Global Economics

Nokia's Magnificent Mobile-Phone Manufacturing Machine


Slide Show >>Try for a moment to wrap your mind around this extraordinary number. In 2006, mobile-phone giant Nokia (NOK) will handle more than 100 billion parts in its 10 factories scattered around the world. To put that in more comprehensible—if still somewhat mind-boggling—terms, it means that every day, from Mexico to Hungary to China, Nokia's giant production plants will take in an average of around 275 million components—and then spit out 900,000 finished mobile phones at the other end of the line.

The challenges of handling such huge volumes are enormous, but over the past decade-and-a-half Nokia has turned high-tech manufacturing and logistics into one of its core competencies. The 141-year-old Finnish company has always produced stuff, even when it was an obscure conglomerate that made cables, toilet paper, and rubber boots. But since reinventing itself as a mobile phone maker in the early 1990s under now-retired Chief Executive Officer Jorma Ollila, Nokia has taken manufacturing to a new level.

It wasn't always smooth sailing. In 1995, Nokia suffered a breakdown in its logistics and supply-chain management when rapid growth outpaced the capacity of its systems. The company was plunged into crisis for months as back orders piled up, and it had to issue a profit warning in the fourth quarter. The memory of those dark days still haunts veteran production managers, who remember it as a turning point in how Nokia approached information technology and manufacturing planning.

CUSTOMIZATION TREND. Today, the company operates nine major handset factories—three in Europe, three in Asia, and three in the Americas—and it is ramping up a 10th facility in India that will be able to produce tens of millions of phones per year. A vast and sophisticated software system manages the procurement and delivery of those 100 billion parts, which range from basic electronics such as resisters and capacitors, to pricey processors and color LCDs, to mechanical pieces such as screws, keypad buttons, and covers. About one-fifth of Nokia's 66,000 employees work in manufacturing.

Aside from contending with ever-increasing volumes—Nokia is on track to ship more than twice as many handsets in 2006 as it did just four years ago—the biggest change to hit the company's manufacturing since the 1995 crisis is the growing demand for customization from mobile operators. As market competition heats up for service providers such as Vodafone (VOD), Cingular Wireless, and Telefónica Moviles (TEF), they are increasingly trying to differentiate themselves via unique software and features built into the phones they offer. And they want that software to be installed by Nokia and other phone makers before handsets leave the factory.

For Nokia, this has meant reorienting its production into two distinct parts. In the first, more time-consuming stage, Nokia builds the innards of phones, or what it calls the "engines." Like embryonic stem cells, these generic engines can then be customized to take on different jobs.

KEY ADVANTAGE. In the second, fast-turnaround stage, called "assembly to order," Nokia pumps orders from specific carriers into its production system and transforms the raw "engines" into tens or even hundreds of thousands of built-to-order phones in a matter of days. Each can have a unique faceplate, for instance, with the operator's logo on it, or special keypad buttons that take users directly to certain wireless services. The software inside also varies from one operator to another, with different menus, features, branding, and languages.

The need to control this complex process with the highest precision and quality is the reason Nokia has never chosen to outsource its manufacturing. (It does use contractors for a small number of handsets, mainly older models that don't require customization or rapid delivery.) Indeed, quite the opposite: Nokia sees its manufacturing expertise as a key strategic advantage, and with its unmatched volumes, Nokia can make phones more efficiently than any other company in the world.

The proof is in the numbers. On average, Nokia spends about $88 to build a phone—though the actual costs vary widely, from $20 or less for basic models to hundreds of dollars for decked-out multimedia gizmos. The average selling price for Nokia's entire product portfolio in the most recent quarter was $130. That works out to a gross margin of nearly 33%, which in turn lets Nokia pull down the highest operating margins in the business.

For a detailed look at how a Nokia phone is made, click here for the slide show.


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