Nokia's Downfall Holds Three Lessons for Europe: Matthew Lynn

What was the most successful European company of the 1990s? Easy. The Finnish mobile phone manufacturer Nokia Oyj. And the most disappointing one of the 2000s? Easy again. Nokia.

A company once held up as an example of how Europe could still compete in technology and create new industrial giants, Nokia has been in steep decline -- a point emphasized last week by its decision to hire the first non-Finn as chief executive officer, charged with turning the business around.

And just as the company’s rise held lessons about how Europe could succeed, its downfall tells us much about why the region so often fails. Nokia rested too comfortably on its laurels. It was never willing to re-invent its business, even if it meant completely changing its products. It was never located at the heart of the information technology industry, among competitors who might force it to keep innovating. Other European companies should study Nokia’s fate to make sure they don’t repeat it.

A decade ago, Nokia was the most successful business Europe had produced in a generation. It captured the emerging market for mobile phones and built the industry’s most powerful brand.

Politicians lined up to praise the company as an example of how Europe could still prosper in the 21st century. No less a figure than Romano Prodi, president of the European Commission, drew attention to the success of Nokia and its rival, Sweden’s Ericsson AB, in a speech in 2002.

“Their achievement in mobile telephones helped to create two vibrant clusters, around Oulu in Finland and Stockholm in Sweden, which have attracted a large number of startups as well as investment from foreign companies,” Prodi said. “These examples demonstrate that European regions are capable of developing new, high-tech clusters.”

Reversal of Fortune

It doesn’t look so good now. In the last three years, the news out of Nokia has only been bad. Since Apple Inc. introduced its iPhone in January 2007, Nokia shares have fallen by 47 percent. The company’s brand, once one of the coolest in the world, is battered. In a ranking of global brands by Millward Brown Optimor this year, Nokia ranked No. 43, dropping 30 places in 12 months. Its profit margins have been shrinking, along with the average price of its phones and its market share.

True, it still has more than one-third of global mobile phone sales. But it looks stranded in the middle of the market. Korean electronics manufacturers such as Samsung Electronics Co. are leading the main consumer market. Apple’s iPhone and Research In Motion Ltd.’s BlackBerry dominate the upscale, smartphone industry.

Importing Leadership

Last week, Nokia recognized the scale of its challenges, hiring Stephen Elop, the head of Microsoft Corp.’s business unit, to turn the company around. Can he succeed? Everyone will wish him well. But if the guy knows so much about phones, he’s kept it a secret. Microsoft has never made any progress in that industry.

The cruel truth is that for all its residual market share, Nokia looks like a has-been. It misread the way the mobile phone industry was merging with computing and social networking. It is probably now too late to turn that around.

There are uncomfortable lessons here for European industry.

First, never rest on your laurels. Nokia got to the top of its industry quickly. But once there, it became complacent in an industry where laziness is fatal. It worried too much about hanging onto its market share, rather than creating new products to excite customers.

Failing to Mature

Second, Nokia was unwilling to challenge itself. The company clung to the model that mobile phones were mainly about calling people. It failed to notice that they were just as much about checking your e-mail, finding a good restaurant nearby, and updating your Twitter page.

Finally, it wasn’t located near a cluster of similar companies. Building a technology giant in Finland was a great achievement. But Nokia wasn’t surrounded by Web companies or consumer-electronics manufacturers. That meant it wasn’t in the mix of innovative ideas, which would have forced it to question its assumptions every day. The company should have relocated to California. Sure, that would have caused an outcry at home. But that’s better than watching its slow decline into irrelevance.

It may be too late for Nokia to turn itself around. But Europe still has companies that dominate industries such as oil, aerospace, pharmaceuticals, automobiles and financial services.

They are all prone to similar missteps. Are the auto manufacturers doing enough to prepare for the arrival of electric cars? Are the drugs companies ready for the merging of computing and biotechnology? Are banks positioned for a decade when debt is steadily reduced, not increased? Probably not.

Politicians and business experts spent a lot of time praising Nokia and trying to learn from its rise. They should devote as much time studying the lessons of its downfall. If they don’t, much of the rest of European industry will repeat its mistakes. And Europe can’t afford to lose many more world leaders.

(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a forthcoming book on the Greek debt crisis. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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