A common economic axiom asserts that you can’t cut your way to prosperity. That may be true in general but if you haven’t got the cash to invest then something’s got to give. This is the situation Nokia finds itself in, with the added complication of an apparent need to try to maintain margins. If sales are declining but R&D spend needs to increase and profitability maintained then lowering overheads is the only sustainable strategy.
So today Nokia announced its intention to cut its way to prosperity by lowering its cost base by €600 million over the next couple of years, mainly by shedding up to 10,000 jobs (11% of its ~90k headcount), a process that will cost around €600 million too. Clearly this is less about short term cashflow and more to do with resizing the company such that it can be consistently profitable enough to spend big on R&D, much as Ericsson did when Börje Ekholm took over as CEO.
Worryingly for new Nokia CEO Pekka Lundmark it’s not like his company had been on a hiring spree before he took over. As Light Reading recently observed Nokia has shed 11,000 jobs over the past couple of years, so by the end of 2023 the company will have shrunk by around 20% in five years. That’s clearly not a trend that can continue indefinitely, so the question investors will be asking themselves is whether this is the last of it.
“Nokia now has four fully accountable business groups,” said Lundmark. “Each of them has identified a clear path to sustainable, profitable growth and they are resetting their cost bases to invest in their future. Each business group will aim for technology leadership. In those areas where we choose to compete, we will play to win. We are therefore enhancing product quality and cost competitiveness and investing in the right skills and capabilities.”
“Decisions that may have a potential impact on our employees are never taken lightly. Ensuring we have the right setup and capabilities is a necessary step to deliver sustainable long-term performance. My priority is to ensure that everyone impacted is supported through this process.”
Here are the cunning plans for each of those four business groups, as detailed by Nokia:
Mobile Networks aims to be the indisputable top in wireless mobility networks and associated services. To achieve this goal it will focus on strengthening technology leadership and will further invest in 5G R&D. It will also accelerate efforts to digitalize processes and tools across the value chain.
It will streamline its portfolio and reduce investment levels in mature or declining parts of the portfolio; continue to reduce site fragmentation; reduce overlapping activities and drive further cost efficiencies.
Cloud and Network Services’ customers are shifting away from owning products to consuming outcomes, delivered as-a-service from the cloud. The business group’s priorities and how it operates must align with this shift.
As a result, Cloud and Network Services intends to align portfolios and streamline service models; strengthen technology leadership by refocusing R&D resources to emerging growth opportunities; streamline operations and support functions and increase productivity through reduced site fragmentation.
Network Infrastructure will remain largely unchanged although it will increase its R&D investments and plan for new capabilities in order to meet customer demand and support portfolio innovation. Additionally, by fully realizing the cost efficiencies offered by Nokia’s new operating model it anticipates streamlining SG&A costs as a percentage of sales.
Nokia Technologies will remain largely unchanged. It will continue to carefully manage costs to enable it to invest in future technologies and maintain high levels of profitability.
So mobile networks is going to double down on 5G R&D, the cloudy side is probably going to focus on partnerships with hyperscalers, such as those announced yesterday, and the other two might spend a bit more on R&D, but otherwise stay as they are.
The depressing thing for Nokia investors is that this feels like just the latest chapter in a decline that has been underway for some time. Nokia’s current share price is around half what it was six years ago, which was when Alcatel-Lucent was acquired. While there was always going to be cost and disruption associated with such major M&A, the anticipated synergies and competitive advantages don’t seem to have emerged.
Add to that the fact that Nokia has recently been cutting its R&D spend, and that much of it was misdirected towards FPGA chips prior to that, and you can understand Lundmark’s concern that Nokia will continue to fall behind its rivals.
Frustratingly there are so many opportunities available to Nokia if it can just get its act together. While it may have missed the boat when it comes to the initial 5G rollout in some of the world’s biggest markets, there will be plenty more work needed to make the most of the new technologies and spectrum on offer. And, of course, there’s always 6G.
In many ways the cashflow dilemma faced by Nokia should make it a prime target for acquisition. A deep-pocketed parent company could enable it to catch up in R&D while ensuring it’s not forced to lose too much talent. We keep hearing about how strategically important mobile networks are to the US so one of its companies would seem an obvious choice. Why not Microsoft? After all, everything went so well last time.