Nokia: The Asia/Pacific Challenge

Transcription

1 Nokia: The Asia/Pacific Challenge Research Brief Abstract: The Asia/Pacific region represents Nokia's biggest challenge. While overwhelmingly dominant in many GSM markets, Nokia has a limited presence in Japan and South Korea. In China, Nokia has been unable to dislodge Motorola. By Ann Liang, King-Yew Foong, Kobita Desai, Sauk-Hun Song, Bertrand Bidaud and Nick Ingelbrecht Recommendations Nokia needs to develop a more flexible distribution organization in China to respond to local market dynamics and improve geographic reach. Nokia should focus on developing a range of high-end products and clamshell designs suited to preferences in greater China markets. Nokia should carefully assess the risks of not partnering with best-of-breed platform and component suppliers against the economies of in-house development and products. Publication Date: 31 March 2003

2 2 Nokia: The Asia/Pacific Challenge Issues and Challenges for Nokia in Asia/Pacific Nokia remains the dominant manufacturer of mobile terminals in many Asia/Pacific Global Systems for Mobile Communication (GSM) markets, with the notable exception of China the world's single biggest handset market. In Japan and South Korea, arguably the world's two leading wireless data markets, Nokia has yet to establish a solid position for its mobile terminals business. Asia/Pacific terminal vendors have also grown into a significant threat to the established global handset manufacturers. Vendors such as Samsung, NEC and Matsushita have accelerated the introduction of advanced color display and camera products to global GSM markets, building on their domestic market experiences, as well as their close carrier relationships and background in consumer products. A different type of challenge has emerged from the burgeoning community of original equipment manufacturers (OEMs) and original design manufacturers (ODMs), especially from Taiwan and South Korea, that are providing a relatively low cost of entry for new handset brands and supporting accelerated timeto-market and shortened product life cycles. On the face of it, Nokia reigns pretty much supreme in Asia/Pacific GSM markets (excluding China, Japan and South Korea), enjoying quarter-on-quarter market shares in the 45 to 70 percent range (with Taiwan around 35 percent). However, this position of strength is under attack. Asia/Pacific vendors have initially focusedmuchoftheirattentiononasia/pacificmarketswherenokia brand loyalty is less ingrained. Given the volatility of these markets, combined with Asia/Pacific s highly varied consumer preferences and with competitive activity from other vendors, the Asia/Pacific region clearly represents Nokia's biggest challenge with regards to GSM, let alone CDMA. The China Challenge Nokia's dominance of global GSM markets does not extend to China, where it has been unable to dislodge Motorola as the leading handset supplier. The reasons for Motorola's dominance in the China handset market are partly historical and partly commercial. The company has been manufacturing in China for many years, enjoys a preferential "whollyowned foreign enterprise" status, supplied roughly half of the original analog cellular infrastructure and has successfully leveraged longstanding relationships with the carriers and the government. More recently, Motorola has exploited its position in CDMA handsets to capture upwards of 40 percent of the explosive growth in Unicom's CDMA customer base. China has some 450 models of cellular terminals available today more than any other market and Motorola has built up a commensurately large product line in China, supported by a flexible and effective distribution strategy. Recently, Motorola has sought to cut costs by standardizing on four handset platforms and using ODMs to deliver

3 3 product into specific markets like China, circumventing time-consuming global operator testing programs. In contrast, Nokia has offered a more limited range both in terms of design and product segmentation. Nokia's expanded product range will help improve its competitiveness in this area, although customers in the larger China markets tend to favor flip-phone designs a form factor with which Motorola and Samsung have excelled. From Nokia's perspective, this is undoubtedly the result of a conscious effort to retain the consistency of brand and styling that it has carefully developed over the past decade and exploited to great effect in other markets and market segments. Nokia's trademark mono-bloc form-factors are more popular in Southeast Asian markets such as the Philippines, Thailand, Indonesia and in Australia, according to Gartner Dataquest research (see "Mobile Handsets: Unfolding the Asia/Pacific Distribution Map," TCMC-WW-FR- 0123). Both Nokia and Motorola suffered sharp declines in market share in China in 2002 as local China brands gained traction in the market. The success of local brands is attributable to their ability to design terminals that appeal to local tastes and in some cases, introducing new models every few weeks. Local brands such as TCL and Haier have also been highly successful in exploiting their established consumer electronics distribution channels. Nokia has also begun to focus on improving its distribution arrangements in China. In the past, Nokia has tended to work through national distribution channels, while Motorola and many of the local brands have worked more closely with local distributors and retailers. This provides a more flexible and responsive distribution organization, betters geographic coverage and ensures a more equitable distribution of compensation throughout the supply chain. (see "Will China Let 100 Handset Vendors Bloom?" SCSA-WW-FR-0122). Bigger Always Better? The challenges faced by Nokia in China illustrate the dichotomy facing the world's largest terminal supplier. On one hand, Nokia enjoys enormous economies of scale, efficiencies in component sourcing and procurement, commercialization capabilities, technical resources and cutting-edge research and development; yet on the other hand, it also relies on a fairly centralized management structure that makes for a less flexible and responsive market organization. Asia/Pacific manufacturers can counter the advantages of volume with cross-subsidization of profits from other lines. In addition, Japanese and South Korean vendors have advanced capabilities in areas such as screen displays, battery technologies and subsidized R&D activity, as illustrated in the relationship between DoCoMo and Japan's 3G handset manufacturers.

