Does Nokia Corp. (NYSE: NOK) need another manufacturing facility, considering the embattled company is embarking on a major restructure that will involve big headcount cuts? Should Nokia even seek to expand its manufacturing footprint in an environment where industry observers expect shipment of its mobile handset devices to continue dropping ahead of the launch of Microsoft's Windows operating systems-based products later this year? The answer from Helsinki is yes.
Nokia is adding a new manufacturing plant in Vietnam as part of its plans to remain one of the major suppliers of connectivity products to consumers in emerging markets worldwide. The company predicts more than one billion people will gain access to the Internet over the next few years; it wants those people to have its products. The new facility being developed near Hanoi in northern Vietnam would require an initial investment of 200 million euros, or about $290 million, plus additional capital equipment spending. Nokia says the new plant will open 2012.
If you are puzzled by this move from a company whose market share is fast eroding, you are not the only one. Numerous questions popped into my mind when I saw the report; perhaps the folks at the Nokia headquarters in Helsinki have lost their minds. Nokia's custom baseband revenue had declined 53 percent in the span of two quarters, and sales in the devices and services business were forecast to fall 10 percent, in addition to expectations for low-single digit operating margin before restructuring costs, as EBN Editor-in-Chief Bolaji Ojo has reported. (See: Nightmare in Helsinki.)
Read further, though, before you join the crowd in condemning Nokia's latest manufacturing initiative. The company may be troubled, but it appears the senior executives are looking beyond the current problems to develop a manufacturing strategy for future growth and to meet continued increase in product demand.
Nokia’s manufacturing network currently consists of ten major facilities in Europe (Finland, Hungary, Romania, and the UK), Latin America (Brazil and Mexico), and Asia (China, India, and Korea). You'd think these facilities would be more than enough to cover the production of handsets Nokia currently sells. However, the company sees demand for connectivity products like smartphones surging in the near future as more people worldwide seek access to the Internet. Nokia does not want to be overwhelmed by the expected increase, executives say.
Esko Aho, Nokia’s executive vice president, said in a press release: "Only about 30 percent of the world's population is currently online, and we believe we can play a major role in connecting the next billion not just to their first phone but to their first Internet and application experience."
Still curious about how the planned Vietnam facility fits into the company’s manufacturing strategy, I went straight to the source. Nokia's media relations spokesperson Henna Pelkola gave me some answers. She confirmed what Aho had said in the press statement and added that the addition of the Vietnam plant does not indicate the company plans to shutter any of its current facilities.
I asked Pelkola whether the Vietnam plant was part of a strategy for not being held captive by possible problems in China. "No. As we said when announcing the plan to establish a plant in Vietnam, it is a part of our strategy to connect the next billion people to the Internet. The plant would add to our manufacturing network," Pelkola said.
Despite the forecast for lower sales, Nokia seems to be preparing for growth, rather than for decline. "Our focus is moving forward with our strategy -- and one pillar of that strategy is to connect the next billion people to the Internet through our mobile phones business," Pelkola said.
Nokia has had a close relationship with Vietnam since 1996. Vietnam now can offer both the location and developing infrastructure to expand Nokia’s manufacturing network. "I am extremely excited about this opportunity and about the support and commitment that Vietnam has offered to Nokia," said Juha Putkiranta, Nokia's senior vice president.
Interesting things are happening in the mobile world, and Nokia obviously aims to remain a major force in the market. The Vietnam plant potentially could make the company a stronger competitor in the wireless devices market. I only wish I could say the same about its plans to dump its Symbian operating system for Microsoft's Windows OS.