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Nokia Faces Long, Painful, & Uncertain Recovery

{complink 3847|Nokia Corp.} investors should expect a long and arduous recovery for the entity that once led the mobile phone market for much of the last decade. They should also expect the near certainty that the company will emerge from the ongoing restructuring painfully smaller and possibly less profitable.

My personal opinion is that Stephen Elop, president and CEO of Nokia, will not be around long enough to see the company's turnaround when (and hopefully, not if) it finally begins to climb out of the current doldrums.

That may seem like a harsh conclusion, but it is not so improbable considering the forces arrayed against the company. This includes the history and dynamics of the industry's leadership changes, and the outcome of the first round of cost-cutting and other reorganization measures implemented since Elop took over management control of the company last May. Today, Nokia announced in a statement that it slashed the first quarter forecast and said it “expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be similar to or below the first quarter 2012 level.”

In other words, Nokia hasn't yet stemmed the slide in the sales of its core mobile phone products and sees the decline extending through the second quarter. Sales in the devices and services division are now estimated at $5.5 billion (4.2 billion euro) for the first quarter with operating margins at “approximately negative 3 percent, compared to the previously expected range of 'around breakeven, ranging either above or below by approximately 2 percentage points.'”

The company attributed the poor performance in the first quarter and decline expected in the current quarter to the following reasons:

  • Competitive industry dynamics, which negatively affected net sales in the Mobile Phones and Smart Devices business units, particularly in India, the Middle East and Africa and China; and
  • Gross margin declines, particularly in the Smart Devices business unit.
  • Competitive industry dynamics continuing to negatively affect the Smart Devices and Mobile Phones business units;
  • Timing, ramp-up, and consumer demand related to new products; and
  • The macroeconomic environment.

Here's how Elop explained the situation and what he believes is ahead for Nokia:

    Our disappointing Devices & Services first quarter 2012 financial results and outlook for the second quarter 2012 illustrates that our Devices & Services business continues to be in the midst of transition.

    Within our Smart Devices business unit, we have established early momentum with Lumia, and we are increasing our investments in Lumia to achieve market success. Our operator and distributor partners are providing solid support for Windows Phone as a third ecosystem, as evidenced most recently by the launch of the Lumia 900 by AT&T in the United States.

    We are continuing to increase the clock speed of the company. The change is tangible, and we are proud of the way Nokia employees are quickly responding to the needs of consumers and partners.

That's only part of the story. Nokia is stuck in a swamp and the company is obviously taking drastic steps to get itself back on track. Here's the problem: Nokia waited too long to start reorganizing its operations even as rivals like {complink 379|Apple Inc.} and {complink 4751|Samsung Electronics Co. Ltd.} were steadily encroaching upon its turf. Like {complink 12925|Motorola Mobility Inc.}, another ex-No. 1 in the mobile handset market, Nokia rested too long on its laurels and failed to provide the innovation the market needed. In the consumer electronics industry, that's a major mistake.

The challenges Nokia faces today began years ago and slowly developed into a full-disease. It's similarly going to take years to pull the company out of the downward spiral. Observers knew Nokia was headed for a nasty experience more than four years ago. In 2008, for instance, Junko Yoshida, editor in chief at EBN sister publication EE Times, observed: “Nokia's biggest enemy is Nokia itself. And it's about time for the world's largest mobile phone vendor to address the issue.” (See: Opinion: Nokia vs. Nokia.) Also, see: Will Nokia Rise Again? and The Nokia Era Is Over.)

Elop has only compounded Nokia's problems, at least for the immediate future. Nobody should be surprised that the company's sales in developing economies “particularly in India, the Middle East and Africa and China,” as Nokia puts it, fell in the recently ended quarter. Its decision to adopt Microsoft Windows operating system and dump Symbian placed consumers on notice not to buy Nokia products, at least until non-Symbian products were introduced. (See: Nok-Win a No-Win Combination.) By the time Nokia eventually introduced its Lumia smartphone, Apple and Samsung had cornered that segment of the market. This was predictable.

So the fact is that Elop may not be around long enough to celebrate a triumphant return by Nokia, if it ever happens. The best he can hope for is that he puts the company on a sound enough footing to sell it in the future to a deep pocketed player, similar to the decision by {complink 2294|Google} to purchase Motorola Mobility, which despite major reorganization efforts, never quite recovered enough to reclaim the top spot in the market.

I don't expect a major reversal in Nokia's fortune. The Lumia is reportedly a fine product, but it lacks the draw of Apple's iPhone. The buzz around what the next iPhone will look like and the features Apple should pack in the device is already so strong the competition will be left only to pick up the market crumbs. (See: Forget The iPad, The Next iPhone Will Be Apple’s Biggest Launch Ever.)

Market leadership in the electronics industry is not easily attained, and once lost, it's even more difficult to regain. Nothing I've seen tells me Nokia's case will be different. Please let me know if you believe Nokia has a good chance of retaking leadership of the mobile phone market.

