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Nokia braves out economic crunch

Posted: 23 Mar 2009 ?? ?Print Version ?Bookmark and Share

Keywords:market handset? economic recession? Nokia layoff?

After years of strong growth and overwhelming domination of the handset market, Nokia Corp. is entering unknown territory as its core product segment matures, leaving it to reorganize and transform operations in the midst of a sweeping recession.

Although the company remains a strong competitor in all of its business segmentsincluding the wireless infrastructure market, where it has a joint venture with Siemens AGthe reorganization plans announced in recent months indicate Nokia is feeling the heat from the global economic meltdown.

Its future now hangs on how welland how quicklypresident and CEO Olli-Pekka Kallasvuo can reduce operating costs, arrest margin erosion and fend off rivals, even as he works to transform the company into a total connectivity solutions provider.

More to come
Nokia's employees might cringe to hear it, but the latest round of job cuts likely won't be the last. Analysts expect Nokia will need to take further steps to improve its operating position, which means its employees should get ready to say goodbye to more than the 1,700 co-workers who will lose their jobs as a result of the just-announced cut.

The math is simple. Nokia had approximately 126,000 employees at the end of 2008, up 12 percent from 2007 and 84 percent from 2006. While a major part of the payroll increase was due to acquisitions and the merger of its communications equipment business with a Siemens unit, Nokia's current workforce was built to support a fast-growing sales base, rather than the declining market the company now faces.

Nokia estimates total worldwide mobile handset shipments will decline about 10 percent in 2009 from 1.2 billion units in 2008, but even this gloomy forecast may be too optimistic if the economy fails to pick up in the second half. If a worst-case scenario develops, Nokia may have to slash costs even more than already announced, according to analysts.

"While we are encouraged Nokia is beginning to take tangible actions to reduce its cost structure, the moves are unlikely to have a noticeable impact on results until 2H 09," Standard & Poor's analyst Jason Willey said in a report.

"We remain concerned with the handset outlook for 2009, increased pressure from Korean and Chinese vendors, and market share losses at Nokia Siemens," Willey added. "We believe there remains room for more aggressive actions, which we expect will prove necessary as the global handset demand environment remains under pressure."

Nokia executives appear to agree, having dropped hints in recent months that layoffs and other cost-control initiatives will escalate this year. For example, the company aims to slash operating costs in the devices and services division by as much as 700 million euros ($917 million), with 50 percent of the reduction taking place in 2009 and the rest unfolding through 2010. The rationalization would occur through cuts in R&D, sales and marketing, and general and administrative functions, according to Nokia chief financial officer Rick Simonson.

"In R&D, we will continue to sharpen our focus on portfolio pruning and prioritization," Simonson said during the company's fourth-quarter conference call on Jan. 22. "In sales and marketing, we will cut some product program spending, and in the general and administrative area, every shared unit has identified and is acting on expense reductions of at least 10 percent in the first half of 2009."

Nokia is also scouting additional savings in traditional places like component procurement. "The unprecedented currency volatility we have recently experienced is impacting our costs," Nokia said in a Securities and Exchange filing March 5. "We are taking action to reduce our devices-sourcing costs in Japanese yen, including price negotiations with our suppliers and shifting the sourcing of certain components to non-Japanese suppliers."

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