Friday, April 13, 2012

Nokia's Nightmare in Emerging Markets



Nokia's Nightmare Scenario




12:05 AM -- The most alarming part about Nokia Corp. (NYSE: NOK)'s profit warning on Wednesday is that it revealed the extent to which the company has been caught off guard in emerging markets and how its strongholds there are crumbling. (See Nokia Dives on Lowered Device Outlook.)

The company now expects an operating margin of negative 3 percentage points in the first quarter as certain factors affected its device business "to a greater extent than previously expected." One of those factors was "competitive industry dynamics," which hit Nokia's net sales, particularly in Africa, China, India and the Middle East.

When I saw those markets flagged up, my first thought was, "Wait, isn't that where Nokia is doingwell?"

Those are indeed the regions where Nokia is strong, according to Stela Bokun, Pyramid Research 's senior analyst and device market specialist, especially Africa and the Middle East. (See Nokia's Bright Spot.)

"However, those are also the regions that are becoming more and more competitive as we speak. If you see what’s going on in Africa, for instance, pressure from Samsung and from fake phones (gray market) is definitely getting stronger," she said. And she saw this trend back in July last year. (See Analyst: Nokia Faces Low-End Threat.)

"While Nokia was investing a lot of time and effort to launch high-end Lumia phones in the U.S. and Western Europe, it seems they have neglected the trends that were going on in the emerging world (penetration of cheap Android phones in particular).

"Don’t get me wrong," she added. "Nokia is still very strong in emerging markets, but the place is getting more crowded."

That means Nokia is well into the nightmare scenario of having to fight for its life to win a share of the high-end smartphone market while at the same time race to the price bottom to defend its position in emerging markets from low-cost competitors.

Nokia CEO Stephen Elop said on a call with media and analysts on Wednesday that it will push down prices of Windows Phone devices. "We're accelerating the rate we can push Windows Phone devices down market."

But will that be enough for Nokia to battle the growing armies of cheap Android smartphones in these markets?

Elop pointed to the 1,000-yuan (about US$150) Androids proliferating in China as a prime example of the low-cost smartphone phenomenon Nokia faces.

"The rate at which this is happening is beyond what we expected," he said.

Today's financial warning showed more than anything else that Nokia needs to put more focus and resources into the low end of the smartphone market.

— Michelle Donegan, European Editor, Light Reading Mobile





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