Shrinking markets force Nokia to cut costs appreciably

CEO Olli-Pekka Kallasvuo believes market share will grow next year

print this

Since the end of September, the sales of mobile phone handsets have shrunk so much that the world’s largest mobile phone manufacturer Nokia can only try to guess at what the current state and the future trend of mobile phone markets might be.
     
The company is preparing itself for the negative impact of slowing sales by taking steps to reduce costs appropriately.
      Nokia CFO Rick Simonson emphasised that appropriate cost reductions are being effected now and are continuing in plans for 2009 and 2010.
      ”We are also acting on all fronts to reduce our costs beyond what may be attributable solely to the scalable aspects of the business model - moving to reduce cost of goods sold even further, reduce operational expenditure appropriately, and scale back capital expenditure. We expect these strong actions to offset in part the negative impact of slowing sales”, reported Simonson.
      However, Simonson was unwilling to comment on any dismissals, even though they are most likely given the global economic downturn.
     
Yesterday, at its annual Capital Markets Day event, Nokia reported that it expects 2009 industry mobile device volumes to decline 5% or more from 2008 levels.
      ”We anticipate an increase in our market share in mobile devices in 2009 compared to 2008. While it is important to improve our market position, we intend to increase our share only in a sustainable way”, said Nokia President and CEO Olli-Pekka Kallasvuo, referring to the company’s old policy, to increase its market share only without sacrificing profitability.
     
Given the general uncertainty, Nokia abandoned its previous practice and did not give any long-term operating margin targets for beyond 2009.
      Simonsen noted only that in 2009 the Nokia Devices & Services operating margin target would be around 13 to 19%. The worst scenario is that the company’s profitability could plunge steeply.
     
Kallasvuo convinced the investors of Nokia’s best competitive advantages: the benefits of Nokia's brand, scale and number one market position, a possibility to make investments (large cash reserves), production and logistics, distribution, prices, and a strong patent portfolio.
      ”Those who possess all these benefits will get the lion’s share of the markets”, Kallasvuo estimated.
     
No doubt, Nokia is the only mobile phone manufacturer with all the competitive advantages.
      The company’s market share is the largest in the emerging markets, namely in Asia and the Pacific region as well as in Africa, where purchase volumes are growing briskly in spite of the downward trend.
      The majority of the world’s population live in these regions.
      "We will be able to attack or defend, if needed, while our competitors will have to risk their entire business”, Kallasvuo noted.
      At a press conference he specified that it is all about tactical choices, which the company can make in order to adjust itself for market changes.
     
The greatest challenge for Nokia is in the field of smartphones.
      According to the international ICT research company Gartner, worldwide sales of smartphones to end-users grew by 12% in the third quarter of 2008 compared to the corresponding period in 2007.
      In spite of the growth, the sales of Nokia smartphones were 3% lower in the comparative period.
      ”We did not have the best possible range of smartphones at the beginning of the year, but the situation will improve with time. For example, the new 5800 XpressMusic has got an encouraging reception in the largest markets. Moreover, the sales of our N96 model reached one million units within two months”, Kallasvuo reported.
      Kallasvuo added that the Nokia E71 e-mail phone is the best-selling 3G phone with a traditional qwerty keyboard.
     
Because of the softening of mobile handset markets, some analysts suspect that teleoperators plan to reduce the subvention of mobile phone prices. It could weaken the manufacturers’ situation even further.
      However, Nokia’s Simonsen pointed out that only 15% of the company’s unit sales come from markets where teleoperators strongly subsidise the prices of mobile phones.
      Nokia's stock was up nearly 4 per cent in Helsinki on Thursday, helping the Helsinki OMX Allshare Index to put on 0.76%.


Links:
  Nokia press release 4.12.2008: Nokia lowers the mobile device industry outlook for Q4 2008 and gives outlook for 2009
  Gartner press release 25.11.2008: Gartner Says Global Economic Downturn Sparked Three-Way Battle for Third Position in Mobile Phone Market in Third Quarter 2008

Helsingin Sanomat