Nokia charts a new course with fibre-optic connectivity and routers

(qlmbusinessnews.com via telegraph.co.uk – – Thur, 11th Oct 2018) London, Uk – –

At first glance, you’d think Risto Siilasmaa was an excitable man. “I thought I’d just grab a quick cappuccino. I didn’t realise they’d do this,” the Nokia chairman enthuses, signalling to his coffee where an image of a horse has been created out of the foam.

Yet, excitable is the last word you’d use to describe Risto when he launches into a brief summary of Nokia’s 150-year history, his voice calm and measured as he thinks carefully before speaking.

Risto took the reins of Nokia as chairman in 2012, when the firm was still reeling from the launch of Apple’s iPhone in 2007. Up until that point, Nokia had held 40pc of the global handset market, had achieved a market capitalisation of more than $290bn (£220bn) and accounted for around 4pc of Finland’s GDP.

However, Apple’s bet on smartphones sent shockwaves through the market. It caused Nokia’s share of the global handset market to plunge to 3pc over the next six years and, eventually, led to the sale of its mobile business to Microsoft in late 2013. Nokia's demise was spectacular and sudden.

“We were for a brief period of time a company basically without a business,” Risto explains. “We had to decide what our business should be, and we chose to be a major player in digital communications infrastructure for both tele-operators as well as enterprises.

“There were lots of heroic deeds done by many people, and obviously it was a very emotional journey because Nokia has a special place in Finland and also worldwide. Many people think of Nokia very warmly as they started their journey in the mobile world with a Nokia handset, so we felt we needed to make sure that Nokia continued.”

The company’s transformation under Risto has been significant. Since selling its mobile phone business, Nokia is now a smaller beast, with a market capitalisation of around $29bn. But, even at that size, it is one of the largest telecoms equipment companies in the world, propelled by its €16bn (£14bn) takeover of French rival Alcatel Lucent in 2016 which saw it enter into the domain of fibre-optic connectivity and routers.

Nokia has been seen as the dominant player in the West in this space for years, gaining a reputation for being better managed than its Baltic rival Ericsson. But with a new chief executive installed at the helm of Ericsson last year, its standing as the European market leader has been thrown into doubt.

“Two years ago if you asked people like me Ericsson versus Nokia, I would have said Ericsson is a dog of a company,” Liberum’s Janardan Menon says. “I would have said they were bloated and didn’t know how to do anything, and that Nokia was a lean mean fighting machine, but the last few quarters have proved that that is not correct.”

In the three months to the end of June, Nokia posted a 42pc fall in operating profit, missing market expectations, in a set of results made even more disappointing by the fact they came just one week after Ericsson announced it had swung to profit in the same period.

To add insult to injury, recent months have seen Nokia lose a number of high-profile contracts, including with Deutsche Telecom in Germany and with Vodafone in the UK.

However, Risto is confident that by spending more on research and development, Nokia can bat off competition and expand its business, especially as the 5G roll-out takes hold.

“We need to be successful in the business we are in and 5G is a major investment cycle,” he says.

“It is now starting and it will last many years, and keep growing on an annual basis for many years. It starts low and then it keeps on climbing up, so we have our hands full of work at the moment.”

In 2017, Nokia did spend more than Ericsson on R&D – around $5.2bn compared to the Swedish company’s $4.5bn.

However, even if both start ramping up spending dramatically, their budgets will still likely pale in comparison to those of Chinese companies. Earlier this year Huawei pledged to spend between $10bn and $20bn annually on R&D, and around 45pc of its employees are engaged in R&D-related activities.

Huawei is now one of the world’s biggest R&D spenders, alongside Amazon and Apple, and has won major contracts in Germany, Canada and the UK.

Given the vast resources of Huawei in the industry, it is fair to assume that Nokia and Ericsson are more than a little relieved that the US has essentially banned Huawei from doing business in the country amid concerns over security.

Recent reports which allege China planted microchips in equipment destined for the US to hack their systems are likely to add fuel to the fire, causing more regulatory barriers to be introduced against Chinese vendors.

Risto admits that, when it comes to reports such as these, Nokia benefits from the fact it is European.

“It is something all companies have to be aware of and prepare for, but we, being a Finnish company, feel we’re outside of all those ambitions of needing access to other people’s information. Our advantage is that we come from a country that is outside that activity.”

But even if this gives Nokia an edge over Chinese companies, this does not put it in the clear.

Ericsson also has this same advantage, and Liberum’s Menon says Nokia really has to “either bring what they have up to a much higher level of performance, or do something else to make their business more exciting”.

To be fair, there have been tentative steps by Nokia to enter into new markets in the past. It bought health tech business Withings two years ago and also previously owned HERE, a digital mapping business.

However, it sold HERE to German carmakers Audi, BMW and Daimler in 2015, and gave up on the health tech company after two years, selling it back to its founders at a substantial loss, and leading to some criticism that Nokia chokes whenever it has to make big moves.

In fact, the timing of the deal to sell Withings has caused some to question whether Nokia really knows the value of some of its businesses, coming just months before Apple unveiled its latest iteration of the Apple Watch which focuses exactly on health monitoring.

“It’s a good thing to experiment and try out new things,” Risto counters. “If you never try new things, you never have to withdraw, and then you can say that you never withdraw, but we would rather try out things in multiple domains. If we don’t feel that they are for us, then we’d rather pull the trigger quickly than let things drag for many years.”

And Nokia is always on the lookout for new opportunities, keeping tabs on companies across different spaces which are working on novel technology.

“It’s one reason we have our venture capital arm, so we can first invest in companies, and then partner with those companies if they do something that may be useful for us. Then we can decide to buy some of them, if they develop into something that is truly important and attractive.

“We have a list of 1,200 companies that we are tracking for intelligence purposes because we can’t do everything internally. Nobody can predict which companies will come up the winning solution so you have to hedge your bets.

“It might be that we pick the wrong horse,” he says, pointing again to his now-empty cup. “Nokia is over 150 years old and we have been in many many industries. We have been really big in many of them and then we have pivoted after 30 years in a single business towards something else and again become quite successful in that. Yes, in some of them we never really became successful, but then we changed course, and I’m sure we will pivot again one day.”

By Hannah Boland