure Spending on wireless infrastructure seems likely to remain weak in the early part of 2002. However, recovery is likely to commence towards the second half of the year, driven by the need to address the quality of service and the reliability of existing networks. Future spending will be driven by the build-out of 3G networks. Announced infrastructure contracts totaled $6.4 billion in the fourth quarter of 2001, which is down from the peak of $11.4 billion in the second quarter of 2001, but this is still at a very high level on a historical basis. There is a long lag time of 12 to 24 months between the contract announcements and actual spending, particularly for 3G networks. 3G announcements dropped rapidly towards the end of 2001, due to the fact that by that stage most operators had already announced their intentions.
Component vendors If handset shipments pick up to the extent that CIBC has predicted, then GaAs IC vendors should see strong growth exceeding 15% during 2002. CIBC points towards companies such as Alpha, Celeritek, RFMD and TriQuint as being particularly good prospects for growth, since these should all benefit from recent design wins on new platforms at top-tier vendors. Many new platforms are more complex multiband and multimode phones that require additional GaAs content per phone. The merger of Alpha and Conexant s wireless businesses will create the world s largest supplier of GaAs semiconductors, with an unrivaled breadth and depth of products, and further consolidation may also occur before long.
• For more information on CIBC World Markets equity research on wireless technology, contact Earl Lum.
