International Financail Management: Nokia Company Analysis - Research Paper Example

NOKIA COMPANY ANALYSIS Corporate History Nokia began in 1965 as a paper mill belonging to Fredrik Idestam, located at the Tammerkoski Rapids, by thebanks of the Nokianvirta river in south-western Finland. During the next century, the company grew to be a major industrial firm, assuming the additional businesses of rubber (1898), cable (1912), and electronics (1960). The Corporation officially assumed the name Nokia Corporation in 1967 with the merger of the cable, rubber, and electronics businesses. In 1968, the Company began its move to convert its business to mobile communications. A more detailed rendition is given in Appendix A of this report. Firm’s Vision and Strategy The goal of Nokia is embodied in its slogan: formerly “Connecting people”, it is now qualified as “connecting people to what matters – whatever that means for each person – giving them the power to make the most of every moment, everywhere, any time” (Nokia, 2010). This is how Nokia perceives it could “help make the world a better place for everyone.” Nokia has articulated a crisp and dynamic vision: “By 2015, all people will experience the full power of being connected everywhere anytime.” Implicit in this vision is that technology becomes invisible, technical literacy becomes irrelevant, and intuition takes over” (Nokia, 2009). Operations In its report to the SEC, Nokia Corporation described itself as a public, limited liability company incorporated under the laws of Finland (Nokia SEC Form 20-F 2009, 2010). The investment industry, however, calls it the leading provider of mobile devices and services in the world, commanding between 30 to 40 percent of worldwide sales. Table 4 in Appendix B shows the company’s time series income statements for the past 10 years. Total sales were slow and largely moved sideways from 2000 to 2004, but from 2005 the net sales figure took off and increased significantly until 2008. In 2009, however, sales dropped to 2006 levels. The company’s 2009 annual report attributes its greatest sales decrease to Europe, which fell some 20% for the past year. For the year, European sales accounted for 35% (down from 37% a year earlier), Asia-Pacific unchanged at 22%, Greater China with 16% (up from 13%), Middle East and Africa unchanged at 14%, Latin America 7% (down from 10%), and North America 5% (up from 4%) (Nokia, 2010). Table 3 shows Nokia’s percent-of-sales figures for its income statement reports over the past 10 years. Gross profit margins, while slightly lower than last year, remains little change in the span of the past decade. Glancing at the net profit margin, however, shows a decidedly precipitous fall from 13% in 2007, to 7.7% in 2008 and only 0.6% in 2009. Offhand, this may signal an uncontrolled rise in operating expenses, but a closer look shows the largest increase in expenses attributable to research and development, while selling, marketing and administrative expenses remain controlled. The rise in R&D, as shown in the SEC report, was shown to be due to justifiable reasons. In 2009, R&D expenses included a EUR 8 million amortization of acquired intangible assets, considered significant in the company’s bid to improve its convergence capability. In 2008, the R&D expense included EUR 153 m representing contribution of the assets to the Symbian Foundation. Likewise, there were other realized expenses due to restructuring charges (primarily related to closure of the Bochum site in Germany), impairment of assets (EUR 56 m, and gain on the sale of the security appliance business worth EUR 68 million (Nokia SEC 20-F 2009, 2010). Table 1 in the same Appendix shows the ratio analysis for the ten years. Current and quick ratios show the company maintains sufficient liquidity despite the financial crisis. Net working capital grew from 2008, and the cash flow statements (Table 8) shows that cashflow is sourced from operating expenses, indicating that regular operations, and not short term loans or intermittent asset sales, sustain cash flow and net working capital. Activity ratios show greater efficiency through increased inventory turnover, improving collection period, and high sales to assets (both net fixed and total). The drop in profitability and earnings have already been explained as attributable to expenses in R&D, a strategic move to improve production. Operationally, it thus appears that Nokia is taking advantage of the weak market to consolidate and integrate its essential functions to better serve its strategic goals for the coming economic recovery. The company is still well in the black, despite the deepest market drop in 2008 and the sluggish market in 2009. Its escalated operating expenses are seen as strategic moves to improve its capability to advance into convergence technology in 2010 and onwards. Management structure Management structure in Nokia is not hierarchical; instead