Nokia Recalls 46 Million Cell-Phone Batteries

HELSINKI/TOKYO – Nokia (NOK) warned consumers that 46 million batteries used in its mobile phones could overheat and offered to replace them for free while it negotiates with battery maker Matsushita over who would bear the costs.

The news pushed shares in Matsushita down 5 percent in Tokyo — its worst one-day fall in 14 months — as one analyst estimated the recall could cut into the company's net profit by as much as 20 billion yen ($170 million).

Nokia, the world's top cellphone maker, said about 100 incidents of such overheating had been reported globally, but none had involved serious injuries or property damage.

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"Nokia has identified that in very rare cases the Nokia-branded BL-5C batteries ... could potentially experience overheating initiated by a short circuit while charging, causing the battery to dislodge," it said on Tuesday.

Nokia said it was working closely with Matsushita Electric Industrial Co. Ltd. (MC), which made the batteries in question between December 2005 and November 2006, to investigate the problem.

Replacing the batteries would have some financial impact, but Matsushita would pay part of the costs, Nokia said.

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Analyst Richard Windsor of Nomura estimated the cost to Nokia at a maximum of 100 million euros ($137 million).

"Historically, when there's been a problem of this nature the supplier has had to pay," he said. Research firm Gartner said one such battery would cost around $4.

Nokia's U.S. shares closed down 64 cents or 2 percent at $29.84 on the New York Stock Exchange. Its European shares had closed down 1.55 percent, helping nudge the DJ European technology index down 0.84 percent.

Some U.S. cellphone analysts said the warning would be unlikely to either hurt Nokia's market share or boost its main rivals such as Motorola Inc. (MOT), Samsung Electronics Co. or LG Electronics.

But Jyske Bank downgraded its rating on Nokia shares to "reduce" from "buy," saying every third Nokia user would now have to check their phone's battery.

"I think this will hurt Nokia's brand a lot, and that's the most precious asset Nokia has," Jyske analyst Soren Linde Nielsen said.

According to Interbrand, Nokia's brand is valued at $33.7 billion, making it the world's fifth-most valued brand after the likes of Coca-Cola (KO) and Microsoft (MSFT).

"By reacting swiftly and responsibly, and by being fully transparent, we believe that consumers will continue to view Nokia as a responsible and trustworthy brand," Robert Andersson, Nokia's head of customer and market operations, told Reuters.

SPLITTING THE COSTS

Mobile phone maker Sony Ericsson, owned by Sony Corp. (SNE) and Ericsson (ERIC), said it depends mostly on batteries from Sony and does not use Matsushita batteries.

Last year, Sony was hit by hefty costs for the recall of 9.6 million laptop PC batteries that could overheat and catch fire.

A representative for LG said she did not know of any LG cellphones that were affected.

Motorola said it has not used the battery that Nokia had warned about but spokesman Charles Kaiser named Matsushita Battery Industrial as one of Motorola's many suppliers.

"Incidents such as this can happen with any consumer product," but are very rare, Kaiser said. Motorola shares closed down 2 percent at $16.51 on NYSE.

The "BL-5C" is Nokia's most widely used battery, powering its low-end 1100 series phones and multimedia handsets N70 and N91, among others. Several suppliers have made a total of more than 300 million of them for Nokia.

Nokia said it had issued a product advisory (http://www.nokia.com/batteryreplacement) to consumers based on preliminary findings from its investigation.

Matsushita said there had been a rare problem in the process of manufacturing battery cells — core components of battery packs — rather than in the design of the batteries. It said the effect on its earnings was uncertain.

"We are still in discussion with Nokia about how to divide the replacement cost," said Matsushita spokesman Akira Kadota.

The battery packs in question were assembled in China, but battery cells were manufactured in Japan, Kadota said.

Daiwa Institute of Research analyst Kazuharu Miura said the battery replacement could reduce Matsushita's net profit for the year to March 2008 by as much as 20 billion yen, or about 8 percent of the market consensus of 253 billion yen.

Sales of Matsushita's battery business came to about 300 billion yen in the year ended March, accounting for 3.3 percent of its total revenues.

Nokia spokeswoman Marianne Holmlund said that in similar cases in the car industry, less than half of consumers eligible for replacement had used the option.