As if the handset businesses of

Ericsson

(ERICY)

and

Motorola

(MOT)

didn't have enough to contend with, they're facing new threats from a European rival as well as Japanese manufacturers.

Handset makers from Japan, most notably

Matsushita Communication Industrial

of the

Panasonic

brand, are determined to take on the global players -- No. 1

Nokia

(NOK) - Get Report

, No. 2 Motorola and No. 3 Ericsson -- by offering lower-priced phones in Europe. At the same time, German juggernaut

Siemens

(SMAWY)

is making big progress against the big three, also with the sale of low-end phones.

The low-end battle is expected to inflict little pain on Nokia in Europe because the Finnish company leader possesses a highly recognized and respected brand and offers a wide range of phones, including lower-priced ones. However, analysts agree this battle will damage the weaker of the three majors, Motorola and Ericsson, even if they're not so sure it's a winning long-term strategy for the interlopers.

Last month, Matsushita, Japan's biggest maker of mobile phones, declared its intention to introduce a lower-priced mobile phone in Europe, probably by the third quarter, with an eye toward expanding its global market share. The company's market share stood at 5.4% at the end of the third quarter of 2000, according to research firm

Gartner Dataquest

. (These are the latest figures available.)

Mulling Steps

Meanwhile,

NEC

and

Mitsubishi Electric

, also of Japan, are said to be mulling the same step, with the three Japanese makers seeking a combined 15% worldwide handset market share by 2003 to 2005. NEC and Mitsubishi Electric currently have negligible shares of that market.

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Siemens already has made serious incursions, increasing its third-quarter market share in Western Europe by 4.6 percentage points to land in the No. 2 position with a 16.7% share, behind only Nokia. To do that, Siemens powered past Motorola and gained ground from Ericsson. In the same survey, Motorola's share fell to 9.9% from 13.2% in the second quarter, while Ericsson dropped to 10.4% from 11.2%.

Though Siemens has a wide range of stylish phones, it achieved its second-place standing with three offerings on the low end, a segment that Ericsson and Motorola have failed to target effectively.

Ericsson and Motorola didn't return calls seeking comments.

The Market

There is a real market for low-end phones in Europe. "In 1999, people woke up and realized they didn't need to have the latest handset. Ericsson was making the best up-market handsets available, but nobody cared. Everyone was buying entry-level phones. Now you don't have to have bells and whistles, just the consumer handset," says Philip Townsend, an analyst with

Arnhold and S. Bleichroeder

. (He rates Ericsson a sell and his firm doesn't participate in underwriting.)

Despite the fact that the majority of the western European population already owns a phone, "low-end phones still account for higher sales, with a bias toward new customers," explains Rose Papp, a co-manager of

L. Roy Papp & Associates'

Papp America Abroad fund.

The dearth of low-end phones in Ericsson's and Motorola's respective product portfolios points to looming market share losses for the two companies.

"They've got more to lose," says Todd Bernier, an analyst at

Morningstar.com

, of Motorola and Ericsson. (He doesn't rate stocks, and his firm doesn't participate in underwriting.)

"Motorola has misread the market repeatedly," adds Peter Baughan, an investment analyst at fund management firm

Harding Loevner Management

, referring to the company's lack of low-end offerings. (His firm has no position in Motorola.)

Already,

Motorola records meager operating profit margins, without even much of a low-end product to drag those margins down. For fiscal 2000, operating margins for the year were 3.3%, well below its stated goal of 10% at the beginning of 2000.

Dire Straits

Ericsson is in even more dire straits. Unable to make any money from its consumer products, the Swedish company announced in January that it will

outsource its entire handset business.

Some question whether going after the low-end market is the right long-term strategy, what with the anticipated move to next-generation phones that are capable of sending and receiving data, not just voice, traffic.

"They

people already with phones upgrade to phones that are Web-enabled. That's not what people are buying today," argues Papp of L. Roy Papp & Associates. "I do believe that within a year or two, people will upgrade toward these Web-enabled phones."

Also, Baughan of Harding Loevner questions the viability of this business strategy. "I don't think it's possible to have a niche of low-end phones," he says. "You develop profit margins in the high-end and then cycle down, with those phones the basis for a profitable set of mid- and low-range phones."

It's also not clear how long Siemens can continue to build market share. "Penetration is quite low in their home markets of Germany and Austria," Johan Carlstrom of Swedish investment bank Handelsbanken says. "When these countries have a strong month, they report nice figures."

He also casts doubt on the importance of Dataquest's western European numbers, saying, "It's more important to have a nice market share in Latin America and Asia, the strongest growth markets."

But in the short term, Ericsson and Motorola will feel pressure from the strategy regardless of whether it works over the long haul.