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NOKIA

Can CEO Ollila keep the cellular superstar flying high?

Behind his gentlemanly demeanor, Jorma Ollila, CEO of (NOK.A), is a man of extremes. As his wife, Liisa Annikki, tells it, her husband fires up the Finnish sauna a good 15 degrees warmer than she likes it, all the way to 212F--hot enough to boil a pot of tea. It was a week after Easter when the Ollilas drove north from Helsinki for their first trip this year to the family's lakeside cabin. Ice was still floating on Lake Pukala, and the kids challenged their father to dive in. Emerging from the sauna, Ollila paused, then plunged naked into the icy lake.

Ollila, a 47-year-old former banker, lives by the plunge. He believes people get comfy and complacent and that it takes a dive into the unknown, or a push, to tap into their strongest instincts--those that guide survival. Six years ago, as an untested CEO, he bet the 133-year-old Finnish conglomerate on cellular phones, challenging rivals Motorola Inc. (MOT) and L.M. Ericsson (ERICY). In the struggle that ensued, Ollila's Finns outdid themselves. Fast and focused, with a canny eye for design, Nokia wrested market share from entrenched competitors and emerged as the most profitable player in the industry.

GOOD NEWS. Sales in Nokia's twin engines--the mobile phones and base stations that make up the bulk of its revenues--more than quadrupled, from $2.1 billion in 1993 to $8.7 billion last year. And the good news keeps pouring in, with operating earnings for the recent June quarter surging to $616 million, up 76% from the same quarter in 1997. These days, the $9.8 billion Nokia has one of the hottest cell phones on the market--the 6100 series--whose battery and unique circuitry support a whole week of standby time. It's the first supersmall phone with that kind of battery life. And Nokia is the first company to develop a mobile phone that surfs the Web.

All told, Nokia is providing troubled Motorola Inc., the leader in old-fashioned analog phones, with a humiliating tutorial on digital communications. Motorola CEO Christopher B. Galvin glumly concedes that ''the analog business is trending down.'' Ollila, for his part, predicts that Nokia will be ''No.1 in the world in the number of phones sold, in growth, and return on capital employed.''

The company's startling climb has provided the Continent with something it was sorely lacking: a new high-tech superstar. What's more, that triumph is in a crucial technology--mobile communications. That's the next frontier for the Internet, and one of the few areas where Europe is racing ahead of the U.S.

AVALANCHE. Smack in the middle of Nokia's success stands Ollila, whose name is accented on the ''O.'' He's a self-avowed nontechie who hasn't even put plumbing in his lakeside cabin. But it's Ollila who is improvising a brand-new style of high-tech management. Refuting the common ''slip-and-you-die'' thinking, Ollila sticks with slip and you grow.

In a sense, this model is a variation on the man's freezing plunge at the lake. Ollila views disasters as education, and he fires almost no one. While others rush to the world's high-tech hot spots, Ollila created one of his own in an underpopulated stretch between Russia and the Arctic Circle. From there, he nurtures a network of suppliers around the globe. And just when Nokia seems to be performing in top gear, as it is now, Ollila risks disarray by switching the jobs of all his top managers. He even muses that if he could, he'd switch his own job.

That's mere idle thought, though, as Ollila and Nokia face an avalanche of work. To keep the company's sales and earnings growing at 25% to 30%, he must push the company to churn out new models of phones at a dizzying rate. He must fight off a welter of cell-phone rivals while coping with market gyrations in Asia. And he must deal with shortages bred by too much success. The 6100 phones are so popular that AT&T (T)--Nokia's most important U.S. customer--can't satisfy all of its subscribers. But AT&T CEO C. Michael Armstrong doesn't seem worried. ''I met personally with the CEO of Nokia,'' he says. ''They have what they call a two-month recovery plan.''

NEW DAWN. While fighting the handset wars, Ollila must also contend with heavy hitters such as Alcatel Alsthom (ALA) and Northern Telecom Ltd. (NT), which compete against Nokia in cellular base stations, or so-called infrastructure. Looking beyond the consumer cellular market, Nokia and its rivals foresee an enormous business market developing in which many of the data networks that connect the world's PCs will go wireless. That's one reason big infrastructure players are spending billions to swallow data-networking companies, and Ollila may be forced to join the fray. As if all that weren't enough, Ollila already is turning his phones into tiny computers and Web surfers, which is bumping him up against some of America's high-tech bruisers in Silicon Valley and Redmond, Wash.

