Monday, February 11, 2019
What’s clear today is that Nokia is taking radical steps to reposition itself in the business world, as it has already done several times in its 150-year history. Having jettisoned the mobile handset business and undertaken a series of strategic acquisitions, including the purchase of Alcatel-Lucent, Nokia is betting the farm on 5G, a nascent technology with the potential to serve a larger customer base, create new revenue streams, and afford the company the stability it has sought for a decade.
“I have absolutely no doubt that a fast and meaningful shift to 5G is under way,” said Rajeev Suri, CEO of Nokia, during a conference call to discuss the company’s fourth-quarter 2018 financial results. “5G will drive a virtuous investment cycle that plays to Nokia’s full portfolio strengths. It begins with radio access networks being upgraded to 5G in key early markets like the U.S., Japan, and [South] Korea. Those upgrades then drive the need for higher-capacity transport connectivity to data centers. And that means more backhaul networks using IP [Internet Protocol] routing and optical infrastructure.”
The potential market for 5G is indeed huge, but it faces strong geopolitical headwinds. Governments are erecting regulatory and other roadblocks in a sometimes futile effort to prevent data breaches. In the United States and other Western nations, efforts to thwart the transfer of dual-use technologies to adversarial powers, such as China and Russia, have hampered tech companies’ ability to operate in their preferred freewheeling mode. Sanctions on rivals such as China’s Huawei create opportunities for companies like Nokia in the West but have negative implications for Western companies in the fast-growing Chinese market.
Nokia operates in a tough competitive environment and faces deep-pocketed rivals in North America and China. All are jostling to supply next-generation equipment to traditional telecommunications service providers and myriad new players, including web-based companies that emerged in the past two decades and now dominate the data and information markets. The targeted customer base includes mammoth enterprises such as Alibaba, Amazon, Facebook, Google, and Microsoft, which have positioned themselves as purveyors and facilitators of the still-evolving information revolution.
Nokia’s vision extends even beyond those companies, however. Waves of new players are barreling into the global information-processing and data-mining market. Many of these “newcomers” are established players in disparate sectors of the economy — aviation, banking and finance, energy, industrial, insurance, manufacturing, military, and transportation — but the thread that binds them is the desire to control the collection, curating, and utilization of data critical to their industries. Toward that end, they are investing in their own high-end networks and shopping for technologies that will ensure not just access to information, but the ability to protect it from digital stealth invaders.
That’s where companies like Nokia come in, said Suri. Nokia has refocused its operations on the enterprise market, preferring it to the rambunctious consumer electronics sector, where contract manufacturers, fabless IC makers, and independent design firms have lowered the barriers to entry.
“We see growth of 5G in 2020,” said Suri. “Every major customer is thinking and talking about 5G. It is going to happen. Private wireless is also going to happen in the enterprise side. I have talked to many enterprise customers in recent months, [and] those conversations strengthen my conviction that as organizations of all kinds seek to digitalize their operations, there is strong demand for Nokia’s products and services.”
As Nokia steamrolls toward 5G, however, there is a harsh reality checkpoint ahead. Nokia is still a deeply troubled company in the throes of a transformation. It is undergoing probably the most difficult reorganization in its history and has had mixed results thus far.
Indeed, the restructuring has entered one of its more crucial phases, and Nokia will likely tweak its strategy for several more years. In October, for example, the company announced the layoff of “thousands” of employees following the posting of less-than-stellar financial results. Revenue slipped in 2018 from the prior year, and the company expects the first half of 2019 to be somewhat damp before a pickup in the second half, followed by a stronger 2020.
Kristian Pullola, Nokia’s chief financial officer, told analysts and reporters during the conference call that the company expects “full-year 2019 to follow a similar pattern as 2018: a soft first half with a particularly weak first quarter, followed by a robust second half, supported by a meaningful 5G acceleration.”
Nokia was operating at a much higher altitude a mere 12 years ago. In 2007, the company had a commanding share of the mobile handset market, including the burgeoning smartphone segment. Its sales shot to a record €51.1 billion (US$70.6 billion) that year, up more than 24%, from €41.1 billion, in 2006.
Just one year later, however, Apple launched the iPhone and began to claw at Nokia’s market share. Within a few years, Apple had supplanted Nokia as the market’s leading smartphone vendor. The Finnish company never recovered from the assault, and in September 2013 Microsoft acquired the Nokia Mobile Devices unit.
The numbers show why Nokia had to exit the handset market. What they don’t show is what Nokia meant to do to rejuvenate its business and avoid following the likes of Alcatel, Lucent, Motorola, and Nortel Networks into the dustbin of corporate history. Having peaked in 2007, Nokia’s revenue started declining the next year, dropping steadily until it crashed to a low of €30.2 billion (US$39.8 billion) in 2012, the year before the company sold its handset business to Microsoft. The 2012 revenue number represented a drop of 41% from the peak only five years before. Following the sale of the handset business, Nokia’s sales sank to €12.7 billion (US$17.5 billion).
