Nokia: Handset sales declining faster than expected

Company plans cost-cutting measures

Olli-Pekka Kallasvuo

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The poor global economic situation has reduced demand for mobile telephones faster than had been expected earlier in the year.
      Nokia issued a profit warning on Friday, according to which sales and profitability in its Devices & Services group will be weaker in October-December than had previously been expected. The company is responding by enacting cost-cutting measures.
      Nokia expects that Christmas sales will be weaker for its competitors as well.
      The company predicts that global sales of mobile phones for this year will be 1.24 billion handsets worldwide. Sales figures in the third quarter are expected to reach 330 million. The previous estimate for this year’s total handset sales was 1.26 billion phones.
     
Nokia also gave a somewhat pessimistic assessment of business prospects for next year.
      The company predicts that the number of handsets sold next year will be lower than this year. This year growth is estimated at just under nine per cent.
      The mobile telephone business has experienced several years of strong growth, fed by the spread of handsets and mobile networks into new market areas in poor, densely-populated countries.
     
According to Nokia CFO Richard Simonson, demand has declined both in the market for cheap handsets and expensive phones.
      Bill Seymour, Nokia's head of investor relations, predicts that demand will decline more quickly in October-December in rich countries than in emerging countries.
      Compared with its competitors Nokia has had an especially strong position in the emerging markets. As the largest and most efficient company in the field, it has managed to manufacture telephones at a lower cost than the others.
     
Currency exchange rates are one reason cited by Nokia for the decline in demand.
      “In many markets, the value of the local currency has declined sharply against the US dollar. As the prices of the products on sale are pegged to the dollar, people’s buying power has declined rather quickly”, Simonson explains.
      This autumn, the exchange rates of the emerging countries have been especially susceptible to sharp fluctuations.
      Because of the financial crisis, credit is more difficult and more expensive to get. Nokia says that the purchasing power of many of its retailers is under pressure, which is why they have not bought phones for resale as much as had been expected.
      On the other hand, Nokia expects to make it through lower demand more easily than its competitors. The company believes that its market share in mobile phone sales will be as high or higher in the fourth quarter than it was in the third.
     
In October, when it announced it’s third quarter results, Nokia did not want to make any predictions for 2009. The company was not expected to announce its forecasts for next year until December 4th, at an investors’ event in New York.
      Prospects on the market appear to have weakened so much that Nokia decided to come forward with the information two weeks in advance.
     
Nokia plans to respond to the new situation by enacting cost cuts.
      The company did not give many details on Friday on how the cost cuts would be targeted. On Friday it said that it would curtail use of external contractors, consultants and professional services.
      Cost-cutting measures will also affect the company’s own operations and personnel. More information on that is expected to come out in December in New York.
     
Nokia’s warning of declining sales pushed the company’s share price down to its lowest level in four years.
      Before the announcement on Friday afternoon, Nokia’s share price on the Helsinki Stock Exchange had been on an upward track, reaching about four per cent above Thursday’s figures. After the announcement, Nokia’s share price fell, closing 3.7 per cent below Thursday’s level.
      Average share prices in Helsinki declined in Nokia’s wake. Nokia also contributed to the downward trend on the New York Stock Exchange on Friday.


Previously in HS International Edition:
  Nokia Q1/2008: Weak dollar eating into value of handset market (18.4.2008)
  Nokia profit falls in third quarter (17.10.2008)

Links:
  Nokia Press release 14.11.2008: Nokia updates its 4th quarter 2008 outlook and gives preliminary outlook for 2009

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