Abstract
Nokia is one of the most famous brands in the world. Starting as a humble paper mill near a small town of Nokia in 1865, it is now a multi-billion enterprise famous for pioneering the mobile phone industry. Due to a series of poor decisions and the inability to perceive and adapt to the rising trend for smartphones, the company lost much of its market share and was forced to strike a deal with Microsoft. In 2017, Nokia planned to re-enter the smartphone industry with three new models. Its future in the global market remains unclear.
Introduction
Nokia is considered a pioneer of the mobile phone industry. From a small enterprise, it became a huge multinational company with billions of dollars in money, assets, and intellectual property. The company has been riding the wave of innovation from as far as the 1980s and came up with many iconic products that it is known for today. However, even such giants of the mobile industry are not immune to failure. Ever since the rise of smartphones in 2007, the company has been struggling to catch up with the demands of its customers and allowed other competitors to claim the market. The purpose of this paper is to review Nokia’s history, its rise to power, its fall from grace, challenges and issues it encountered along its path, and give an informed outlook on the company’s future.
Brief History of Nokia
Nokia was not always a multi-billion giant in the mobile industry. Its humble beginnings could be traced back to a small Finnish town of Nokia. In the year 1865, an entrepreneur named Fredrik Idestam built a paper mill there. The enterprise was successful, and three years later, he built a second mill. In 1871, Idestam transformed his company into a shareholding, thus giving birth to what we now know as Nokia (“The rise, dominance, and epic fall,” 2015). The company kept growing, but its true rise came when it started investing in the development of electronic products, which happened in the 1960s. The industry was full of potential back then, as groundbreaking inventions and discoveries were yet to be made.
Nokia’s first famous product was Mobira Oy – the first cellular telephone with an international network. It was released in the year 1979. At the beginning of the 80s, Nokia followed up with Mobira Senator – its first car phone, and Mobira Cityman, which grew in popularity after receiving approval from Mikhail Gorbachev. The device was heavy, clunky, and expensive, but it was considered cutting-edge technology at its time (“The rise, dominance, and epic fall,” 2015).
The golden age of Nokia came between the 1990s – 2000s. Its famous products, the 6110 and 5110 models, released in 1997, were excellent devices renowned for their utility, reliability, and versatility. These models were way ahead of their time, and greatly outclassed the competitors presented by Apple, Siemens, and Sony.
These successes helped establish Nokia as the world’s leader in the mobile phone industry, with a net worth of over 42 billion dollars by 1998. During this year alone, the company sold over 41 million units, which helped it outpace and outclass Motorola – another mobile phone giant. Nokia 8810 was made without an external antenna, which significantly smoothened its lines and turned it into the most advanced product of its time (“The rise, dominance, and epic fall,” 2015).
The second millennium promised great challenges and profits for Nokia. Wireless technology was evolving, and the mobile internet became a reality. During this period, Nokia strived to produce both expensive and highly sophisticated devices as well as low-key models to cater to all customers. Nokia 7650, released in 2001, featured a built-in camera, and colorful display. The 6650 model was the world’s first 3G-enabled smartphone.
Nokia 1100, launched in 2003, saw great marketing success. A quarter of a billion units were purchased worldwide. It holds the title of the most selling electronics product in the world. The model featured an innovative design with the buttons placed in a circle instead of square and was known for reliability and budget-friendliness.
While the company never failed to produce innovative and successful models in the first half of the decade, the signs of the incoming crisis appeared in forms of periodic failures and “hiccups,” which heralded the future collapse. In 2001, the company suffered a loss of profit. However, it was due to an economic crisis, which caused a drop in phone sales worldwide. Nokia started losing its market share ever since 2004, although even then, it remained at 35% (“The rise, dominance, and epic fall,” 2015).
A massive failure happened in 2007 when the company had to recall a great number of phone batteries. Over 46 million batteries appeared to be faulty, which crippled the company’s image and reputation for reliability and significantly hindered sales of all models, which operated using said batteries. The year 2007 also heralded the rise of smartphones and touchscreens. Nokia responded to the following trend by releasing its first smartphone – the 5800 Xpress Music. The product was largely unremarkable when compared to Apple’s iPhone.
Since 2008, the company was in a state of economic decline. Revenues kept dropping, which forced Nokia to close down factories and dispense with its workers. Its products, like the Lumia 800 and Lumia 710, created in partnership with Microsoft, saw moderate success but were not enough to stop the company’s plummet.