Sales have zigzagged since and remain under pressure. The purchase of Alcatel-Lucent boosted the two entities’ combined revenue to €23.6 billion in 2016, but the tally slipped to €23.2 billion in 2017. Sales in 2018 came in at €22.6 billion, down 3% from the prior year. Sales are forecast to rise about 2% in 2019.
Nokia today is a shadow of the enterprise that once ruled its market segment. Could it have opted to hang on in the mobile device business? Yes, but it didn’t.
The iPhone’s ascendance and the company’s own blunders might have forced its hand, but Nokia’s management shifted gears abruptly and aggressively to capitalize on what it bet would be a broader market dynamic. And it is beginning to look like Nokia was prescient in making that move.
The smartphone market is generally agreed to have peaked, mere years after phones took over from PCs as the sales volume drivers in consumer and enterprise electronics. Apple drove home that point when it announced that revenue had declined in its fiscal 2019 first quarter. CEO Timothy Cook pinned the drop in part on a 15% decrease in iPhone revenue, citing “weak macro conditions in some emerging markets [that were] more severe than we originally foresaw, especially in Greater China … compounded by quarterly iPhone upgrades that were lower than we anticipated.”
Smartphone sales will continue to rise in the years ahead but at a much slower pace, market watchers now believe. And as suppliers compete for shares of a smaller pie, pricing pressure will drive down revenues, just as it did in the PC market.
In other words, the dreaded product commoditization that has long plagued consumer electronics is creeping into the smartphone business, and the remaining players could be powerless to stop its advance. In that light Nokia’s hasty retreat from the handset market might have given it a strategic advantage over former rivals Apple and Samsung.
That doesn’t mean its gambit is sure to succeed. Internal challenges persist, including the upheavals of reorganization. In its efforts to become a nimbler enterprise, Nokia confronts an urgent need to change its corporate culture, making it more proactive and less reactive to market developments.
“We are making structural changes that will enable us to execute quicker on our strategy and to enhance our customer focus,” CFO Pullola told analysts. “We are also taking cost actions. We have gone through one phase of cost optimization after the Alcatel-Lucent integration, and we are now moving into the next phase.”
Nokia and its competitors also face external challenges, which will be more difficult to resolve. The tussle for political and military dominance among the world’s leading nations has seeped into the corporate world, boosting some enterprises in their home countries but crippling their competitiveness in foreign markets. Nokia and its rivals operate in such an increasingly sensitive segment of the technology world that every step they take to expand market share, introduce products, and establish critical partnerships will require approvals from multiple regulatory authorities and governments. That regulatory burden will slow down sales expansion.
Nokia’s bet on 5G will also be dogged by technology innovations, supply/demand challenges, and constraints on capital and R&D expenditures. Already, imbalances in the supply chain are forcing companies to rethink their strategies for planning and building out 5G infrastructure, even as the industry is beginning to talk about shifting 6G — the next-generation of communications technology —out of the labs and into product development. That’s not a problem Nokia can resolve alone, and Suri acknowledges the impact on the company’s financial performance.
“There are several factors that point to 2019 being very second-half loaded. The first is the staggered nature of 5G rollouts,” Suri said. “The second is that the 5G ecosystem, standards, chipsets, and devices are still in the early days. We expect that to stabilize in the coming months, but it means that development and testing are operating under considerable time pressure.”
This isn’t the first time Nokia has had to accept it must completely retool operations and shift its focus to a completely new market. The company was founded as a pulp mill and dabbled in electricity generation, rubber, military equipment, and cable before jumping headlong into electronics, consumer electronics, and now networking and communications equipment.
The new Nokia hasn’t strayed very far from its more recent interest in high tech, but this evolution has already proved to be more fundamentally disruptive for the company, its suppliers, and consumers. The decline in Nokia’s position in the wireless handset market severely crimped growth at chip manufacturers and other suppliers and helped move the center of communications equipment innovation to North America and, eventually, Asia.
At the peak of its success, though, Nokia gave the world much more than a distinct ringtone. It helped to spur growth across the world and laid the foundation on which other enterprises built an industry. Is it destined again to play a similar role, or will the new Nokia become another footnote in the long history of once-dominant enterprises that aimed for the next big thing and missed the mark?
Either way, the tech world should keep an eye on Nokia. When it succeeded in the past, the company ruled unchallenged for a time and left its imprint on the industry. And when it failed, it left quite a dent.
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