New Nokia, New Supply Chain
Nokia itself isn’t about to disappear, that’s certain. However rough the immediate future might be, the Espoo, Finland-based company is sure at least for the next several years to remain a leading member of the electronics industry. Semiconductor, interconnects, passives and electromechanical (IP&E) components makers, distributors, electronics manufacturing services (EMS) providers and other suppliers serving Nokia will experience changes in their relationship with the company: Some will merge into Microsoft’s design and supply chains and the majority would be cast adrift to seek opportunities elsewhere in the industry.
A minority of Nokia’s current suppliers who serve its non-mobile handset business can expect to continue their engagement with the company. They’ll be serving a much smaller Nokia, though. At its peak in 2008, when it dominated the mobile handset market with more than a 40 percent share, Nokia reported revenue of 50.7 billion euro ($66.9 billion, using the exchange rate of 1 Euro = $1.32). Since then, the company’s sales have been going downhill, dropping to 41 billion euro, in 2009 and by last year to 30.2 billion euro ($39.8 billion).
Sales have continued to decline. Nokia’s revenue fell 22 percent in the first nine months of this year to 17.2 billion euro, down from 22.1 billion euro in the comparable period of 2012. The steepest decline was reported in the devices and services division where sales fell 28 percent to 8.5 billion euro in the nine months ended September 30, from 11.8 billion euro, in the year-ago comparable period.
The new Nokia, comprising primarily of Nokia Solutions and Networks, HERE, the location services provider, and Advanced Technologies, which pools together the company’s IP portfolio, accounted for roughly half of the company’s current revenue in the latest reporting period. Company executives believe Nokia’s decision to sell the mobile handset unit to Microsoft and other restructuring efforts will position the company as a better competitor in the selected markets.
“The third quarter was among the most transformative in our company's history. We became the full owner of NSN and we agreed on the sale of our handset operations to Microsoft, transactions which we believe will radically reshape the future of Nokia for the better,” said Ihamuotila, in a statement announcing the company’s third quarter results. “Subject to the completion of the Microsoft transaction, Nokia will have significantly improved earnings profile, strong financial position and a solid foundation from which to invest.”
That future will be anchored by NSN, a joint venture with Siemens AG, but which is now wholly owned by Nokia following the acquisition of the partner’s stake in August. NSN is itself undergoing a multi-year reorganization but it will in future represent about 90 percent of the new Nokia’s sales. The division is one of the leading suppliers of mobile broadband equipment to telecom services providers and depending upon how its reorganization plays out, it will either partner with or intensify competition with fellow Europeans Alcatel-Lucent and Ericsson, North America’s Cisco Systems and China’s Huawei.
NSN hasn’t performed as well as expected in recent years, hence the latest round of reorganization, according to Rajeev Suri, CEO of the Nokia business division. Sales in the latest quarter for the group decreased 26 percent from the prior year partly because the company shunned low margin businesses and moved to focus on the mobile infrastructure market. The decisions taken to reduce costs and refocus the company will begin to yield results in coming years, Suri said.
“As we head towards 2014, we will begin to put the restructuring program that we announced in 2011 largely behind us,” Suri said. “That will allow us to shift to a process with continuous improvement across the entire company and build on our progress in innovation and quality.
Nokia will also get incremental revenue from its huge wireless patent portfolio, which it has bundled into the Advanced Technologies division. The unit licenses its IP to the world’s leading mobile handset companies sometimes in transactions that were non-cash based due to cross-licensing agreements. With the sale of Nokia’s mobile handset business to Microsoft, however, the company should be better positioned to turn those licensing agreements into solid revenue streams, according to executives and industry observers.
“The revenues that we presently generate in this business primarily come from licensing our industry-leading portfolio of standard essential radio patents which comprised approximately 10 percent of our patent families,” said Ihamuotila. “We see opportunities to expand our licensing coverage to presently unlicensed vendors and to parts of our portfolio that are not broadly licensed under our current agreements.”
Some of the identified opportunities are already yielding fruits. In November, for example, Nokia said it extended for five years a patent licensing agreement with Samsung that was scheduled to expire in 2013. As part of the new deal, Samsung would pay “additional compensation to Nokia for the period commencing from January 1, 2014 onwards,” the company said in a statement. The actual compensation was not announced.
“This extension and agreement to arbitrate represent a hallmark of constructive resolution of licensing disputes, and are expected to save significant transaction costs for both parties”, said Paul Melin, chief intellectual property officer at Nokia in the statement.
It is likely that the company will announce similar deals with other mobile handset manufacturers in future. As in the Samsung case, the discussions on how much Nokia will receive will probably extend into 2015 while the company concludes the Microsoft transaction and waits for the expiration of existing cross licensing agreements. Some analysts believe Nokia could eventually sell the IP portfolio for upward of $15 billion to a group of other tech companies similar to other deals that have been concluded in the industry.
“We believe Nokia can grow its annual royalty run-rate of 500 million euro by a further 40 percent pursuing licensing agreements with currently unlicensed handset vendors,” said Credit Suisse in a research report. “Second, 90 percent of Nokia's patents are unlicensed and we believe its intellectual property rights, (IPR) especially in areas such as chipsets and OS, can be applied not only to the handset market but also to the wider consumer electronics market. Third, the strategic importance of Nokia's IPR also makes this an acquisition target potentially for Qualcomm, Intel, Apple, Huawei, Google, Ericsson, Samsung or a consortium of tech companies.”
As Nokia said on its web site, the next chapter begins now for the company. The journey will most likely be bumpy but it’s a road the company has before travelled successfully. How well it fares this time will depend as in the past on how much it is prepared to risk and how widely it diversifies from its current businesses.