Updated from 2:21 p.m. EST

Shares of mobile-phone giant


(NOK) - Get Report

fell Tuesday after Morgan Stanley Dean Witter downgraded the stock to underperform from neutral, citing concerns over slowing global demand and expectations for a decline in telecom equipment spending in China in the first half of the year.

Morgan Stanley set a price target of $13 on the stock, some 40% below the Friday close of $22.50. The firm cut its 2002 earnings estimate by 6% to 0.73 euros, or 65 cents a share, and lowered its 2003 earnings estimate by 4% to 0.81 euros, or 72 cents a share. The firm also slashed its forecast for global mobile-phone sales to 401 million for 2002, compared with the consensus forecast of 435 million. Morgan analyst Angela Dean said she expects subscriber growth to decline by 11% in China this year and wireless capital spending to fall between 10% and 20%.

In a separate research note, Merrill Lynch also voiced concerns that the speculation about wireless demand in China for 2002 was too optimistic.

Nokia lost 6% to $21.15, while rival



fell 7.5% to $4.45.


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, gave back 5.1% to $13.53 ahead of its quarterly earnings report.

Great Expectations

After a terrible year in 2001, some investors were expecting a major upturn in sales in 2002, in part based on launches of data-capable mobile phones this year. But because of a weak holiday season, Wall Street has become

increasingly skeptical about the outlook.

Wireless shares have fallen sharply over the past two weeks. Nokia gained 60% between September and December 2001, but the stock has lost 22% since Jan. 3. Ericsson has dropped 25% since that date, and Motorola has lost 13%.

Morgan Stanley lowered its estimates for global mobile phone sales in part because of data showing a larger than normal seasonal falloff in demand during the fourth quarter, which resulted in excess inventory. The firm expects similar weakness to continue, "until wider availability of color screen phones is achieved in the second half."

Meanwhile, the Chinese market, which had been viewed as a huge driver of growth for the sector, may level off. Mobile phone subscribers surged 250% in China during the past 24 months, and wireless infrastructure spending has jumped 40% to 45% a year in the country since 1991. But Morgan Stanley and Merrill say that as saturation increases, that kind of growth can't be sustained.

"The more densely populated coastal regions have reached higher penetration levels" of 25%, versus 11% in the country as a whole, Morgan Stanley wrote in the research note. Meanwhile, the pace at which Chinese mobile phone users will replace old models is difficult to forecast, the note indicated.

Put a Lid on It

Slower subscriber growth should, in turn, put a cap on infrastructure spending. Both Nokia and Ericsson supply equipment to Chinese network operators China Unicom and China Mobile. "In theory there was the potential to add capacity for another 15 million users in 2002, but now that looks highly unlikely," Morgan Stanley's note said.

Merrill also said that new subscriptions will "likely be more price sensitive," while local manufacturers will be "more competitive in rural areas where technology isn't as sophisticated."

The Nokia downgrade came just ahead of the company's earnings report, which is scheduled for Thursday. Ericsson is expected to report earnings on Friday.

On Dec. 11, Nokia said it would

hit the high end of its earnings target of 16 cents to 18 cents a share for the fourth quarter, or possibly exceed that number. The company began revamping its product line in the fourth quarter and expects to continue through 2002. But some new products have faced delays, slowing the rollout of next-generation data-capable services in Europe. According to Thomson Financial/First Call, analysts, on average, are looking for a profit of 18 cents a share for the fourth quarter.