Nokia is a leading international communications company, focused on the key growth areas of wireline and wireless telecommunications. Nokia is a pioneer in digital technology and wireless data communications, continuously bringing innovations to the highly competitive and growing telecommunications markets. Nokia is also actively involved in international R & D cooperation, including the development of the standards for third generation mobile telephony.
Nokia Corporation is the world's largest manufacturer of mobile phones, with a worldwide market share of about 27 percent, far surpassing the number two player, Ericsson, which has about 17 percent. About two-thirds of the company's net sales are generated by the Nokia Mobile Phones business group. Nokia's other main business group is Nokia Networks, which is responsible for about 30 percent of net sales. Nokia Networks is a leading global supplier of infrastructure for mobile, fixed, broadband, and Internet Protocol (IP) networks. With a sales network that spans 130 nations, Nokia Corporation generated more than half of its sales in Europe, a quarter in the Americas, and about 22 percent in the Asia-Pacific region. Over the course of its more than 135 years in business, the company has evolved from a concentration in pulp, paper, and other basic industries to a focus on telecommunications.
Originally a manufacturer of pulp and paper, Nokia was founded as Nokia Company in 1865 in a small town of the same name in central Finland. Nokia was a pioneer in the industry and introduced many new production methods to a country with only one major natural resource, its vast forests. As the industry became increasingly energy-intensive, the company even constructed its own power plants. But for many years, Nokia remained an important yet static firm in a relatively forgotten corner of northern Europe. Nokia shares were first listed on the Helsinki exchange in 1915.
The first major changes in Nokia occurred several years after World War II. Despite its proximity to the Soviet Union, Finland has always remained economically connected with Scandinavian and other Western countries, and as Finnish trade expanded Nokia became a leading exporter.
During the early 1960s Nokia began to diversify in an attempt to transform the company into a regional conglomerate with interests beyond Finnish borders. Unable to initiate strong internal growth, Nokia turned its attention to acquisitions. The government, however, hoping to rationalize two underperforming basic industries, favored Nokia's expansion within the country and encouraged its eventual merger with Finnish Rubber Works, which was founded in 1898, and Finnish Cable Works, which was formed in 1912, to form Nokia Corporation. When the amalgamation was completed in 1966, Nokia was involved in several new industries, including integrated cable operations, electronics, tires, and rubber footwear, and had made its first public share offering.
In 1967 Nokia set up a division to develop design and manufacturing capabilities in data processing, industrial automation, and communications systems. The division was later expanded and made into several divisions, which then concentrated on developing information systems, including personal computers and workstations, digital communications systems, and mobile phones. Nokia also gained a strong position in modems and automatic banking systems in Scandinavia.
Oil Crisis, Corporate Changes: 1970s
Nokia continued to operate in a stable but parochial manner until 1973, when it was affected in a unique way by the oil crisis. Years of political accommodation between Finland and the Soviet Union ensured Finnish neutrality in exchange for lucrative trade agreements with the Soviets--mainly Finnish lumber products and machinery in exchange for Soviet oil. By agreement, this trade was kept strictly in balance. But when world oil prices began to rise, the market price for Soviet oil rose with it. Balanced trade began to mean greatly reduced purchasing power for Finnish companies such as Nokia.
Although the effects were not catastrophic, the oil crisis did force Nokia to reassess its reliance on Soviet trade (about 12 percent of sales) as well as its international growth strategies. Several contingency plans were drawn up, but the greatest changes came after the company appointed a new CEO, Kari Kairamo, in 1975.
Kairamo noted the obvious: Nokia was too big for Finland. The company had to expand abroad. He studied the expansion of other Scandinavian companies (particularly Sweden's Electrolux) and, following their example, formulated a strategy of first consolidating the company's business in Finland, Sweden, Norway, and Denmark, and then moving gradually into the rest of Europe. After the company had improved its product line, established a reputation for quality, and adjusted its production capacity, it would enter the world market.
