Nokia Rocks Its Rivals
By Janet Guyon
(March 4, 2002, Fortune Magazine)
“Flawless execution put Nokia on top. Will
customer love keep it growing?”
Last year was the worst ever for the telecom industry, but Jorma Ollila, CEO of
Finland’s Nokia, comes across like a man who has just returned from a six-month
sabbatical in the South of France. At 51, he looks thinner and younger than he has
in years. “I started watching my diet 18 months ago,” says the smiling Ollila, who
still hasn’t any gray hair. Playing tennis at least three mornings a week, he’s as fit
as he’s ever been.
By most appearances, Nokia is in peak condition too. In a year when all of
the giant telecom makers but Cisco lost money on operations, Nokia posted $4.8
billion in operating profits, nine times more than John Chambers’ Internet-routerand-switch company. Unit sales of Nokia cellular handsets grew 9% even as, for
the first time ever, industry sales dropped (by 6%). Nokia grabbed share from its
rivals, winning 37% of the global market last year, just three percentage points
from its goal of 40% and more than twice that of Motorola. Most impressive, the
Finns maintained operating margins of 20% in the cell phone business, which
accounts for 75% of Nokia’s sales. Few manufacturing companies can boast that
kind of profitability, let alone in a down market.
Yet not everyone is impressed. A few days before Nokia reported fourth-quarter
and year-end earnings on Jan. 24, Angela Dean, an influential technology analyst at Morgan
Stanley in London, downgraded the stock. Nokia’s shares swooned, bringing its market
capitalization to $100 billion, $150 billion less than it was two years ago when its
price/earnings ratio was a lofty 100. Dean says she’s less upbeat than Nokia executives
about growth this year in the Chinese market, which accounts for 11% of Nokia’s sales, and
doubts that the new “techno-phones” due out this year will impress consumers enough to
make them buy. “We hope these new phones will drive growth,” says Dean. “But we are less
confident than Nokia.” While the Finns project market growth of 10% to 16% this year,
Dean is predicting a more anemic 6.5%, with just 410 million cell phones sold worldwide.
She has a point. Whichever numbers you believe, they illustrate what is not
happening in the wireless-phone industry. It’s no longer growing at stunning speeds, with
annual sales zooming up by 45% to 65% a year, as they did between 1995 and 2000. Most
people who can afford a cell phone in practically every developed country already have one
(except in the U.S., which is burdened with competing technical standards). That means the
industry can grow only by pushing phones in newer markets such as Russia, China, and
India, where fewer people can afford them, or by persuading existing subscribers that they
need either a second phone or one that’s more state of the art. “From the early ‘90s until the
first quarter of 2001, it was a spectacular continuous-growth story,” says Ollila. “But it was
as if on Dec. 15, 2000, someone had turned off the lights in the U.S. Then, in the third week
of May 2001, they turned them off in Germany.”
That leaves Ollila and Nokia with a problem that the company hasn’t had to face
before: how to keep growing as the industry matures. Ollila says Nokia will return to
revenue growth of 25% to 35% by the fourth quarter of this year, with operating margins in
the high teens—“if we implement well,” he adds. The results include profits from the
network-equipment division, where margins are in the low teens, vs. the 20% of the mobilehandset division.
Crucial to the outcome will be Nokia’s ability to capitalize on a quantum leap in
the technology of the world’s wireless networks. Beginning in Europe this year, cellular
operators will roll out packet-switched networks that route signals in the same hyperefficient
manner as the Internet. The services that run over these networks will mark the first major
step toward implementing so-called 3G (third generation) technology, which will let users of
a new generation of cell phones cruise the Internet as easily as they can from a PC. The
phones designed for these networks will also be able to send and receive images, and much
more cheaply and quickly than the fanciest current models. So critical are the new networks
to growth, says Ollila, that “this is a defining year for the industry.”
If any cell phone maker can thrive in this new world. Nokia can. The company is a
little bit Wintel, a little bit Apple, a little bit Dell, and a whole lot Coca-Cola. While rivals
have stumbled over the past few years, Nokia has come up with the best products, the best
manufacturing logistics, and the best brand name in telecom. Mastery of all three
disciplines, executives in Finland say, is what sets Nokia apart. “This isn’t a business where
you do one big, strategic thing right and you’re set for the next five years,” says Ollila. “It’s
a big orchestration task.”
The Coke-like brand-building exercise began when Nokia listed on the New York
Stock Exchange in 1994. At the time, the company needed capital, but Ollila also
understood that, especially in America, a widely known stock would boost sales of the
company’s products. “In the U.S., Wall Street dominates the media and the attention of the
people,” he says. Last year, Nokia spent $900 million, or 3% of sales, on advertising and
sponsorships, and was ranked the world’s fifth-most-valuable brand by consultant
Interbrand, just behind GE and just ahead of Intel. Two years ago, Nokia was in 11th place.
(Ericsson is No. 36 and Motorola No. 66.)
Nokia believes that such brand recognition will pay off as the market switches
from one that adds new subscribers to one that sells existing subscribers new things. About
300 million of the globe’s 930 million cell phone subscribers use Nokia phones. The
company’s research suggests that 80% to 90% of them will buy a Nokia when they replace
their phone. “Our competitors have a much lower brand loyalty,” says Matti Alahuhta, head
of the mobile-phone division. And because Nokia’s installed base is so large, it will get the
lion’s share of the replacement market, which the company expects to account for 55% of
sales this year, and even more in the years to come.
