Ringing in the changes

Despite much instability, constant rumours and changeable financial results, mobile phone giant Nokia continues to defy its critics, as Rhys Jones reports.

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By  Rhys Jones Published  September 11, 2005

|~|nokia200.jpg|~|NEW LOOK: Nokia’s new range of mobile handsets are being rolled out with plans for many more throughout 2005. |~|Despite much instability, constant rumours and changeable financial results, mobile phone giant Nokia continues to defy its critics, as Rhys Jones reports. IS A COMPANY IN CRISIS Or so you would think. With varying recent results, takeover rumours, a wildly fluctuating share price and declining margins, the impartial observer would probably tell you to steer well clear of the Finnish mobile phone firm. Add the fact that its CEO, Jorma Ollila — the man credited with transforming Nokia’s fortunes over the past two decades — has decided to jump ship and you’d be well within your rights to assume the company is teetering on the brink... but you would be wrong. The company reported a strong set of results for the second quarter of 2005, with shipments up by 34%. Net profits rose 15% to US$975 million during the quarter, with pre-tax profits of US$1.4 billion. A broader range of phones, including more clamshell and camera devices as well as the introduction of more low-priced models, contributed to an increase in market share to 33%. Much of this growth came from emerging markets however, where low-end products predominate and pricing pressures are currently intense while industry average selling prices continue to edge downwards. Nevertheless, the Helsinki-based phone maker seems to be back on track after a rocky 2004, which saw company profits slump by some 2%. “In 2005 we are seeing an increase in market share and a significant recovery from 2004 — we are actually back into good growth for 2005,” Dr. Walid Moneimne, senior vice president, Europe, Middle East and Africa (EMEA), Nokia networks told Arabian Business. “This is in line with our strategy to grow faster than the market and this is proving to be true in both the mobile phone and network businesses — we aim to do this by gaining a share of the existing market and expanding within the addressable market where there are a lot of opportunities. Examples are in multimedia, services and in countries where we were didn’t previously have a presence — these are ... expandable markets for us,” he adds. It isn’t all rosy, however. The company’s Q2 results were weaker than many analysts had expected and shares in the mobile phone firm fell by as much as 11%, after it warned that tough competition was likely to drive down prices and margins this year. “The guidance was well below [forecasts], which suggests that Nokia’s margins are going to be a lot lower than people expected,” says Akber Khan, an analyst at Deutsche Bank. It also appears that rival Motorola is gaining ground on the Finnish mobile-phone maker. The two companies are reported to have accounted for 49.8% of worldwide mobile phone sales in Q2 2005. Nokia’s market share grew 2.3% in the quarter according to research company Gartner, while Motorola saw its market share grow from 15.7% in Q2 2004 to 17.9% in the same period this year, despite the fact that profit margins are coming under pressure across the mobile sector. “Motorola was stable, the others had declining margins and ... Nokia’s margins are not too good. It’s very much a margins issue here,” says Jussi Hyoty, a mobile analyst with FIM Securities. In spite of growing competition and an uneven stock price, Nokia remains upbeat — and with good reason. Worldwide mobile phone sales totalled 190.5 million units in the second quarter of this year, reflecting 21.6% growth year on year, according to Gartner. The research company reported that this performance represented the second strongest quarter of growth on record after the final quarter of 2004 when worldwide sales surpassed 195.3 million units. “Looking at the dynamics in a long-term perspective, this really is an interesting period now because we’re back on a growth track, but it was not only 2003 which lacked in terms of Nokia’s total sales — 2002 and 2001 were poor as well,” explains Kai Konola, director, strategy and business development, networks, Nokia. “Network industries went down by some 15% per annum from 2001 to 2003 — the industry as a whole was in a real slump and Nokia network sales suffered, but we recovered last year by doubling our growth for 2004 and we plan to grow in 2005,” he predicts. This aim looks to be a realistic proposition considering Gartner’s prediction that the strength of the world’s mobile phone market in the second quarter of 2005 means that it will reach 780 million units by the end of the year. In regional terms, Gartner estimates that combined sales in Eastern Europe, the Middle East and Africa grew 37% year on year and that mobile phone sales rose to 33.6 million units during Q2 2005. “The Middle East is recognised as a very important region for Nokia and we are seeing significant subscriber growth there — our business is growing significantly and we also have investment for several countries where we are not today,” says Moneimne, adding that the company has already expanded outside its traditional UAE base into Saudi Arabia, Egypt and Morocco. “On the network side we have been quite active in countries like Iran, Saudi Arabia, Kuwait, Egypt and Morocco and we are putting a plan in place to do two things. On one side to go into some additional countries that are not part of our network presence today and this is mainly in Algeria, Tunisia, Nigeria and Kenya, and we hope to attract more business across these countries,” he adds. It doesn’t appear that Nokia needs to attract a great deal more business in the region, however. A recently released report by the Arab Advisors group, which has produced some 120 studies on the Gulf’s communications markets, claims that cellular users in the region change their mobile phone once every five weeks. But Nokia puts the trend down to the maturity of the region’s telecommunications industry. “There’s more independence in the Middle East — the retail market is very developed and the whole advertising around mobile phones is very driven by the distributor and the retailer, which creates a lot of appeal,” explains Moneimne. “But it is interesting to compare other industries and