Nokia is looking to grow global cellular share by selling more entry-level handsets in emerging markets, like India. With low-cost rivals pushing a pricing war, is the Finnish mobile phone maker running off in the wrong direction again?
The company is the top supplier of entry-level handset phones in the faster growth markets of Africa, Asia-Pacific, and India, according to telecom analysts at VisionGain. With a number of new players crowding its city markets, Nokia (NOK) is directing more entry-level handset and features phones to lower-income, semi-urban and rural areas to gain more share.
Nokia would deny it, but there’s a sense of urgency behind its bigger push into emerging markets. Though the global handset giant was flush with cash (net of debt) of $4.2 billion at quarter-ending September, demand for Nokia high-end smartphones in developed corridors is lagging — especially in Western Europe, which accounted for approximately 32 percent of its aggregate $9.79 billion in mobile phone sales for third-quarter 2010 (1 EURO = $1.365).
Believing its established brand image was relatively insulated from upstarts, like the Blackberry from Research in Motion (RIMM), the company got caught napping as converging technological forces were changing handset users’ behavior — especially consumers’ growing appetite for “smarter” mobile phones with more advanced features, capable of advanced multimedia to web-enabled applications (apps), from online banking to navigation.
Indolence and executed missteps in the last three years vitiated Nokia’s global dominance in cellular phone sales, prompting a 900 basis point drop in market share to a new low of 30 percent:
- In October 2010, South Korea’s Samsung and Sony Ericsson shuttered developer activities for Nokia’s smartphone operating system Symbian, in favor of Google’s (GOOG) Android application ecosystem – troubling evidence of a dearth of OEM confidence in Nokia’s brand appeal.
- International Data Corporation (IDC) analyst Francisco Jeronimo predicts unit volume of Android phones sold will outsell Nokia smartphones equipped with its Symbian OS in Western Europe by 2012, with the Chinese market close behind.
Despite an expanding presence on the U.S. West coast and ambitious advertising campaigns, the company has failed to grab a meaningful share of the U.S. smartphone market. In fact, recent share of shipments was a pitiful 3.4 percent, down from more than 15 percent back in 2007, according to research firm IDC. Additionally, more than 75 percent of new Apple (APPL) iPhone smartphone users reported being “very satisfied” with their purchases, according to a November Changeway survey — suggesting the U.S. will remain a cellular “dead zone” for Nokia.
“Three things cannot be long hidden: the sun, the moon, and the truth.” ~ Hindu Prince Gautama Siddharta, founder of Buddhism (563 – 483 B.C.)
China and India are Nokia’s two most important emerging markets, contributing approximately 14.6 percent and 6.8 percent to annual sales. The company has historically leveraged its core advantages — brand recognition, scope of product portfolio, and extensive distribution systems — to thwart competitive threats in these markets; but, as hardware and software costs continue to fall — so do barriers to entry.
“Numerous microvendors have benefited from the surging demand for low-cost 2G phones in rural and suburban markets, said Strategy Analytics researcher Neil Shah. And, pose significant competition for established players by being able to offer cheaper entry-level phones.
Shah presciently noted, too, that innovative features tailored to satisfy local needs — such as additional battery power (big demand in electricity-starved rural locales) — have helped Asian handset makers establish footprints in China and India.
Capitalizing on consumer demand for built-in UV lights capable of detecting counterfeit bills Chinese handset maker Tianyu has cornered 7.5 percent of its domestic smartphone market, up from less than two percent in late 2007.
Though disputed by Nokia, market consultant IDC disclosed back in September that Nokia’s share of the Indian handset market fell to 36.3 percent at the end of June, from 54 percent in December 2009. Again, management erred in predicting the demands of local consumers. As reported by The Economic Times, India:
“The numbers are particularly embarrassing for Nokia, which commanded a market share of more than 70% just two years ago. By contrast , homegrown handset makers had a meager 0.9% share of the market in 2008, their stupendous rise almost entirely on the back of socalled dual-SIM phones (even triple-SIM ) which allowed thrifty consumers to have two numbers on a single device and effectively exploit plunging tariffs in a cut-throat mobile services market.
Data compiled by IDC showed that nearly 39% of all handsets sold in the country during January to June this year were dual-SIM phones, a segment that Nokia did not have a single model until recently. Nokia introduced its first dual-SIM handset — C2 — in India in August, a move some analysts called a ‘startlingly late reaction’.”
The popular Nokia-1100 series, which has sold more than 200 million units since launch back in 2003, is advertised for sale in India — with texting and basic web browsing — at a bargain price of $26 (1,200 rupees). Micromax has carved out a 4 percent share of the market in India by offering similar mobile devices priced to sell for $18 (800 rupees).
Indian vendor Karbonn, with a 3 percent share, is now aggressively moving to muscle in on Nokia’s “customer retention” business, the second-time buyer looking for an upgrade to a mid-entry, multimedia phone (camera, radio and MP3). Some dealers have priced the Karbonn K444 to sell for as little as $42 (1,900 rupees).
Where Nokia still trumps the upstart carriers is in customer service. The company has more than 1,000 customer service centers in India, reaching more than 650 towns. Additionally, mobile vans are available for travel to isolated villages.
Karbonn, by comparison, has only 550 service centers — not nearly enough care centers to guard against customer churn as it looks to rapidly expand, predicts CyberMedia columnist Ritu Singh.
Nokia hasn’t completely nodded off in developing innovative products that meet customers’ needs. For example, Nokia 2000 version handsets in developing economies are enabled with consumer-specific features:
- Nokia Life Tools comes with a suite of Agriculture services, where farmers can download daily news feeds on weather or commodity and fertilizer prices; students can learn English through the Educational option. Subscription costs in India per service are cheap, about 66 cents per month!
Falling manufacturing costs and increased competition are blurring the distinction between entry-level and feature phones. Winning share in this segment means discounting price — a no-win endgame.
A message to Nokia senior management: The battle to win back share from Andoid OS smartphones or Apple iPhones won’t be won in the hinterlands.
“Because of Nokia’s scale, brand, distribution channel, and strategic alignment with operators, we have always had the potential to create a strong, highly profitable consumer ecosystem,” newly-installed chief executive Stephen Elop told analysts on the third-quarter earnings call.
The jury is still out on Elop’s verdict, but the evidence supporting his optimism isn’t encouraging:
- Stocking its software shelves with acquired third-party apps and services hasn’t contributed much to the bottom-line, too. In July 2008, the company completed its $8.1 billion purchase of digital mapping and navigation-content services company Navteq — at a $5.4 billion premium over book value!
- The company now provides free location-based software for selected smartphones, believing it will help strengthen brand competitiveness (support their selling prices) — and contribute a recurring monthly revenue stream to handset operations. Though year-date sales increased 56 percent to $946 million, segment profitability has proven elusive: losses totaled $281.2 million during nine-month period ended September.
Software service are unlikely to infuse enough cash flow necessary to support development of next-generation mobile devices from Nokia, across all market segments. Nor will recurring service revenues underwrite the aggressive price discounting vital to share growth in emerging markets.
Article via BNET
