There are interesting developments occurring in the mobile handset industry with yet another reminder on the important implications to the relationships between product design and management and global supply chain strategy.  These implications reflect on how components and operating systems are determined, and how quickly devices can be brought to market.  The stakes are becoming extremely high, to the point where company fortunes and long-term presence are on the line in this particular segment

The latest news among media catering to financial markets has featured headlines reflecting that the CEO’s for both Nokia and LG Electronics are stepping down, principally motivated by each company’s perceived shortfall in its ability to aggressively compete in the smartphone market, especially concerning rival Apple.  The mobile handset market has been on a tear, moving beyond basic mobile device offering web surfing or music player capabilities into full fledged personal productivity devices that bring together email/web/media capabilities as demonstrated in Apple’s current iPhone4.  In essence, the clock-speed of this market segment has been ratcheted way-up. Apple’s superior integrated global chain capabilities that fuse product design, new product introduction, vertical supply chain sourcing, and rapid time-to-market has been the culprit, and it seems that competitors are running in place or playing catch-up.

It is also a battle of who’s operating system “will reign supreme” to coin a phrase from the TV show Iron Chefs.  Will it be Google’s Andoid, Apple or Microsoft or Nokia? In our view, it’s a classic battle of technology platform vs. market volume dominance, and sometimes the two goals are at odds with market clock speed.

Nokia, who has been designated the world’s largest mobile phone producer by volume, recently shook-up its top management team, hiring Stephen Elop, a Canadian, who previously managed Microsoft’s business division, to steer the company in a more aggressive direction.  The company is aiming to release its new N8 smartphone at the end of September but at the same time is hinting that initial deliveries of the phone may be delayed until October because of various production ramp-up issues. While the company has denied that there are any significant issues with the pending release, financial markets have been hammering Nokia stock because of uncertainty over management turmoil and rumors on the new N8. The N8, which is the first model to be based on Nokia’s new Symbian operating system was originally scheduled for a June release, but was postponed until September. According to an article published in the Financial Times print edition, Nokia is anxious to remove any perceived glitches in its new phone, as well as position the N8 to compete in the upcoming pre-Christmas selling season.  Nokia also plans to make another upgrade to the Symbian operating system next year, with the release of the MeeGo operating system to be co-developed with Intel comes to market.

In the case of LG Electronics, the company reported a 90 percent drop in operating profit in the second quarter largely due to declining performance in mobile phones. Global handset revenues had reached $14.7 billion in 2009, and LG has a reported 10 percent share of the market.  CEO Nam Yong will step aside in October, and a member of LG Group’s founding family, Koo Bon-join will take the helm.  According to a Financial Times print article, Mr. Koo has been credited with turning LG Display into the world’s second-largest flat panel manufacturer by investing heavily in LCD technology before it became widely adopted.  What makes LG even more interesting from a supply chain perspective is that LG is also an electronics component provider, doing business in the vertical layers of handset supply chains. LG’s chemical business currently makes components for the iPhone4 touch screen but according to the FT article, the handset side of the business failed to exploit this technology in LG’s handset offerings.  Knowing Apple’s sourcing practices, I suspect that there may have been a contractual clause or two prohibiting use of the specific technology in competing mobile devices.

Samsung, who with 20 percent market share in overall mobile phones but only 5 per cent in smartphones, also practices a business model that has a significant vertical supply chain presence in the mobile device as well as the broader consumer electronics market.

As we all continue to monitor ongoing developments in this fast-moving and strategically important market segment, it is important to dwell upon the interplays of global supply chain sourcing, product development, and supply chain ramp-up capabilities. This is a classic battle of market dominance where supply chain capabilities do matter, and may well be differentiator in the final outcome.

Bob Ferrari