POST OF THE DAY
Nokia Corporation
Re: Business model problem

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By Caesium
July 19, 2004

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[This post is in rebuttal to Friday's Post of the Day]

Mannprod,

Thanks for your post and your points are well made. It is indeed a fact that Nokia did well in the 'fast growth' period and it is true investments are based upon future cash flows not past ones.

On those points we are 100% agreed. Where we differ is in two aspects. Firstly your view that mobile phones are a commodity and your view that comparisons with competitors are not relevant.

You compare the mobile phone industry with the PC industry and although your points are well noted there are differences between the two. No one in the PC manufacturing industry achieved the dominant market position during its "fast growth" phase. They all boomed but not one was able to command double the market share of its next 3 competitors. Nokia achieved that and in doing so created a supply cost chain that is an enviable moat that still survives. Why and how do you think Nokia is able to make the margins they do compared to their competitors?

As with any industry that matures once the market growth slows a consolidation period ensues and hence some get bought/merged and others fade away. In some ways that has already happened in mobiles. Sony and Ericcson teaming up, others like Philips dropping out altogether. That will continue as in every other industry. The question is can Nokia maintain margins and/or increase growth?

As others have pointed out, outside of Europe and America, Nokia is still the brand people want. In Europe as Hallucigena has confirmed from my findings in the UK, Bluetooth enabled phones have given Sony/Ericcson and Motorola an edge over Nokia's offerings. As several articles have pointed out, that also coincided with less than compelling products from the Nokia stable. Those two things in tandem created the problems Nokia now finds itself in, I still maintain it is not a simple lack of clamshell only issue. In America Nokia has always been behind the curve in the deals they make with the carriers and product launches behind the rest of the World.

Those two markets now see more products being offered and bought from Nokia's competitors. That has resulted in the great quarters from MOT and Sony/Ericy and the poor quarters from Nokia.

Now if you disagree with that position, then you are right to be worried because you, like others, see the problems in Nokia as being more endemic and harder to solve. Regarding the view that mobile phones are now a commodity they have two characteristics that I believe will avoid them becoming commodities, form and fashion. For whilst the functionality of phones becomes ever more complex with increased features, not only for voice, camera, and PDA, but even as a mobile credit card and key to your home, car etc., and coupled with the fact that these accessories are carried with you 24/7, there will always be a fashion element to consider; then a commodity it cannot ever be. If you seriously disagree with that opinion then you should sell Nokia now as there is no way Nokia can sustain its margins if the phones become nothing more than a commodity.

Regarding their competition all of whom are achieving success where Nokia is not, LG being the latest to shout loudly of their sales growth, all of them have yet to display that they are able to supply the volume of critical mass. It is one thing to be increasing from a low base, quite another to show consistent 20%+ growth on 15% of the World market. It is also another thing to be able maintain quality control once the bulk of your production has to be outsourced. Nokia does not have that problem, yet another moat we can claim they still possess.

All of the above explains why I take the view I do, but it does not mean that I think Nokia can suddenly return to 20%+ [annual] growth and once again distance itself from its peers. I also think Olilla has to publicly disentangle himself from the "40% world market share" albatross. But they have to get their product mix right again for each market and somehow get the relationship with the carriers in the US and Europe on an even keel in order [that] they, the carriers, do not over promote the competitive brands at the expense of Nokia.

My view is that the problems Nokia has are solvable, it remains to be seen if Nokia can solve them. Presently I believe they can, that is why I am not selling, but I fully understand why some are selling.

Caesium


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