4 4 Nokia: The Asia/Pacific Challenge Nokia faces the generic problem that as corporations get bigger, they invariably become slower to react to market dynamics, particularly those that involve significant discontinuities to traditional business activities. At the same time, Nokia has a unique and comprehensive market view that, in theory, should allow the company to anticipate market trends earlier than other vendors, and respond to them. Nokia has focused much attention on its logistics management that has helped control expenses and deliver cutting-edge competitive advantages (like those Dell Computer has). Increasing consumerization, in developing markets particularly, will lead to impulse purchases and this will mean carrying adequate inventory in those markets and after-sales support. Under such circumstances, increased outsourced manufacturing could be an important option for Nokia. Against this, it has to be remembered that Nokia s reluctance to rush down this route is attributable to the strength of its own manufacturing operations, which the company regards as one of its core competencies, which in turn delivers some greater flexibility of operation and control of production. Nokia has seen an increased market share in the Asia/Pacific region as distributors have sought to exploit parallel/gray market channels using older Nokia inventory. The influx of low-price, quality handsets into price sensitive markets has helped drive up Nokia's market share in the region during However, there is a risk that sales of newer models will be depressed if older Nokia product is readily available at greatly reduced prices. In India, where approximately three-quarters of terminals sales are through the gray/black market, Nokia has attempted to regularize distribution arrangements by absorbing part of the burden of import duties and taxes, but with an obvious impact on margins. There is a further danger that extensive terminal subsidies could hurt the brand in developing markets and compromise the launch of new high- and mid-tier devices in the region. In developing markets there is clearly an opportunity for manufacturers to provide low-priced mobile phones to people who have never owned one. Global handset vendors such as Nokia need to maintain high volumes to maintain profitability through economies of scale. However, there does not appear to be a proven strategy to address market demand for sub-$100 phones in developing markets, notwithstanding Nokia's 2100 product. One of the reasons for this is the price of cellular chipsets (still around $40). As the market evolves and cellular chipsets fall in price, the issue facing Nokia is whether it needs, or wants, to be in the business of providing very low margin products in a consumer market. Interestingly, Nokia set up a business unit in early 2002 to develop emerging market solutions, including ways of helping network operators remain profitable in low average revenue per unit (ARPU) markets.

5 Before the breakup, AT&T stopped manufacturing basic low-end fixed phones because it decided it was not worth competing with Taiwanese manufacturers in the sub-$10 space. The same logic may increasingly apply to the low-tier cellular business. The possibility of erosion of brand equity cannot be ignored in this context. Targeting this segment could dilute the Nokia brand. One alternative would be for Nokia to attack this market through a new brand or by licensing its technology and components to other vendors. The extent to which the Nokia brand is vulnerable in developing Asia/Pacific markets is debatable. In many markets, the Nokia brand is quite well-recognized, but this does not confer brand loyalty and as seen in the China market, users will choose product from other vendors if it is attractive and offers value. Assuming Nokia continues to execute its strategy well and other major brands continue to build on the inroads they have so far secured, the outlook for Nokia five years hence is that it faces steady erosion of overall market share. But properly positioned it stands to retain a lucrative share of an even bigger business than exists today, expanding as the industry moves to embrace new media, new content and into segments such as fashion and gaming devices. 5 Threats to Brand Loyalty Gartner Dataquest statistics bear out Nokia's strong position overall in the hearts and minds of consumers. Nokia is one of the world's most valued brands. But signs of change are here. Asia/Pacific markets such as Singapore, the Philippines and Australia remain Nokia strongholds, but the abundance of familiar local electronics vendors now making phones of high quality and diverse design are becoming a force for brand loyalty fragmentation. The ever-present Japanese and South Korean vendors are also broadening their portfolios to attack nearby markets, making a Nokia entrenchment unlikely. Many Asia/Pacific countries have begun to adopt clamshell designs. In North America, buyers are as familiar with the Asia/Pacific brands in consumer electronics as they are with Nokia. Brand loyalty has never seemed assured as shown by the downfall of Motorola as the No. 1 handset supplier. Europe remains Nokia's fortress. Despite recent quality problems, Europeans continue to demand Nokia products both to support a European vendor, because the styles suit European tastes and because Nokia is entrenched in the distribution network with peripherals and after-market add-ons. But recently Samsung has begun to appear in some countries almost overnight and other manufacturers will enter the European market as barriers to entry erode (for example, the GSMpatentportfoliowasusedtokeepvendorssuchasFujitsuandNEC from the European market).

