Financial Management at Nokia - Assignment Example

Financial Management at Nokia f) How did the firm change its strategies over time in an attempt to respond to changes in its operating environment (i.e. global economic trends, change in major competitors’ strategies). An analysis of Nokia’s annual reports during the period 2004-2009 showed a major strategic shift that took place in 2008. This move by the company showed its attempt to respond to a highly dynamic operating environment, such as global economic trends and changes in the strategies of Nokia’s competitors. Reading through the reports of the Board of Directors from 2004-2009 that reflect the business environment during the period January 31, 2004 to December 31, 2009 (Nokia’s balance sheets show that its fiscal year ends on December 31 of each year), the following were amongst the major challenges faced by management: First, there was an increase in global competitors in the market for mobile phone handsets, where Nokia enjoyed tremendous competitive advantage as a low-cost, highly efficient manufacturer. Competitors from China, South Korea and India were eating into Nokia’s market share. From a peak of €37,000 million in 2007, devices, handset and services net sales declined to €27,853 million in 2009. This was a decline of almost 25% in net sales. Profit declined some 85% from €7,985 million to €1,197 million during the same period. Nokia also closed a major manufacturing plant in Bochum, Germany in 2008 to further cut down on expenses and manage the erosion of profit margins. Second, there was a shift towards smart phones that adopted convergence in mobile technology. Mobile phones were not only used for communication but developed usage for a host of multimedia applications, such as video, audio and Internet access. During the period 2004-2009, Nokia branched out into other services such as navigation technologies using mobile phones. In mid-2008, Nokia purchased for €5,342 million the NAVTEQ Corporation, a US-based corporation that was a leading provider of comprehensive digital map information for automotive systems, mobile navigation devices, Internet-based mapping applications and government and business solutions. Starting with revenues of €361 million in 2008, NAVTEQ contributed €670 million of Net Sales to Nokia by the end of 2009 (Nokia, 2009, pp. 25-26). Another major project (2009, p. 24) that Nokia really pushed during the period was Ovi, its Internet services brand that was aimed at competing with Apple’s iTunes applications platform. Nokia launched its Ovi Store, Software Development Kit, and an Application Programming Interface using the Symbian and Maemo platforms. Earlier, Nokia purchased the majority shares in Symbian to develop its unique software applications platform for its portfolio of Nokia handsets. Third, there was a global economic crisis that began in 2007-08 and was still ongoing until the end of 2009. This had an effect not only on the way Nokia managed its operational and marketing challenges, but also on how the company managed its finances to cope with the volatility of global financial markets. Nokia, aside from adopting financial management strategies to manage the volatility in exchange rates (foreign exchange risk), interest rates, and the prices of equity investments in various companies all over the world, also resorted to major strategic changes in its business. It shifted its marketing and operations to its biggest markets to bring down costs and improve competitiveness. In 2004, its biggest markets were Europe-Middle East-Africa (55%), Asia-Pacific (15%), U.S. (12%) and China (10%). In 2009, market sizes were EMEA (50%), Asia-Pacific (22%), China (16%) and Latin America (7%), with China, India and Indonesia, three nations with a population of almost 3 billion, amongst its biggest markets. In order to exploit and develop relationships, Nokia also bought companies and manufacturing plants in these growth markets. g) Your advice and evaluation of the performance of the firm’s financial managers The economic and business environments in the last few years have been extremely challenging for a multinational corporation like Nokia, which is in an industry – telecommunications hardware, software and services – that is highly competitive not only because technology shifts quickly and timing of market entry and technology bets are very crucial. For Nokia, a huge portion of its risks lies in its global operating environment: the company manufactures, develops, owns and sells products and services in almost 180 countries (Annual Report 2009, p. 4). Most of these countries have their own currencies that fluctuate in value depending on the shifting political, economic and business environments. Nokia’s annual reports contain enough information that would allow the analyst to daringly hazard an objective judgment and evaluation of the firm’s financial management performance. Whilst this may seem easy, as it should be for an armchair analyst, such would not approximate the tough real-world conditions faced by Nokia’s financial managers in the last six years, most especially in the last two upon the advent of the global economic crisis. Whilst the Board is optimistic that there have been signs in the last few months of 2009 of a worldwide economic recovery, Nokia management admitted (2009, p. 24) significant uncertainty regarding the speed, timing and resiliency of such a recovery. This is a sign of the conservatism with which management treats its financial reporting and has been reflected in the amounts, totalling around €2,135 million, lower than in previous years, that it allocated to the impairment testing of company Goodwill. Aggressively valuing Goodwill in the balance sheet is a common form of window-dressing that financial managers resort to in order to inflate the stock price. By being conservative in its valuation, Nokia is adopting a certain degree of prudence and caution as a way of protecting its stockholders. At the same time, this is likewise a sign that the management may expect better valuations in coming years, reflecting a positive upside potential from improved business and economic conditions. Another set of figures that are worth analysing are the Foreign Exchange Losses and Gains that Nokia reflects in its Financial Income and Expenses Summary Reports. Looking at the figures from 2004 to 2009 show that from a positive €32 million in 2003, the figure has fluctuated to reach a high of €432 million in 2008 to a low of –€358 million in 2009. The usual explanation of Nokia for the fluctuation in gains and losses has always been the higher cost of hedging and increased volatility in foreign exchange markets. Whilst winning (or maximising gains) and losing (or minimising losses) is the objective of hedging with the use of financial derivatives, one way of passing judgment as to whether the firm’s financial managers have done their jobs well is to sum the net position of their efforts to manage foreign exchange, equity or market and interest rate risks over the past periods. From 2003 to 2009, the net position of Nokia is €77 million. Despite losses (all in millions) of €11 (2005), €31 (2006) and €358 (2009), there were gains of €32 (2003), €8 (2004), €37 (2007) and €432 (2008). This reflects, to-date, good risk management practice. Another measure of good financial management is the Return on Capital Employed or ROCE, which shows how management invested shareholders’ capital. Whilst the 2009 figure is a low 6.7%, due to the global economic crisis, the figure peaked at 54.8% in 2007 before its decline to 27.2% in 2008, the first year of the global crisis. ROCE has to be higher than the company’s borrowing cost of capital for non-erosion of shareholder value, which seems to be the case based on the figures in the 2009 Report (pp. 34 and 66). Lastly, as the economic crisis raised interest rates, which led to higher interest expenses in the last few years, Nokia’s financial managers successfully brought down its gearing from a high 78% in 2004 to a low 14% in 2008. Whilst the figure increased to 25% in 2009 due to lower net sales and stable expenditures in R&D and marketing, this is a sign of good management because it shows the company’s willingness to invest in preparation for a more stable and certain economic recovery and shows that Nokia is making the right moves. References Nokia Corporation (2004, 2005, 2006, 2007, 2008, 2009). Annual Reports. Nokia: Espoo. Read More