Global financial crisis and its effects on Nokia Company - Assignment Example

Global Financial Crisis The global financial crisis, says economists, is on the rise. In effect, it is causing considerable economic slowdown in both developed and developing countries around the globe. As of now, Nokia Group is trying to contain the situation but many economic experts assert that the worst is yet to come. It is a shocking scenario because the rates of market exchange are down more than 40 percent from their recent highs. Additionally, investment banks are collapsing and rescue packages are drawing up more than a trillion U.S. dollars, and rates of interests around the globe are rising at what appears to be a coordinated response. Most worrisome, the leading global economic indicators like shipping rates are declining at an alarming rate. Documented evidence shows that, the root cause of this economic and financial turmoil is the selling of sub-prime mortgages by the United States mortgage market to huge numbers of consumers with inadequate incomes. This paper will seek to address this global issue focusing on Nokia Company with response from money lending institutions. Nokia started its journey in 1865 when Fredrick Idestam, an engineer, started a paper manufacturing company in southern Finland. At this time, Nokia specialized on paper and cardboard manufacturing as these products had demand due to the European industrialization. Soon, Nokia flourished and became successful and in 1895, engineer Fredrick delegated the reins of Nokia to his son-in-law Gustaf Fogellholm. The company exported its products to the UK, France, and Russia. With success comes attraction. Nokia attracted large workforce and other companies such as Finish Rubber Works whereby this company started using Nokia as its brand name in 1920. After the Second World War, Finish Rubber Works bought most of Finish Cable Works shares a company that grown vastly due to high demand for telephone and telephone networks. In 1967, these two companies consolidated and merged forming the Nokia Group (Stole, 2006: 2-4). With electronics department established in 1960, it contributed 3 percent of Nokia’s net sales with a 460 workforce. When global financial crisis started showing effects in the beginning of the 1990’s Nokia slid down as Finland was in deep recession. On one side, many people believed those responsible for the crisis were the ones receiving bailouts, whereas on the other end, the worldwide financial problems were to affect the livelihoods of almost every individual on the planet due to global interconnection. The subprime turmoil came about in large potion due to the financial tools such as securitization used by banks (Sheila, 2008: 20). Through securitization, banks would pool some of their loans into sellable assets. In so doing, they off-load the risky loans onto others. For this matter, banks knew they would make millions of cash through money-earning loans. However, these money-earning loans tied up for decades, therefore, banks turned them into securities. Security buyers received payments regularly from all mortgages. As a result, the U.S. banks off- loaded their risks. Upon testing this instrument, financial gurus saw securitization as perhaps the greatest innovation of the 20th century. With economic slump entrenching its effects into the global economy, the divisions of the Nokia including telecommunication and mobile phones division started backing up the pillars of Nokia. In spite of the global deep recession, Nokia grasped potential, quickly came to its feet, and soon started streamlining its business. Financial crisis affected most financial institutions. However, as the securitization business continued buoying, high street banks got into a form of investment banking where they bought, sold, and traded risks. Same investment banks not contented with trading risks, selling and buying, they ventured into home loans and mortgages while they lacked the right management and controls. Many banks took huge sums of money inform of loans thus increasing their exposure to financial problems (Goldsmith, 2009:19-22). At this point, perhaps, it was ironical, observed Evans Davies, a former BBC economist and presenter, that a financial instrument believed to be the best tool to help reduce risks and increase the security lending capacity would backfire at such a pace. When most people eventually began noticing the risk, their confidence fell down at an alarming rate. As a result, the level of lending slowed down at once and in other cases ceased for sometime. Up to date, there is still lack of confidence. Surprisingly, some banks were sitting on some of the riskiest loans that other banks did not want. In addition, assets began plummeting in terms of value to an extent that lenders started wanting their money back. However, some investment institutions sadly had little in deposits. They had no secure retail funding therefore some of them ended up collapsing so fast and dramatically (Kates, 2011: 169). This action was so huge, even banks that had large sums of capital reserves ran dry. As a matter of course, they had to run to the government to come to their rescue (bail out). Suddenly, more was injected into the banks in order to allow them lose extra cash without going bust. Sadly, injecting more money was not enough to restore confidence. These shrinking financial institutions suck many billions of cash out of the economy and on the other side made people nervous. They created a spiral of issues result. Agreeably, this sparked the world economic and financial crisis. September 14, 2008 witnessed Lehman Brothers collapse (Goldsmith, 2009: 52-55). Following its collapse, governments worldwide struggled to rescue their gigantic financial institutions as the state of the failing stock and housing sectors persisted. During this time, many institutions continued to encounter liquidity crisis. Nokia had a financial strategy that committed the company to telecommunications. It involved investing close to 8.5 percent of the company’s net sales in research and development. This helped the company cope with the global pandemic in different