Why Nokia Is Leaving Moto in the Dust (Extended)
By Jack Ewing
Pop singer Alicia Keys and Ramkishen Pyarelal, proprieter of a Mumbai tea stall, may not have a lot in common. But they both carry Nokia mobile phones. If you want to know why Motorola (MOT ) is in such trouble these days, the celebrity and the street merchant provide a big part of the answer.
From stylish $750 handsets with built-in global-positioning receivers to $45 basic models with black-and-white displays, Nokia (NOK ) saturates the booming mobile-phone market in a way neither Moto nor any other competitor has been able to duplicate. Nokia's formidable lineup of some 100 models is just one of many reasons why more than one out of every three handsets in the world traces its origins to the Helsinki suburb of Espoo. The former producer of rubber boots and timber, which famously made a risky decision in 1992 to focus on mobile technology, seems to be doing everything right these days. Nokia's supply-chain management may be the best of any company in the world. It has a big head start in fast-growing markets such as China and India. And it has $9.5 billion in cash and practically no debt, so it can invest far more than rivals on developing new products or conquering new markets—and thus build even more intimidating economies of scale. "We are about to report our billionth customer, so we must be doing something right." says Anssi Vanjoki, a Nokia executive committee member responsible for multimedia devices.
Thanks to those advantages, Nokia's global market share has climbed to 37%, and some in the industry think it could hit 40% this year. "If there's a time when that goal looks realistic, it's now," says Gartner (IT ) analyst Carolina Milanesi. Motorola managers can take some comfort in recalling that Nokia, too, has endured some devastating crises. Back in 1995, its manufacturing system nearly collapsed under the weight of rapid growth. And in 2003, Nokia was slow to introduce clamshell-style phones and color displays. From the fourth quarter of 2003 to the first quarter of 2004, its market share plunged from 34.6% to 28.4%, according to market watcher Strategy Analytics .
Similar woes have driven other mobile-phone producers from the market. Onetime contenders such as Panasonic (MC ), Philips (PHG ), and Siemens (SI ) (which later sold its phone division to Taiwan's BenQ ) today have market shares below 1% each. But under former Chief Executive Officer Jorma Ollila and his successor, Olli-Pekka Kallasvuo, the stoic Finns emerged even stronger. By diversifying its products and its geographical reach, Nokia now seems far less vulnerable to shocks than it was three years ago. "Nokia has definitely learned from that experience," says Neil Mawston, an analyst with Strategy Analytics. "They have spread their risk a lot more."
ALL THINGS TO ALL CONSUMERS.
One lesson Nokia learned was that it doesn't pay to rely too heavily on a few top-selling models. Motorola, by contrast, became overly dependent on the Razr. Nokia has nailed both the high and low ends of the market and pretty much everything in between. For affluent buyers who want the latest technology, the $750 top-of-the-line N95 includes an Internet browser, music player, GPS satellite receiver, and the ability to connect to Wi-Fi networks as well as standard cellular services.
Even Nokia's entry-level phones offer extras that appeal to Mumbai tea sellers and vast numbers of other low-income people enjoying their first taste of telecommunications. Its $45 model 1200, for example, can go more than two weeks without a recharge and has a built-in flashlight, handy for people who live in homes without electricity.
The company has invested hundreds of millions of dollars building distribution systems and networks of retailers in developing countries, including vans that bump along the rural roads of India between stops for instruction on how to use mobile phones (see BusinessWeek.com, 05/04/07, "Nokia Gets It Right for South Asia"). As a result, it's the No. 1 handset supplier in China and India and is growing fast in Africa, the industry's next frontier. Meanwhile, Motorola's low-cost phone for India has been a flop despite a $35 price tag, in part because its limited features didn't convey a sense of status to potential buyers.
Perhaps most impressive is that Nokia has managed the shift to low-cost phones while maintaining healthy profit margins. The company earned an operating profit of 16.8% on mass-market mobile phones in the first quarter of 2007, a modest decline from 18.5% a year earlier. But that doesn't even include Nokia's high-end multimedia devices, which had a profit margin of 18.8%. In the most recent quarter, net profits were $1.3 billion on sales of $13.4 billion. When Nokia reports second-quarter results on Aug. 2—figures analyst Richard Windsor of Nomura Securities in London—profits should climb 11% on a 7% increase in revenues.
Nokia makes money at the low end because of its superefficient supply-chain and manufacturing systems. It also keeps costs and complexity under control by sharing components among devices and designing phones that have fewer parts than competing models. Such practices pushed Nokia to the No. 1 spot this year in Boston consultancy AMR Research 's annual survey of top supply-chain operators, ahead of logistics champions such as Toyota (TM ) and Wal-Mart (WMT ). (Motorola was a respectable No. 12 in the ranking, which was based in part on a poll of supply-chain executives.) Analysts say even low-cost Chinese producers such as Huawei Technologies Co. can't match the efficiency of Nokia, which operates its own factories in Vietnam, India, and other low-wage countries.
NOT THE IPHONE, BUT SO WHAT?
To be sure, Nokia still has weaknesses. Its Eseries devices for the corporate e-mail crowd lag rivals such as Research In Motion's (RIMM ) BlackBerry and are unprofitable. Swedish rival Ericsson (ERIC ) is far ahead of Nokia's joint venture with Siemens in the market for base stations and other mobile infrastructure. And in design, Nokia faces a serious challenge from Apple (AAPL ) and its hot iPhone. Nokia has only a few touch-screen products and none as advanced as the iPhone, with its glass surface and finger-operated interface.
It's not the first time a competitor has challenged Nokia for classiness: see LG Electronics' Chocolate Phone or Samsung's elegant superthin handsets. But time and again, the Finns' consistently excellent distribution, manufacturing, and marketing have prevailed. It will take more than one cool phone to threaten Nokia's dominance. "Maybe the iPhone will be very successful," says Martin Garner, director of wireless intelligence for London market researcher Ovum . "Does that knock Nokia off its perch? I don't think so."
With Nandini Lakshman in Mumbai