In 2012, the company Nokia’s economic losses were at about 1.4 billion dollars. This caused a collapse of production in Finland. Over 10,000 employees lost their jobs in the process. To make up for it, the company moved its factories to countries with a cheaper labor force, such as India and China.
Nokia’s big hopes were with its new smartphone, called the Lumia 920. Despite the mixed reviews from the clients and the retailers, who criticized the phone’s size and bulkiness, going so far as to call it a “shovel,” it became the best-selling phone of the week on Amazon and saw popularity in the UK. These sales managed to briefly return the company to profitability in the first quarter of the year 2013, which was soon followed by a considerable drop in revenue, as the phone failed to make a considerable impact on the smartphone market (“The rise, dominance, and epic fall,” 2015). In April 2014, the company made a deal with Microsoft, selling its smartphone development division to them.
In November 2016, Nokia cut ties with Microsoft and announced its return to the smartphone industry, announcing three mobile flagships on Android to be released in 2017. How well this venture goes, and will the company be able to claim its market share with these models remains to be seen.
Entering the International Arena
Nokia’s true appearance on the global market is largely associated with the development of the GSM. GSM, also known as Global System for Mobile Communications, is a protocol used in all cellular networks and was first deployed in Finland in 1991. Over 90% of all mobile phone operators around the world use this protocol. Nokia was instrumental in the development of GSM. The world’s first GSM call between the Finnish prime minister Harri Holkeri and Kaarina Suonio, the major of Tampere, was conducted in 1991 (“GSM: a new mobile future opens up,” 2009). Both parties were using the equipment and network developed by Siemens and Nokia.
The introduction of GSM marked the creation of a worldwide mobile phone market, where Nokia quickly achieved notoriety by providing the most innovative technology. The Finnish company had an advantage when compared to its competitors – it already had a name to itself, which is earned by selling such devices as Mobira Senator and Mobira Cityman. The latter model was well-received around the world and particularly in Russia, after being endorsed by Mikhail Gorbachev (“The rise, dominance, and epic fall,” 2015).
Initial International Issues and Challenges
When Nokia entered the newly-created mobile phone global market in the early 1990s, the company quickly realized that in order to be successful, it had to dispense with the diversification of its products and focus all efforts on telephone communication and electronics. This allowed the company to capitalize on its strengths without dispensing materials and resources on other ventures.
When entering the global market, all companies have several issues and challenges they would have to face. These challenges are (Hill, 2016):
- Identifying the true market need
- Dilution of Brand-Name power
- Logistics
- Finding reliable partners
In order to understand Nokia’s success, let us analyze how it dealt with all four during its early days in the global market. Back in the 1990s, when cell phones were not as nearly widespread as they are now, there was a clear market need for compact communication devices. The word “compact” was relative, as a 0.8 kilogram, Nokia Cityman was considered compact when compared to earlier models, which weighed 5 or even 10 kilograms. The market was a Blue Ocean, which did not become red yet, meaning there was plenty of room for growth. Therefore, the need was clearly present, not just among the wealthy businesspersons who needed communication, but among the average citizens as well.
While most mobile phone companies began their development in the 1990s, Nokia started nearly two decades earlier. This experience was what cemented the company’s superiority in the early stages of market development. Nokia did not suffer from dilution of its brand name when it ventured outside of Finland because it was practically the only company with a history of creating communication devices. It had something its competitors did not – notoriety.
Nokia was one of the few companies to come up with an innovative logistics strategy that was not solely based on resources. Pekka Ala-Pietila proposed the concept of logistics strategy with an emphasis on culture during a conference in Helsinki in 1998 (Collin & Lorenzin, 2009). This idea suggested building logistic chains in other countries in close proximity to the potential markets and resources and hiring workers among the population to minimize costs and adapt the company to the specifics of particular markets and cultures. Later, the company used outsourcing to reduce production costs (Eitemann, Stonehill, & Moffett, 2013). Nokia’s logistics net is based on quick and agile response to customer demand. It uses the concept of Demand Supply Planning (DSP) to predict a profitable balance between demand and supply capability (Collin & Lorenzin, 2009).
