Smaller manufacturers of cell phones have to compete for two diametrically different market segments: ultra low cost mobile phones for emerging markets as well as rather expensive smartphones used by experienced users. However, such strategies are possibly not the finest, according to ABI Research.

Second tier mobile handset vendors shipped 80.5 million units last year, a small fraction of the global total. But they face significant challenges when seeking greater market share. They are competing against the first tier giants, such as Nokia, Motorola and Samsung, which together control about 70% of the global market. They are also trying to differentiate themselves and create recognizable brands. According to a new study from ABI Research, the most obvious strategies open to them may not be the best.

“Most Tier 2 handset vendors are Chinese, Korean, and Japanese. Many have tried to expand beyond their home regions through international partnerships (often leveraging existing infrastructure deals), but with mixed results. Some have succeeded, but often a variety of factors, intensified by global recession, is forcing vendors to retreat to their home bases,” said Michael Morgan, an industry analyst with ABI.

Such refocusing is necessary for them at this time, but in the next few years they will have to start another offensive onto other regions.

“They’re in the bunker now, but within the next two years they’ll have to come out, because in every region except Japan, the big players – the Nokias, Motorolas, and Samsungs – will be coming in with a vengeance,” explained Mr. Morgan.

To achieve the volumes they need, the second tier vendors will have to get out and into emerging markets suited to the kinds of phones they make. Those making low-cost phones might consider Latin America. For high-tech, there may be space in the Japanese market – Pantech has had some success there, claims ABI.

The good news is that in the high-margin smartphone segment, the arrival of the open source Android OS has lowered the entry threshold, and technically proficient vendors may be able to put their own stamp on the smartphone concept.

The ultra-low-cost handset (ULCH) market may not be as logical an opportunity for these smaller players as one might think. With their huge volumes, the Tier 1s are able to sell ULCHs on paper-thin margins and still profit. Unfortunately, most second tier cell phone makers cannot do that.

Tags: Nokia, Samsung, Motorola, LG, Sony Ericsson