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Nokia: Answering The Call Won't Be Easy


When Jorma Ollila became chief executive of Nokia Corp. (NOK) in 1992, the money-losing Finnish conglomerate was desperately seeking fresh ideas. Ollila assembled a close team of lieutenants and bet the future on an emerging technology whose success exceeded their wildest dreams: mobile phones. It was a blue-sky opportunity that Nokia rode to the stratosphere. Today the Helsinki company sells one-third of the world's handsets, more than the combined share of its two closest rivals, Motorola Inc. and Samsung Electronics. Profits neared $4.4 billion in 2004 on revenues of $40 billion, up tenfold since Ollila took over.

But the Ollila era is ending, and life for his successor could be much harder. On Aug. 1 the 54-year-old CEO said he'll step down when his contract expires next June. In Ollila's place will be another company veteran, 52-year-old Olli-Pekka Kallasvuo, who served 10 years as chief financial officer before taking charge of Nokia's mobile-phone unit 18 months ago. Strong operational and money-management skills -- and two years heading Nokia's American business in the '90s -- apparently gave Kallasvuo a leg up over his rivals.

Kallasvuo will face far different challenges than Ollila did early in his tenure as CEO. Despite a steady increase in Nokia's unit sales, annual revenues have sagged about 1% each year since 2001. Kallasvuo has to find new growth avenues, fight sliding profit margins, and revive a stock that has been flat since 2001. He also must battle ever-tougher competitors, especially a resurgent Motorola and Korean powerhouses Samsung and LG Electronics. "Nokia is facing the renaissance of rivals," says analyst Richard Windsor of Nomura International in London.

No question, the mobile industry Nokia helped create is still growing at an astonishing rate. Researcher Gartner Inc. figures worldwide sales will hit 780 million units this year, up 16%, and could exceed 1 billion in 2009. The problem is that booming business in developing areas such as China, India, and Latin America is shifting Nokia's sales mix to less lucrative models, squeezing results. Nomura's Windsor predicts the company's handset revenues this year will climb 12.7%, to $31.6 billion, less than the industry's growth rate. Operating margins that used to hover above 20% in Nokia's glory days could drop as low as 15% this year.

SNAZZIER PRODUCTS

Kallasvuo is likely to stick close to his predecessor's vision. In recent years, Nokia has diversified under Ollila into corporate phone/PDA hybrids and multimedia devices such as handsets with camera and built-in music players. Higher prices and profits there should help counteract downward pressure from mass-market phones. The new initiatives still kick in just 20% of revenues and 5% of operating profits, but analysts predict the contribution will climb sharply in coming years. As head of the core mobile-phone group, which accounts for 60% of Nokia's sales, Kallasvuo also backed efforts to push snazzier products to market faster and improve research and development productivity. That should alleviate Nokia's tendency to deliver cutting-edge features to customers later than rivals do.

A new generation of Nokia managers will help Kallasvuo put his stamp on the company. Most of Ollila's inner circle have moved on; they'll be replaced by a younger, more diverse crowd, including 46-year-old American CFO Richard A. Simonson and Simon Beresford-Wylie, 47, an Australian who runs the networks group. Another fresh face: Mary T. McDowell, 41, who was recruited from Hewlett-Packard Co. (HPQ) to head a new Nokia unit that sells Internet gear and mobile-data devices to corporations. Says Ollila: "We need new blood."

That's not all Nokia needs. To bring back robust growth, Kallasvuo may eventually have to find new opportunities far beyond Ollila's road map. The youthful brain trust should help, but the job will fall to Kallasvuo to dream up a vision that rivals Ollila's brainstorm.

By Andy Reinhardt in Paris


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