International -- Int'l Business: FINLAND
NOKIA'S SIGNAL ISN'T REALLY FADING (int'l edition)
The company may bounce back quickly from its poor results
The news was a shocker. Nokia Corp., Finland's hugely successful maker of mobile phones and other electronics, announced on Feb. 28 that 1995 net earnings had dropped 43%--after a $505 million restructuring charge. Worse, the company issued a profit warning for the first half of 1996. Nokia shares, which had been dropping for months, sank further, settling at 36, almost 50% below the September high.
Yet Nokia's reversal of fortune may not be so dismal as it appears. The company, with $8.1 billion in sales, has some problems to tackle, such as production bottlenecks and price erosion in mobile phones. But Nokia still recorded a 39% jump in 1995 operating earnings. And its plans to shut or sell its troublesome television business, launch a new generation of mobile phones, and expand its network-equipment business could turn the bears back to bulls by yearend.
"JUST A HICCUP." Part of Nokia's problem stems from three years of superheated growth. To meet soaring demand for its phones in Europe and Asia, the company added 7,000 new employees last year but had difficulty digesting them. Productivity, which had climbed 15% in 1994, advanced only 3% as Nokia encountered problems with suppliers and late component deliveries. "They lost control of logistics. They lost efficiency," says Bill Coleman, a telecommunications analyst at James Capel & Co. in London. In addition, the U.S. market for digital handsets did not grow as much as anticipated because of a regulatory delay. Meanwhile, makers of analog phones cut prices as much as 50%.
Nokia Chief Executive Jorma Ollila is racing to implement new controls and make Nokia respond more quickly to regional markets. He insists all bottlenecks will be gone within six months. "It's not an insurmountable problem," says Ollila. He also aims for a productivity gain of up to 20% this year, so the company can endure price wars without sacrificing profits. "This is just a hiccup," says Johan Siberg, head of L.M. Ericsson's mobile-communications company. "We view Nokia as a very capable competitor."
A growing source of profit will be the sale of network equipment to telecom companies setting up cellular-phone systems. Nokia's equipment business grew 50% in 1995, to $2.3 billion in sales, while operating profits jumped 60%, to almost $600 million. In contrast, profits were flat in mobile phones, where margins of 11% are less than half those in equipment. Since January, Nokia has garnered network contracts worth $150 million with British mobile operator Cellnet and $200 million with Chicago's American Portable Telecom.
Nokia continues to gain market share in Europe, Asia, and the U.S. Early estimates give the Helsinki company roughly 25% of the global market in mobile phones, narrowing the gap with market leader Motorola's 36%. "Nokia is still good at bringing innovative products to market early," says Susan Anthony, analyst at Schroders PLC in London. Nokia's newest phone, the 1610, features a battery that outperforms rivals with seven hours of talking time and 200 hours of standby time. Nokia also leads in development of the digital technology used to transmit data over the airwaves. Despite recent bumps, manufacturing efficiency is strong, too. A study by market researcher Dataquest Inc. estimates Nokia's cost of making its 2100 series of mobile phones at $234 a phone and its selling price at $550. Only Ericsson's costs are lower.
This edge in technology should help fuel sales growth soon. "I can't see their position [as global No.2] being threatened," says Dataquest's Adam Zoldan. "There is no reason to wipe a big portion of the value off the shares." Analysts project strong earnings growth will resume in 1997 after a flat 1996.
The rebound depends on Ollila's ability to leave the TV business, smooth out production in mobile phones, and expand network-equipment sales in the U.S. "They have three levels of change going on at once," says Susan Kalla of market researchers Soundview Financial Group. "Any one of those issues is a big challenge."
Ollila himself likens the speed of change in mobile phones to a bullet train. He's quick to point out that Nokia was almost bankrupt in 1992 before he bet big on cellular phones. Now, he has to prepare for more dizzying changes. Investors are watching.BY GAIL EDMONDSON IN PARISReturn to top