its management structure follows its organizational structure which is strategically configured to meet the goals it has set out for itself. The diagram that follows, replicated with its detailed company-provided explanations, is shown in Appendix C. It is readily observable from the diagram, however, that the services and devices are overlapped by solutions, which likewise links the three operational units to the marketing function. This creates a tightly integrated, and it is assumed a more effective and efficient machinery by which the company may develop its converged technology in accordance with speculated market wants and needs. Also incorporated in the structure is the closely adjacent situation of the operational structure to the Group Executive Board, and the supporting function of Corporate Development that enables the Corporate Functions (Finance, HR, that address the operational requirements. Corporate governance Corporate governance follows US standards, except that the firm abides also by the Finnish law with respected to equity compensation plans, which must secure shareholder approval at the time of launch. The firms complies with the Finnish Corporate Governance Code, approved as of January 1, 2009 by the Finnish Securities Market Association and NASDAQ OMX Helsinki. Industry competitors Nokia has identified two classes of competitors, the convergent and the traditional. Convergence Technology For the year 2010, Nokia has assessed that the convergence of mobile, internet and PC has come to define the parameter of mobile communications. Market research has described the “smart phone” as “singleness model, long-life cycle, low diluted cost … high entry barrier, outstanding brand affection,” high customer loyalty, and higher profit-margin market (Research and Markets, 2009). To show the extreme competition among providers of converged technology devices and services, the full-function browsers that have come into existence because of the smart phones are listed as follows: Apple Safari, operating on Mac Os X and Windows RIM BlackBerry Browser Google Chrome Mobile, operating on Linux Internet Exporer Mobile, operating on Windows Mozilla Mobile Fire Fox, operating on Linux or Windows Nokia S60 Browser, operating on Symbian Opera Mobile, operating on Windows Palm Blazer, operating on PalmOS Teleca Obigo, operating on various platforms Skyfire, Azingo, SK Innoace Among the providers of converged mobile technology, Nokia considers Apple and RIM as its closest competitors, mainly on the back of iPhone and Blackberry sales which have wrested the top market positions away from Nokia. Thus, Nokia aims to tailor its upscale R&D towards a full integration of PC, mobile, and internet connection that defines converged technology today. Traditional mobile industry Other than the converged mobile industry, the increasing maturity of the traditional mobile devices industry has ushered in competitors that compete mainly on the basis of lowest total cost of ownership for basic voice and text messaging. Some competitors have even chosen to build mobile phones based on commercially available components, software and content at very low cost. Vendors of both legitimate and counterfeit or unlicensed products proliferate, with particular concentration in Asia and other emerging markets. Other competitors avail of protectionist policies of their countries’ governments. Motivation to operate as MNC Nokia is in an industry that “connects people” literally across the globe. The technological development is in strong flux, and the development of platforms for wide use has still to be consolidated. The room for innovation, and thus market penetration, is wide. The motivation for any modern mobile communication company to expand worldwide is extremely appropriate, it is almost a given. In fact, it is one of those few industries where firms must go global if they are to achieve leadership (Root & Smith, 2003, p. 83). Communication goes in pairs: the sender and the receiver of the message. When a message is sent from one person in a country, he is part of a market for mobile communication products and services. Likewise, the person receiving the message may be in another country, thereby defining another market for the same products and services. It is but natural that a mobile communication device and service provider would week to conduct operations in both markets if but for economies of scale. Furthermore, the Company will tend to expand sales as far as possible because it must spread the costs of its high investment in research and development. Foreign exchange exposures The firm deals in euros, thus foreign currency transactions are recorded at the equivalent exchange rates current at the data of the particular transaction. For the year 2009, foreign exchange losses were incurred due to the increase in the cost of hedging and higher volatility of exchange rates on the global