Mixed fortunes for the Nordic cellular giants
totaltele.com
By Ian Kemp
15 March 1999
With worldwide mobile phone unit sales and subscriptions booming and demand for business wireless
services gathering speed, leading mobile equipment and services vendors looked set for sustained
income growth for some time to come.
But changing market conditions have seen contrasting levels of growth during the past 12 months at
Europe's mobile and wireless giants, Finland's Nokia Oyj and L.M. Ericsson AB of Sweden, respectively
the first and third-largest providers of mobile phones worldwide.
The mobile market continues to grow sharply, with worldwide handset unit sales alone rising by some
50% last year. But intensified competition, stimulating sharp reductions in margins for mobile handsets,
and a squeeze on tariffs, combined with a downsizing in technologies such as switching products and
related installation services, are now having an effect.
In January Nokia announced 66% growth in net profit for the financial year January to December 1998,
posting profits of 10.4 billion markka ($1.9 billion) on sales of Fmk79.2 billion, up 51%. The company's
chief executive Jorma Ollila commented that strong growth and good profits in the last quarter had led to
record overall results.
Rival Ericsson, meanwhile, recorded net profits of 13 billion Swedish krona ($1.6 billion) - a much more
modest rise of 9% - on sales of SKr184.4 billion, up 10%.
Just three days prior to these results Ericsson announced that it would cut 11,600 jobs worldwide over
two years, from a global workforce of 104,000.
A leaner Nokia - but with its attendant narrower technology focus - has a workforce of 44,000 worldwide.
"Nokia had the luxury of not having the heritage that Ericsson had," said Jane Zweig, executive vice
president at wireless market analysts Herschel Shosteck Associates Ltd., of Washington DC. As a result
it had not been encumbered by the "old traditional way of doing things," which focused more on large
switch-based infrastructure business, she said.
The largest proportion of Ericsson's cuts (8,500) came from its Network Operators division, while the
Enterprise Solutions division will lose 1,300 staff. Explaining the cuts, the company said an installation
project that once required 12 weeks could now be completed in a week with half the number of personnel.
The cuts, once implemented, will save it SKr3 billion annually, it estimates.
The restructuring had already begun some three months earlier, under a strategy initiated by chief
executive Sven-Christer Nilsson. Ericsson was reorganized into three business units to reflect an
increased focus on customers, particularly corporates (CWI, 2 November 1998, p.35). Mobile systems and
phones in the business segment were the "main contributors" to operating margin last year, the company
said.
Herschel Shosteck Associates broadly attributes Nokia's recent success in handset sales to its ability to
foresee, early, the rise of the digital market in the United States and Europe, and to the company's design
mix that has embraced such consumer wishes as dual-mode phones. It was also, said Zweig, too small an
enterprise to embrace the many mobile technologies on the market, opting to focus on GSM, which
subsequently burgeoned, particularly as a standard in Europe.
But other user demands have taken their toll. Consumer uptake in the lower end of the market, such as
pre-paid services that make use of entry-level phones, has put further pressure on margins for the
manufacturers, but has had a contrasting effect on the two operators. Whereas Ericsson said price
competition in the entry-level segment, particularly in Europe, had adversely affected its sales revenues
during the year, Nokia said the increase in pre-paid had conversely made a strong contribution to its
consumer business growth.
Add to this decreasing margins for mobile handsets - in Ericsson's case close to a 30% reduction overall,
according to the company - and it is clear that volume is becoming more important than ever if operators
are going to compete in this growing lower-end segment of the consumer mobile market.
According to San Jose, California-based marketing consultancy Dataquest Inc., during 1998 Nokia sold
37.4 million mobile phones worldwide, while its Swedish counterpart sold 23.8 million units. "Handsets
are not a high-margin business, but Nokia is doing it in numbers," said Zweig at Herschel Shosteck.
Ericsson's broader service and product mix mean that mobile handsets represent only 24% of its total
revenues compared with some 60% at Nokia.
While Nokia's revenue from handset sales jumped an impressive 70% last year, it is likely to slow down
considerably in 1999 as other vendors, including Ericsson, launch new lines, say analysts.
Ericsson recently announced its T28 line of dual-band handsets that become available in the second half
of this year. They feature technologies such as voice-activated calling and call filtering, and are
Ericsson's smallest GSM offering to date.
In an attempt to offset erosion in margins, both companies are also increasing their research and
development spending into enhanced mobile data services - such as Wideband Code Division Multiple
Access (WCDMA), General Packet Radio Service (GPRS), offering speeds of up to 115 kilobits per
second, and Enhanced Data rate for GSM Evolution (EDGE), reaching 384 Kbps - which promise
high-speed/broadband wireless data connectivity for Internet access and multimedia services.
In January, for example, Ericsson announced two major contracts: with the mobile arm of Deutsche
Telekom, T-Mobil GmbH, to implement packet-switched GPRS into the German operator's nationwide
GSM network; and with BT, worth SKr3,400 million over a five-year period, integrating IP-capable ATM
into the U.K. operator's circuit-switched networks handling its national and international traffic.
The race is now on to supply the market with handsets ready for these high-speed services. Although
neither company has yet announced firm timetables for the launch of their next generation of phones,
upgrade business is likely to make a significant contribution to future handset revenues, with customers
swapping their old phones for newer, more advanced models.
As for 1999, Nokia has a target of 25% to 35% net sales growth, while Ericsson, declining to give figures,
foresees "sales growth at least in line with market growth."
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