By ALEX WEBB / BLOOMBERG
NOKIA Corp only really has two competitors in the telecommunication equipment business, and one of them — China’s Huawei Technologies Co Ltd — has been all but banned from much of the market.
At the same time, phone companies are opening their checkbooks for a new generation of 5G technology that’s only supplied by Nokia, Huawei and the other big rival, Ericsson AB.
Pretty ripe conditions for a thriving business? Not for Nokia. The Finnish company yesterday cut its profit outlook for this year and next, and suspended a dividend payout. Nokia shares fell the most in 19 years. CEO Rajeev Suri (picture) urgently needs to stop the bleeding.
With a new burst of infrastructure spending by the big telecommunication carriers, mobile networks should be a bright spot for equipment makers. Yet, they’re Nokia’s biggest problem. Revenue from this business grew just 4.4% in the three months through September.
Sales at Ericsson’s networks arm (which includes more than just mobile products) rose 9% in the same period.
Ericsson’s performance may be flattered by its decision to cut prices to attract new customers, and then look to make bigger profit from long-term service contracts. Nokia is wary of copying this strategy, which has gone wrong for its Swedish rival in the past after the longterm revenue didn’t appear. But that caution isn’t helping.
The gross profit margin at Nokia’s network arm still fell to 29% in the third quarter, down from 34% a year earlier. Suri ascribed that to the higher cost of 5G components.
Because adoption of the technology isn’t yet widespread, economies of scale haven’t lowered its expenses.
Unfortunately for Suri, Ericsson’s gross margin in the most similar part of its business increased slightly over the same period.
Nordea Bank Abp analyst Sami Sarkamies reckoned Nokia simply lags behind Ericsson technologically. That makes Nokia’s equipment more expensive to produce.
With the company still having to try to compete with Ericsson on price, this erodes profitability.
Yesterday’s share price decline has erased more than €5 billion (RM23.41 billion) of Nokia’s market value, leaving it capitalised at €21 billion. That’s big, but not too big to be an acquisition target. American authorities are eager to beef up the 5G capabilities in the US, given China’s relative strength, so maybe a company like Cisco Systems Inc or Qualcomm Inc might be persuaded.
A bid at the shares’ one-yearhigh, touched in January, would represent a 50% premium over where the stock was trading yesterday.
It’s far from certain that would overcome Finland’s concerns about losing a national champion, but it might at least make it think. Suri needs to find some answers quickly to ensure these remain only market talk. — Bloomberg
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