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Nokia feels economic heat

Posted: 20 Mar 2009     Print Version  Bookmark and Share

Keywords:mobile handset market  wireless infrastructure  reorganisation plans  R&D budget 

"In R&D, we will continue to sharpen our focus on portfolio pruning and prioritisation," Simonson said during the company's fourth-quarter conference call on Jan. 22. "In sales and marketing, we will cut some product program spending, and in the general and administrative area, every shared unit has identified and is acting on expense reductions of at least 10 per cent in the first half of 2009."

Nokia is also scouting additional savings in traditional places like component procurement. "The unprecedented currency volatility we have recently experienced is impacting our costs," Nokia said in a Securities and Exchange filing March 5. "We are taking action to reduce our devices-sourcing costs in Japanese yen, including price negotiations with our suppliers and shifting the sourcing of certain components to non-Japanese suppliers."

A victim of own success
Nokia has become a victim of its own success. The company ships about 40 per cent of the cellular phones sold worldwide each year, but as demand for the devices has spread across the world, the market has attracted not only titans like Apple Corp. but also smaller suppliers in China, now the largest geographical segment.

As the crowded field jostles for placement with the biggest telecommunication service providers, and as handset penetration in the wealthiest markets approaches saturation, prices and margins are driven down industrywide. That hurts handset household names such as Motorola, Nokia, Samsung and Sony-Ericsson, all of which previously could count on surging demand for high-end products to boost profits.

Even as the established players vie for shares of emerging markets, where demand is hot for low-end phones, rapid technological change is increasing the sophistication of consumers worldwide. "Success in the mobile communications industry requires continuous introduction of new products and solutions based on the latest available technology," Nokia said in its SEC filing. "This places considerable demands on our R&D activities. Consequently, in order to maintain our competitiveness, we have made substantial R&D expenditures in each of the last three years."

Nokia's companywide R&D budget rose in 2008 to Rs.39,853.24 crore (6 billion euros) up 6 per cent from Rs.37,196.35 crore (5.6 billion euros) in 2007. The increase was "primarily due to increased R&D expenses in devices and services, which were partly offset by decreased R&D expenses in Nokia Siemens," Nokia said in its filing.

Basically, the company was spending huge sums maintaining its competitive edge—a practice it cannot afford in a declining market. Analysts thus believe a cut in Nokia's R&D budget this year is inevitable.

Nokia is no stranger to change, however. Indeed, it has not always been a technology products company; the businesses that were cobbled together to become Nokia got their starts in the less-fashionable worlds of forestry, rubber and cable production.

Even in today's difficult market, Nokia can reinvent itself and take advantage of financially weak rivals to build an unassailable position in handsets while branching out into other areas. Kallasvuo has reportedly said he is considering entering the PC market, for example, as convergence drives electronic products closer together.

The challenge for Nokia executives is determining where to place their bets and how far to trim the current cost structure until the economy revives.

-Bolaji Ojo
EE Times

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