Information Processing: TELECOMMUNICATIONS
AT NOKIA, A COMEBACK--AND THEN SOME
A case study in surviving in the fast-shifting electronics business
As winter closed in on Nokia's Helsinki headquarters a year ago, gloom hung in the air. After four years of superheated growth, sales and profits at the world's No.2 cellular-phone manufacturer were in gut-wrenching decline. Delayed chip deliveries had halted some assembly lines. Inventories were building, and costs climbing. On Dec. 14, Nokia warned investors that profits might suffer. Within a week, its stock dropped 36%.
Through the dark days, Nokia managers insisted that the setback was temporary. Now, they've proved it. On Nov. 14, Nokia posted a 39% jump in third-quarter sales, to $2.1 billion. Operating profit rose 21%, to $263 million. Along the way, Nokia stole sales from Motorola Inc., the world's leading supplier of cell phones. While the total market for handsets rose by 39%, sales at Nokia's mobile division jumped 58%, to $1.2 billion. Its stock, at 55 a share, is now at a 52-week high, up 66% since mid-July. "They've done a first-class job," says Peter Knox, an analyst with UBS Ltd. in London.
CHIP DEBACLE. How Nokia stumbled--and recovered--could be a case study in how precisely electronics companies must manage all aspects of their business to survive in the Digital Age. In just two years, the cellular phone business has gone from an industry of predictable product cycles and operating margins as high as 16% to steep price cuts, single-digit operating margins, and the kind of turmoil familiar to makers of personal computers and camcorders.
Even Motorola was caught off-guard. It missed the first wave of digital cellular in Europe, ceding market share to Nokia and Ericsson. It had huge inventories of cell phones at the end of 1995 and in its most recent quarter blamed poor earnings partly on rising competition and falling margins in cellular.
In Nokia's case, the stumble wasn't caused by external conditions as much as by shortcomings in the unglamorous but increasingly critical discipline of logistics--feeding all the right items to factories, warehouses, and distributors in hundreds of locations around the globe. Until 1995, logistics for Nokia were straightforward: With unit sales surging 100% a year, managers focused solely on buying enough parts to feed five plants in Europe, Asia, and the U.S.
The chip debacle in the summer of 1995, however, signaled new problems. Without the necessary chips, phone production backed up, causing inventory buildup in other components. Parts prices were eroding by 20% to 25% a year, but Nokia couldn't take advantage of the trend. So it got saddled with higher costs. Group operating margins fell from nearly 14% in early 1995 to 6% in the first quarter of 1996, just as the cellular market slid into its first-ever slowdown.
In North America, Nokia had been too optimistic about how quickly carriers would convert from analog to digital. That left the company with lots of unwanted digital handsets--and no plan to sell analog units instead. "Nokia missed the continuing demand for analog," says Dataquest Inc. analyst Clint McClellan.
By early 1996, Nokia Chief Executive Jorma Ollila was heading a turnaround. He formed "commando teams" to slash inventories, speeding up turnover of raw materials and finished goods. He let regional managers renegotiate contracts and strong-arm suppliers. Chip vendors were told to cut delivery times from 12 weeks to 8.
At the same time, Nokia overhauled its management information systems. It installed software from Germany's SAP, which let purchasing managers tap into a real-time database, track excess parts, and reroute them to factories in need of them. In six months, the commandos slashed the supply of raw material on hand from 80 days' worth to 40. Nokia also tripled its turnover rate for inventories, which fell by 35%, to $1.69 billion.
Now, Nokia is betting big on personal communications services (PCS), a new cellular market (page 103), where Motorola trails. In March, Nokia won a $200 million contract for PCS equipment from American Portable Telecom Inc.--now called Aerial Communications Inc.--in Chicago. Says Aerial President Don Warkentin, "They really have made a commitment to innovative services."
Nokia also is pushing high-end, high-margin products. Its 9000 Communicator, a phone/Internet device, lists for $2,000. It's a niche product, but it shows that Nokia "has leapfrogged competitors," says AirTouch International Executive Director Edward A. Salas. Just as important, Nokia has learned how to manage in a suddenly volatile market.By Gail Edmondson in Helsinki, with Peter Elstrom in Chicago and Peter Burrows in San FranciscoReturn to top