By Sohini Bagchi
Chief executive of Nokia Rajeev Suri is stepping down from his leadership role after the company struggled during his half-decade tenure to gain foothold in the key markets with 5G mobile equipment. The company has faced fierce competition from China’s Huawei and Sweden’s Ericsson in recent years. The Finnish networking giant has now elected Pekka Lundmark, President and CEO of energy firm Fortum, as the President and Chief Executive Officer of Nokia.
While Nokia had until now failed to create a revolution in 5G mobile network, question remains, would Suri’s exit solve the long pending issue? Would Nokia be able to consistently deliver robust shareholder returns, renew the company’s strategy, and reposition itself as a strong player in the market after Suri leaves his current position on August 31 this year? At the same time, would new CEO Pekka Lundmark recreate Nokia’s 5G magic and infuse new energy in the company? (It’s a different question that he comes from the energy sector) or, is Nokia’s 5G problem needs to be seen in the wider canvas – bigger than the CEO appointments and failures – that well extends to the market, investors and the broader ecosystem.
Can new CEO infuse new energy in Nokia?
The company, like its rivals Sweden-based Ericsson and Chinese giant Huawei, has shifted its attention in recent years to aggressively build a portfolio of technologies and products for 5G networks. But some analysts have argued that Nokia’s move to buy Alcatel-Lucent, maker of telecom equipments, for $16.6 billion in 2015 ($18 billion on closing) distracted it from becoming the market leader for 5G products and technologies.
The Finnish telecom networking major seems optimistic with Suri’s departure. The company’s board said, in Lundmark, they get a leader who has “consistently delivered robust total shareholder returns, successfully renewed the company’s strategy, and positioned it to be a strong player in the transforming global energy sector.”
In a statement, Risto Siilasmaa, Nokia Board Chair said, “With the acquisition of Alcatel-Lucent behind us and the world of 5G in front of us, I am pleased that Pekka has agreed to join Nokia.
“…together we can create shareholder value by delivering on Nokia’s mission to create the technology to connect the world. I am confident that the company is well-positioned for the 5G era and it is my goal to ensure that we meet our commitments to our customers, employees, shareholders and other stakeholders,” he added.
Thanking everyone on his parting note, Suri said, “I leave the company with a belief that a return to better performance is on the horizon and with pride for what we have accomplished over time. Pekka is an excellent choice for Nokia. I look forward to working with him on a smooth transition and wish him the best success in his new role.”
Nokia’s 5G problem
Nokia’s 5G problem is not just a change of CEO issue. It is ingrained in the broader problems of the market. A report by InvestorPlace contributor Vince Martin states that investors don’t trust Nokia.
Martin makes an interesting point as he says, “I’ve long been skeptical of the turnaround case for Nokia stock for two core reasons. This is a company with a long history of overpromising and under delivering.”
The mega deal with Alcatel-Lucent is certainly a case in point. In December this year, Rajeev Suri told Bloomberg in an interview that part of the company’s problem was that its acquisition of Alcatel-Lucent created “more work,” as the company had to migrate all of the legacy Alcatel-Lucent products to the Nokia nameplate. But that acquisition was completed three years ago, and certainly, Suri was aware of that issue when the company reiterated guidance in August.
This instantly implies a gap in top management collaboration. Last year, there is an issue with its go-to-market strategy as well, a reason it said it was losing to Ericsson. The networking major went for an overhaul in that area but no real growth happened. Again with Huawei’s growth prospects are in question for security concerns, there was no other competitor besides Ericsson. And yet Nokia failed to capitalize onto that opportunity. The question investors are asking is: Then when will Nokia show some real growth and demonstrate clear progress on the 5G front in order to win back the trust of investors.
In October, Nokia angered investors when it suspended its dividend and cut its earnings guidance, wiping 23% of the share price in a single day. Over the past 12 months, the company had reportedly lost about a third of its market value.
This was in a response to Bhaskar Gorti, the head of Nokia’s software business’, statement that Nokia did not have a 5G problem. Gorti’s claims were refuted somewhat by Suri. On the company’s third quarter earnings call, Suri acknowledged that the company’s 5G profit margins have declined due to the higher cost for its ReefShark chipset. The chip uses field programmable gate array (FPGA) silicon, which is an integrated circuit that can be configured by a customer after manufacturing. The benefits of this programmability are flexibility and a time-to-market advantage. The downside of FPGAs is cost and power consumption.
With unclear management strategy, investor pressure and failing to capitalize on the market, even when Chinese suppliers Huawei was banned in the US over security concerns – Nokia reported weak results in recent quarters, warning that its rivals were being aggressive in winning 5G deals.
Nokia, on its part said that it has now started to explore its strategic options, including potential asset sales or mergers, Bloomberg News reported last week, citing people close to the deliberations.
Is a Nokia-Ericsson Merger Possible?
Some believe Nokia should join hands with another super power to effectively compete with Huawei in the 5G era. According to recent reports, Nokia, is considering the option of selling assets and mergers. This immediately triggered the company’s consortium with Swedish rival Ericsson. Opinions are divided as some believe such deals often lead to strategic mistakes. In comparison, asset sales are a much smarter option.
Those in favor of the merger believe, if the two Nordic companies merge, it is likely that they will complement each other. As such, Nokia has experienced several turbulent quarters and is in trouble because it failed to effectively integrate the last major acquisition transaction of the Alcatel-Lucent for a sky-high price.
In terms of market share, Nokia and Ericsson together account for nearly 50% of the global telecommunications equipment market. The merger of Nokia and Ericsson will make it easier for them to compete with Huawei even in terms of price, an analyst mentioned, it may take several years for the transaction to get regulatory approval, let alone integrate the business. And this is where Huawei wins. When the two major rivals face uncertainty, it can seize the opportunity to win more new customers.