outlets in different parts of the globe. The government of Australia announced the first stimulus packages in order to jump-start the country’s failing economy. This depicted worldwide economic crisis that resulted from financial meltdown. Next was the government of the United States of America that proposed a rescue plan worth 700 billion US dollars. Sadly, this plan failed to pass since some US Congress members objected claiming that it was unacceptable to spend such amount of money from taxpayers in bailing out Wall Street investment banks whom they believed could have been one of the major causes of the global financial crisis. Upon undergoing such a serious financial status, people started investing heavily in gold, bonds, currency, dollar, and Euro by September and October 2008. Investing in these areas appeared to be the only safer measure against the ailing stock and housing department. President Obama, on January 2009, proposed a federal spending of about 1 trillion dollars in bid to improve the financial crisis state (Kates, 2011:193). On the other side, the Australian government also proposed another package of stimulus whereby the government pledged to give handouts to taxpayers and firms like Nokia in order to increase the level of expenditure on long-term infrastructural projects. This only appeared to work but rather never shook any effect. At this time, the level of inflation in almost every nation was at its peak meaning that Nokia products suffered sales downturn. In Australia, the government responded by presenting the budget to the cabinet addressing inflation as their main issue. Prime Minister Kevin Rudd together with Treasurer Wayne Swan delivered the budget with view of tackling the financial crisis. The Australian governmental response was that, in October 2008, banks received deposits guarantee (Ariff, Farrar, and Khalid, 2011:100). With the economy facing recession, Prime Minister Rudd announced an economic stimulus package that amounted to $ 10.4 billion. The government made the announcement on December 2008 moments before the Christmas spending and as result, Nokia retailers reported booming sales. The company was able to boost its sales by a large margin especially in countries where governments injected money into the economy. Many governments injected huge sums of money into the economy in order to rescue them from succumbing to the global financial crisis. However, the price of global major economic boosters such as oil, continued accelerant. This resulted to increased price of commodities, which in turn increased the rate of inflation worldwide. As a result, rescuing banks did not work against the predominant economic freefall. The American central banks kept rates of interest high. On the side, oil marketers kept the oil price high claiming that it was the only bulwark against inflation. With high interest rates charged by commercial banks, the level of borrowing went down. As a result, most economies underwent stiff financial difficulties. It affected Nokia sales whereby the company recorded losses in some countries. Cognitively, in view of curbing the global financial crisis some countries around the world, both developed and developing, joined forces forming the G20. The G20 put across that, in order to avoid economic recession turning into a slump, interest rates were to reduce drastically (Savona, Kirton and Oldana, 2011:69). The global financial crisis crippled the world economy beyond the expected limits. During this period, Nokia’s Q4 sales forecast went down by 6 percent due to the expected economic slump within the world’s handset market. The company’s mobile and fixed infrastructure markets also experienced intense financial crisis. Even though the financial crisis did not cause or result to the company’s shakeout, it pressed hard and chilling effects among venture capital funding sources. Countries reserve banks ran out of money and resolved to borrowing from international money lending institutions. However, not all was working as all nations faced the same financial meltdown. After the coordinating efforts on winter of 2008-2009, the G20 summed up to resolve the crisis. On second of April 2009, at the London G20 summit, world leaders committed to join concerted efforts in order to raise 3 trillion Euros for fiscal expansion. This was an excess of $1.1 trillion worth of resources to help the International Monetary Fund together with the global institutions with the view of boosting the economy and creating jobs as well as reforming the banks (Savona, Kirton and Oldana, 2011:102). Due to global financial crisis, individual consumers of 3-D data services and WiMAX dropped since most of them reduced their spending. In addition, as Nokia resolved to reduce expenditure in order to withstand the prevailing economic slump, it retrenched 1,700 employees globally. As elaborated, reaching a governmental solvency was one of the worst nightmares the world was not willing to experience. This is because, most country’s budget deficits ballooned during the recession mainly due to lower tax receipts, accelerated non-discretionary welfare spending, and the announced fiscal stimulus packages during the winter of 2008 and 2009 (Savona and Oldana, 2011:92) . Most telecommunication companies, Nokia included, went on a rampage of acquisitions basing their actions on premise that an increase in demand would actually solve overcapacity concerns and eventually resolve massive debt. Financial crisis continued hurting countries worldwide as austerity turned out as the new watchword. As a result, it affected policy decisions and actions of many Nokia outlets in the United Kingdom, euro zone and not so long ago, the United States of America. Austerity saw policy makers encounter a slowing economy globally as well as a systemic crisis in one of the component parts of the global economy, Europe (Kates, 2011:217). In this instance, it came to financial analysts’ attention that, policy makers and their counterparts united but united in stupidity, wedded in austerity that would only make things more badly, not better. The possible way the current financial crisis can affect the