Why Nokia is winning the phone war

Ericsson's Kurt Hellström: Writing on the wall says it all

By BBC News Online's Mike Verdin

It was largely down to Ericsson that Nokia entered the mobile phone market in the first place.

Now the beleaguered Swedish giant may wish it had kept its mouth shut.

The same day it reported losses of 4.9bn Swedish crowns (£337m), and announced 12,000 job cuts, Nokia revealed pre-tax profits of 1.48bn euros (£926m) and plans to steal Ericsson's leadership in the infrastructure market for third-generation (3G) mobile telephony.

Jorma Ollila: "More than pleased"

"We have to be realistic," Ericsson's chief executive Kurt Hellström said. "We have to bring Ericsson back to profitability."

Meanwhile in Finland, Jorma Ollila, his opposite number at Nokia, trumpeted that he was "more than pleased with our first-quarter numbers".

"Our position in this industry has never been stronger," Mr Ollila added.

Transformation

Yet it was almost by accident that Nokia even entered the telecoms business.

The firm, launched near Finland's Nokia river in 1865 as a timber business, was for decades a solid, old-style industrial company, selling even until the 1970s products ranging from toilet paper to rubber boots.

It bought into the telephones business some 30 years ago to gain a slice of the promising technology markets, and follow the then fashionable trend for diversification.

A decade later, after Ericsson installed a cellular network, Nokia, as an expert in radio telephones, stepped in to provide handsets.

And when the collapse of the Soviet Union in the 1990s deprived Nokia's traditional operations of important customers, the firm looked to its promising mobile phone unit for redemption.

Shares rocket

The strategy worked.

Profile - Ericsson

Based in Stockholm

Employs 107,000 people

World's largest network supplier

Third ranking mobile phone maker (7-8% market share)

1st quarter data

Network systems sales: 62.6bn SEK (+13%)

Handset sales: 7.2bn SEK (-52%)

Total sales: 55.9bn SEK (-5%)

In 1998, Nokia overtook Motorola to become the world's biggest manufacturer of mobile phones and could be reasonably described as the Abba of Finland, accounting for one fifth of the country's exports.

The firm's share price had, a year ago, increased by a factor of 12 in less than two-and-a-half years.

The stock has since given up half those gains. But even here Ericsson has fared worse, with its shares worth one third what they were a year ago.

Debt hangover

These slides reflect a deceleration in sales growth blamed in part on the downturn in global economic growth.

Consumers, worried about the slowdown, are deferring decisions to upgrade to new-style phones, or even to take up mobiles at all, firms say.

But considerable responsibility is also being placed at the door of the telecoms operators which, in the exuberance of last year's technology boom, spent billions of pounds, dollars and euros buying licences for operating 3G phones, and woke up weeks later with huge debt hangovers.

So operators have been less willing to offer customer discounts in an effort to boost trade - Ericsson blamed "lower subsidies from operators" among reasons for a 52% slowdown in handset sales during the first three months of the year.

The debt burden has also threatened to slow spending by operators on installing 3G networks, of which the likes of Nokia and, in particular, Ericsson are leading suppliers.

Key market

Ericsson makes more than three quarters of its sales in the network market but, judging by comments in Friday's results statement, is under no illusions of the financial ills besetting its customers in this market.

Profile - Nokia

Based in Helsinki

Employs 60,000 people

World's top ranking mobile phone maker (35% market share)

1st quarter data

Networks sales: 2.0bn euros (+35%)

Handset sales: 5.8bn SEK (+20%)

Total sales: 8.0bn (+22%)

"The capital markets are still fairly cautious about financing operators' investments in 3G," the statement said. "In the present business climate, we will be more prudent than ever regarding customer financing."

Meanwhile the exuberant Mr Ollila, as if only to kick further silicon in Ericsson's face, said Nokia was "well on track for our targeted leadership in 3G infrastructure".

The firm "has the extraordinary opportunity" to achieve twice the market share rolling out 3G networks than it did installing second-generation (2G) equipment, he added.

Product quality

Mr Ollila's confidence is based partly on the quality of the firm's products.

Nokia's 8310 phone comes in 100 colour combinations

It was, after all, the firm's advantage in GSM - the European standard for 2G mobile phone technology - which allowed it to steal the world manufacturing heavyweight title from America's Motorola.

"Motorola had the advantage of achieving dominance in the US, which was the prime mover in terms of mobile phone markets," said Robin Birchall, technology analyst at Brown Shipley Securities.

"But Motorola really struggled when it came to GSM."

Nokia has also monitored cultural advances, and last month, for instance, introduced a phone capable of downloading MP3 music files.

Later this year, the firm will launch a Gold Edition phone for "lifestyle conscious consumer segments in the Asia-Pacific".

Board quality

The quality of Nokia's management, however, has also played an important part in securing the firm's profitability, Mr Birchall said.

Ericsson is being killed in the mobile phone market

Robin Birchall, Brown Shipley Securities

The firm's efficiency has allowed it to run at an operating margin of 17% compared with Ericsson's 4% - that is to convert more of its income into profits.

Indeed "Ericsson is selling phones for less than the cost of making them", Mr Birchall said.

The company, while also boasting respected technology, has been losing an estimated 558 Swedish crowns (£38) on every handset sold, when broader costs such as marketing are included, analysis of company accounts shows.

"Ericsson is being killed in the mobile phone market," he said.

Hence the firm says it is attempting to boost efficiencies by "further streamlining" phone operations, outsourcing operations and reducing staffing levels at the division by some two thirds to 5,000.

New markets

At stake, after all, is the its place in the 3G handset and network markets.

If they arrive.

"There should be no doubt about the strong demand for 3G," said Ericsson's Mr Hellström who predicts the market will be worth $50bn by 2003. "It is driven by the need for increase voice and data capacity."

Yet, when speaking of a technology which has yet to prove its consumer credentials, and which depends on debt-laden telecoms operators for its survival, many observers are making more cautious predictions.

Even Ericsson itself does not expect 3G services to be taken up in volume until 2003.

Two years is a long time in the telecoms business, as the last couple have shown.

Nokia may yet rue the day it snubbed toilet paper and rubber boots in favour of higher technology.