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The labors of Lundmark: Herculean turnaround faces new Nokia bossThe labors of Lundmark: Herculean turnaround faces new Nokia boss

Pekka Lundmark will join Nokia as CEO in August, returning to a company he previously worked for 20 years ago. The task ahead of him looks immense.

Iain Morris

June 24, 2020

7 Min Read
The labors of Lundmark: Herculean turnaround faces new Nokia boss

The last time Pekka Lundmark worked for Nokia, 3G was a ground-breaking new mobile technology, Google had just emerged from nerddom into the wider world and facetime was an up-close-and-personal chat rather than a socially distanced videoconference.

Twenty years later, after top jobs in everything from homeware to power plants, Lundmark will return to the Finnish equipment vendor at which he spent the whole of the 1990s. When he quit the firm, he was senior vice president of marketing on the Internet side. He re-joins in August, a month sooner than originally planned, as CEO.

His start date was officially brought forward today after Fortum, the energy company Lundmark is leaving behind, found a replacement who could start on July 1. Lundmark will have to quickly clear his mind of electric vehicle charging, soil remediation and hydroelectric power. A crash course in 5G, optical networks and cloud-native software will be his first priority.

Figure 1: He's smiling now Pekka Lundmark, Nokia's incoming boss, will join the Finnish vendor in August, a month sooner than originally planned. Pekka Lundmark, Nokia's incoming boss, will join the Finnish vendor in August, a month sooner than originally planned.

Two decades is a geological age in technology, and Lundmark will find the tectonic shift so great at Nokia it is almost unrecognizable. Since he left, it has given up making devices, executed a networks merger with Germany's Siemens and, more recently, completed a €15.6 billion ($17.6 billion, at today's exchange rate) takeover of Alcatel-Lucent. 3G is nearly dead (but not 2G). Hardware is as important but unsexy as the average accountant. Software rules.

Nokia does not, though. The Alcatel-Lucent takeover that was supposed to create a muscular rival to China's Huawei has produced a flabby giant, barely profitable in its last fiscal year. Missteps in the all-important 5G market have left Nokia trailing both Huawei and Ericsson. In mid-April 2015, when Nokia confirmed its interest in Alcatel-Lucent, its share price was valued at €7.77. At the start of this year, when corona was still just a brand of Mexican lager, the enlarged company's stock was worth less than half that amount.

Figure 2: Nokia's share price in Helsinki since June 2015 Source: Yahoo Finance Source: Yahoo Finance

Big strategic questions will confront Lundmark as soon as he sets foot in the workplace (or fires up his home computer, as the case may be). The financial press has previously mooted a possible merger with Sweden's Ericsson that would surely horrify customers and competition authorities and probably alarm Ericsson's own shareholders. Another suggestion is that US authorities take a stake in Nokia to produce a more vigorous competitor to Huawei.

Earl Lum, a US semiconductor analyst with EJL Wireless Research, is unconvinced by the rationale. "It would be very difficult to have a publicly traded company that was partially state owned," he told Light Reading during a conversation earlier this year. "There is a conflict there so you either have to buy the whole thing and privatize it or you don't, but there is no halfway that I can see that makes sense. Just because we own part of it doesn't mean anything unless you are willing to dump a whole lot of money, and then you have to hire people."

A more realistic suggestion is for Nokia to mimic Ericsson and flog non-core assets so that it can double down on what it does best. Trouble is, what it does best – IP routing and optical networks – accounted for just a fifth of sales last year. Its young software business is performing well but claims just 12% of total revenues. To compound all this, the fastest-growing customer segment, the relatively new enterprise business, is responsible for only 6% of sales.

On the networks side, most of the money is in mobile access, which hauled in about €11.7 billion ($13.2 billion) in 2019, around half Nokia's entire sales. Unfortunately, this part of the business has been tripped up by the Alcatel-Lucent merger, some bad technical decisions about 5G and related hold-ups at an important supplier, identified as Intel by several analysts.

Assuming a sale of mobile assets is unlikely, Lundmark's main operational challenge will be to restore Nokia's 5G reputation after the recent blunders. Speeding up the transition to lower-cost 5G chips, which Nokia does not currently expect to complete until 2022, seems paramount. The trick will be to pull off this resource-intensive move without endangering Nokia's technology expertise elsewhere.

Dave Kang, an analyst with B. Riley FBR, flagged the risks after Nokia this week revealed that forthcoming job cuts in France will affect research-and-development activities within a former Alcatel-Lucent unit. "Since Alcatel-Lucent develops and markets optical products, Nokia, which has struggled to improve margins in recent years, could be signaling that it will primarily focus on 5G wireless at the expense of the optical business," he said in a research note. "This would be positive for Alcatel-Lucent's optical competitors such as Infinera and Ciena."

Want to know more about 5G? Check out our dedicated 5G content channel here on Light Reading.

That aside, there are some grounds for mobile optimism, including the goodwill of customers that do not want to see another major supplier in trouble while Huawei is under the US cosh.

If Nokia lags in 5G, it looks ahead of either Ericsson or Huawei in "open RAN" (O-RAN), a set of technologies that would allow customers to use radio access network components from a multitude of suppliers. Shortcomings in technical interfaces currently force operators to buy all their gear at the same vendor shop to avoid future interoperability problems. Many are demanding change.

After Nokia this week became the first big RAN vendor to unveil a portfolio of O-RAN-compliant products, Lundmark will have a timely opportunity to establish a lead over his chief rivals in a more competitive market. "We welcome the fact that there will be more players, but we also believe we will still be in a great position to compete and win additional business," said Michael Clever, Nokia's head of edge cloud platforms, in an email response to questions about the latest move.

Nokia might also have the edge in private networks, built for the business campus or factory. Wary of competing against its own customers, Ericsson works only through telco partners, and avoids selling directly to the business. Nokia has no such compunction. That makes it the natural choice for spectrum-licensed industrial groups that do not want to use a public telco network. Lundmark's industry connections could turn out to be extremely helpful.

Rejuvenating mobile without hurting optical, IP routing and the fixed access business will be a tough juggling act. Lundmark could always decide that is futile and put these Alcatel-Lucent assets up for sale, but that would largely undo the merger that has consumed so much effort and expense. Its pitch continues to be that an "end-to-end" portfolio, covering all network domains, gives it an advantage over mobile-only Ericsson and other rivals with a narrower focus. Explaining a U-turn will be hard, even for a new boss.

Management changes often bring a strategy update within a few weeks, especially when investors are demanding swift improvements. If divestment activity is planned, Lundmark will not want to wait for analysts to speculate about the impact of cuts on competitiveness. When Börje Ekholm took control of a then-struggling Ericsson in early 2017, a decision to flog non-mobile assets and offload non-critical staff quickly followed.

For Lundmark, the potential solutions are far less obvious. Mounting geopolitical tension and a coronavirus pandemic are other complications that Ekholm did not have to face when he joined Ericsson.

Still, the Swedish vendor was in similarly flabby shape at the end of 2016, and Ekholm was a self-confessed telecom "rookie" when he became boss. Last year, Ericsson's sales grew 4%, on a constant-currency basis, and it made a small net profit of 1.8 billion Swedish kronor ($170 million) after recording hefty losses for 2017 and 2018. Ekholm's successes will give Nokia's shareholders hope that Lundmark can mount a similar comeback.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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