Far from fretting about the future, though, Ollila passionately embraces it. Sitting in his summer cottage a few months after his spring plunge, the lake shimmering behind him, Ollila describes a breathtaking new dawn in the wireless world. Imagine all of the information in the world, he says--all the voices, pictures, movies, music, news, every item on the Internet--all of this available through a wallet-size device.

This future isn't so far away. Ollila believes it will begin in Japan in about three years, when the country finishes laying infrastructure for a new wireless technology wave. Europe and the U.S. should come a year or two later. Techies call it the Third Generation, the first two being analog and digital cellular. The new generation will be marked by dramatic increases in bandwidth. Wireless phones will send information at up to two megabits per second. That's 40 times faster than today's computer modems--fast enough for teleconferencing on a mobile phone. Researchers at Nokia, as well as its competitors, already have most of this technology in hand.

For the winners in this market, the growth prospects and potential rewards seem boundless. Eventually, radio capability will be built into all manner of household appliances. That will let consumers set their VCRs from the road and enable machines to notify their manufacturers of parts failures. Conventional cell phones will shrink in size and price, eventually becoming embedded in watches or earrings, Nokia executives predict. At that point, cell phones may well outnumber the population in rich countries. Much of the phoneless developing world, meanwhile, will leapfrog the traditional poles and wires and move straight to cellular.

Rapid growth should about double the worldwide number of cellular subscribers, now equally divided among Europe, Asia, and the Americas, to 550 million by 2001, according to a conservative estimate from Dataquest Inc. This benefits the big three--Motorola, Ericsson, and, of course, Nokia--which rule three-quarters of the cellular market with nearly equal shares. Motorola, though, is struggling to escape from dying analog, where prices are collapsing. And Ericsson, while fully in stride with Nokia in digital sets, is far larger and more diverse and is burdened with less profitable old-line businesses. When Ericsson declared 24% earnings gains on July 27, the market compared that to Nokia's far greater second-quarter growth and drove the stock down 13%.

For now, it's the Finnish company that is seducing investors. Of the three contenders, Nokia has the highest operating margins--about 18% in the second quarter--and is the most focused on the booming cellular market. The stock, which is traded in Helsinki, Stockholm, London, and New York, already is up 130% this year. ''They are executing almost flawlessly,'' says Mark McKechnie of Nationsbank Montgomery Securities.

But the challenges the company faces are formidable. First, phone prices are likely to head down--way down--a trend that is likely to spook cell-phone stocks. Even Nokia executives say that in a few years, knockoffs of its whizzy 6100 phones, which sell for as much as $500 now, will likely be sold at Wal-Mart Stores (WMT) for $19.95. To keep fetching top dollar for its phones, Nokia must keep developing the zippiest features. Indeed, it's this pressure that's pushing Ollila toward Internet phones.

CONVERGENCE. Ollila's strategy fits right into the much-ballyhooed digital convergence--the joining of telephones, TVs, computers, even kitchen appliances, into brainy do-it-all contraptions. Of all these devices, the computer-with-cell-phone is a natural. Ollila will push this vision aggressively in the U.S.--the biggest market today. But he's also spreading the gospel in China--the world's fastest-growing market and Nokia's largest--as well as in Net-obsessed Japan.

Trouble is, Nokia isn't the only one searching for a digital El Dorado in the form of convergence. While Ollila's sharp and nimble Finns ambushed Ericsson and Motorola in the telephone market, they're now converging right into a Silicon Valley traffic jam. To sell pocket-size Net devices, Ollila must maneuver his way among the brightest stars of America's high-tech economy, where everyone from Microsoft Corp. (MSFT) to 3Com Corp. (COMS) wants to own a piece of the same business.

And few of them are convinced that this next revolution is going to be conducted through mobile telephones. Who's to say, after all, that mobile Web surfers won't use palmtop computers equipped with telephone chips? And there's always the chance the public will shrug at the entire selection of these tiny devices. ''You have to think hard,'' says Richard Howard, director of the wireless research lab at Lucent Technologies Inc.'s (LU) Bell Labs. ''Do you really need full-motion video in a car phone?''

