Nokia may not have 99 problems but it does have one very big one: its mobile division, the part of its business that is responsible for almost half of its sales, continues to fall. CEO Pekka Lundmark expects 2021 to see the company’s revenue “decline significantly” which is the last thing the company needs after years of struggles. A closer look will show that the Finnish telecom giant is now out of China and its robust market for 5G radio access network (RAN) products causing a fall in revenue of 25%. The company also lost a giant contract to Samsung that provided the opportunity to work with Verizon in North America.
For these reasons and others, it should be no surprise that the company expects to lose market share in the United States, does not expect to generate a profit from its mobile sales, and is forecasting to break-even at the operating margin level. Sales in 2021 are expected to be between $24.7 billion and $26.1 billion at best. The range of these figures is lower than 2020’s total sales figure of $26.2 billion.
Nokia has been changing for years to strengthen the company. Cutting costs, changing strategies, and appointing new leadership such as that of the newly appointed Chief Executive of North American Operations, Ed Cholerton, and the newly appointed CEO of six months, Pekka Lundmark. The company has seen improvements due to these cuts including $600 million in savings, however, due to the bleak outlook of sales, further cuts should be expected in the future which will, unfortunately, mean jobs lost. “The new operational model is a great opportunity to look for cost efficiencies,” said Lundmark. “One of the goals is to identify places where we can improve cost efficiency.”
One of the notable hurdles Nokia continues to face is the decision to have chosen to create 5G components that are programmable and more expensive than the competition. As competitors continued to push and margins began to shrink, both became a problem in an industry looking for custom solutions. Now Nokia is working to reverse its mistake and the good news is, things appear to be going well. Though Nokia has set a goal of completing its transition in 2022, 43% of its 5G products in 2020 used lower-cost chips which would beat its original goal of 37%.
To take things to the next level, research and development (R&D) is the next logical step. While others in the industry such as Huawei and Ericsson continue to increase their spending, Nokia has seen its R&D expenses shrink beginning in 2016 including a 10% drop in 2020. Luckily, Lundmark has stated a “willingness to sacrifice margins to increase investments in R&D.” This is evidenced by an uptick in R&D expenses in the fourth quarter by 7%.
If there is a bright spot for the company it’s that Nokia is finding opportunities in Europe. This is due to several reasons headlined by the political backlash against Chinese telecom entities. Specifically, the backlash against Huawei. As Lundmark stated, “It is clear there have been deals driven by geopolitical developments and opportunities to swap out competitor equipment. Our market share in Europe is on a positive trend.”
Source: Light Reading