In its venture of finding reliable partners in other countries, Nokia often aimed to buy off potential allies and competitors, assimilating them into the company and receiving a ready base of operations in the country, equipped with personnel, management staff, and all required infrastructure. These companies include Ipsilon Networks Inc. (USA), Matra Nortel Communications (France), Aircom International (UK), Vienna Systems Corporation (Canada), and many others. In addition, Nokia put a great effort into educating and train its new partners and allies to ensure better understanding and cooperation.
If we analyze Nokia’s efforts based on these criteria, it is possible to see that the company passed all of the obstacles in its path with flying colors. Some of the obstacles were not even an issue due to the fact the global market of the mobile industry was fresh and claimed by no one and others – with innovative thinking and advanced leadership. With these factors in their favor, it is no wonder Nokia ensured dominance in the competitive market for an entire decade.
Current International Issues and Challenges
Now, after nearly two years of fruitless partnership with Microsoft, Nokia is planning to re-enter the smartphone market with three new models, two of which are meant to be high-end products aimed to compete with the likes of iPhone and other expensive smartphones, viewed as premium-class items. In a way, the company finds itself in a situation where it has to re-enter the global market of smartphones. However, the situation is vastly different from what it used to be nearly 3 decades ago.
The market for smartphones is currently full. There are numerous companies, such as Apple, Samsung, Blueberry, Huawei, and others, who claimed all the niche products (Gilbert, 2016). In order to be able to claim its market share, Nokia has to present a product that would not only be able to compete with other models but to introduce something new to the customer, something that other models are incapable of doing.
The reason why Nokia suffered so much revenue loss in the past 7 years is that its structure was used to great revenues and great success. With the rise of powerful competition and revenue drain, Nokia was forced to cut on its workers, close factories, and make the structure slimmer. Reports say that Nokia is willing to do just that – accept the market share it has, and size itself down to turn a deficit into profit.
One of Nokia’s strengths in this endeavor is its brand name. Popular estimates say that roughly 4 billion people know the brand. However, some analysts say that faith in Nokia’s brand power may be overrated. The company did not present anything noteworthy to the public in the last 2 years, which means that its notoriety has diminished. A brand that nobody talks about is not a brand at all.
Another issue is the patent loss. While Nokia retained most of its patents, the majority of handset and camera technology patents are going to Microsoft as the result of the deal between these two companies. Cameras were the strong points of Nokia smartphones, which means they will be robbed of their natural advantage.
Lastly, Nokia’s return comes in the wake of great geopolitical tensions and economic crises around the world. These crises, along with product oversaturation, have slowed down the smartphone market, as it is estimated to grow only by 5% in 2016, as opposed to 11% in 2015 and nearly 28% in 2014 (Gilbert, 2016).
Volatility, Exchange Rates, Hedging Activities, and Property Rights
Nokia risk analysis conducted by Macroaxis describes Nokia’s volatility standing as risky within a month investment horizon period. Over the last month, the company had a Sharpe ratio of 0.2228, which means that the amount of return per unit of risk over the last month was 0.2228 percent (“Nokia risk analysis,” 2016). According to the report presented on the site, the company’s Downside deviation is currently estimated at 2.24, while Mean Deviation is at 1.45. Nokia Corporation’s actual return volatility rate is at 2.1832% (“Nokia risk analysis,” 2016).
According to exchange rate data, Nokia currently stands at -176.52 million dollars (“Effect of exchange rate changes,” 2016). These rates were down for the majority of the year, with the only event of growth observed during Q1-15, standing at 137.42 million, and negligible growth in Q3-14 and Q4-15. In Q1-16, the exchange rates dropped by 103.04 million dollars (“Effect of exchange rate changes,” 2016).
In regards to hedge funding, there are several hedge fund managers that were meaningfully and purposefully increasing their holdings in Nokia, starting from Q4 of 2015. According to Insider Monkey, Fir Tree holds the largest position in Nokia Corporation, with over 108 million dollars in assets (“Nokia Corp (NOK),” 2016). Renaissance technologies is a close second, with a 105 million dollar position. Other minor investors include Israel Englander’s Millennium Management, Clint Carlson’s Carlson Capital, and Francis Chou’s Chou Associates Management (“Nokia Corp (NOK),” 2016).
The majority of Nokia’s company worth lies within its intellectual property assets. The company possesses over 24,000 key patents, and that number only increased after Nokia’s purchase of Alcatel-Lucent in 2015. As of 2015, its total assets are worth around 45 billion dollars, according to the company’s Q4 and full-year report.