foreign exchange market. Nokia is the world leader in mobile communication devices, and thus maintains global operations in all major markets. It is thus necessarily exposed to foreign exchange risks that arise from currencies. Thus all assets and liabilities used in its international operations that are denominated in foreign currencies, together with the cash flows it expects from sales and purchases, all factor into the exchange rate exposure. Operations affected by foreign exchange risk are all dealings and transactions as well as assets maintained outside the Euro zone. Nokia also has substantial foreign-denominated investments in other countries where it has operations, including subsidiaries and other interests, and exposing the euro-denominated equity of Nokia to foreign exchange rate pressures. Furthermore, as the firm is listed in the New York Stock Exchange as American Depositary Shares (ADSs), any dividend declarations denominated in euros will be translated into US dollars upon release to the American shareholders. The exchange rate will impact on the attractiveness of the dividend value to this market, affecting its assessment by cross-border investors. Hedging currency exchange risks The company resorts to derivatives, mainly options and futures, to hedge not only foreign exchange exposures but also interest rate fluctuations and other financial risks. The firm makes use of hedge accounting for “certain forward foreign exchange contracts and options, or option strategies,” under the following qualifications: “where the contracts or options have zero net premium or a net premium paid; “where the critical terms of the bought and sold options within a collar or zero premium structure are the same; and “where the nominal amount of the sold option component is not greater than that of the bought option” (Nokia SEC Form 20-F 2009, 2010, p. F-17). Following are data on the company’s hedging position, to provide an idea about the breadth of its hedging strategy. Its major currency exposures are given in US dollars, Japanese yen, Chinese yuan, and Indian rupee, although its exposures are not limited to these. Source: Nokia SEC form 20-F 2009, 2010, p. F-78 Firm’s Expansion into New Markets The firm has already practically captured somewhere between 30% to 40% of the global market for mobile phone units, and occupies the leadership position with its closest competitor, Samsung, a distant second with less than half its market share (14%). However, Nokia has lost its foothold in the North American market, particularly the US, to Apple whose product iPhone is the best seller because of its multiple functions sought by the American consumers, beyond those offered by Nokia. Nokia has identified North America as priority target market in its development of products, services and solutions, as it sees the current market leader’s products there as the direction for the future for the rest of the world. In reference to this, Nokia has targeted the development of a “a focused, optimally-sized offering of commercially appealing high quality mobile devices with aesthetically pleasing and well-designed hardware and software, an intuitive user interface and a combination of value adding functionalities—such as Internet access, various means of messaging, media, music, entertainment, navigation, location based and other services—that are easy to discover and use” (Nokia SEC Form 20-F 2009, 2010:11). The company aims to do this through the following: 1. The firm will not only rely on its own R&D, but invite collaboration with third parties to more closely design applications and content that not only meet but anticipate local consumers’ requirements, safety and security standards. 2. The firm is also aware that its products, services and solutions should not only comply with customers’ requirements, but also the preference of application developers and content providers who will be invited to collaborate with the company. 3. The firm will develop these products, services and solutions based on robust technology supported by a competitive cost structure and cost-effectiveness from the consumers’ point of view. 4. The firm intends to constantly obtain and efficiently evaluate “a complex array of customer feedback, information on consumer usage patterns, and other personal and consumer data” (Nokia SEC Form F-20 2009, 2010:12). 