Nokia shows smarts with margins on low ASPs

Nokia Corp.’s earnings report last week may well have drawn sighs of relief from many in the industry. The Finnish handset vendor established that winning strategies are possible even as the handset industry is driven by emerging markets, where average selling prices and margins don’t match those in mature markets.
Nokia’s news, of course, came on the heels of Motorola Inc.’s poor profits on high volumes under similar circumstances, underscoring Nokia’s feat and the vagaries of the market. Only six months ago, Motorola had world-beating results that took it to giddy heights and rosy forecasts.
Meanwhile, as the two behemoths battled it out in emerging markets, Sony Ericsson Mobile Communications L.P. continued its streak of record growth in revenue, profit and volume. The Japanese-Swedish partnership, now ranked No. 4 globally, pulled in more revenue in the fourth quarter than No. 3 Samsung Electronics Co. Ltd. and nearly as much profit as Motorola, on well under half the handset volume or revenue of the No. 2 vendor.
“The big surprise definitely was how Nokia achieved high margins on low-end phones,” said Tero Kuittinen, analyst at Nordic Partners Inc. “It appears they achieved something like 18-percent to 19-percent margins at the lower end of their portfolio. I find that astonishing.”
That Nokia’s margins remained high despite a 10-percent drop in average selling prices was “quite a trick,” the analyst said. These healthy margins give Nokia room to cut prices, should it feel intense, competitive pressure from Motorola, whose low margins no longer give it such leeway. For its part, according to the analyst, Motorola must make a strategic decision whether to press on in relentless pursuit to regain global supremacy or pull back for profits’ sake.
“Nokia has always talked about the ‘exceptional design’ of their low-end handsets and their prowess in automated manufacturing and these results lend credibility to their claims,” Kuittinen said.
Ramon Llamas, analyst at IDC, said that Nokia has also benefited from the combination of local manufacturing in emerging markets such as India along with direct retailing that bypasses carriers and yields higher ASPs.
“Is it a miracle?” Llamas asked, rhetorically. “It’s just smart.”
When Motorola decided to give chase in the emerging markets, one avenue was the Ultra Low-Cost Handset program administered by the GSM Association, which may have eroded the American handset vendor’s ASPs and margins, Llamas said.
On the other hand, according to Kuittinen, in the United States, Nokia’s bid to ignite a market segment-broad consumer interest in e-mail-capable slabs with multimedia-found willing carriers, but a cool reception among consumers. The Motorola Q and the Nokia E62 did not fare as expected, even with massive carrier subsidies, Kuittinen said.
“That’s a downer,” the analyst said. “Carriers have to find a way to energize consumers to pay back their investment in advanced networks.”
Therein, however, lies Nokia’s opening, according to Kuittinen. As carriers roll out W-CDMA networks, particularly the new AT&T Inc./Cingular Wireless L.L.C. entity and T-Mobile USA Inc. expands its commitment to dual-mode Wi-Fi/GSM offerings, Nokia may find that the market has swung to its advantage. In contrast, Sprint Nextel Corp.’s current subscriber woes may well have hurt Motorola in the short term. Kuittinen said Nokia has not abandoned the U.S., despite the precipitous, 40-percent drop in volume growth here.
Llamas said that, moreover, until Nokia’s patent dispute with Qualcomm Inc. is resolved, it’s too soon to conclude anything from Nokia’s current public stance that its CDMA efforts are “under review.” In such a competitive landscape, anything is possible, including a CDMA comeback by Nokia.
Meanwhile, slow European uptake of 3G has hampered sales of Nokia’s N Series “multimedia computers,” according to Kuittinen. Enter: Sony Ericsson. Kuittinen called the company’s Walkman handset strategy “a Trojan horse” that provides a palpable advantage to advanced handsets-music is the means to introducing the company’s higher-end, smartphone offerings in a manner that doesn’t daze consumers.
As Sony Ericsson approaches the decision of its short life-how to approach the volume game at the lower-end of its portfolio in emerging markets, where prospects remain bright-it is taking “deliberate steps at just the right pace,” Kuittinen said. Meanwhile, Sony Ericsson’s portfolio, geared toward music and imaging, can carry it forward for a year or more even in the face of competitive threats from, say, Apple Inc.’s iPhone, Kuittinen said.
Evaluating handset vendors’ relative global fortunes using handset shipment volumes “does everyone a disservice,” Llamas said.
“Which war are you trying to win?” Llamas said. “Can you ship a million handsets a day? Nokia did. But at what cost? Sony Ericsson is doing the highest ASPs of any vendor because it hasn’t played that mass-market volume game.”
The fact that emerging markets are showing the greatest strength in the year now unfolding, however, may bring greater urgency to Sony Ericsson’s strategic decisions about how to enter that fray.
“It’s a challenging choice to make,” Llamas said.