Arima Communication Corp is likely to benefit from an agreement to supply mobile phones to Ericsson AB, but the deal's value will be limited to experience gained from the agreement rather than large profits, securities analysts said yesterday.
Ericsson, one of the world's largest makers of cellular phones, signed a letter of intent with Arima Communication on Thursday to outsource the manufacturing and development of "entry-level" mobile phones to Arima.
Arima Communication is a subsidiary of notebook maker Arima Computer Corp (
Arima Communication will produce the mobile phones according to Ericsson's specifications. In addition to reducing production costs, the agreement frees Ericsson to develop technically advanced products, said Jan Wareby, executive vice president of Ericsson's consumer products division, in a statement following the agreement.
Last month, Ericsson said in its interim six-month report that component shortages and an unfavorable product mix resulted in losses in its entry-level phone segment during the second quarter of the year.
To restore profitability, the company said it would reallocate high volume production to factories that could produce the phones at low cost.
Arima Communications would give no details about the size, delivery date or value of the order, but Jan Ahrenbring, marketing director at Ericsson's phone unit, reportedly said the first Arima-developed products will come out next year.
According to securities analysts and local media, Ericsson will order roughly 10 million phone-sets, with each set costing between US$70 and US$80. Arima Communication currently produces about 500,000 units per month.
"The price is very near cost," said an analyst at Entrust Securities, who asked not to be identified.
"So the order won't make much of a contribution to Arima's bottom line."
Indeed, the low cost was probably one of the reasons Ericsson most likely chose Arima over mobile phone manufacturer GVC Corp (
The deal could also guarantee Ericsson a long-term supply of handsets and foster relationships between the two companies in other fields, the analyst said. Arima Communication supplies PCMCIA cards to Ericsson.
According to Arima officials, the company was selected based on its large manufacturing capacity, its design capability and its intention to maintain a long-term relationship with Ericsson.
But even if Arima Communication manages to just break even with this deal, it will benefit in other ways, said Hsu Wei-che, an analyst at Taiyu Securities Co.
"It uses low prices to gain production experience," Hsu said. "That's how Arima grew with its notebooks."
Based on this strategy, Hsu doesn't expect Arima Communication to make a significant profit over the next year or two from the production of mobile phones. However, he sees benefits in the longer term.
"First learn properly, then find a way to make money," Hsu said.
With dwindling profit margins in their own sector, several other notebook makers, such as Quanta Computer Inc (
"In the short term, many people have recently been talking about Bluetooth," said the analyst from Entrust Securities. "So for notebook makers, most are hoping to combine notebooks and handsets."
Bluetooth is a technology that allows devices of any kind to talk to one another using very low-powered radio signals within a range of 10m to 100m.
The first phone with Bluetooth built-in, the Ericsson T36, is expected to be available by the end of the year.
The Arima Group, led by Arima Communication, is focusing increasingly on telecommunications manufacturing.
The group expects 85 percent of its revenue to come from its notebook business this year, and 5 percent to 7 percent from its handset business, company officials said yesterday.
By 2002, handsets will account for 25 percent to 30 percent of the group's revenue, with the contribution from notebooks down to 50 percent to 55 percent, they said.
The group is expected to announce its half-year results today after a meeting of its board directors.
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