5 The firm will maintain a consistent stream of focused marketing messages to communicate to its target market the continuing development of its converged devices, services and solutions. Nokia’s Capital Structure Table 1 (Appendix B) shows the debt ratio to have increased significantly from about 45% in 2000 to almost 60% in 2009. A look at the common size balance sheet (Table 6) shows equity to comprise 40% in 2009 (from 55% in 2000) of assets, confirming the debt ratio obtained. This is not surprising. The company recognized an impairment of goodwill and intangible assets during the financial crisis, as the drop in valuations as a result thereof were treated as reductions in equity. Several indicator of impairment of goodwill and intangibles that Nokia has identified per their SEC report include significant negative industry or economic trends that would tend to cause a drop in value in these assets. In the Annual Report for 2009, Nokia has indicated that it intends to address the capital structure issues by a 10% share repurchase to be undertaken in 2010 to improve share price. This will eventually be followed (presumably during economic recovery) by the subsequent issuance of a maximum of 740 million shares through special rights offer, the purpose of which is to develop capital structure (stronger equity position from proceeds of the rights offer), diversify shareholder base, and provide financing for operations. Another observation that may be noted in Table 6 is the shift in debt proportion from current to non-current liabilities. This is an improvement in financial risk, because a greater reliance on short-term liabilities increases the chances of default, and greater reliance on long-term debt decreases default risk. Effects on Market Value Market value is greatly dependent upon the company’s continued earning prospects (Brigham & Ehrhardt, 2008, p. 281). In the past year, Nokia’s ADSs price slid 19% when news that its share of the smartphone market receded to 39.3% from 42.3% a year ago. This is a drop to 12.8 times PE ratio for a stock that usually commands 28.1 times in its market valuation. Recently, however, Nokia shares have begun to show bullish signs as the Company released its new touch-screen phones and improved applications (Kearns & Hoffmann, 2010). The company appears to be prepared to address risks posed against the steady maintenance and growth of these earnings. Nokia’s reliance on hedged contracts and derivatives are well-considered and monitored, and appropriately provide risk coverage without abuse due to speculation. Such tight controls pose little risk to the Company, and in truth allow for necessary risk management against the uncertainties of the currencies markets. On the other hand, the firm is aware of certain market and operational risks to the company’s competitive advantage as mobile communication global leader. Some of these are: 1. Erosion of Nokia brand - The firm needs to comply with requirements by certain mobile network operators that mobile devices be customized to their specifications with certain preferred features, functionalities or design, and co-branding with mobile network operator’s brand. (Presently, this is the case in North America, a market which Nokia lost, and some pockets of the Asia-Pacific region, where it has strong presence now but which it is in threat of losing.) To address this, the firm will have to produce mobile devices in smaller lot sizes. Such customization for local network operations could negatively impact economies of scale, profitability, and after-sales service capabilities. The firm understands that it will have to balance global standards with local requirements, and that its profitability will depend heavily on this balance. 2. Failure to adapt to converged mobile device market - The traditional mobile device market has been characterized by slowing average prices and reduced profitability margins, more intense competition from unbranded competitors, and reduced product differentiation (Nokia SEC F-20 2009, 2010). 3. Failure to maintain market share due to intensifying competition – The advanced market position of high-end, converged mobile communication devices and providers is a barrier and barometer for Nokia to meet. On the other hand, the local providers using assembled components and the unlicensed and illegitimate operators also pose a strong threat to the Company because of their cutthroat prices. Nokia will have to address both in order to maintain its global market leadership, a key factor in its share price. 4. Possibility of IPR Issues – In a quickly developing field such as electronic communications, Nokia is aware that there is always a risk of being subject to IPR claims against it, or itself filing claims against third persons for such intellectual property. 