6 6 Nokia: The Asia/Pacific Challenge Asia/Pacific: Barometer of Worldwide Change? Nokia has strong brand equity in the Asia/Pacific region's GSM markets, but customers are fickle and brand loyalty will erode quickly if Nokia is perceived to be no longer delivering good value products compared with other vendors. In this context, it is worth remembering that Japanese and South Korean vendors are world leaders in integrated camera, display and battery technologies. They may challenge Nokia's technical superiority in advanced models and in Nokia's ability to get new color displays to market quickly. Nokia's 4,000-color 7650, for example, is one or two generations behind South Korean and Japanese products, which now typically feature 65,000- and 260,000-color displays. GSM markets clearly lag behind the terminal markets of Japan and South Korea in technical innovation. The carrier community has also become frustrated at the inability of traditional GSM suppliers to deliver compelling product to the market in the same way South Korean and Japanese vendors do. This frustration has been expressed in the M-Services Phase 2 initiative and in attempts by carriers such as MM0 2 and Vodafone to source new terminal product from Taiwan and Japan manufacturers The key difference in Japan and South Korea is the very close relationship between carriers and manufacturers in the development and commercialization of terminals in line with new carrier service initiatives. Domestic issues are also driving Japanese and South Korean vendors into Nokia's markets. Japan is already saturated with high-end devices and the growth is coming largely from the replacement market. Vendors like NEC, Matsushita (Panasonic) and Samsung have launched forays into the GSM markets. Their advanced technologies and core competency in microelectronics pose a significant threat, even though they face thin margins as they attempt to build market share. Nokia has been traditionally quite strong in terms of the user interface of its devices, but this advantage may erode over time, especially as user interfaces are changing to graphic rather than text-driven menus and Nokia's "de-facto" standard menu structures are increasingly being incorporated into other vendors' products. CDMA Markets Qualcomm officials (not surprisingly) argue that Nokia's belated entry into the CDMA handset business could cost Nokia the "No. 1 slot" in the mobile terminals market. This may ultimately prove true, but we do not believe this will occur purely for reasons associated with Nokia's CDMA direction. That said, Nokia's attempt to make up for lost ground in CDMA markets has proved less than impressive. The launch of Nokia's IS-95B gray-scale display terminals in South Korea was ill-timed in the context of the prevalance of cdma2000 1X terminals in the market and also because of the high pricetagon the Nokia device terminals. The result of such poor market performance has been that thousands of the new Nokia products

7 7 have been handed out to customers free of charge, lowering brand perceptions. In January 2003, Nokia decided to close down its CDMA research and development center set up in 1999 in Seoul. The company also said that it would end its production alliance with Telson Electronics, a South Korean handset maker that has been supplying handsets to Nokia under an OEM/ODM contract. This decision suggests that Nokia is revamping its CDMA business globally, rather than simply its strategy for South Korea. South Korea has played an important role as a CDMA testbed because of the level of investment by the three local carriers in their CDMA networks, the advanced data services and handsets available. On the other hand, Nokia is exiting an unproductive OEM relationship with Telson redolent of low volume and poor longer-term prospects. Nokia cannot afford to exit the CDMA market entirely, but is clearly minimizing its exposure in a business that affords it limited margins. The closure of the R&D center is an understandable cost-cutting measure, but risky in terms of Nokia's efforts to secure market share in the United States market. The entrenched position of South Korean handset vendors Samsung and LG made Nokia's task in penetrating the South Korea market extremely challenging. Longerterm, Nokia's reluctance to work with Qualcomm suggests Nokia will never enjoy significant success with generation CDMA technology. Nokia is expected to re-enter the South Korean market as a supplier of wideband code division multiple access (W-CDMA) equipment after services are introduced in May 2003, but without local R&D resources, its potential in the South Korean market will be limited in the near term. Nokia is nevertheless retaining its South Korean production plant in Masan, which is producing more than 30 million GSM handsets annually, for global export markets. Nokia signaled a shift in its focus in the South Korea market toward delivering its own object management architecture (OMA), CDMA and W- CDMA-compliant products, which it believes will strengthen its position in South Korea in the longer term. The South Korean retrenchment appeared to dampen Nokia's immediate prospectsinthenorthamericanandchinacdmamarketsandhinderits objective of securing and sustaining a 40 percent global market share. However, Nokia subsequently announced plans to start production of cdma handsets in China, along with a scheme to merge its four joint venture businesses into one organization. The consolidation has the stated intention of strengthening the operational efficiency and competitiveness of Nokia s China operations. Key Issue How will Nokia leverage its global position to secure its long-term position in Asia/Pacific markets?

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