Meanwhile, Nokia's traditional, heavy industries were looking increasingly burdensome. It was feared that trying to become a leader in electronics while maintaining these basic industries would create an unmanageably unfocused company. Kairamo thought briefly about selling off the company's weaker divisions, but decided to retain and modernize them.
He reasoned that, although the modernization of these low-growth industries would be very expensive, it would guarantee Nokia's position in several stable markets, including paper, chemical, and machinery productions, and electrical generation. For the scheme to be practical, each division's modernization would have to be gradual and individually financed. This would prevent the bleeding of funds away from the all-important effort in electronics while preventing the heavy industries from becoming any less profitable.
With each division financing its own modernization, there was little or no drain on capital from other divisions, and Nokia could still sell any group that did not succeed under the new plan. In the end, the plan prompted the machinery division to begin development in robotics and automation, the cables division to begin work on fiber optics, and the forestry division to move into high-grade tissues.
Rise of Electronics: 1980s
Nokia's most important focus was development of the electronics sector. Over the course of the 1980s, the firm acquired nearly 20 companies, focusing especially on three segments of the electronics industry: consumer, workstations, and mobile communications. Electronics grew from ten percent of annual sales to 60 percent of revenues from 1980 to 1988. In late 1984 Nokia acquired Salora, the largest color television manufacturer in Scandinavia, and Luxor, the Swedish state-owned electronics and computer firm. Nokia combined Salora and Luxor into a single division and concentrated on stylish consumer electronic products, since style was a crucial factor in Scandinavian markets. The Salora-Luxor division was also very successful in satellite and digital television technology. Nokia purchased the consumer electronics operations of Standard Elektrik Lorenz A.G. from Alcatel in 1987, further bolstering the company's position in the television market to the third largest manufacturer in Europe. In early 1988 Nokia acquired the data systems division of the Swedish Ericsson Group, making Nokia the largest Scandinavian information technology business.
Although a market leader in Scandinavia, Nokia still lacked a degree of competitiveness in the European market, which was dominated by much larger Japanese and German companies. Kairamo decided, therefore, to follow the example of many Japanese companies during the 1960s (and Korean manufacturers a decade later) and negotiate to become an original equipment manufacturer, or OEM, to manufacture products for competitors as a subcontractor.
Nokia manufactured items for Hitachi in France, Ericsson in Sweden, Northern Telecom in Canada, and Granada and IBM in Britain. In doing so it was able to increase its production capacity stability. There were, however, several risks involved, those inherent in any OEM arrangement. Nokia's sales margins were naturally reduced, but of greater concern, production capacity was built up without a commensurate expansion in the sales network. With little brand identification, Nokia feared it might have a difficult time selling under its own name and become trapped as an OEM.
In 1986 Nokia reorganized its management structure to simplify reporting efforts and improve control by central management. The company's 11 divisions were grouped into four industry segments: electronics; cables and machinery; paper, power, and chemicals; and rubber and flooring. In addition, Nokia won a concession from the Finnish government to allow greater foreign participation in ownership. This substantially reduced Nokia's dependence on the comparatively expensive Finnish lending market. Although there was growth throughout the company, Nokia's greatest success was in telecommunications.
Having dabbled in telecommunications in the 1960s, Nokia cut its teeth in the industry by selling switching systems under license from a French company, Alcatel. The Finnish firm got in on the cellular industry's ground floor in the late 1970s, when it helped design the world's first international cellular system. Named the Nordic Mobile Telephone (NMT) network, the system linked Sweden, Denmark, Norway, and Finland. A year after the network came on line in 1981, Nokia gained 100 percent control of Mobira, the Finnish mobile phone company that would later become its key business interest as the Nokia Mobile Phones division. Mobira's regional sales were vastly improved, but Nokia was still limited to OEM production on the international market; Nokia and Tandy Corporation, of the United States, built a factory in Masan, South Korea, to manufacture mobile telephones. These were sold under the Tandy name in that company's 6,000 Radio Shack stores throughout the United States.
