Global Economics

Nokia, Siemens Plan to Join and Conquer


Klaus Kleinfeld and Olli-Pekka Kallasvuo are both relatively new CEOs facing daunting challenges. Kleinfeld, CEO of Munich-based Siemens (SI) for just over a year, is trying to make the electronics and engineering giant as consistently profitable as rivals such as General Electric (GE). Kallasvuo, just a few weeks into his tenure as CEO of Helsinki-based Nokia (NOK), is trying to make his mark after succeeding the legendary Jorma Ollila, who played a decisive role in turning a marginal Finnish conglomerate into the world's dominant handset supplier.

Both men came a big step closer to their goals June 19. Siemens and Nokia announced they would combine their units that make equipment for telecommunications networks into a new 50/50 joint venture, Nokia Siemens Networks. The deal creates a major industry player with annual sales of $20 billion. Nokia Siemens will rank third in its industry after the planned merger of Alcatel (ALA) and Lucent Technologies (LU); and Ericsson (ERICY) following its purchase of Marconi.

The new company will be roughly the 300th largest corporation in the world, by Kallasvuo's reckoning. If they can pull off the merger, Nokia and Siemens will be in a better position to build market share in Asia—especially in the fast-growing markets of China and India—and to cope with technological shifts that are blurring the line between wireless and land line networks.

IMPROVING COMMUNICATIONSFor Kleinfeld, the joint venture lets him check off a big item on his to-do list. Siemens' marginally profitable communications division, most of which will be folded into the new venture, has been a big obstacle as Kleinfeld attempts to get Siemens firing on all cylinders. The company's range of products includes trains, power plants, auto parts, and medical equipment, but only rarely have all divisions performed well simultaneously.

Last year Kleinfeld set tough profit margin goals for each division, but communications fell far short. It reported an operating margin of less than 1% in the quarter ended in March (Siemens' fiscal second quarter) vs. a target of at least 8%. Now, by getting rid of the division, Kleinfeld can boast that six of Siemens' remaining main units are meeting their goals and the other three are on the way.

"It's tracking very nicely," Kleinfeld told BusinessWeek. Siemens is also close to selling a majority in its enterprise networks business, which is not part of the Nokia deal, Kleinfeld told reporters at a press conference in Frankfurt.

SALES GIANTSiemens will still be in the telecom networks business via the joint venture, of course, but at least the burden is now shared with Nokia. The new company will be based in Helsinki and run by Nokia executive vice-president Simon Beresford-Wylie—tacit acknowledgement that Nokia has a better track record running communications businesses profitably than does Siemens.

In contrast to Siemens' Communications division, Nokia's networks division had operating profits of $1.1 billion last year on sales of $8.3 billion—a margin of 13%. Combined sales of the two groups to telecom and wireless operators will be at least double those of competitors such as Nortel (NT), Cisco (CSCO), NEC (NIPNY), Motorola (MOT), and Huawei, according to Siemens and Nokia.

For Kallasvuo, the agreement with Siemens marks his first big move as Nokia CEO. Both outsiders and insiders see the modest Kallasvuo as less extroverted than Ollila. With the Siemens agreement, though, Kallasvuo shows that it may be wrong to stereotype the former CFO as a cautious bean-counter.

NEW CHALLENGEHe is breaking from Nokia's tradition of building the business from within rather than via mergers and acquisitions. "This is a big thing for us," Kallusvuo said in an interview with BusinessWeek, adding with classic Finnish understatement, "It changes Nokia a bit."

Can Nokia handle this new challenge? The company, whose $43 billion in sales last year were less than half those of Siemens, is perceived as the more nimble company. The ambience of its modern wood and steel headquarters on a Baltic Sea cove outside of Helsinki is more California than Munich.

Moreover, Nokia has succeeded spectacularly in the mobile handset business, reporting a profit margin of more than 17% last year, while Siemens pulled out of handsets last year following years of losses, handing off the business to Taiwan's BenQ.

JOB CUTS AHEADBoth CEOs, who negotiated face-to-face during the joint-venture talks, agreed that merging their two company cultures is key. Asked how he plans to do that, Kleinfeld jokes that Siemens managers will undergo training in how to stay longer in the sauna, a Finnish tradition. Kidding aside, Kleinfeld and Kallusvuo argue that Siemens and Nokia workers are fundamentally similar. "They're both no-nonsense, straightforward, make-it-happen cultures," Kallasvuo told BusinessWeek as Kleinfeld, sitting across the table, nodded in agreement.

Still, Nokia has relatively little experience in the business of conventional land- line telephone networks, or in dealing with German labor laws, which make it difficult to reduce the size of the staff quickly. "Nokia's management is now tasked with fixing businesses that have long eluded the best efforts of Siemens," Richard Windsor, an analyst at Nomura Securities in London, wrote in a note to investors.

Nokia Siemens Networks must cut 20,000 jobs, a third of its workforce, to be competitive, Windsor says. Nokia Siemens is planning cuts of less than half that. Kleinfeld and Kallusvuo showed June 19 they are smart dealmakers. But they still have a lot to prove.


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