Corporate Social Responsibility Efforts
Nokia Corporation is notorious for publishing its annual corporate social responsibility reports since the year 2002 (Blandford, 2012). The company is branded as a leader in corporate ethics and environmental philosophy due to extreme care and dedication with which it treats the surrounding communities and the environment. The report covers a great variety of issues, giving a broad perspective on the social responsibilities the company undertakes. The report analyzes how mobile technology can be used for the benefit of communities and the environment worldwide and addresses the challenges that the company had to face throughout the year. There are six important highlights in the report (Blandford, 2012):
- Corporate taxation
- Employees
- Environmental design
- Materials
- Charges
- Emission
Corporate taxation refers to the company’s policy towards taxes. Nokia is notorious for upholding the taxation laws of Finland and any other countries where it operates. The majority of profits and losses are attributed to the company’s central business in Finland, which means that the majority of taxes are paid to the country. This contrasts greatly with practices adopted by many other electronics companies that try to minimize taxation rates by offshoring profits to countries with low corporate tax jurisdictions (Blandford, 2012). The current taxation rate for multinational companies in Finland is 23.9% (Eitemann, Stonehill, & Moffett, 2013).
Due to company’s switch to Windows Phone in 2012, there was an increase in job losses. Nokia took care of its former employees by initiating a program called “Bridge.” The purpose of that program is to assist the company’s former employees in finding jobs. Over 17,000 people have already participated in the program (Blandford, 2012).
Environmental design refers to considerations Nokia takes when designing its phones and other products. The company’s specialists design the product to be made out of sustainable and recyclable natural resources. According to the annual report of 2012, the company reduced its greenhouse gas print by more than 50% (Blandford, 2012).
In order to ensure customer safety and environment preservation, Nokia banned all radioactive materials from its products. In addition to that, the use of perfluorooctanoic acid was limited due to how dangerous its vapors are when caught ablaze. The company makes great use of recycled paper – over 52% of product packages are made out of recycled material. The percentage grows to around 90% for transportation packages (Blandford, 2012).
In order to help preserve electricity, Nokia made sure to optimize the idle energy consumption rate of its charges. They managed to decrease the no-load consumption rate by 73%, and since 2012, all Nokia products are equipped with energy-preserving charges (Blandford, 2012).
The corporation’s environmental goal is to reduce its CO2 emissions by 30% in short-term perspective for the next 3 years. A comparative research shows that the company’s emissions went down by 29% in the period between 2006 and 2013. In addition, Nokia aims to reduce emissions from air travel by traveling less, instead of making use of voice chat, telephone and video conferences (Blandford, 2012).
Outlook for the Future
Nokia’s future largely resides in its ability to re-enter the smartphone market. The company is aware that entering an oversaturated market will be difficult, which is why they are using a “Soft re-entry” strategy. Instead of financing the production of their own phones, they invest in development and offer the use of their brand name to other companies, such as the HMD Global and Foxconn. In addition, Nokia’s purchase of Alcatel-Lucent in 2015 provides the company with a new developer team for replacing the division bought out by Microsoft in 2013-2014 (Gibbs, 2016).
The new product is expected to appear in the smartphone market by the end of the first quarter of 2017 (Gibbs, 2016). The company has announced its return and is building up the excitement for the new release. However, the return to the market will not be easy. According to the Telegraph, Apple currently dominates the high-end product market share, followed by Samsung – a very fierce competitor. Oppo and Huawei, on the other hand, have occupied the feature phone niche that used to belong to Nokia. In order to push them out, the product will need to be truly exceptional.
Financial analysts are predicting that Nokia will outperform the market in the next month. This has been a consensus among the 34 polled analysts interviewed between 9th and 13th December 2016.
Nokia suffered a steady revenue deficit ever since 2009, and its partnership with Microsoft did not rectify the issue, as Windows phone never became successful. While it is possible that the next product developed with the assistance of specialists from Alcatel will manage to push Apple and Samsung enough to earn Nokia a place among the competitors, the possibilities for that are slim. As the company’s current CEO said in an interview regarding Nokia’s role and future, the company is unlikely to become the megacorporation it used to be and will settle for a smaller role in the niche market (Gibbs, 2016).
Appendix A
Financial Statement
Table A1 (“Nokia OYJ ADR,” 2016).
Appendix B
Key Ratios
Table B1 (“Nokia OYJ ADR,” 2016).
Appendix C
Stock History
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