Nokia has revealed it will cut 1,233 jobs in France under its latest savings program as it tries to boost profitability following a disappointing run of quarterly earnings results.

The Finnish equipment vendor confirmed an earlier report by Reuters, which said the layoffs would equal about one-third of the workforce at French subsidiary Alcatel-Lucent International.

Of Nokia's 5,138 employees in France, around 3,640 work for Alcatel-Lucent International, according to the Reuters report.

A spokesperson for the company subsequently told Light Reading that the cuts would affect R&D and central functions at two French facilities.

"The project, which Nokia presented to the European and French Works councils (ALU-I) today, is expected to lead to an estimated reduction of roughly 1,233 positions across R&D and central functions at Nokia's Paris-Saclay and Lannion sites," said the company in an emailed statement.

The company said the plans would "streamline" activities in France in line with a global cost-saving program. "The aim is to achieve a best-in-class operating model globally, increase R&D productivity and agility to strengthen the company's competitive position and secure long-term performance," it said.

Average headcount at the Finnish firm fell by nearly 5,000 roles in 2019, leaving Nokia with 98,322 employees, according to its most recent annual report.

Despite those reductions, Nokia's gross profit margin shrank 1.7 percentage points last year, to 35.7%, and the business was barely profitable, managing net income of just €18 million ($20.2 million) on sales of €23.3 billion ($26.1 billion).

Last October, Nokia was forced to slash earnings guidance after it appeared to fall behind rivals Huawei and Ericsson in the market for new 5G mobile network equipment.

Its operating margin target was cut to just 9.5% for the 2020 fiscal year from a previous forecast of 12-16%.

Before then, Nokia had been aiming to cut annual costs by €700 million ($785 million) between 2018 and 2020, but this target was also revised down, to around €500 million ($561 million), because of the need to invest more in the struggling 5G business.

CEO Rajeev Suri acknowledged that a decision to use more expensive, programmable components for its 5G products had torn into profit margins. He also said Nokia had been "let down" by delays at one of its suppliers – subsequently identified as Intel by analysts.

The vendor is now switching to the application-specific integrated circuits favored by rivals, although it does not expect to complete this transition until late 2022.

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Although profitability improved in the recent first quarter, news of cuts to the R&D department is a potential concern given the market's perception that Nokia has lagged Huawei and Ericsson in 5G technology.

It is the only one of the "big five" (Cisco, Ericsson, Huawei, Nokia and ZTE) whose R&D investments have markedly declined in the last couple of years, although it does spend a higher percentage of revenues than any of its rivals.

Figure 1: R&D spending ($M) (Source: companies.)

One risk is that a decision to increase investments in 5G leads to cuts in other product areas. Since the completion of its 2016 merger with Alcatel-Lucent, Nokia has a far more diverse portfolio than Ericsson, which has sold off media assets and become even more focused on mobile infrastructure under its latest strategy.

During an interview with Light Reading in 2019, Suri, who will step down later this year, denied that Nokia was too thinly spread from an R&D perspective. "We have a better mix of low-cost countries after looking at where talent is available," he said. "It has helped to not have everything in Finland but use Poland, Greece and other parts of Europe."

Today's announcement has reportedly met with a backlash from trade union groups in France, who said it was "contrary to all the commitments made by Nokia in France," according to Reuters.

At the time of its Alcatel-Lucent takeover deal, Nokia promised it would not cut French jobs for a two-year period and said France would be an essential part of its R&D plans for 5G technology.

In its statement, Nokia said the cuts would not affect employees working for other French affiliates, including Radio Frequency Systems (RFS), Nokia Bell Labs France (NBLF) and Alcatel Submarine Networks (ASN).

"We will do our best to make sure that those affected are treated fairly and respectfully, and that they fully understand the options and support available to them," said the company. "We intend to introduce support programs to help employees transition to new positions or careers as much as possible."

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— Iain Morris, International Editor, Light Reading