Mobile-phone behemoth Nokia Corp., with the credibility that comes from commanding one-third of the global market share and the kick provided by its recent, optimistic projections for handset shipments in 2006, appears well-positioned to take a leadership shift in stride as Jorma Olilla, departing chairman and chief executive officer, soon bids the industry farewell.
Olilla is set to become non-executive chairman of Royal Dutch Shell plc on June 1, to be replaced by CEO-designate Olli-Pekka Kallasvuo, currently president and chief operating officer.
The shift in leadership comes at a time when Nokia has raised its estimate of global, industrywide handset shipments to about 915 million units this year (an increase of about 120 million from 2005), raised its projected average selling price for first quarter to around $125 and found traction in the hotly contested U.S. market with a belated launch of clamshell-style phones.
Equity-research firm Bear Stearns, in turn, has raised its projections of global handset shipments, Nokia’s handset shipments and Nokia’s ASP. Bear Stearns’ rating on Nokia’s stock is “outperform” (as it is for Motorola Inc.). Nothing fuels Wall Street credibility like the numbers reflecting Nokia’s recent performance. And, when Nokia raises its estimates, industry watchers apparently consider that reliable insight. As for solid information, Nokia is set to announce first-quarter earnings this week.
As he surveyed the terrain from the keynote stage at CTIA Wireless 2006 earlier this month, Olilla looked back over his 13 “unforgettable years” at Nokia’s helm, while reflexively looking ahead to the proverbial “next billion” subscribers said to await mobile service in emerging markets such as India and China.
“Network demands and customer preferences vary with geographic diversity,” Olilla told his CTIA audience in perhaps his last appearance at a major wireless industry gathering. “The winners will understand consumer needs [in a segmented market].”
That means not one or two successful products, he added in an apparent elbow at arch rival Motorola Inc. and its Razr handset-which continues to sell at an unprecedented pace nearly two years after its release-but a broad portfolio that addresses the segmented demands of the global marketplace.
Olilla’s successor might do well to take his advice. As Nokia’s handset business goes, so goes the company. Of Nokia’s four business units-infrastructure, enterprise solutions, multimedia handsets and mobile phones-mobile-phone sales produce the lion’s share of the company’s revenues and are the vendor’s most visible indicator of progress and profitability.
With 15 factories in 10 countries churning out handsets, Nokia appears well-positioned to take advantage of its “value and volume” strategy for mature and emerging markets, respectively. Nokia manufactures “value” handsets such as upper-tier handsets and smart phones-presumably with higher margins-for mature markets, while its “volume” manufacturing model meets the needs of emerging markets for entry-level products, as well as the increasingly attractive prepaid market in the United States. The value model of manufacturing allows rapid changes in design and function to respond to consumer demands in mature markets, according to Tim Eckersley, Nokia’s senior vice president for North America.
While Nokia leads the globe in handset sales, the picture in the U.S. is less assured, with Nokia trailing Motorola by a significant gap.
Historically, Nokia’s early weakness on the CDMA side and initial slowness to adopt clamshell-style devices slowed its march in the U.S., Eckersley acknowledged. Nokia’s response has been to ramp up consumer phones in the clamshell style and to announce that it intends to form a joint venture with Sanyo Electronics Co. Ltd. that, according to Nokia, will become the largest single CDMA handset maker in the world. Nokia’s CDMA strengths have been in the lower tier of the overall market, pursuing volume in India, China and Latin America and its alliances with regional players in the U.S., according to Eckersley. Sanyo’s strength is in higher-tier markets such as in Japan and its solid relations with Sprint Nextel Corp. in the States. “This makes us a formidable player in the CDMA space, where we’ve struggled in the recent past,” Eckersley said.
Advances in Nokia’s U.S. fortunes may not be visible for several quarters, according to Eckersley. “There will be a lot of stories coming out in the next 12 months,” he said.
Analysts hold differing views on the prospects for the joint venture. Avi Greengart of Current Analysis said that while the JV sounded perfect on paper and acknowledges that it may reshape the U.S. handset market, it doesn’t necessarily advance the CDMA position of either partner and JVs have a poor track record of success. While the two partners’ pursuit of volume sales in this space makes sense, each company had a better chance to improve its CDMA position as individual companies, Greengart said.
Miro Kazakoff of Compete Inc. suggested that the interlocking interests of the two partners, as described by Eckersley, is likely to produce an effective competitor because there is so little overlap in each partner’s portfolio or markets.
To Olilla’s point that winners in the global competition-and in the prized U.S. market-will have to understand consumers and their new focus on form over function, Kazakoff’s research at Compete-which tracks consumer preferences through online sampling and surveys-adds a resounding “amen.”
“U.S. consumers tell us they will pay a premium for stylish phones that make a statement,” Kazakoff said. “It’s form over function. What works today will work tomorrow, but what’s cool today may not be cool tomorrow. When handset vendors talk about a flexible manufacturing model, that’s not enough. You need to be closely connected to that consumer. Their phone says, `This is who I am.’ That’s very difficult to divine ahead of time.”
Motorola has succeeded in prolonging the life of its Razr handset simply by delivering it in pink to exploit the female segment of the market, Kazakoff said, acknowledging the market’s positive reception of such an obvious move. How Nokia might discern the next iconic form factor is anyone’s guess, Kazakoff said, neatly finessing the million-dollar question of what new design could deliver another blockbuster akin to the Razr.
How well Nokia maintains its current momentum and market share, how it plays catch-up in the U.S. and how the joint venture with Sanyo will improve the Finnish vendor’s CDMA position are among the issues awaiting Olilla’s successor.
In Eckersley’s view, the change in executive leadership will be invisible to outsiders as Nokia focuses on executing its strategy of value and volume to maintain and increase market share globally, while also overtaking its rival, Motorola, in the U.S. market.
“Jorma Olilla has said that `sometimes change is good,”‘ Eckersley said. “In this case, change means more of the same. Our strategy is four-pronged: deliver efficient, cost-effective network solutions, drive mobile-phone sales from a value and volume perspective, drive the consumer multimedia experience and provide end-to-end enterprise solutions. There’s really no reason for us to change our strategy. We’re executing it very well and it’s been received very well in the marketplace. Our new CEO may have a different managing style, but the transition will be invisible to the marketplace.”
Indeed, when Kallasvuo told a Finnish magazine last month that the U.S. market is a trend-setter that wields an importance disproportionate to its size, he may have quietly signaled Nokia’s renewed ambitions to dominate the U.S. market, which currently accounts for about 12 percent of the company’s global volume.
With a reputation for credibility based on delivering positive financial numbers, Nokia’s shift in CEO may be invisible to the public until those numbers signal success or failure in its many endeavors.