5. Changes in regulations and trade policies – Inasmuch as Nokia operates in various countries, there is always the possibility of sudden policy changes in localities would adversely affect its interests and strategies in that locality. As for international financing, global markets have become integrated to the point of economic and financial contagion becoming a real risk factor worldwide. Many emerging countries also do not afford the vehicles for risk hedging, such as an active derivatives market. Strategic Changes Early in 2008, three business groups – Mobile Phones, Multimedia and Enterprise Solutions, were integrated into a single business group which was given the name Devices and Services. By midyear, Nokia had fully acquired NAVTEQ Corporation, which remains a separate reportable segment of Nokia. Also to be remembered is that April 1, 2007 marks the inclusion of Nokia Siemens Networks in the financial reports of Nokia. Nokia Siemens is jointly owned by Nokia and Siemens. (As a result of the integration of its results with those of Nokia, financial statements for yearend 2007 and those for 2006 and earlier are not directly comparable.) Also, it was already observed that the company underwent restructuring procedures involving the closure of the Bochum site in Germany, and the sale of the security appliance business worth EUR 68 million (Nokia SEC 20-F 2009, 2010). This shows that Nokia, in redirecting its efforts, undertook a strategy of disposing of peripheral businesses and consolidating strategically aligned undertaking. The company has modified its organizational structure in order to better position itself for a world where the mobile device, the Internet, and the computer are fusing together. Nokia believes that the convergence of mobile, internet and PC is the new model of mobile communications. No longer are devices sufficient; what are needed are complete solutions supported by invisible technology. The Company has adopted “consumer relationships” as the new unit if value, because in the era of convergence, consumers avail of services that are “consumed” at the same time they are created. Evaluation of Firm’s Financial Performance and Advice As early as 2001, American consumers have awaited new mobile phone designs and services from Nokia (Charny, 2001), but satisfaction for the clamor was slow in coming. Today, some nine years hence, Nokia appears to have awaken from its lethargy to the truth that failure to meet consumers’ demand for constant innovation will cause it not only the North American market, but its position in the global market. So far, it has taken the necessary steps towards this end, by investing in its R&D capability, consolidating its operations and restructuring its organizational set-up. Nokia’s intention to coordinate with local and technical partners is a strong strategic move, enabling it to better keep in touch with offshore markets and spreading its R&D risk with companies that are research-capable. The company’s avowed mission is to “explore technology frontiers…in order to deliver irresistible personal experiences tomorrow (Nokia Research Center, 2010). Such undertaking could only be embarked upon when costs incurred are justified by returns forthcoming. Thus efficient financing, cost-effective operations, and insightful marketing are critical goals for Nokia to attain together with its bid to maintain its current market leadership. WORDCOUNT = 3,500 excluding title REFERENCES Brigham, E F & Ehrhardt, M C 2008 Financial Management: Theory and Practice, 12th ed. Thomson South-Western, Mason, OH Charny, B 2001 ‘Nokia says next-generation phones on time’, CNET News, 28 June 2001, Accessed 24 March 2010 Kearns, J & Hoffmann, K 2010 ‘Markets Bet on Nokia Resurgence’, BusinessWeek, 7 January 2010, accessed 25 March 2010 Nokia 2010 Nokia in 2009: Review by the Board of Directors and Nokia Annual Accounts, 2009. Accessed 5 April 2010 Nokia 2009, Nokia’s Vision of the Future, accessed 22 March 2010, http://www.nokia.com/NOKIA_COM_1/About_Nokia/Company/Vision_and_Strategy/pdf/NokiaStrategy10.pdf Nokia Home Website 2010 Accessed 18 March 2010, http://www.nokia.com/home Nokia Research Center 2010 Accessed 1 April 2010 Nokia SEC Form 20-F 2009, 2010 Accessed 26 March 2010 < http://www.nokia.com/home> Research and Markets 2009 Global Smart Phone Market and Industry Chain Report, 2008-2009. Accessed 25 March 2010 Root, J & Smith, J 2003 ‘Matching Global Growth to Industry Structure,’ European Business Forum (EBF), issue 14, summer 2003, pp. 82 – 84. Multiple documents: Nokia Annual Accounts, years 2000 to 2008 Nokia SEC Forms 20-F years 2000 to 2008 APPENDIX A History of Nokia Corporation The newly formed Nokia Corporation was ideally positioned for a pioneering role in the early evolution of mobile communications. As European telecommunications markets were deregulated and mobile networks became global, Nokia led the way with some iconic products... 1979: Mobira Oy, early phone maker Radio telephone company Mobira Oy begins life as a joint venture between Nokia and leading Finnish television maker Salora. 1981: The mobile era begins Nordic Mobile Telephone (NMT), the first international mobile phone network, is built. 1982: Nokia makes its first digital telephone switch The Nokia DX200, the company’s first digital telephone switch, goes into operation. 1984: Mobira Talkman launched Nokia launches the Mobira Talkman portable phone. 1987: Mobira Cityman – birth of a classic Nokia launches the Mobira Cityman, the first handheld NMT phone. 