how they react in the Middle East. There is differentiation in many markets and a good example in the car market is Range Rover when they had the 4.0 and the 4.6. In the global market, 80% of people owned a 4.0 and 20% owned a 4.6, but in the Middle East it was 80% with the 4.6 and 20% with the 4.0,” he adds. Despite these statistics, Nokia bosses have denied the company pressurises its Middle Eastern customers to change mobile phones by constantly releasing new handsets in the region. Last year the Finnish mobile phone giant launched some 40 new models in the Gulf. “I don’t think Nokia exercises pressure on people to buy new phones, but I do think there is an element of pressure to change the phone because it is very a personal thing,” says Moneimne. “It is true that countries that are very status conscious will change their phones more often. The fact that people are interested in having the very latest phone is a worldwide phenomenon and it is more ubiquitous in the Middle East,” he adds. The Finnish company expects its regional business — especially in terms of networks — to grow further as a result of the wider liberalisation of the Middle East’s telecommunications industry. In terms of opening up, Jordan paved the way four years ago and now countries such as the UAE, Saudi Arabia and Bahrain are following suit. Good news for Nokia. “We see this [market liberalisation] happening in the Middle East where if you look at the plan for the next two years there are many licenses to be awarded,” says Moneimne. “In Iran there are plans for a second licence to be awarded — or a third depending on how you look at it — in Saudi Arabia there is a plan for a third and both the UAE and Egypt are on track. There will also be a lot of 3G licences to be awarded so we see a very strong dynamic that will definitely promote more opening in these markets,” he adds. When it comes to promoting the company, however, Nokia is second to none. The company was ranked as the world’s sixth most valuable brand in 2005, according to the annual BusinessWeek/Interbrand Global Brand Scorecard. Valued at more than US$26.4 billion, 10% more than last year’s estimate, Nokia moved up two spots within the top 10 from eighth to sixth place. The Finnish firm, whose slogan is ‘Life goes mobile!’, was described in the study as “looking to take on Apple’s iPod as cell phones and MP3 players converge into one device”. The company launched more than 34 new handsets in just the first six months of 2005 with features ranging from handheld gaming to MP3 players to enterprise smartphones for the office. Nokia was both the only mobile phone manufacturer and the only European brand to make it into the top 10. One of the reasons for its success in this field is down to the company’s emphasis on simplicity. “The things that we want to emphasise together with our brand are things like ease of use and the human technology aspect — of course you can build lots of features and functionalities to devices — but I think the key issue is ease of use so that the devices become very natural things to use,” says Konola. “I think ease of use, reliability and trust are the two aspects that the average person associates with Nokia. We are diversifying though because we understand that there are customers who appreciate a high-tech flavour and for them it would be dull unless they see the high-tech aspects such as the camera pixelation. But if you go to the average Joe on the street I think the human aspect, reliability and ease of use would come up,” he adds. Despite Nokia’s impressive branding strategy, it may need to undertake some serious crisis management measures when the company’s CEO — and saviour — Jorma Ollila leaves the firm next year. Ollila transformed Nokia’s fortunes after taking the top job in 1992 and his departure will leave a huge void within the firm. Ollila will become chairman of Royal Dutch Shell when he steps down from his position with Nokia, although he will remain as chairman of the board for the Finnish firm. The oil giant revealed last month that Ollila — who changed Nokia’s fortunes after joining in 1992 — would succeed Aad Jacobs as its non-executive chairman on June 1, 2006, the same day he leaves Nokia. Olli-Pekka Kallasvuo becomes president and CEO on October 1 and takes over from Ollila as chief executive in June 2006. He will have a lot on his plate — first and foremost dealing with persistent takeover rumours, something that definitely concerns Nokia shareholders. A spate of recent reports in the UK press indicated that Cisco is exploring a bid for Nokia. But in reality, with a US$73 billion market cap, it is unlikely Nokia will have too many suitors. Nevertheless, Cisco is no stranger to buying companies. But during its recent spurt of activity, it appears to be focusing on smaller acquisitions. It recently paid US$30 million for NetSift, which develops packet-processing solutions for computer networks. There was also the US$97 million deal (up to US$122 million if certain “product milestones” are met) for Sheer Networks, which develops network service management products. Basically, Cisco buys companies to enhance its infrastructure services. But in buying Nokia, Cisco would be entering the consumer-handset market for the first time. There are some apparent synergies, though — such as with Nokia’s Networks division. Rumors have floated around over the past few years that Nokia would sell off this division, and it could certainly use some help, especially since its chief competitor, Ericsson, is making inroads. The division would fit nicely within Cisco’s wireless-infrastructure focus, and Cisco would benefit by gaining access to Nokia’s “intelligent” wireless applications and its base of network operators. However, both companies’ stocks have been treading water for some time. And with Cisco’s market cap at US$123 billion, an acquisition would be dilutive to its shareholders, even if it kicked in some of its cash hoard. Nokia’s chief of corporate communications, Arja Suominen, denied the news as unsupported speculation. Changes at the top, constant rumours and changeable results the past couple of years has certainly provided many ups and downs for the Helsinki-based company. But with the company’s new N-Series multimedia phones hitting the shelves over the coming weeks, Nokia will be hoping for considerably more ups than downs. ||**||

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