In 1986, eager to test its ability to compete openly, Nokia chose the mobile telephone to be the first product marketed internationally under the Nokia name; it became Nokia's 'make or break' product. Unfortunately, Asian competitors began to drive prices down just as Nokia entered the market. Other Nokia products gaining recognition were Salora televisions and Luxor satellite dishes, which suffered briefly when subscription programming introduced broadcast scrambling.
The company's expansion, achieved almost exclusively by acquisition, had been expensive. Few Finnish investors other than institutions had the patience to see Nokia through its long-term plans. Indeed, more than half of the new shares issued by Nokia in 1987 went to foreign investors. Nokia moved boldly into Western markets; it gained a listing on the London exchange in 1987 and was subsequently listed on the New York exchange.
Crises of Leadership, Profitability in the Late 1980s and Early 1990s
Nokia's rapid growth was not without a price. In 1988, as revenues soared, the company's profits, under pressure from severe price competition in the consumer electronics markets, dropped. Chairman Kari Kairamo committed suicide in December of that year; not surprisingly, friends said it was brought on by stress. Simo S. Vuorileto took over the company's reins and began streamlining operations in the spring of 1988. Nokia was divided into six business groups: consumer electronics, data, mobile phones, telecommunications, cables and machinery, and basic industries. Vuorileto continued Kairamo's focus on high-tech divisions, divesting Nokia's flooring, paper, rubber, and ventilation systems businesses and entering into joint ventures with companies such as Tandy Corporation and Matra of France (two separate agreements to produce mobile phones for the U.S. and French markets).
In spite of these efforts, Nokia's pretax profits continued to decline in 1989 and 1990, culminating in a loss of US$102 million in 1991. Industry observers blamed cutthroat European competition, the breakdown of the Finnish banking system, and the collapse of the Soviet Union. But, notwithstanding these difficulties, Nokia remained committed to its high-tech orientation. Late in 1991, the company strengthened that dedication by promoting Jorma Ollila from president of Nokia-Mobira Inc. (renamed Nokia Mobile Phones Ltd. the following year) to group president.
Leading the Telecommunications Revolution: Mid-1990s and Beyond
Forbes's Fleming Meeks credited Ollila with transforming Nokia from 'a moneylosing hodgepodge of companies into one of telecommunications' most profitable companies.' Unable to find a buyer for Nokia's consumer electronics business, which had lost nearly US$1 billion from 1988 to 1993, Ollila cut that segment's workforce by 45 percent, shuttered plants, and centralized operations. Having divested Nokia Data in 1991, Nokia focused further on its telecommunications core by selling off its power unit in 1994 and its television and tire and cable units the following year.
The new leader achieved success in the cellular phone segment by bringing innovative products to market quickly with a particular focus on ever-smaller and easier-to-use phones featuring sleek Finnish design. Nokia gained a leg up in cellphone research and development with the 1991 acquisition of the United Kingdom's Technophone Ltd. for US$57 million. The company began selling digital cellular phones in 1993.
Ollila's tenure brought Nokia success and with it global recognition. The company's sales more than doubled, from Fmk 15.5 billion in 1991 to Fmk 36.8 billion in 1995, and its bottom line rebounded from a net loss of Fmk 723 million in 1992 to a Fmk 2.2 billion profit in 1995. Securities investors did not miss the turnaround: Nokia's market capitalization multiplied ten times from 1991 to 1994.
In late 1995 and early 1996, Nokia suffered a temporary setback stemming from a shortage of chips for its digital cellular phones and a resultant disruption of its logistics chain. The company's production costs rose and profits fell. Nokia was also slightly ahead of the market, particularly in North America, in regard to the shift from analog to digital phones. As a result, it was saddled with a great number of digital phones it could not sell and an insufficient number of analog devices. Nevertheless, Nokia had positioned itself well for the long haul, and within just a year or two it was arch-rival Motorola, Inc. that was burdened with an abundance of phones it could not sell&mdashålog ones&mdash Motorola was slow to convert to digital. As a result, by late 1998, Nokia had surpassed Motorola and claimed the top position in cellular phones worldwide.
