Sony Ericsson posted an operating loss of two million euros (3.1 million dollars) in

the second quarter, compared to a profit of 315 million euros in the same period of last year.

Net profit plunged by 97 percent to six million euros from 220 million a year earlier, while sales fell by 9.4 percent to 2.82 billion euros. In a statement presenting its second quarter earnings, the group announced a restructuring programme aimed at cutting operating costs.

“Our target is to achieve a reduction in operating expenses of 300 million euros annually, with the full effect expected to appear within a year,” Sony

Ericsson chief executive Dick Komiyama said.

For the past year the group has been trying to develop its business on fast-growing emerging markets, in order to reduce dependence on its traditional, near-saturation European outlets. As a result it has sold more low-end phones, where prices are lower and the competition is tougher than in the high-end segment, the company said.

But Sony Ericsson has been hit by a double whammy: it is suffering from the economic slowdown in Europe, and at the same time it lacks the products and volumes necessary to make a splash in emerging markets such as China and India.

“The market in general is much, much worse than one or two years ago. And secondly the products Sony Ericsson has today are not as strong as they used to be,” analyst Greger Johansson at Redeye told AFP.

“Sony Ericsson is not big enough in Western Europe and in the mid- to high-end segment. So we are seeing a slowdown in Western Europe and in this higher market,” Michael Andersson, analyst at Evli Bank, said. “That creates a problem right away because Sony Ericsson doesn’t have (a strong enough) low-end or the global offering,” he added.

Andersson said Finnish rival Nokia went through a similar phase several years ago, when sales of its high-end phones began to flag in Western Europe. But it was able to compensate for the fall by strong sales in emerging markets, which made it possible to maintain strong margins.

With its late entry on emerging markets Sony Ericsson has been forced to reduce its average selling price for handsets, which fell to 116 euros from 125 euros in the second quarter last year, weighing down profits. “It’s a big problem for them because they are very dependent on the Western European market and Nokia is very dominant on the emerging markets,” Andersson said. The analysts said they saw Sony Ericsson’s restructuring plan as “necessary.”

At the end of June, Sony Ericsson had eight percent of the mobile phone market, compared to Nokia’s 40 percent.

Sony Ericsson, which is not quoted on the stock market, was formed in 2001 through the merger of Ericsson of Sweden, world leader in mobile phone networks, and Japanese electronics giant Sony. On the Stockholm stock exchange, the Ericsson share closed up 3.58 percent at 72.30 kronor (12.13 dollars) in late afternoon trading on Friday, in an overall market up by 2.64 percent.