Nokia’s surprise announcement of massive new spending cuts and 10,000 more layoffs had observers cautioning the beleaguered mobile phone giant is at a crossroads that will determine if it sinks or swims.
Nokia, which only recently lost the world number one ranking it had held for 14 years, dramatically changed its strategy a year and a half ago when the then new chief executive, Stephen Elop, warned it was “standing on a burning platform” and needed to immediately shift course.
But after the company on Thursday suddenly said new big spending cuts and another 10,000 job cuts would be needed on top of the some 12,000 layoffs already announced since the shift, some observers said the company appeared to be slowly committing suicide.
“Nokia jumped from a burning oil platform and sank like a stone,” the STT news agency said, summing up Thursday’s announcement.
The Finnish company’s new strategy involved phasing out its Symbian smartphones in favour of a partnership with Microsoft.
That alliance has produced a first line of Lumia smartphones, which Nokia is counting on to help it survive in a rapidly changing landscape marked by stiff competition from RiM’s Blackberry, Apple’s iPhone and handsets running Google’s Android platform.
“I believe it was the wrong strategy from the beginning,” Andalys Oy analyst Ari Hakkarainen told AFP, stressing though that now that Nokia had shifted course it was too late to turn the tanker around.
“They have chosen this strategy and they have invested everything that Nokia has in the new strategy. Basically, they must succeed or die,” he said.
“They are at a crossroads,” agreed Pohjola Bank analyst Hannu Rauhala, adding that it was hard to predict Nokia’s future since “the visibility of the business is very poor.”
The company, which in 2008 enjoyed more than 40 percent of the global mobile phone market, was already struggling to maintain its leading position when it entered the Microsoft partnership.
Since that deal it has been bumped by Samsung as king on the hill and reportedly has just around 20 percent market share.
“Nokia took a calculated risk and they knew that (the shift) would be very painful and that Nokia would lose market share in the short term, but in the long term of course, they have the reasoning that Nokia will bounce back,” Hakkarainen said.
The company’s announcement Thursday that it would implement an additional 1.6 billion euros ($2.0 billion) in cost cuts by the end of 2013, shutting down factories in Germany, Canada and Finland and letting go 10,000 more employees was meanwhile taken as a bad sign by many.
“Perhaps they should have enacted these reforms earlier. Investors who are looking for long-term profit are not convinced that Nokia is a company that can deliver in the future,” Dividend House analyst Arje Rimon told AFP.
Nokia’s stock price plunged by as much as 16 percent Thursday and on Friday, ratings agency Moody’s downgraded the company’s long-term credit rating to junk status, following in the footsteps of Fitch and Standard and Poor’s.
“Today’s rating action reflects our view that Nokia’s far-reaching restructuring plan … delineates a scale of earnings pressure and cash consumption that is larger than we had previously assumed,” Moody’s said, adding though that it thought the restructuring was “positive and necessary.”
Analysts too were caught off guard by the scope of Thursday’s announcement.
“I thought it would be smaller… This shows the market situation is worse than we thought,” Rauhala said.
Many observers meanwhile applauded Nokia for its decision to slim down in a bid to improve its competitiveness.
Juhani Risku, previously in charge of Nokia innovation, told AFP he thought it was “an excellent move to make the company smaller.”
“Hopefully, it will make the company more competitive, as it will have to sell fewer phones to cover its fixed costs,” agreed Nomura Securities analyst Richard Windsor.
At the end of March, Nokia counted 122,148 employees worldwide, including the nearly 70,000 working for Nokia Siemens Network, but those numbers do not take into account the tens of thousands of layoffs announced but not yet put into effect.
As Nokia continues to trim down and in light of its share price — which since Elop announced the strategy shift has fallen from above 8.0 euros to below 2.0 euros — has meanwhile made the company a prime takeover target, observers say.
“That’s certainly possible,” Rauhala said, mentioning Samsung, Microsoft and Facebook as names circulating as potential buyers.
“Nokia has many interesting assets (and) its brand is still very good,” he said.
According to Andalys Oy analyst Hakkarainen, however, the company’s brand might be so strong that it would frighten off its direct competitors, which might not want to pay the price for another brand or want the hassle with regulators.
“But if I was an Asian, or let’s say a Chinese manufacturer, I would be very interested,” he told AFP.