Nokia at the crossroads

Nokia is one of the most interesting companies to study for the analysts these days. It was not merely the market leader, but a dominant player in the mobile phone market less than 10 years back. Now it has fallen down so much that people are waiting to write the epitaph for Nokia. What has brought this change is anyone’s guess. While Nokia remained adamant on pursuing Symbian, Apple changed the game with it IOS and its apps. It was followed up by Google’s android OS, which had the same look and feel of IOS but came much cheaper and had even more apps (most of them free!). All this while Nokia was trying to revive its fortunes through Symbian, which the users were just not interested in.

Global smartphone shipments are set to rise by 35.5% in 2012 (YoY), while overall cellphone shipments will increase by approximately 1%. This rapid growth will propel 2012 smartphone penetration to 47%, up from 35% in 2011.

Samsung is expected to account for 29% of worldwide cellphone shipments; up from 24% in 2011. Nokia’s share in 2012 will drop to 24%; down from 30% last year, as presented in Table 1.

Table 1

Table 2  

 

A dislodged Nokia will cause Samsung to rise to first place for the full year of 2012, up from the second rank in 2011. Nokia will not be in peak position for overall cellphone shipments during a full calendar year for the first time since 1998!

Thankfully for Nokia, the respite is just round the corner

Not all is lost for Nokia though. It still is ranked second in the overall category and it has a strong following among a number of users globally. Thankfully, the reliability and customer service of Nokia is still appreciated around the world.

In the third quarter of 2012 (July-September 2012), Nokia sold more windows based smartphones than analysts predicted, boosting confidence in its ability to compete. Nokia followed it up by selling 19.6 million smartphones in November. That’s about 1 million more than the average estimate of analysts. Apple sold 37 million iPhones in the same period. Therefore Nokia sold more than 50% of Apple Shipments. Comparing this to the above prediction for 2012 in table 2 (which expects Nokia to be 25% of Apple in Smartphones) is a major achievement. It is also important to note that their flagship devices running windows 8 were not on sale till this period. Nokia reported a pre-booking of 2.5 million Lumia 920 devices by the end of November alone, while the devices are expected to be ready for sales only by December 2012.

Other than just smartphones, the ASHA series of entry level phones also picked up in volumes. The profit margin for Nokia has also improved marginally and it plans to break even in Q4 2012 for this series of phones.

The story can get even better in Asia

China Mobile is taking pre-orders of the Lumia 920T until it receives stock from Nokia in January of 2013. However, China Mobile announced that it intends to subsidize the cost of the 920T for customers that sign up for a two-year data plan. What will the Lumia cost customers, after subsidies, in China? All of 1 Yuan!

Getting a subsidy by China Mobile is the difference between selling 1 million phones and 10 million phones in the country. This move can definitely turn things around for Nokia, who has been suffering huge market share loss in the country. While many companies see China has a driver of growth, Nokia suffered shrinkage in the country year after year. For example, in the third quarter of 2012, the company's revenues in China fell by 78% compared to the same quarter in the year of 2011. In the third quarter of 2010, Nokia sold 20.2 million phones in China, followed by 15.9 million in the same quarter of 2011 and 5.8 million phones in the same quarter of 2012.

If Nokia wants to have a successful turnaround story, it has to make a comeback in markets like China, India, Russia and the Middle East. For many years, Nokia was known as the company that produces indestructible cheap phones that one could use for years. Now the company is proving itself again to the world, as it shows everyone, that it can build a phone that is as good as Apple’s and Samsung's flagship phones, if not better in many ways.

Nokia's turnaround is not completed yet. It is far from over. The company's share price has nearly tripled since it bottomed at $1.68 last summer, but there is still a lot of road to go, a lot of walls to climb and a lot of work to do. The sentiment on Nokia is much better than how it was 6 months ago, but there is still a lot of room for improvement. First, Nokia needs to break-even  which should happen in the first half of 2013; and then, it needs to become profitable: which should happen in the second half of 2013. There are a lot of threats and dangers in front of Nokia, but the company's management is well-positioned to convert most of those threats into opportunities in the medium and long term.