developing nations is the possibility of a financial contagion and the presence of spillovers for the country’s stock markets within the emerging markets (Savona and Oldana, 2011:117). The stock market of Russia had to cease trading twice. In addition, the stock exchange market of India fell down by 8 percent in the same day the stock markets of Brazil and the US plunged. Since May 2008, the stock exchange markets of the developed countries have dropped substantially and so are those of the developing countries. What depicts this is the prevalent tumbling of share prices between 12 percent and 19 percent in the stock markets of the US, UK, and Japan in just a single week while at the same time the MSCI emerging markets index dropped by 23 percent. This drop includes the stock markets in countries like Brazil, India, South Africa, and the Peoples Republic of China. The linkages among all these nations joined freely that is why the financial crisis affected all of them. Financial analysts assert that, financial downturn in developed countries may some significant impacts on the developing countries. First, channels of trade and trade prices may show some effects in the financial and economic sector of the developing nations. Growth in both China and India has increased the level of imports and consequently pushed up the demand for products like copper, oil and other related natural resources. This in turn has resulted to greater levels of exports and accordingly increased prices. This increment includes those from Africa as well (Savona and Oldana, 2011:123). Therefore, financial crisis among the developed countries goes all the way to end up inflicting economic meltdowns on innocent African countries where the repercussions exceed limits. Currently, economists say, growth in China and India is depicting signs of slowing down. As a result, this will have knock results among other poorer nations especially those in African Continent. Apart from knock effects inflicted on African nations by financial crisis in developed countries, there is still the issue of remittances. Upon undergoing shocking financial problems, the level of remittances decline drastically among the developing countries (Savona and Oldana, 2011:133). This decline caused major decrease in Nokia handsets and other telecommunication related services. This is because, financial crisis led to depleted financial stocks belonging to the people in developing countries hence, only few economic migrants moved to the developed nations since they were in recession as well. Decline in the level and volume of remittances in the developing countries created a huge gap in domestic growth margins. Domestic economic indicators projected hard economic that resulted to decline in Nokia activities in African markets. The prices of essential commodities are hiking due to increased prices of fuel. Currently, China is undergoing financial turmoil and for the second time it has raised the prices of petrol and diesel by 6 and 7 percent respectively in the first quarter of 2012 (Zheng and Tong, 2010:259). This has come due to staggering rising cost of crude oil. Consequently, Nokia is feeling the pinch since China is one of its biggest market for handsets. Apart from China, other countries around the globe are facing the same ordeal since the global oil supplier, Iran, is undergoing critical tensions. The tension in Iran, analysts assert, aims at ensuring plenty of domestic fuel supplies and helping local refiners meet their goal of cutting the heavy losses incurred frequently. Countries worldwide are crying loud for something to in effect the amendments regarding price controls, especially for the essential commodities. The looming financial crisis has not left big economies like Japan out of picture. Recently, as surprising as it is, Japan’s largest company, Toyota, announced recall of vehicles in three continents and consequently announced closure of five assembling plants in the United States. The recall together with the shut down came to people’s attention as shocking news since Japan is the world’s biggest manufacturer as well as he exporter of motor vehicles (Amyx, 2004:163). Furthermore, financial crisis facing the globe is posing an astonishing threat to the well-being of Japan. This is because, the Standard and Poor threatened to effectively downgrade the Japanese government’s credit rating since Prime Minister Yukio Hatoyama is actually moving too slowly to act on reducing the country’s debt. Moreover, the financial problems are about to leave Japan tarnished since, according to Japanese Automobile Manufacturers Association, China is overtaking Japan as the world’s largest manufacturer of motor vehicles. The condition is seriously afflicting the world as economies of different nations are facing downturn. In conclusion, global financial crisis is inflicting and driving even the developed economies bankrupt. As elaborated, countries around the world are getting weary due to the financial turmoil and its effects. For instance, a Canadian economist Jeff Rubin puts across that, having accessibility to oil is a crucial element of globalization. This is because; the manufacturing areas have shifted to distant places from where the consumers are. Therefore, transporting those goods needs cheap oil in order to make the movement affordable. However, as financial crisis deepen, so is the price of oil, and as a result, the idea of globalization will slowly get out hand as time goes by. Supposedly, this paper has explained cause of the global financial crisis, the world’s response, as well as its effects. Bibliography Amyx, J., 2004. Japan's financial crisis: institutional rigidity and reluctant change. Princeton: Princeton University Press. Ariff, M., Farrar. J. and Khalid, A., 2011. Regulatory Failure and the Global Financial Crisis: An Australian Perspective. Cheltenham: Edward Elgar Publishing. Goldsmith, B., 2009. Handbook for Surviving the Global Financial Crisis. Bedfordshire: Barbara Goldsmith. Kates, S., 2011. The Global Financial Crisis: What Have We Learnt? Cheltenham: Edward Elgar Publishing. 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