re: Fortune on Nokia
>> Nokia Rocks Its Rivals
Flawless Execution Put Nokia On Top. Will Customer Love Keep It Growing?
FORTUNE
Monday, March 4, 2002
Janet Guyon
Paola Hjelt
fortune.com
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-router-and-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 74% 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 "technophones" 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 mobile-handset 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.) <<
- Eric - |
