Mobile phone maker Sony Ericsson said on Friday it plans to cut one in five jobs this year in its battle to return to profit as a sluggish market brought a hefty first-quarter loss, as expected.

The world no.4 handset manufacturer, owned by Sweden's Ericsson and Japan's Sony Corp <6758.T>, plans to slash 2,000 jobs this year after shedding a similar number in 2008.

The company shed a quarter of its market share to 6 percent year-on-year but said it saw signs of a stabilization in demand, echoing comments made by top cellphone maker Nokia a day earlier.

In March there were signs of stabilization ... in the U.S. and in Europe, CEO Hideki Komiyama told Reuters in an interview.

Still, in some areas we still have weakness, in Eastern Europe, in Russia, the Middle East and India, but some other areas have clearly started seeing some signs of correction.

The company's pretax loss of 370 million euros ($485 million) - against analysts' forecasts of 371 million - came a day after Nokia reported its first-ever quarterly loss.

What should Sony Ericsson do to get out of this slump? They are not big enough to compete with Nokia, and now we have the iPhones. I don't think they should go after all segments of the market, said Michael Andersson, analyst at Evli.

Sony Ericsson's success has been built on a strong offering of mid-range phones with high-quality cameras and music players, but this market segment has seen a sharp fall in demand as operators have doled out subsidies to more expensive phones.

Imaging and music are now part of most of the competitors' portfolios and Sony Ericsson is finding it more and more difficult to have its products stand out, said Gartner Research Director Carolina Milanesi.

Because of the economic downturn consumers are increasingly selective about their mobile phone purchases and upgrades.

Touchscreens, good web browsing, and navigation are moving up the wish list, Milanesi said.

Sony Ericsson lacks strength in these areas.

EXTREMELY CHALLENGING

The cellphone industry has entered the toughest year in its history as consumers rein in spending, with the market set to fall 10 percent or more this year, and retailers try to clear inventories of unsold phones after bleak holiday sales.

Komiyama said the company targeted to cut a further 400 million euros in annual operating expenses by mid-2010, taking on additional 200 million in restructuring charges.

An analyst who asked not to be identified said Sony Ericsson's additional cost cuts were inevitable.

With the level of losses we are seeing and the gross margins they have, they don't have any choice. But the uncertainty remains. Will this be enough? he said.

Sony Ericsson, the fourth biggest global handset maker after Nokia, Samsung <005930.KS> and LG <066570.KS>, had flagged its steep first-quarter loss in a profit warning last month, and warned of a collapse in unit sales.

It sold 14.5 million phones in the first quarter, down from 24.2 million in the fourth, and saw its market share slip by 2 percentage points to 6 percent compared with the same quarter last year.

Shares in Ericsson were up 2.5 percent at 77.90 Swedish crowns at 6:10 a.m. EDT. Sony shares had closed up 5.9 percent in Tokyo before the results.

(Additional reporting by Tarmo Virki, Niklas Pollard, Simon Johnson and Johan Ahlander, Editing by Will Waterman and David Cowell)

Japan Russia India Electronics