More Finns Finished

The continuing downturn in the wireless network infrastructure market is the main catalyst for today's decision by Nokia Corp. (NYSE: NOK) to cut 1,800 staff, more than 10 percent of the total, from its network division (see Nokia Networks Axes 1,800).

According to Thomas Jonsson, communications director for the Finnish firm's network infrastructure business, the cuts will leave the division with approximately 15,000 employees, down from 17,361 at the end of 2002. The majority of the redundancies will affect Finnish staff, where 1,100 positions will be lost. About 100 jobs will be lost throughout the U.S., while the remaining 600 jobs will go in Western Europe, mostly Germany and Italy.

Today’s announcement follows February's cull of 550 staff, which affected personnel in the U.S., Sweden, Finland, and the U.K. (see Nokia Cuts R&D). And earlier this week the new CEO at LM Ericsson (Nasdaq: ERICY), Carl-Henric Svanberg, hinted that further job cuts are likely at the Swedish vendor, due to the lack of recovery signs in the wireless networks market (see Ericsson: Market Still Waning).

Analysts were unsurprised by Nokia's decision. “I was expecting this,” says Devine Kofiloto, senior research analyst at EMC. “This is Nokia's way of gearing up for the worst, and fits in with its previous announcements and general strategy this year.”

The reduction follow's last month’s warning by Nokia that its network division will be reporting sales up to 20 percent lower than originally predicted for the first quarter of this year, leading to a substantial pro forma operating loss (see Network Warning From Nokia).

Nokia Networks’ profits have been on a steep decline since the beginning of 2001, as the table below illustrates:

Table 1: Financial Performance at Nokia Networks ($ million)
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02
Revenue 2,202 2,065 1,807 2,132 1,564 1,606 1,683 2,270
Operating Profit 396 327 169 277 159 186 87 21
Operating Profit Margin ���������� 18% ������� 16% ����������� 9% ���������� 13% ��������� 10% ��������� 12% ������������ 5% ������������ 1%
Source: Company data, Unstrung Insider

“The reductions reflect the market conditions that we have had and are still having,” Jonsson tells Unstrung. “A significant amount of these cuts will affect our R&D departments, while operations, sales, and marketing will also be hit.”

Jonsson claims today’s cuts will be the last from the division this year. “As far as we can see, this is enough. We don’t expect to make any further reductions under the current market conditions.”

Jonsson says the cuts will result in a smaller range of “product configurations,” and will lead the company to focus on its key network technologies: GSM, GPRS, EDGE, and W-CDMA. “We definitely aren’t abandoning any of our core strategies in terms of developing products for these networks,” he says. "We don’t need to have the same variety of offerings we thought necessary 24 months ago."

As Nokia is not in the CDMA infrastructure market, which technology is being sacrificed? "If they are concentrating on those four areas then that leaves TETRA as a possibility,” comments Kofiloto. “I get the feeling they are thinking about completely pulling out and closing the whole thing down.”

TETRA (TErrestrial Trunked RAdio) has had some success in China recently (see Nokia Wins China Tetra Deal and Nokia Tetras in China), but Nokia would not comment on its future ahead of the April 17 first-quarter results announcement.

Despite the slump in the market and dramatically reduced sales, Nokia remains the only wireless network equipment vendor to have shown a profit for every quarter in the previous two years, notes Unstrung research analyst, Gabriel Brown: “Nokia profits have trended downward for the past eight quarters, but most of its competitors have been so far underwater that it’s scary. So, kudos to Nokia for turning a profit thus far.”

The Finnish giant is currently the second largest manufacturer of wireless networking gear, despite its claim that today's staff cuts will enable it to strengthen its "leadership position." According to recent Unstrung Insider reports into the global infrastructure market (November and December 2002), LM Ericsson (Nasdaq: ERICY) is the undisputed world number one, with a market share of 32 percent during the 12-month period from the fourth quarter 2001 through the third quarter 2002. Nokia trails Ericsson by a whopping 19 percent and has Siemens AG (NYSE: SI; Frankfurt: SIE) and Lucent Technologies Inc. (NYSE: LU) breathing down its neck, as shown in the chart below:

— Justin Springham, Senior Editor, Europe, Unstrung

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