Sony Ericsson yesterday said it would miss its finanical targets this quarter as rising food and fuel prices in emerging markets ate into sales of mobile phones.

In a second profit warning in just over three months, the company, which is jointly owned by Sweden’s Ericsson and Japan’s Sony, said that it would now only break even in its second quarter.

In the first three months of this year the group saw profits drop 48 per cent as the combined effect of a saturated Western European market and a tighter grasp on purse strings hit demand.

Now it appears that high growth markets such as China and India, which have been adding as many as seven million mobile subscribers a month, are coming off the boil.

Many emerging markets have been hit by high inflation, with mobile users more inclined to buy basics and stay with their existing phones.

Carolina Milanesi, a mobile devices analyst for Gartner, said: “At the beginning of the year people were concerned about Western Europe and North America and we thought the emerging market growth would be enough to counter that. But then we heard about rising food and fuel prices in emerging markets.

“Although phones are still considered essential and if you do not have one you will try to find the money to buy one, what we are seeing is that the people that have a phone are not necessarily upgrading. Net additions are slowing as penetration increases. If you want to continue to grow you have to rely on replacements.”

She added that high inflation and the recent stock market crash meant that Gartner has revised down its initial forecast for the Chinese market.

Sony Ericsson is particularly vulnerable to a fall in consumer spending as its portfolio is concentrated towards more expensive feature-rich music and camera handsets. Its rival Nokia now rings in 75 per cent of all its handset sales outside Europe and North America but, unlike Sony Ericsson, it has targeted the low-end segment.

Ms Milanesi said: “Nokia is still in a better place to address first-time users in emerging markets as they have lower cost phones.”

In a statement yesterday ahead of its results on July 18, Sony Ericsson said that it expects to ship 24 million phones in the second quarter with an average selling price of €115 (£88).

Gross margin is expected to decline year-on-year and the group is expected only to break even.

Geoff Blaber, an analyst for CCS Insight, said: “Unlike the other top five handset vendors, Sony Ericsson is highly dependent on Western Europe, with only a limited presence in high growth, emerging markets. Competing with the scale and distribution footprint of Nokia and Samsung is becoming increasingly difficult.”

Sony Ericsson has recently launched two lower-tier models but is still a long way behind Nokia, Mr Blaber added. Samsung and LG are also seeking to expand their range of cheaper phones.

Yesterday’s profit warning surprised the markets. James Marshall, Sony Ericsson’s head of global portfolio marketing, had said on June 17 that, after the weak first quarter, the outlook for the rest of the year was more positive.

The warning immediately sent shares in the co-parent Ericsson tumbling 7.6 per cent in Stockholm, while Nokia’s shares fell by 4.5 per cent in Helsinki.

Sony Ericsson had built up momentum in recent years and had been targeting the No 3 slot, but the poor sales dragged it down to fifth place, behind LG, the Korean manufacturer.

With 39 per cent of the global market share, Nokia is still the clear leader, followed by South Korea’s Samsung and Motorola of America.

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