Nokia: Wired for Profits

The mobile-phone maker's global strategy of blanketing many markets with hundreds of models is paying off in spades

Nokia's (NOK) dominance in the global cell-phone market seems unassailable. After arch-rival Motorola (MOT) posted its second straight quarterly loss last month, the Finnish giant announced on Aug. 2 a 57% increase in second-quarter operating profits, to $3.2 billion, while the company increased its global market share by four percentage points, to 38%.

Not bad for a company based in Espoo, Finland. And Nokia's success is by no means a flash in the pan. Offering more than 100 models in numerous regional markets, the company has outmaneuvered its competitors in lucrative emerging markets, increasing the sales of its phones by 29%, to almost 101 million units, in the second quarter of 2007. The targeting of these markets, particularly India and China, has helped to shore up its core European sales; Nokia now expects volumes to grow by more than 10% by the end of the year.

"Compared to its competitors, things are looking very rosy" for Nokia, says Gartner (IT) analyst Carolina Milanesi, adding the company's overall handset margins of 20.9% were better than expected. As Motorola's growth has stalled over recent months, Nokia has taken advantage of the vacuum by saturating the market with phones that suit every taste (see, 7/19/07, "Why Nokia Is Leaving Moto in the Dust"). The strategy is working. Sales have risen 28% and Nokia's stock closed up 8.2% on Wednesday, its largest move since January, 2004.

Offsetting Slow North American Sales

Expanding into emerging markets has been central to Nokia's success. By offering handsets for as little as $45, the company sold 23.7 million phones in the Asia Pacific region during the second quarter and now holds a 56% share of the Middle East and Africa market. Nokia was the first major, and most aggressive, phone maker to target the African market, which analysts believe will be the new frontier for handset sales. According to Gartner's Milanesi, the company still must develop its distribution network further, but retains an advantage over its competitors due to the breadth of its product range.

Yet emerging markets aren't the only source of Nokia's unmatched wealth. The company also has launched upmarket handsets in Europe that include everything from MP3 players to global-positioning-system receivers. The top-of-the-line N95 phone has been a particular success, and Nokia's European volumes increased by 28.4% year-on-year, to 23.9 million units. This helps offset continued underperformance in the North American market, where the firm sold a mere 4.8 million phones in the first quarter of this year.

Best Performer

Of greater concern is Nokia's network joint venture with German electronics giant Siemens (SI). Last year, the companies agreed to merge their businesses that make telephone base stations and switches for phone lines, but analysts remain unsure how the enterprise will compete against industry rivals such as Alcatel-Lucent (ALU) and Ericsson (ERIC). According to the company, Nokia Siemens Networks lost $1.8 billion in the second quarter, although both companies are looking to cut costs by $2 billion by 2008.

Despite these growing pains, Nokia's business appears to be in good shape. With $9.5 billion in the bank and a range of handsets that are the envy of its rivals, the company remains the best performer in the cell-phone industry. And with the likes of Alcatel-Lucent recently posting second-quarter losses of $802 million, Nokia's dominant position will go uncontested for some time to come.

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