Nokia Eschews Factories
In Most Low-Cost Regions
By DAVID PRINGLE
Staff Reporter of THE WALL STREET JOURNAL
SALO, Finland -- This town of 25,000 people on the northern fringe of Europe may not seem the obvious choice for a mobile-phone factory. Accessible only via a two-lane highway, Salo is a 90-minute drive from Helsinki's international airport. Average wages in the region are around 30 times those in low-cost manufacturing centers, such as China.
Yet the Nokia Corp. plant in Salo is the nerve center of the mobile-phone company's global-manufacturing operation. Rather than joining Dell Computer Corp., Cisco Systems Inc. and other technology giants in contracting out manufacturing to low-cost specialists in Asia, Nokia makes most of its phones in its own factories, some of them in expensive locations, such as the U.S., Germany and this town in southern Finland.
At the Nokia plant in Salo, Finland, wages are high, but overall production costs remain low.
On the surface, the world's biggest maker of mobile phones seems to be breaking every efficiency rule in the book. While many Asian rivals buy cheap off-the-shelf electronics, Nokia has the guts of its handsets custom-made to its own designs. Nokia also has complicated its task by doubling its product portfolio in just over a year, developing camera-phones and handsets with full alphabetical keyboards, rather than just churning out tens of millions of near-identical phones. Nokia now makes about 40 different models.
Still, Nokia's production costs have declined. It cost the company an average of $114 (€109) to make and sell each phone in the third quarter of 2002, compared with about $131 a year earlier. Its closest rival, Motorola Inc. of Schaumburg, Illinois, spent an average of $139 to make and sell each phone in the third quarter. Goldman Sachs estimates Nokia is making low-end handsets for as little as $70, matching the best of the Asian makers.
"We are the cost leader," Jorma Ollila, Nokia's chief executive officer, told analysts recently. "It is just a question of the degree, of how fast we can run ahead of the others."
For years, some analysts have been predicting that Nokia wouldn't be able to maintain its cost advantages and fat profit margins. So far, they have held up surprisingly well. Nokia's operating margin on phones was 22% in the third quarter, and the company promised in December to top that in the fourth quarter.
What's the secret? For one thing, Mr. Ollila encourages Nokia's brightest managers to work in manufacturing. "If you do well in manufacturing, you get a good career in Nokia," he says.
These managers carefully design Nokia's nine factories around the globe so they can switch rapidly from making one product to another. Following a last-minute delay to a new color-screen model this summer, Nokia quickly plugged the gap by boosting production of an existing phone by 50%, using its factories in Finland, Germany and China. By contrast, Sony Ericsson Mobile Communications Ltd., the handset venture of Sony Corp. and Telefon AB L.M. Ericsson, relies heavily on contractors and lost potential sales after it was taken unawares by strong demand for its first color-screen model, which sold out in many European stores last winter.
Nokia also designs its phones to share a high proportion of parts, allowing it to save costs by ordering huge quantities of those common components and to switch faster from producing one model to another when market conditions change.
In early December, the Salo factory was turning out nine different models, including Nokia's new 6650 handset, which makes use of new radio technology for downloading video clips and other multimedia snippets. Though the 6650 is packed with far more parts than a standard model, it was rolling along the same production lines used to assemble the most basic phones.
Workers at the Salo factory move at a leisurely pace, and the only sound is the low hum of machinery. On each of the 14 production lines snaking their way up and down Salo's vast factory floor, green circuit boards glide along conveyer belts, gradually accumulating the 300 or so parts that make up the heart of a phone. The circuit boards, wide enough to yield four handsets, all have the same dimensions so that the production line doesn't have to be physically altered to switch to a different model.
Visitors to the Salo factory are often disappointed by the apparent lack of activity. But for Vesa Harilo, who runs the Salo plant, a serene atmosphere is a sign that things are proceeding well -- always good news for Mr. Harilo, whose annual performance bonus depends on how quickly he increases production of new phones.
Mr. Harilo says his team can perform a changeover in 10 minutes by swapping the software that directs the machines and wheeling in a new set of parts. The manager's life is about to get more complicated, though. Most experts expect the mobile-phone market to fragment further into a string of smaller segments, such as gaming phones, camera phones and personal-organizer phones. Some of the new devices in Nokia's pipeline, such as a portable games console, will need their own unique parts and won't easily fit on the established production lines, making it more difficult to quickly switch from making one product to another.
"It is impossible to forecast the exact volumes of each product when the number of products is so high." acknowledges Matti Alahuhta, president of Nokia's mobile-phone division. "The new challenge in logistics is to manage changes in the mix."
Some industry executives argue that Nokia would be better off using standard electronics rather than designing its own. Ulrich Schumacher, CEO of wireless semiconductor maker Infineon AG, estimates that Nokia pays up to a 30% premium for custom-designed chips compared with off-the-shelf modules.
Mr. Alahuhta says Nokia isn't "religious" about using its own technology and will buy off-the-shelf components when they are the "most competitive solution." Moreover, Nokia does make limited use of manufacturing specialists. The company contracts out the production of between 15% and 20% of its phones, typically models that don't need much testing. By outsourcing this way, Nokia gains insight into the efficiency of the competition.
"We have good intelligence," says Mr. Ollila, Nokia's CEO. "We follow it very closely. But we don't see any [need to] change."
-- Kevin Delaney contributed to this article.
Write to David Pringle at david.pringle@wsj.com
JMHO: If you know what you are doing, you can stay out of China and do better. |
