Nokia heading in the wrong direction
The bleak news from Nokia earlier this month caught experts off guard. Until then, many believed that the Finnish telecom equipment provider would fare better than its competitor Ericsson in the third quarter. After all, CEO Pekka Lundmark had implemented drastic measures three years ago to free up funds for essential investments in the new 5G technology and restore the company's competitiveness. This effort began to pay off, especially in the lucrative US market, where Nokia managed to regain some lost ground with the implementation of the new standards.
Furthermore, in Espoo and Stockholm, the extensive blocking of the Chinese rival Huawei in Western markets was also taken into account. Huawei, once a global market leader just a few years ago, was sidelined in the West due to security concerns raised by the US. The resulting shift towards a de facto duopoly faced by telecom network operators led to price increases in new network technology, particularly in the US. But this effect was less pronounced in Europe, where customers of Nokia and Ericsson find it challenging to pass on rising costs to their clients. Instead, telecom companies hit the brakes on investments in an uncertain economic environment.
Focus on margins
As a result, there has been a sharp decline in revenue, especially for Nokia, with a core business drop of around 20%, which is even more severe than Ericsson's. The cost inflation due to research and development led to a 70% plummet in profits for the Finns. Lundmark is forced to implement another cost-cutting program, including significant job cuts, to maintain investor confidence in the medium-term margin targets. Nonetheless, saving against a backdrop of persistent revenue weakness is not a confidence-inspiring measure, as evidenced by an 8% decline in Nokia's stock price over the last six days.
It turns out that politically motivated structural shifts in the telecom equipment market have not had the positive impacts the management had hoped for at Nokia and Ericsson. A lucrative investment cycle in the US, which is naturally finite, is being offset by declining revenues in China, where the Western security campaign has backfired on the Scandinavian telecom equipment providers. As the world's second-largest 5G market, China is firmly in the hands of domestic providers like Huawei and ZTE. Moreover, technologically advanced Huawei continues to lead in many global markets. While Latin America and Africa may not entirely make up for the demand in Western markets, and related countries such as India or Australia have effectively excluded Chinese providers, these regions are likely to fuel a growth in telecommunications infrastructure, particularly in mobile networks.
Not much to gain
However, it is doubtful that there is much to gain for the Scandinavian providers, given their significant cost disadvantages. It is not without reason that Ericsson has been trying to secure business in the Middle East and Asia using questionable methods, attempting to gain contracts that were otherwise unachievable through fair competition. Consequently, the company finds itself entangled in an apparently deep corruption quagmire. If Nokia and Ericsson want to balance their global footprint more effectively to counter the cyclical nature of telecommunications investments, they will have to make significant adjustments to their cost base.
To regain stability on this precarious path, more than just cost-cutting measures are needed. In addition to the core business, where Nokia previously achieved a critical size through a massive merger with Alcatel-Lucent and previously Siemens Networks, having a second revenue stream is essential to cushion fluctuations in the core business. With its early foray into the rapidly growing area of private enterprise networks, Nokia has already positioned itself well for this.