In a move that said much about Nokia Corp.’s new leadership as well as the fragmented global market for CDMA handsets, the global leader in mobile phones said it would dissolve its joint venture with Sanyo Electronics Co. Ltd. and instead pursue CDMA in the United States through deals with original design manufacturers.
Nokia said last week the JV with Sanyo was doomed by three elements:
No.1, the terms and conditions of the partnership (read: Sanyo didn’t have product platforms enabling a volume play, requiring substantial Nokia investment); No. 2, a “financially prohibitive CDMA ecosystem” (read: Qualcomm Inc. licensing terms); and No. 3, recent developments in the business case for CDMA in emerging markets (read: those markets are flat, fragmented and expensive to pursue).
The bigger story? Nokia’s new Chief Executive Officer Olli-Pekka Kallasvuo just avoided an expensive misstep, though his firm still faces huge challenges in maintaining a CDMA presence in United States.
Among the winners and losers:
-Sanyo: a big loser, which will need new partner to prosper;
-Pantech Group: a winner if Nokia indeed relies on it for the U.S. market;
-LG Electronics Co. Ltd., Motorola Inc. and Kyocera Wireless Corp.: winners if they can scoop up Nokia’s potentially lost market share in the United States;
-and Samsung Electronics Co. Ltd.: a winner because the JV will no longer put pressure on its efforts in CDMA.
Finally, the two toss-ups: Is Nokia out of the frying pan and into the fire? And will Qualcomm remain unaffected by the JV’s implosion, as the company has argued?
Both Strategy Analytics and Current Analysis’ assessment of the JV announcement in February was that it looked like a complementary product match-up on paper but, to succeed, Nokia would have to devote significant resources to product development. They were prescient.
Both analyst firms weighed in on the news that the JV would not proceed.
“Whether or not this is the right move, Nokia’s management has demonstrated that it is clear and decisive,” said Avi Greengart, an analyst with Current Analysis. “To their credit, they pulled out before the JV failed. These types of deals tend to get rolling and acquire a momentum of their own and the brain leaves the building.”
“In terms of management, I applaud the move,” said Chris Ambrosio, an analyst with Strategy Analytics. “This definitely makes a statement about Nokia’s willingness to continue to focus on profitability. Nokia has always been about profits first. And [Kallasvuo] is saying the same thing. He’s admitting that Nokia has failed to succeed in the CDMA world. So, rather than continue to spend on an unprofitable segment, they’re going to focus on 3G, on W-CDMA. It’s a good move for him.”
What unraveled the deal, in these analysts’ view?
“When you make an investment, you never really know how it’s going to turn out,” Greengart said. “Nokia cannot bring itself to make a big bet on CDMA; they just can’t do it. Their entire business model is predicated on building very high-quality GSM phones and selling as many as they possibly can, and relying on their brand to pull slightly higher margins than competitors. They followed that model in India brilliantly.”
The CDMA market looked daunting to Nokia, in Greengart’s view, because it requires a high volume of low-cost phones, and CDMA phones cost more to make due to Qualcomm’s licensing requirements.
“It’s one thing to go after emerging markets with low-cost handsets and try to hit volume, even with low margins in CDMA,” Greengart said. “The problem is, CDMA volume is not that promising.”
Also, Greengart said, there’s some “Nokia think” on display here. “Don’t get me wrong, `Nokia think’ has made that company the most successful mobile phone maker on the planet. But some of this is Nokia’s wishful thinking that CDMA is going to go away. They’ve under-invested in CDMA in the past few years because they don’t believe in it. They thought they’d fix that problem with a JV to keep margins up and support their stock price. They looked more closely and saw that the cost was too high.”
Ambrosio pointed to seeds of failure in the original concept for the JV.
“The JV initially was an income sheet exercise for Nokia to get the expensive cost of CDMA product development and manufacturing off of their profit-and-loss statement,” Ambrosio said. “For Sanyo the JV was to be a huge plus. Sanyo is struggling to be profitable in its domestic market in both CDMA and GSM. In the U.S., they’ve never had the marketing presence or product development resources to compete beyond its position with Sprint (Nextel Corp.). Sanyo is primarily in high-end handsets in CDMA and they had a product platform with Qualcomm chipsets. Nokia brought a complementary portfolio of entry-tier phones and relationships with a lot of network operators. That was a great opportunity for Sanyo.
“Our take on the success of the JV depended on Nokia continuing to spend on product development in both the high end and the low end of the product spectrum. Sanyo did not have those resources.
“From my perspective, that’s the element that scared Nokia away. Once they got into bed and looked under the sheets, it turned out Sanyo didn’t have the product platforms that would have made it easier to manufacture profitably and the numbers didn’t look good enough. Nokia realized it would have to continue to invest to develop those product platforms, and that defeated its original purpose, which was to get those expenses off its balance sheet.”
What is the nature of the CDMA market in developing countries that led to Nokia’s balking?
“The only emerging market where CDMA is doing well is in India,” Ambrosio said. “Other than that, growth for CDMA is flat, if not slightly down. In China, for example, CDMA sales are flat, prices are too high, it’s not selling as well as entry-tier GSM. This is a bold move. Nokia basically is ceding the CDMA market to the Asians and Koreans.”
And the upshot for Nokia’s U.S. CDMA market strategy going forward?
“It’s a yawn,” said Ambrosio. “As a percentage of the global market, the U.S. CDMA market is no big deal. As 3G ramps up with Cingular (Wireless L.L.C.) and T-Mobile (USA Inc.), Nokia will try to replace the lost units in CDMA with wins on the W-CDMA side. I don’t see them really competing on CDMA in the U.S. It’s not an issue. In the short term, it’s a negative because they’ll probably lose CDMA market share here.
“LG is the winner here in the U.S.,” Ambrosio added. “The dissolved JV opens up the entry-tier CDMA market, where Motorola has been. LG, Motorola and Kyocera stand to benefit the most. You’re basically taking away about seven million units of Nokia’s volume over the next year or two.
“The top loser is Sanyo. It has no compelling roadmap for product development in either the high tier or entry tier. They have no resources to court the larger market. This probably is a lifeline for Kyocera, if it gets some energy into its marketing themes here in the U.S. and can get a chunk of those seven million low-end units that Nokia is giving up.”
For his part, Greengart is incredulous.
“Nokia will call Pantech and just order more phones?” Greengart asked. “The problem is brand. Nokia feels it must be in the U.S.-and they’re right-and they need to maintain a global brand. If you’re going to fight in the U.S. market with re-branded handsets and you’re going up against the strongest competitors anywhere-Samsung’s slim products, Motorola’s design-heavy hot products-good luck.”
