ESPOO, Finland—What a difference four months can make, especially in the hyper-competitive pursuit of global domination in a burgeoning business.
Nokia Corp. and Sanyo Electronics Co. Ltd. announced they will not proceed with the joint venture for CDMA phones they announced in February. In a statement, Nokia’s Kai Oistamo, executive vice president of the company’s mobile phones division, said, “We feel it would not be in our best interests to make an agreement that proved to be less beneficial than originally anticipated. After exploring all available opportunities and making every effort to create a sustainable CDMA business, this is our only viable option.”
Nokia’s stock dropped slightly on the news to around $20 per share.
Analysts said the news probably would not affect Nokia’s profit and loss balance or the company’s stock ratings, as its CDMA business has been peripheral to the company’s outstanding performance in GSM markets.
Nokia intends to pursue a CDMA business in the lucrative, showcase market of the United States, according to the company, while apparently pulling back on plans to tackle CDMA in emerging markets, where large, long-term investments, slim margins and reinvigorated competition from rivals pose a daunting challenge.
The precise causes for Nokia’s change of heart on its joint venture remain unclear at this point, and Nokia’s Bill Plummer, vice president for external affairs, declined to elaborate on the announcement’s several points, leaving the company’s statement to speak for itself—and leaving outsiders to parse the announcement’s language and speculate on its implications.
The vendor gave two specific reasons for canceling the JV in its public statement today. Nokia said that “the terms and conditions of the proposed partnership were not satisfactory and in the best interests of Nokia’s long-term success.” In short, it appears that Nokia’s ability to profit was outweighed by the needed commitment of resources to make the JV a success for both parties.
On the market conditions for a CDMA joint venture, Nokia stated: “In addition to an already financially prohibitive CDMA ecosystem in general, recent developments may indicate that the CDMA emerging markets business case is looking more challenging.”
The reference to the “financially prohibitive CDMA ecosystem” may be a veiled reference to Nokia’s complaint that CDMA chip vendor Qualcomm Inc. charges too much for IPR licensing of its core technology, and that CDMA-based handsets are incrementally more expensive to produce. The reference to the business case for emerging markets seems to reflect Nokia’s recognition that with low-cost handsets for developing countries already offering slim margins, an effort to produce and distribute the more expensive CDMA technology would not be worth the effort, at least in the JV format.
Nokia also said it would “ramp down” its own CDMA R&D and manufacturing by April 2007. As a result of the cancelled JV, Nokia will take a restructuring charge in the third quarter of this year of around $189 million.
On Nokia’s continued interest in the U.S. market, Plummer said “We see the U.S. market in general as a major and important wireless marketplace. Going forward, with convergence taking place—and mobility, frankly, being the value add for convergence—the U.S. will be the leading market in that respect. We will have a special focus here in CDMA.”
As for the impact of today’s news on Nokia’s business plans and results this year, Plummer added. “We are poised and ready to deliver as we have committed to.”
In a note to investors today, CIBC World Markets analyst Ittai Kidron speculated that Nokia reevaluated its joint venture intentions after news that two network operators—Reliance in India and Vivo in Brazil—would consider switching to GSM networks from CDMA. Nokia has built a long-term brand presence in India—which with 1.1 billion people is one of the world’s largest and fastest growing markets—and has invested heavily in manufacturing there. Presumably that formed a basis for anticipated market traction by the Nokia-Sanyo joint venture, perhaps derailed if major operator partners switched air interface technologies. Brazil is by far the largest market in Latin America with 190 million people.
Kidron speculated that Nokia’s short-term solutions to the global patchwork of CDMA markets would involve relying on original design manufacturers such as Pantech Group, which indeed has recently made several CDMA model handsets for Nokia while the joint venture with Sanyo presumably moved towards production. Now, Nokia may rely more heavily on ODMs to build its CDMA phones. Kidron forecast a possible benefit for CDMA chipset vendor Qualcomm Inc. if Nokia relies on ODMs to meet demand for CDMA handsets, while a loss of CDMA business in India could hurt distributor Brightpoint.
