Nokia outsourced less than 5% of smartphone volume beginning 2010. Finding balance between leveraging internal strengths and faster execution. Competition from Apple, HTC, RIM driving margins downward. Nokia’s size obscures the fact their competition has been growing in recent years. Nokia attempting to make a hard change in course using Yahoo as one of its rudders.
Nokia recently announced it would be reshuffling executive ranks for the fourth time in less than four years. This time it has retired mobile phones czar Rick Simonson. However, a simple retirement is not the entire change internal Nokia. The Company has also restructured the mobile handset unit into three groups. The new mobile handset groups are:
- Mobile solutions
- Mobile phones
- Mobile markets
I believe the changes are part of a major restructuring of Nokia’s mobile handset business, designed to better focus resources and intellectual capital on the highly competitive smartphone and mobile computing market segments.
Nokia is attempting to find the correct balance between business continuity, better leveraging internal strengths, and faster execution. However, it does not take a rocket scientist to know Nokia is having a tough time in the global handset marketplace.
Nokia is by far the world’s dominant handset vendor. Apple’s iPhone, HTC’s Evo and other devices, and even RIM’s Blackberry have garnered such publicity and attention in the last three years these other vendors have taken away millions of handsets in new annual business from Nokia. This said, Nokia is still selling almost 30 million handsets each month.
Apple’s iPhone does not even come close to Nokia’s sales figures.
However, when you consider Apple and HTC are brand new to the handset business, their sales data is disturbing to Nokia. Why this situation is significant is because for the first time in nearly a dozen years Nokia actually now has competition to contend with.
The handset industry is highly competitive with a per unit market lifespan average of six to eight months. At the end of this cycle, vendors sell new handset models or their existing models are upgraded with new software platforms. Typically, by the end of 12 months a completely new physical model replaces the device.
Normally, handset vendors look to shave as much cost out of the manufacturing and assembling of handsets. Handset vendors have spent years developing component supply relationships to help shave costs…they no longer manufacture handset casings; the chips, the display screens, or even the cheap leather-like cases the handset sometimes sit in.
Outsourcing / sourcing is a necessity in the handset business and Nokia has credited sourcing as a key element to its ability to control costs. Every component, from the handset cover to the chip, is fair game for outsourcing.
In the mid-1990s, the handset business was happy with 15% margins. Since the mid-2000’s we have seen handset profit margins in the low 20’s percentile. Outsourcing in the early to mid-1990s led to handset manufacturers buying chips from other vendors. Today, handset manufacturers are nothing more than system / device integrators.
Competition from vendors like Apple, HTC, and even RIM has driven handset margins down to the 12% range. Traditional outsourcing will not help Nokia. In fact, Nokia cannot gain much of a benefit outsourcing any part of their new smart handsets unless they get the components for free. Sourcing logistics and distribution management is another area of cost savings. Even then, outsourcing is only a solution for reducing capital and some operating expenses.
One thing to keep in mind is that China is a major supplier of outsourcing services and components to the technology community. Hopefully, Nokia is not relying on the Chinese for sourcing.
Nokia’s problems have nothing to do with cost structure. The company has not been able to come up with a smart handset that can compete against the iPhone, Blackberry, and the hype of the Evo.
Since 2007, Nokia has been acquiring companies and developing relationships in the media space; content creation and access. Nokia began this effort because it recognized that its revenue and profitability was and still is driven by their success in the traditional mobile handset business.
The traditional mobile handset business is transitioning into a business where the mobile devices are “smart” and are content management platforms. Nokia’s size obscures the fact their competition has been growing in recent years.
Restructuring meets challenges
Meanwhile, Nokia has been attempting to turn the ship in a new direction these past few years. A company the size of Nokia will require time to turn the ship around. What we are seeing is a restructuring effort, even if Nokia has not said so.
Typical restructuring efforts begin with restructuring of a company’s financial structure. However, Nokia’s past track record shows a company working diligently to control costs. The restructuring that Nokia is currently undergoing in its mobile group will actually cost money, and time.
The biggest immediate challenge facing Nokia is determining what shape the Company believes its converged media business should take. Essentially, Nokia must decide what is its business model.
Is Nokia’ model going to be fixated on selling handset units? Is Nokia’s business model going to focus on numbers of handset units and content management? Is Nokia’s business model going to focus on content management?
After Nokia figures out what it thinks this model ought to look like, Nokia will have to create administrative structures and likely develop new technologies. All of these efforts will cost money.
Nokia has been busy acquiring companies in order to gain critical skills, intellectual property, and relationships. In fact, one can say Nokia’s restructuring has been going on since 2007 with its mobile acquisitions. Nokia’s acquisitions in the last couple of years have included:
- Twango: media sharing solution for organizing and sharing photos, videos and other personal media
- Enpocket: supplier of mobile advertising technology and services
- Navteq: supplier of digital mapping data
- Cellity: mobile software specializing in aggregating address book data
- Plum Ventures: specializing in social location services
- Novarra: mobile web browser firm
- MetaCarta: technology-based location search and services provider
- Symbian Ltd: developer of Symbian operating system for the smartphone
Looking at the above, Nokia is clearly acquiring assets to enable it to operate in the content space. While Nokia is acquiring content-related companies, it has yet to fully integrate these pieces into the Company’s core business.
Nokia has spent more than $8 billion acquiring companies in less than three years. (Nokia spent roughly $8 billion just on Navteq)
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