With Dell-like mastery of logistics, Nokia reinforces that brand loyalty by
delivering the right products at the right time. It learned this skill the hard way in 1995,
when a parts shortage caused it to disappoint network operators and other customers that
were expecting Nokia deliveries in time for critical Christmas sales. Logistical problems
often hang up the mobile-phone industry. Phones are made from a huge variety of highly
specialized parts, from microprocessors to transceivers to long-life batteries, and few makers
produce all of their own components. To succeed, a manufacturer must stay in close touch
with its suppliers, making them virtual partners.
Few events illustrate Nokia’s logistical prowess better than the aftermath of a
March 2000 fire that broke out when lightning struck a Philips semiconductor plant in
Albuquerque. The plant supplied Nokia and Swedish rival Ericsson with critical radiofrequency chips. Weeks passed before Philips was able to resume shipments. The resulting
shortage devastated Ericsson, which had no backup suppliers; it missed production targets
and posted a $1.7 billion loss in its handset division that year.
In the days immediately following the lightning strike, Nokia’s constant scrutiny
of its supply chain alerted it to a blip in chip deliveries even before Philips told it about the
fire. Ollila intervened personally and within two weeks persuaded the Dutch company to
dedicate other plants to supplying Nokia. The Finns also redesigned their chips so that
producers in Japan and the U.S. could make them also. Despite the fire, Nokia made its
production targets and took market share from Ericsson, gaining economies of scale
unmatched in the industry. “We were supplied by the same factory, but we acted faster,” says
Pertti Korhonen, who was Nokia’s troubleshooter.
Nokia anticipated the current slowdown sooner than its rivals too. In early 2000,
when employment was approaching 60,000, Ollila decided the company was getting too big,
too fast. For four years it had added people at the rate of 1,000 a month. That couldn’t go on.
“We had to make sure everyone knew what they were doing,” says Ollila. Nokia quit hiring,
stopped adding new projects, and began outsourcing production of network equipment and
cell phones. Although the sales drop hit harder than Ollila dreamed, Nokia avoided big
layoffs.
So far, Nokia has also been quicker to master the technology and design quirks of
cell phones and make the most consumer-friendly devices. With an Apple-like flair for
melding form and function, Nokia has given most of its phones a smoothness and roundness
that make them pleasant to hold. Interfaces are instantly understandable. The Finns have
carefully segmented the market according to style, from ultraluxury, with the new Vertu
platinum and gold phones, to basic.
That strategy has worked until now, but to succeed in a maturing industry Nokia
will have to learn some new tricks. With demand for plain-vanilla phones nearing saturation
in many countries and Nokia approaching the upper limits of market share, the company
needs to drive prices higher. But as Dean of Morgan Stanley points out, when
commoditization takes hold, average selling prices go down. Indeed, cell phone prices have
declined by 15% to 20% a year for the past decade.
If it wants to lift prices, then, Nokia will have to introduce products and services
so compelling that people will not only want to buy a new gadget but also pay more for it.
“If we only had to add new technology, it would be easy,” says Alahuhta. “Our challenge is
to understand what services people will use and in what ways.”
To date, neither Nokia nor any other company has had much success selling more
than voice service with a bit of text messaging. Two years ago, Nokia talked about making
phones for browsing the Internet. The idea never took off. Now company executives are
hoping to have a hit with devices that support so-called multimedia messaging—sending not
just voice but also graphics, audio clips, and photographic images over cell phones. Nokia
also sees a future for phones that double as entertainment devices—a phone-enabled Sony
Walkman, if you will—and for ones that allow game-playing, electronic shopping, and
mobile access to office applications. “All the research tells us that this will be the next
explosion,” says Alahuhta.
To exploit the fatter pipes of the new wireless networks, Nokia will need a helping
hand from network operators like Vodafone, which has 100 million subscribers worldwide,
and from its competitors too. After all, why would anybody buy a phone that can send
pictures if nobody else has one that can receive them? This is why the company is pushing
for open software standards—and why it is battling Microsoft, which wants to extend its
dominance in personal computers to mobile phones. The new multimedia mobiles must also
connect to PCs. “It is essential that we collaborate with competitors to make all these
devices interoperable,” says Korhonen, now senior vice president of the mobile-software
unit.
By tapping into new markets, though, Nokia is butting up against a new class of
competitors well versed in selling consumer gadgets. Samsung, for example, built share
from nothing five years ago to 7% in 2001. And don’t forget Sony, which has teamed up
with Ericsson and is another formidable brand.
So Nokia is blitzing the market with new products, promising 20 in the first half of
2002, nearly double the number in the same period last year. Its digital-camera-in-a-phone,
the 7650, will start selling in the second quarter. Late last year Nokia introduced its 5510
entertainment phone, which incorporates an FM radio and digital music player.
It’s too early to tell how well these phones will sell. But Ollila has been nothing if
not in sync with the times. He put the company on its head-count diet at the same time he
went on his own. “I didn’t want to be CEO of this company with 100,000 people because
you can’t keep in touch with the front line,” he says. “And when management stops being
interested in the front line, or can’t see it, the company gets in trouble.”
Given the upheaval in Nokia’s business, Ollila can’t afford to be blindsided.