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Nokia

From Handset Hero to Internet Media Master?

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From rain boots to TV sets to today’s omnipresent cell phones, Nokia has always been ready to transform itself. Now it’s taking aim at the massive Internet services market.

From Handset Hero to Internet Media Master?

By Fuyuan Hsiao
From CommonWealth Magazine (vol. 385 )

The car skirted the blue waters of the Gulf of Finland through forests of white birch nearly bereft of their leaves under the autumn sky. A glass edifice came into view, shimmering like a palace. Here was the headquarters of Finland 's world-renowned Nokia. It was here that a major revolution within Nokia was quietly underway.

Every decision made here influences the lives of 900 million people all over the world and touches a nerve within Taiwan 's technology industry.

All eyes were on Nokia on 1 October of this year as the company announced the biggest acquisition in its history, a US$8.1 billion deal for digital mapping company Navteq, which provides global geographical information services to Yahoo!, Google and Garmin. The move was Nokia's latest since its Ovi division began offering Internet services in August.

“All of a sudden, Internet services have become a focus for Nokia,” Juha Putkiranta, Nokia's senior vice president for multimedia operations, says in English spiced with a heavy Finnish accent.

For Nokia, it's another strategic watershed, one more shift in its business model.

That's because Internet services have heretofore been neither Nokia's strong suit nor part of its main business operations. Flipping through Nokia's annual report from last year, one sees that 60 percent of operating revenue resulted from handset sales, while multimedia operations accounted for less than 20 percent.

But according to an analysis by Citibank Securities, Nokia's revenue from handset sales will hit a growth bottleneck beginning this year and begin to stagnate. Among Nokia's three major divisions, multimedia operations boast the highest operating profit and most stable growth.

This is something of a departure from the Nokia so familiar to the world.

The world knows and admires it because of the sheer number of handsets it sells.

Every Second, 12 More Nokias

Every day 900 million people around the world clutch their Nokias to talk about everything from business to love. Every second of every day, 12 Nokia handsets are being sold somewhere in the world.

Nokia further solidified its position as the world's top handset manufacturer this year. Its global market share will soon surpass 40 percent, and its projected sales of 430 million units tops competitors Motorola, Samsung and Sony Ericsson combined. Nokia appears to be reliving its high-growth glory days of the late 1990s (Table 1).

With everything seemingly coming up roses for Nokia, why undergo yet another transformation and enter a completely alien field?

Like the meticulously calculating Finns, Nokia sees not just the crisis directly ahead, but the opportunity three years down the road.

The latest crisis finds King Nokia beset by new enemies within its own domain, amid a gathering digital storm. From Apple's iPhone and Microsoft's Windows Mobile to Google's Android platform, the new game of the leading Internet players is mass encroachment on Nokia's turf.

Commencement of the Pocket Wars

The “pocket wars” have begun, with everybody looking for a piece of the tiny two-inch mobile phone screen. The fastest mover, Google, has already had its high-flying YouTube operation placed on the Vodaphone mobile network, the world's largest. And Google earnings powerhouse AdSense is now an internal feature of several global telecom providers. Not to be outdone, Yahoo! has teamed up with eight telecom providers in cooperative arrangements to provide Yahoo! Go mobile Internet services in 17 countries.

Faced with such formidable new competitors in Google, Microsoft, Apple and others, Nokia is unflinching.

“We've faced new competitors before,” Putkiranta remarks dryly, without so much as a crease of the brow. His calm is a reflection of his calculation that the flip side of crisis is even greater opportunity.

As it happens the giants of the handset, telecom, computer and Internet industries are all simultaneously scrambling to carve out a beachhead on a new shore: the nearly NT$3 trillion wireless services market.

The Internet of today needed 12 years of development to reach its current online population of 1.2 billion. The next billion Internet users will take only seven years to bring online.

That next billion is the market in Nokia's sights, Putkiranta declares flatly.

“We believe that Nokia is the best company to bring mobility and Internet together,” asserts Petteri Alinikula, deputy director of Nokia's research center responsible for core technologies.

Alinikula's conviction is actually grounded in the marriage between Nokia's enormous commercial prowess and its technological R&D capabilities. Nokia's smartphones now account for 50 percent of the market. The Symbian Developers Network writes applications for the Nokia smartphone operating system and numbers 3.4 million software engineers, more than the population of Taipei City . However, Alinikula's confidence is even more rooted in history.

