Commentary: Taiwan handset shipments to grow 9-10% on quarter in 2H08

With Nokia, LG Electronics and Sony Ericsson continuing to increase their handset outsourcing, and expanding shipment volumes of High Tech Computer's (HTC's) Touch Diamond, Taiwan's handset shipments are expected to grow 9-10% on quarter during the final two quarters of 2008, bringing total shipments for the year to 120 million units, up 10.7% from a year earlier.

Taiwan's handset sector saw shipments continue to drop 4.4% sequentially to 27.37 million units in the second quarter of 2008 following a 14.3% sequential decline in the first quarter as orders from Motorola remained weak, and those from clients in emerging markets were rather limited due to the transition to new models. However, second-quarter shipments represented an increase of 30.7% from a year earlier due to new orders from India's Reliance Communications and China's Hwawei Technologies.

The proportion of various categories of handsets shipped by Taiwan makers in the second quarter was similar to that seen in the first quarter, although a decrease in orders for entry-level models from Motorola, an increase in orders from LG, and more orders for smartphones were recorded.

As a result, shipments of handsets with a built-in 3-megapixel camera increased by nearly four percentage points to account for 6.5% of total handset shipments in the second quarter, whereas shipments of handsets without a built-in camera or with a only a 300,000-pixel camera declined by 6.5 percentage points sequentially.

While increasing orders from LG and Sony Ericsson are expected to stop Taiwan's handset shipments from declining further in the third quarter, shipments of CDMA models to Nokia and the Touch Diamond handsets from HTC will be the main growth drivers for Taiwan's handset industry in the second half of the year.

The ratio of Taiwan's shipments of CDMA handsets is likely to increase by four percentage points sequentially to account for 28.3% of total shipments in the third quarter, while shipments of WCDMA models will also continue to grow to account for 10% by the fourth quarter, buoyed by shipments of HTC's own-brand models and those shipped to Motorola by Qisda.

Orders for entry-level handsets from Motorola, Reliance and Hwawei in the second half of 2008 are expected to be lower than those seen in the first half, and therefore the ratios of handsets with a monochrome display and without a built-in camera will drop to below 10% and 40%, respectively, in the fourth quarter.

For individual Taiwan handset makers, Compal Communications is expected to rely more on its two new clients, Nokia and LG, to sustain future growth, with shipments of CDMA handsets to Nokia to begin in the second half of 2008 and shipments to LG to contribute a greater proportion of its revenues in 2009.

Chi Mei Communication Systems (CMCS), an affiliate of Hong Kong-listed Foxconn International Holdings (FIH), will also rely on CDMA shipments to Nokia to keep its production scale from declining as its shipments were affected by slow sales at Motorola and Sony Ericsson recently.

Thanks to orders from Sony Ericsson and LG, Arima Communications saw its handset shipments increase 58% on year to 5.46 million units in the first half of 2008 with prospects to see quarterly shipments surpass four million units in the second half of the year.

Due to a change in outsourcing strategy, LG is expected to move up to rank third in the global handset market in the first half of 2008, making it a crucial sales driver for either Compal and Arima (the two ODMs competing for orders from LG) in 2009 and beyond.

In addition, Arima is also expected to tie up with Finland-based EMS provider Elcoteq in order to strengthen its ability to compete with CMCS to win more orders from Sony Ericsson.

Led by HTC, shipments of smartphones by Taiwan makers are expected to grow quarter-by-quarter, with accumulated shipments to account for 16.1% of Taiwan's overall handset shipments in 2008.