Nokia Corp. and Sanyo Electric Co. Ltd. announced they plan to form a joint venture to build CDMA phones. The move likely will have major repercussions for the global wireless industry and stands as evidence that no one company-no matter how successful-can go it alone in the world’s cutthroat cell phone market.
Nokia and Sanyo offered little in the way of detail for their joint venture, giving the announcement the appearance of being rushed. The companies said they would combine their respective CDMA businesses, and that the new company would have “major operations” in San Diego, Calif., and Osaka and Tottori, Japan. The companies said the deal should be completed by the second quarter, and that the new business would begin operations in the third quarter, pending regulatory approval. The companies did not say how much they would invest in the new business, although investment-banking firm Lehman Brothers said Nokia likely would take a minority stake in the joint venture so that the JV’s finances would not show up on Nokia’s income statement.
Neither Nokia nor Sanyo discussed specific job cuts as part of the announcement; such work-force reductions are a standard byproduct of most corporate mergers. Rick Simonson, Nokia’s chief financial officer, said there would probably be some layoffs, but declined to offer any details. Nokia currently employs around 3,500 people in its CDMA operations, and could cut around 250 of those positions due to the joint venture, according to reports. Simonson emphasized during a quick news conference at the 3GSM World Congress in Barcelona, Spain, that the handset deal would not affect Nokia’s CDMA infrastructure business.
Neither Nokia nor Sanyo said what the new joint venture would be called. However, Nokia’s Simonson said “we do intend to take advantage of both brands.” According to reports, the joint venture will be called Nokia Sanyo in Europe and the United States and Sanyo Nokia in Japan.
“Meeting and exceeding our customers’ expectations is the key priority that drives Nokia every day,” said Olli-Pekka Kallasvuo, the company’s president and chief operations officer. Kallasvuo is set to become Nokia’s new chief executive officer in June. “We identified this new entity as the best way to create an attractive CDMA phone portfolio for our customers with the widest possible product offering at the high-end, mid-range and entry levels. We estimate that the creation of this separate, associated company will provide Nokia with financial benefits from start. It also offers both parties timely access to R&D competencies that complement their own internal strategies.”
Sanyo and Nokia said their new joint venture would retain the strengths of each company-Nokia’s successes in low- and mid-range phones and Sanyo’s specialty in high-end phones and carrier customizations. Further, the JV is expected to benefit from Sanyo’s strong Japanese business-an area where Nokia has struggled-and from Nokia’s CDMA accomplishments in Latin America and elsewhere.
Nokia also said the joint venture will be able to use its global supply chain and distribution system-considered by many to be the most efficient in the industry.
The announcement is especially notable for Nokia, which has long struggled in the CDMA mobile-phone arena. Although Nokia is the world’s largest mobile-phone vendor-one out of every three phones sold worldwide bears the Nokia brand-the company has largely failed to find success in the CDMA market. Over the years the Finnish vendor has repeatedly promised to improve its CDMA position, but it still derives much of its profits from sales of GSM products.
Indeed, Lehman Brothers said Nokia’s CDMA phone business generated about $1.4 billion in revenues last year, or around 4 percent of Nokia’s total sales, but failed to produce any profits. The firm said cutting CDMA out of Nokia’s income statement should boost the company’s profit margin from 17 percent to around 18 percent.
Investors appeared pleased with Nokia’s decision. The company’s stock rose steadily after the announcement to around $18.77 per share.
Rumors have long swirled that Nokia would eventually offload its CDMA phone efforts to Asian original equipment manufacturers. Companies like Compal Electronics, Quanta Computer and others design and build mobile phones and then sell the phones to original equipment manufacturers like Nokia, which then add their logo to the phone and sell it to end users. In GSM, Nokia designs and builds the vast majority of its phones internally.
Nokia’s agreement with Sanyo indicates that Nokia would rather realign its CDMA phone business altogether rather than simply outsource its design and manufacturing efforts.
Nokia’s agreement with Sanyo also signifies a major new turning point in the CDMA phone industry. According to investment-banking firm UBS, the CDMA phone market totaled about 157 million phones last year, with GSM and other technologies accounting for the remaining 632 million phone shipments. South Korean vendors Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. control the vast majority of the CDMA market; Nokia and Sanyo’s new joint venture will enter the industry as the world’s No. 2 CDMA handset supplier behind LG, according to research and consulting firm Strategy Analytics. The firm said a combined Nokia-Sanyo commanded an 18 percent market share last year.
“Samsung’s margin pressure is likely to accelerate in the mid-term if the venture sees early success,” Strategy Analytics wrote in a report on the Nokia-Sanyo announcement. “The devil is in the details of this agreement at this stage, and the long-term success of this venture depends on both parties’ willingness to continue to devote resources for broad product development in higher tiers. This is requisite before Nokia and Sanyo can realistically expect to steal significant volumes from CDMA stalwarts Samsung and LG.”
Another major ramification from the joint venture is its impact on CDMA pioneer Qualcomm Inc. Analysts agree that the combination of Nokia and Sanyo stands as a major positive for Qualcomm, which would benefit from increased CDMA handset shipments as well as potentially additional CDMA chip sales.
“Qualcomm is likely to emerge as the chip partner for the new joint venture,” wrote Lehman Brothers in a research note. The firm makes a market in the securities of a variety of wireless players. Qualcomm investors roared on the news; the company’s stock jumped from around $46 per share to almost $48.
Nokia to date has refused to buy chips from Qualcomm, including CDMA chips. Instead, Nokia has worked with Texas Instruments Inc. to build its own line of CDMA chips-a strategy that involves a significant amount of time, energy and money. If the Nokia-Sanyo joint venture uses Qualcomm’s CDMA chips-as Sanyo does now-Qualcomm would be able to claim a 100 percent market share in CDMA chips.
Aside from the implications for Qualcomm, Samsung and other CDMA players, Nokia’s CDMA joint venture with Sanyo ultimately highlights the increasingly complicated nature of the worldwide mobile-phone industry. Nokia spent $4.5 billion on research and development last year, and still the company found itself unable to compete in the CDMA phone market by itself. And Nokia is not alone-rival Sony Ericsson Mobile Communications L.P., itself a joint venture between Sony Corp. and L.M. Ericsson, pulled out of the CDMA market to focus exclusively on GSM. Other companies including Alcatel and Siemens AG have simply exited the mobile-phone industry altogether.
Indeed, Nokia’s agreement with Sanyo could indicate the beginnings of a shift in the worldwide mobile-phone market, where vendors compete in specific technologies, products and regions rather than on a global, industrywide basis.
RCR Wireless News Associate Publisher/Editor Tracy Ford contributed to this report.