1991: GSM – a new mobile standard opens up Nokia equipment is used to make the world’s first GSM call. In 1992, Nokia decided to focus on its telecommunications business. This was probably the most important strategic decision in its history. As adoption of the GSM standard grew, new CEO Jorma Ollila put Nokia at the head of the mobile telephone industry’s global boom – and made it the world leader before the end of the decade... 1992: Jorma Ollila becomes President and CEO Jorma Ollila becomes President and CEO of Nokia, focusing the company on telecommunications. 1992: Nokia’s first GSM handset Nokia launches its first GSM handset, the Nokia 1011. 1994: Nokia Tune is launched Nokia launches the 2100, the first phone to feature the Nokia Tune. 1994: World’s first satellite call The world’s first satellite call is made, using a Nokia GSM handset. 1997: Snake – a classic mobile game The Nokia 6110 is the first phone to feature Nokia’s Snake game. 1998: Nokia leads the world Nokia becomes the world leader in mobile phones. 1999: The Internet goes mobile Nokia launches the worlds first WAP handset, the Nokia 7110. Nokia’s story continues with 3G, mobile multiplayer gaming, multimedia devices and a look to the future... 2002: First 3G phone Nokia launches its first 3G phone, the Nokia 6650. 2003: Nokia launches the N-Gage Mobile gaming goes multiplayer with the N-Gage. 2005: The Nokia Nseries is born Nokia introduces the next generation of multimedia devices, the Nokia Nseries. 2005: The billionth Nokia phone is sold Nokia sells its billionth phone – a Nokia 1100 – in Nigeria. Global mobile phone subscriptions pass 2 billion. 2006: A new President and CEO – Nokia today Olli-Pekka Kallasvuo becomes Nokia’s President and CEO; Jorma Ollila becomes Chairman of Nokia’s board. Nokia and Siemens announce plans for Nokia Siemens Networks. 2007 Nokia recognized as 5th most valued brand in the world. Nokia Siemens Networks commences operations. Nokia launches Ovi, its new internet services brand. 2008 Nokias three mobile device business groups and the supporting horizontal groups are replaced by an integrated business segment, Devices & Services. APPENDIX B Financial Statements & Analysis Spreadsheets APPENDIX C NOKIA’s Organization Strategy and Structure (Reproduced from Nokia’s Home Website) A. Strategy Our competitive advantage now and in the future Leveraging our core strengths: Leading brand Scale Distribution capability Product portfolio excellence Leading market position in most markets Developing new strengths Seamless, delightful and effortless user experiences Vibrant partner ecosystem People and places enriched solutions Direct and continuous consumer relationships Regain market position in all markets (NA) Our Goal: To become the leading provider of mobile solutions, because… in the mobile converged internet space consumers expect seamlessly integrated solutions to deliver these solutions requires continuous relationships with consumers and vibrant ecosystems Our Strategy: New focus and clear prioritization Create irresistible solutions through vibrant ecosystems with our partners User Experience at the heart of all we execute Continuing our transformation Intensify pulse on consumer needs Bringing the best devices to all markets Smart context aware services with People and Places B. Organization Structure Our Devices unit is responsible for developing and managing our portfolio of mobile devices, which we make for all major consumer segments. Services designs and develops Internet services that enrich the experience people have with their mobile devices and the web. Messaging, music, maps, media as well as Ovi developer tools are key focus areas as we continue to expand our services offering to consumers and create opportunities for developers and content providers. Solutions is responsible for driving Nokias offering of solutions, where the mobile device, personalized services and content are integrated into a unique and compelling package for the consumer. The unit is tasked with concepting and creating such solutions. Markets manages our supply chains, sales channels, brand and marketing activities and is responsible for delivering our devices, services and solutions to the consumer. Corporate Development provides operational support to Devices, Services, Solutions and Markets, and is also responsible for exploring corporate strategic and future growth opportunities. Nokia Siemens Networks provides wireless and fixed network infrastructure, communications and networks service platforms, as well as professional services to operators and service providers. NAVTEQ is a leading provider of comprehensive digital map data for automotive navigation systems, mobile navigation devices, Internet-based mapping applications, and government and business solutions. NAVTEQs map data will be an important part of the Nokia Maps service that brings downloadable maps, voice-guided navigation and other context-aware web services to peoples pockets. Read More