So despite his laid-back manner, Ollila has no time to catch his breath. He must prepare Nokia for a metamorphosis. Like a snake growing out of its skin, the company has to emerge sleek and strong in the next generation, when simple handsets are stocking stuffers and mobile phones molt into powerful new be-alls.

Ollila's tried-and-true motivator is the plunge. In the past, there have been plenty of crises around which to rally the team. Ollila recalls them with great fondness. But now, Nokia has become synonymous with success, with giddy growth and a soaring stock. It even has its name on America's Nokia Sugar Bowl.

So how does Ollila conjure up a sense of fear and urgency? For starters, on July 1, he reached into Nokia's sparkling glass-and-steel headquarters on the shore of the Baltic, took the inner circle of four fortysomething Finns who run the company's main divisions, and switched all their jobs. His infrastructure executive, Matti Alahuhta, was rotated from his customer-schmoozing position into the marketing vortex of handsets. Asia-Pacific chief Sari Baldauf was told to head up infrastructure, as well as development on the Third Generation. Handset chief Pekka Ala-Pietila, who oversaw the spectacular development of the 6100s, became vice-chairman, charged with exploring new ventures. Later this year, Ollila will bring back his chief executive for U.S. operations, Olli-Pekka Kallasvuo, to be chief financial officer. In short, except for Ollila, every top person at the company is getting ready for a brand-new job--all in the name of ''removing people from their comfort areas,'' as Ollila puts it.

Despite the upheaval, Ollila is determined to preserve a corporate culture in Helsinki dominated by Finns. He jokes about this, explaining that the best brains in Silicon Valley, London, or Hong Kong recoil from moving to icy Helsinki, where it's dark all winter. The trick is to give his new recruits autonomy and let them pursue their careers in Nokia's big markets, where taxes are far lower and the lakes thaw by Easter. But Ollila also believes that Nokia draws strength from its understated collegiality, which he associates with the Finnish character. ''We don't snap our suspenders,'' he says in his fluent British English.

The culture Ollila struggles to preserve goes back a ways. Founded in 1865 in a mill town 100 miles north of Helsinki, Nokia has made just about everything at one time or another. Many Finns still associate the name with the rubber snow boots they wore as children. A hundred years later, Nokia had grown into a regional conglomerate.

GOOD TIMING. In the mid-'80s, the company made perhaps its best acquisition, landing a local hotshot from Citibank named Jorma Ollila. The son of an electrical engineer in Seinajoki in Western Finland, Ollila was chosen at age 17 for a scholarship at Atlantic College in Wales. After returning to Helsinki for a political science degree, he went to the London School of Economics and then joined the British headquarters of Citibank. At 34, the young father of three children moved to Nokia. He started out in finance but was determined to learn about industry. One colleague recalls the tall, thin financier circulating through the nearly deserted headquarters on a Saturday, introducing himself to the few people there, in his low-key way, as ''the cashier.''

In 1988, as Nokia was getting steamrolled by Japanese and American titans, management underwent a generational shift, drawing Ollila and a group of other thirtysomethings into positions of power. Ollila, then 38, got his first taste of industry, heading the tiny cellular-phone division.

What he learned fired up his engines. Europe was heading toward a digital standard for mobile phones. This would provide European manufacturers with a vast unified home market. If Nokia could concentrate its resources on mobile communications, it could seize a leadership role.

Ollila got a chance to test this plan in 1992 when the board abruptly named the 41-year-old CEO. He claims he wasn't hungry for the job, or even ready for it. But he had a vision of Nokia that inspired his colleagues. In short order, he pumped up research in Helsinki and Tampere, 100 miles to the north, and even in distant Oulu, near the Arctic Circle. He tightened bonds with key suppliers, building up the U.S. headquarters in Fort Worth, Tex., near chip supplier Texas Instruments Inc. (TXN). At the same time, he unloaded pieces of the old conglomerate, selling off computers, cables, and TVs.

GENTLE CORRECTION. Ollila's timing was perfect. As the digital phone standard called GSM took off in Europe, Nokia was ready with easy-to-use cell phones, all equipped with the trademark TV-shaped screen. The company engineered its phones so that the same models, with small variations, could be adapted to the varying frequencies and standards around the world. Motorola, meanwhile, concentrating on the splintered U.S. market, was still pumping research into analog technology. That left Europe and the growing digital markets in Asia largely to the two Scandinavians, Nokia and Ericsson.

