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Wed 2 Nov 2005 04:00 AM

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Lap of Honour

Jorma Ollila has presided over Nokia, the world's largest handset manufacturer, for 13 years. In October next year he will step down as CEO and chairman, leaving an obvious void as he departs. He tells CommsMEA what he believes his legacy at the company may be.

|~||~||~|Humility in the face of success is one of the abiding principles Nokia CEO and chairman Jorma Ollila is most proud of. Not only does such a philosophy sound good, it has also been instrumental in allowing Nokia to claw back the market share it had lost in the last couple of years, having been accused of losing touch with the market in the wake of its tremendous success.

One in every three mobile handsets sold in the world today carries the Nokia brand name, and given that the number of mobile subscribers globally now exceeds over 2 billion; the size of the business is colossal. This was not always the case, and at the time when the first GSM networks were being deployed at the start of the 1990s, market estimates saw the new technology's appeal extending to millions, at most.

Thus Ollila has been credited with growing Nokia's mobile device business into the industry leader that it is today, having surpassed US rival Motorola to the number one spot in the third quarter of 1998.

“It is not for me to say what my legacy will be,” Ollila declares. “What I do think though, is that it is not about numbers, profitability or share price. It will probably be about two things. One will be about this 2 billion (mobile subscribers). It's a huge number and being a shaper of the industry, which has become such an important one (will be one of my legacies),” Ollila explains.

On a more nationalistic level, Ollila suspects that his role in helping a company based in a small Nordic country to become a truly multinational operation is likely to go down as perhaps another one of his lasting legacies.

“Building an organisation and corporation that has enabled the country (Finland) to go global, I think would be my second legacy,” Ollila forecasts. “We now have an organisation we couldn't even have dreamt about 14 or 15 years ago.”

A market leader by definition has to ward off the challenges of competitors if it is to demonstrate its leadership position, and this is a path along which Nokia has been travelling for the past six years or more. Having lost market share to new and established competitors alike in the latter part of 2003 and early part of 2004, Nokia has been busy reconnecting with end-users and driving further into growth markets on a mission to reconfirm its dominance.

“This is a friendly time for us and our competitors can see that,” Ollila says. “It is not an unfriendly time for us.”

Analysis from global research company Gartner earlier this year reported that Nokia had gained market share in the second quarter of 2005 to reach 31.9%, up from 29.6% a year earlier. The slide in Nokia's market share had been attributed mainly to gaps in its product portfolio, for example the absence of a clamshell form factor, together with the handset vendor's resistance to offering tailor-made modifications of its software and user interface to service providers. Both these shortcomings have been identified and are being addressed, the result of which can be seen in Nokia's rebounding market share.

Nokia estimates that 20% of the next billion mobile subscribers on the planet will be added from emerging markets across Latin America, Asia and the Middle East and Africa, with the 3 billion subscriber milestone being reached in 2010. Thus Nokia has been looking to maximise its position in emerging markets, and believes it has built up a strong enough presence to compete effectively for a share of the growth being generated from these regions.
||**|||~|Jorma2001.jpg|~|Ollila will be assuming the position of non-executive chairman of Nokia after he steps down as CEO.|~|“Penetration across the Middle East and Africa stands at close to 12%, with 150 million users, and we expect this number to more than double in the next fours years,” Ollila predicts. “We were one of the companies that came early to the region, and it's visible to see there potential that exists there.”

Carolina Milanesi, principal mobile and wireless analyst at Gartner in the UK is in no doubt of the growth potential that the Middle East region represents, and vendors' enthusiasm to cash-in on that development.

“Sales (of mobile handsets) in the Middle East for the first quarter of the year were just short of 6 million units,” says Milanesi. “The second quarter saw sales increase to 6.4 million and key markets remain Turkey and Saudi but Iran is also growing fast.”

Given Nokia's heavy emerging market focus, fears had arisen that dominance in this arena would result in the vendor's margins being squeezed, a fear that appeared to be validated as Nokia reported operating profit in its mobile devices unit had declined 2% year on year to US$953 million in 2Q05. The operating margin for the quarter came in at 16.2% down from 19.8% a year earlier, with Nokia explaining the reduction in the profitability of the unit on the continued pricing pressure in the market and a higher proportion of lower priced entry-level phone sales. This was driven by stronger demand in emerging markets, compared to last 2004.

“A year-on-year increase in sales and marketing expenses, supporting a high number of new product launches and branding initiatives, also impacted second-quarter profitability,” the vendor stated in its 2Q05 financial results.

Ollila, however, is not overly concerned by the dip in profitability within the mobile device unit. “We have invested in R&D based on margins, which have consistently been the highest in the industry,” Ollila explains. “We have consistently been very profitable in emerging markets and we do not see that changing in the future.”
||**|||~||~||~|In a development reflecting Nokia's ongoing confidence in the execution of its strategy, the company in September updated its financial guidance for the third quarter of 2005, raising its net sales projection for 3Q05 to between US$10.14 billion — US$10.26 billion, up from previous guidance of US$9.54 billion — US$9.9 billion.

“This is due to stronger than expected sales during the first two months of the quarter, good cost control and one time positive items,” Nokia explains in a press release. “The mobile device market has continued to be strong and Nokia delivery volumes of mobile devices in the third quarter are anticipated to exceed its earlier expectations. In addition, due to geographical sales mix and relatively firm pricing, the average sales prices during the quarter are expected to decline less than initially anticipated.”

Ollila predicts that the total handset shipments into the Middle East and Africa region in 2005 will exceed 200 million, and will in fact approach the 300 million mark. Having recently opened a distribution hub in Jebel Ali, Dubai, Ollila believes Nokia is well positioned to continue selling to the market from an access perspective and the company does not foresee requiring the development of increased manufacturing muscle in the region.

“Nokia currently has nine existing factories, with a 10th in India that should be up and running in a matter of months,” says Ollila. “We do not see the need at this point to consider another manufacturing location, though this is a position we review once of twice a year.”

It is Nokia's logistical prowess, and its ability to manufacture and ship mobile devices at a lower cost base to its competitors that has the company so far ahead of the competition, a factor that is widely acknowledged within the industry.

“The handset is a commodity. It is not a technology; it is a function of three things; logistics, design and user interface,” explains Michel Clement, president of Nortel France Middle East and Africa. “Nortel is a technology company and there is less and less technology residing in the handset, so we took the decision to get out of the business. We took the decision to be handset agnostic and we have worked with all the major handset manufacturers so it (the lack of a dedicated handset division) is not so much of a constraint to us,” he adds.

Having forced many a competitor out of the mobile devices market, Nokia's CEO says he is happy with the way his company has dealt with competition and consolidated its number one position. However, given the choppy waters the vendor has experienced recently, one of Ollila's last priorities as CEO is likely to be ensuring the culture of successful humility persists.

“It is at the peak of your success when you face the greatest test,” muses Ollila. “I strongly believe in the appointment of an internal successor with a handover period. It is not pleasant to have a bloody revolution like we had a bit of in 1992, and we don't want a repeat of that.”

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