Why Nokia Is Leaving Moto in the Dust

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Its $45 model 1200, for example, can go more than two weeks without a recharge and has a built-in flashlight, handy for people who live in homes without electricity.

The company has invested hundreds of millions of dollars building distribution systems and networks of retailers in developing countries, including vans that bump along the rural roads of India between stops for instruction on how to use mobile phones (see BusinessWeek.com, 05/04/07, "Nokia Gets It Right for South Asia"). As a result, it's the No. 1 handset supplier in China and India and is growing fast in Africa, the industry's next frontier. Meanwhile, Motorola's low-cost phone for India has been a flop despite a $35 price tag, in part because its limited features didn't convey a sense of status to potential buyers.

Supply-Chain Smarts

Perhaps most impressive is that Nokia has managed the shift to low-cost phones while maintaining healthy profit margins. The company earned an operating profit of 16.8% on mass-market mobile phones in the first quarter of 2007, a modest decline from 18.5% a year earlier. But that doesn't even include Nokia's high-end multimedia devices, which had a profit margin of 18.8%. In the most recent quarter, net profits were $1.3 billion on sales of $13.4 billion. When Nokia reports second-quarter results on Aug. 2—figures analyst Richard Windsor of Nomura Securities in London—profits should climb 11% on a 7% increase in revenues.

Nokia makes money at the low end because of its superefficient manufacturing systems. It also keeps costs and complexity under control by sharing components among devices and designing phones that have fewer parts than competing models. Such practices pushed Nokia to the No. 1 spot this year in Boston consultancy AMR Research's annual survey of top supply-chain operators, ahead of logistics champions such as Toyota (TM) and Wal-Mart (WMT). (Motorola was a respectable No. 12 in the ranking, which was based in part on a poll of supply-chain executives.) Analysts say even low-cost Chinese producers such as Huawei Technologies can't match the efficiency of Nokia, which operates its own factories in Vietnam, India, and other low-wage countries.

Not the iPhone, but So What?

To be sure, Nokia still has weaknesses. Its Eseries devices for the corporate e-mail crowd lag rivals such as Research In Motion's (RIMM) BlackBerry and are unprofitable. Swedish rival Ericsson (ERIC) is far ahead of Nokia's joint venture with Siemens in the market for base stations and other mobile infrastructure. And in design, Nokia faces a serious challenge from Apple (AAPL) and its hot iPhone. Nokia has only a few touch-screen products and none as advanced as the iPhone, with its glass surface and finger-operated interface.

It's not the first time a competitor has challenged Nokia for classiness: see LG Electronics' Chocolate Phone or Samsung's elegant superthin handsets. But time and again, the Finns' consistently excellent distribution, manufacturing, and marketing have prevailed. It will take more than one cool phone to threaten Nokia's dominance. "Maybe the iPhone will be very successful," says Martin Garner, director of wireless intelligence for London market researcher Ovum. "Does that knock Nokia off its perch? I don't think so."

With Nandini Lakshman in Mumbai

Ewing is BusinessWeek's European regional editor.