Chronicle of Transformation through Acquisition

Since the days of its inception, Nokia has been playing a constant transformation act.

For older Finns, Nokia's deep blue logo represents the rain boots they wore as kids and the tires their folks used. The first impression adult Europeans had of Nokia was as a maker of television sets, before it became known for cell phones. Nokia is betting that the global youth market will soon see the company as an Internet multimedia company.

During the past two years, Nokia has plunked down US$9 billion in its quest to morph into an Internet multimedia company, the equivalent of four years earnings at Hon Hai Electronics.

The money was spent on a series of acquisitions, including iTunes competitor Loudeye, guidance systems software company gate5, multimedia sharing website Twango and last month's purchase of Navteq. Human resources will also soon be redirected to focus on Internet operations. Starting next year Nokia will be divided into two main divisions, hardware and services, underscoring the rising position of Internet services within the company. The move means Nokia will no longer interact with the world purely through its handsets.

Hardware complemented by software remains Nokia's best play.

As a hardware company, Nokia is reliant on a highly efficient manufacturing and distribution system.

“Even when we are selling a 30-euro device, we are making gross margins in the high 20-percent range,” Nokia CFO Richard Simonson proudly told American reporters at the release of this year's third-quarter report.

The secret to the high-profitability of Nokia's low-end handsets lies in the enormous scale and surprising efficiency of Nokia's manufacturing and distribution systems.

From Hungary to India and China to Mexico , Nokia has 12 production plants scattered across the globe each day assembling 270 million components to produce 900,000 handsets. Crunching of the numbers between high- and low-end handsets, one arrives at a figure of an average unit cost of US$88 with a net operating profit ratio of 23 percent.

Boston-based consultancy AMR Research this year even ranked Nokia as the world's top supply chain, ahead of Toyota and Walmart.

“Sharing same components among different models and designing models of less components keep Nokia profitable in any price range,” BusinessWeek magazine observed.

As an Internet media company, the insights into consumer preferences that Nokia has amassed over the years will still serve it well in this new digital challenge.

The company, perhaps, is in the best position to understand how the world wants to use its mobile phones.

“The rule of thumb: observe, and then design,” says Hannu Nieminen, Nokia's head of Insight and Innovation, eyes twinkling behind his glasses. He has noticed that users in India tend to carry their phones in the shirt pocket of the light, short-sleeved shirts they prefer. For the Indian market he is now considering more design elements that place logos at the top end of the handsets, as well as ways to make them thinner and lighter.

And Nieminen isn't the only designer at Nokia who's wracking his brain. The company has a battalion of more than 300 designers scattered across seven countries to observe consumer trends and design for local markets.

Of course, the curtain has yet to fall on the chronicle of Nokia's latest transformation. The challenge lies in how the conflict of interest with the telecom providers and Nokia's integration of various services plays out.

The script is just starting to play out in Finland , and arrangements are already underway in Taiwan .

A Boon for Taiwanese Contract Manufacturers?

Not wanting Hon Hai's plant in Lahti, Finland to be too much the center of attention, in August LiteOn Technology shelled out NT$12.3 billion to acquire Finnish company Perlos, the world's largest producer of modules and casings for the handset industry. Perlos' biggest client just happens to be Nokia. With its acquisition of Perlos, LiteOn is looking to prove that it too can be a part of the Nokia supply chain.

Historically, Taiwan has always been overly reliant on a contract manufacturing industry developed by Motorola. From DBTel and BenQ to Compal , Taiwan 's leaders in 3G handset manufacture have in the past all relied, above all, on orders from Motorola.

But while Motorola has been losing its luster of late, it is Nokia's new direction – particularly with the addition of new CEO Olli-Pekka Kallasvuo, under whose tenure the company has continued to increase outsourcing of manufacturing – that is increasingly filling Taiwan 's OEM handset industry with anticipation.

Will the yet again transformed Nokia make Finland proud once more? Will the company's latest foray prove a boon for Taiwanese contract manufacturers?

The Finns are watching. The Taiwanese are watching. So is the world.

Translated from the Chinese by Brian Kennedy


Nokia

2006 Workforce: 68,000 (31 percent engaged in R&D)

2006 Gross Revenue: 41.1 billion euros

2006 Profit: 5.5 billion euros

Global market share: 39 percent

Ranked world's sixth most valuable brand in Interbrand survey

Source: Nokia

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