Right on cue, mobile-phone growth exploded. Ollila quickly expanded capacity by enlisting parts suppliers across Europe, while barging into China and Mexico. Then, in late 1995, Nokia hit a speed bump. The stock plummeted by half, and calls for executive firings echoed from Wall Street to Helsinki. But Ollila resisted the pressure. He and his colleagues chopped up responsibility for inventory, logistics, and design, and divvied them up by region. After a few months, they had the company back on track. Ollila now views the crisis as a precious lesson, vindicating his vision of gentle Finnish management. ''In that situation, a typical American company would have fired 12 people,'' he says.

Sitting in his simple summer cottage, a tennis book on the coffee table and his wife, Liisa, up the hill hoeing the garden, Ollila sometimes contemplates retirement. But he has little time to indulge such fantasies. Nokia is riding high on a host of new handsets, including the 6100, the centerpiece of an AT&T nationwide campaign. To all other cell-phone players and wannabes, that makes Nokia the company to beat. Soon, both Motorola and Ericsson will come out with racy new products of their own. Ericsson is preparing a multiband ''world phone'' that should extend roaming across oceans. And analysts expect Motorola's new digital phones to grab back some share in the U.S. market.

Such competition could erode some of Nokia's recent gains. But the company thinks it can outrun rivals by doing what Nike Inc. (NKE) accomplishes with its sneakers. Ollila hopes to turn one product into dozens of niche offerings, each one targeted to different moods, occasions, and age groups. Already Nokia pumps out new models every 35 days.

The testing ground for this approach is Japan--home of the world's most gadget-happy consumers--where Nokia launches many of its niche systems. New ones include a tiny $950 steel-encased phone that has the look and feel of the ever-popular Zippo lighter. That one targets executives. For the fast-growing market of teenage girls, there are chameleon phones: By changing a panel, you match the phone's color to your clothes or fingernails. And for the techno crowd, Nokia will soon release the second version of its $995 Communicator, a phone that folds open into a tiny Web-surfing computer. It's still painfully slow, with cellular data transmission stuck at 9,600 baud. But Ollila is hoping that the Communicator's fleeter, more powerful offspring will carry Nokia into the Third Generation.

To win in this uncharted territory, Nokia and its competitors will require more than fabulous cyberphones. They'll need to offer customers network knowhow in their base stations. These are the transmission stations, costing from $75,000 to $300,000, that account for 35% of Nokia's sales. Operating companies buy them by the hundreds and scatter them through their coverage areas. For customers to extend their data networks into mobile telephones, as the industry expects, all the players are going to have to pack these stations with network smarts.

To pick up this expertise, Nokia last December bought Ipsilon, a Silicon Valley systems company, for $120 million. But since then, its rivals have been buying far bigger outfits. In June, Alcatel Alsthom snapped up DSC Communications Corp. (DIGI) for $4.4 billion. Weeks later, Nortel (NRT) nabbed Bay Networks Inc. (BAY) in a $9.1 billion deal. Analysts think Nokia may shop for a big systems company of its own. But it is still toying with developing the expertise in-house, according to Ala-Pietila.

While Nokia, Ericsson, and Motorola are all preparing to battle one another with Internet phones and intelligent base stations, they've been forced to join forces on the Third Generation. Their worst nightmare: All the new features arrive on schedule--on palmtop computers instead of cell phones. To avoid that scenario, in June the three companies formed a London joint venture with British computer maker Psion PLC. The deal establishes a common software platform--Psion's operating system--for the coming generation of mobile Net devices.

In linking up with tiny Psion, Ollila and his competitors jilted none other than William H. Gates III. Earlier in the year, the Microsoft chairman toured Europe, plugging Microsoft's Windows CE software for Third Generation machines. He lost out. His software, phonemakers complained, was wrenched from the PC and not created for next-generation machines. Gates's loss, though, means that cellular phones could eventually be battling a slew of Microsoft-powered handheld devices in the same mobile market.

Ollila claims not to be worried. ''The market will be big enough for all of us,'' he says. But don't misread the man. He's plenty competitive: He can recite the exact ages of his two sons when they finally beat him in tennis. When it comes time to plunge, Ollila is extreme--a man of fire and ice, leading Nokia into cyberspace.

By Stephen Baker in Helsinki, with Roger O. Crockett in Chicago and Neil Gross in New York



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Updated July 30, 1998 by bwwebmaster
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