17 comments on “Nokia Faces Long, Painful, & Uncertain Recovery

  1. Barbara Jorgensen
    April 11, 2012

    I don't like to kick a company when it is down, but blaming the competitive environmant (twice) and the macroeconomic environment (at least once) isn't going to garner any sympathy from analysts and shareholders. As Bolaji points out, Nokia was No. 1 in its market, and as such competition is the one thing you can be certain of. Nokia's competitors operate in the same competitive environment. Things are tough all over. Deal with it.

  2. bolaji ojo
    April 11, 2012

    Barbara! 🙂 The company appears to be in denial about the likely impact of certain actions. When you dump your operating system and announce you will adopt a rival's but that new products won't be forthcoming for a year, you shouldn't expect customers to hang around. Nokia isn't down because it simply tripped. It is down because of steps taken so far to correct problems at the company. Like you said, the entire market is in turmoil but at least one company isn't complaining.

  3. t.alex
    April 11, 2012

    Blame the korean phone makers such as Samsung, HTC, LG.. They have new products are very fast pace with the latest Android OS. While Android went through quite extensive users acceptance test, Windows OS has to be equally competitive. 

  4. FLYINGSCOT
    April 12, 2012

    I wish I could argue with your article Bolaji but I cannot.   I reckon your opinion is sound and I do not expect great things from Nokia any more.  The competition from low cost Asian phone suppliers and US/Asian smart phone suppliers has Nokia painted into a bad corner.

  5. Wale Bakare
    April 12, 2012

    @t.alex i have similar opinion to yours – since android OS emerged that has shrinked smartphone markets to tiny portions to compete for. 

    “Windows OS has to be equally competitive” How would you suggest this to Nokia?

  6. t.alex
    April 12, 2012

    Wale, users will compare Nokia against Android and iPhone. They'd better copy all the popular functions fast and ensure all the similar apps are there 🙂

  7. _hm
    April 12, 2012

    The gist of story is innovation is the key to success. Dynamic technical leader is very essential for success of today's orgnization. When people looks from other aspect, they become laggard and miss train and loose market share.

     

  8. bolaji ojo
    April 12, 2012

    Dynamic leaders too never take their eyes off the ball! The competition needs only get lucky once, current leaders have to be lucky all the time. This reality was lost on Nokia as it was on previous market leaders. By the way, I believe Nokia isn't anymore the news. The watch is on for what will happen eventually to the current market leader.

  9. _hm
    April 13, 2012

    Vision, future technology and dreaming is very important part for success of innovative products. Also organization should be very transperant and supportive of unusual, crazy, chimerical ideas. If organization continue this with importance of engineering and relevant branch, it survives much longer at top position.

     

  10. Taimoor Zubar
    April 14, 2012

    The competition needs only get lucky once”

    @Bolaji: What do you think the competition was lucky at in Nokia's case? I'd say that the competitors were lucky to enter into touch-screens while Nokia was very late to develop touch based phones. I think that's the the only turning point I can see in Nokia's case.

  11. Taimoor Zubar
    April 15, 2012

    Companies like Samsung and HTC that had very little name in the cellphones market emerged out and became market leaders in smartphones category because of using Android platforms in their phones. Do you think it may have been a good move if Nokia had also launched an Android-based phone? I am not saying that they should have abandoned Symbian. But just a parallel range of handsets that had Android.

  12. Wale Bakare
    April 15, 2012

    You are right on Samsung and HTC. Not only them are contributors to market debacle for Nokia, even ZTE originally started as 3G mobile broadband dongle maker, now the company is also producing mobile devices aside dongle device.

    Even Huawei has also joined in the fray – focusing in Africa market, where Nokia and BB have certain proportions of market fan base but now both ZTE and Huawei are operating fine in Africa with affordable mobile devices, also of good quality. I believe, developing the region may also make market situation better — ZTE for instance, is diversifying into greener power generation for telecom service provider in part of Africa. That's another strategy i think may help sustainability.

    Had Nokia launched its mobile devices on Andriod? Well, i dont think it that would have contributed enough to Nokia's market situation.

     

     

  13. Himanshugupta
    April 17, 2012

    Nokia is dealing with fierce competition in all the segments. While in lower price handsets local maker are giving tough time in developing markets so in the smartphones Nokia has been unable to capture the market.

    I used to think that Windows-Nokia can be a winning combination but i am rethinking my stand that Nokia could profit more from the Android ecosystem.

  14. Wale Bakare
    April 17, 2012

    I believe Nokia can compete well and emerge successfully, its track records in mobile phone business more than enough to face the battle there – developing markets. Nokia – Android partnership? For me i can hardly foresee success in the romance. Well had it stuck its gun to Symbia and engaged Symbia developers painstakinly that would have probably be better. That's my thought.

  15. Anne
    April 22, 2012

    Nokia need to amend its plans in order to be a player in the competitve smartphone market. They need to come up with a really disruptive, innovative product, or a huge marketing budget to create customers demand.

  16. Anne
    April 22, 2012

    @hm,

    I agree with your opinion, what Nokia need innovation.

  17. itguyphil
    April 22, 2012

    Someone forwarded me an article where European's are grim on Mokia and its new flagship product, the Lumia. I wonder if the issues mentioned in the article will actually come to fruition.

    http://www.csmonitor.com/Innovation/Horizons/2012/0418/Nokia-Lumia-faces-hurdles-in-Europe-report

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