Aiding this surge was the November 1997 introduction of the 6100 series of digital phones. This line proved immensely popular because of the phones' small size (similar to a slim pack of cigarettes), light weight (4.5 ounces), and superior battery life. First introduced in the burgeoning mobile phone market in China, the 6100 soon became a worldwide phenomenon. Including the 6100 and other models, Nokia sold nearly 41 million cellular phones in 1998. Net sales increased more than 50 percent over the previous year, jumping from Fmk 52.61 billion (US$9.83 billion) to Fmk 79.23 billion (US$15.69 billion). Operating profits increased by 75 percent, while the company's skyrocketing stock price shot up more than 220 percent, pushing Nokia's market capitalization from Fmk 110.01 billion (US$20.57 billion) to Fmk 355.53 billion (US$70.39 billion).
Not content with conquering the mobile phone market, Nokia began aggressively pursuing the mobile Internet sector in the late 1990s. Already on the market was the Nokia 9000 Communicator, a personal all-in-one communication device that included phone, data, Internet, e-mail, and fax retrieval services. The Nokia 8110 mobile phone included the capability to access the Internet. In addition, Nokia was the first company to introduce a cellular phone that could be connected to a laptop computer to transmit data over a mobile network. To help develop further products, Nokia began acquiring Internet technology companies, starting with the December 1997, US$120 million purchase of Ipsilon Networks Inc., a Silicon Valley firm specializing in Internet routing. One year later, Nokia spent Fmk 429 million (US$85 million) for Vienna Systems Corporation, a Canadian firm focusing on Internet Protocol telephony. Acquisitions continued in 1999, when a further seven deals were completed, four of which were Internet-related. Meanwhile, net sales increased a further 48 percent in 1999, while operating profits grew by 57 percent; riding the late 1990s high tech stock boom, the market capitalization of Nokia took another huge leap, ending the year at EUR 209.37 billion (US$211.05 billion). Nokia's share of the global cellular phone market increased from 22.5 percent in 1998 to 26.9 percent in 1999, as the company sold 76.3 million phones in 1999.
Nokia's ascendance to the top of the wireless world by the end of the 1990s could be traced to the company being able to consistently, over and over again, come out with high-margin products superior to those of its competitors and in tune with market demands. The continuation of this trend into the 21st century was by no means certain as the increasing convergence of wireless and Internet technologies and the development of the third generation of wireless technology (which followed the analog and digital generations and which was slated to feature sophisticated multimedia capability) were predicted to open Nokia up to new and formidable competitors. Perhaps the greatest threat was that chipmakers such as Intel would turn mobile phones into commodities just as they had previously done with personal computers; the days of the $500 Nokia phone were potentially numbered. Nevertheless, Nokia's 25 percent profit margins were enabling it to spend a massive US$2 billion a year on research and development and continue to churn out innovative new products, concentrating on the various standards being developed for the third generation wireless networks.
Principal Subsidiaries: Nokia Matkapuhelimet Oy; Nokia Mobile Phones Inc. (U.S.A.); Nokia Networks Oy; Nokia GmbH (Germany); Nokia UK Limited; Nokia TMC Limited (South Korea); Beijing Nokia Mobile Telecommunications Ltd. (China); Nokia Finance International B.V. (Netherlands).
Principal Operating Units: Nokia Networks; Nokia Mobile Phones; Nokia Venture Organization; Nokia Research Center.
Principal Competitors: Alcatel; Telefonaktiebolaget LM Ericsson; Harris Corporation; Kyocera Corporation; Lucent Technologies Inc.; Matsushita Communication Industrial Co., Ltd.; Mitsubishi Electric Corporation; Motorola, Inc.; NEC Corporation; Nortel Networks Corporation; Oki Electric Industry Company, Limited; Koninklijke Philips Electronics N.V.; Pioneer Corporation; Qualcomm Incorporated; Robert Bosch GmbH; Samsung Group; Sanyo Electric Co., Ltd.; Siemens AG; Sony Corporation; Tellabs, Inc.; Toshiba Corporation.