Analysis: Nokia job cuts may hasten, not stop, death spiral
By Tarmo Virki | Reuters – Fri, Jun 15, 2012Related Content
Nokia employees arrive for a personnel …
HELSINKI (Reuters) - With the latest round of job cuts announced this week Nokia's chief executive Stephen Elop could be hastening rather than arresting the once dominant Finnish phone maker's decline.
The company has cut a third of the workforce in its
phone business during the 21 months Elop has been in charge and the
latest 10,000 lay-offs will now include its main source of innovation,
the research and development team.Analysts also worry that the restructuring costs will further strain the company's cash position and achieve little in turning around what many see as its biggest problem: slow sales of its new Microsoft Windows-based handsets.
"Elop is cutting costs and hoping for a miracle, but it looks like Nokia is staying on death row," said John Strand, founder of Danish industry consultancy Strand Consult.
Once the world's dominant mobile phone provider, Nokia is now struggling to compete with Apple, Samsung and Google in smartphones while it is also losing share in the markets for cheaper, more basic phones.
Under Elop's current strategy, which places all its bets on smartphones running on software developed by Elop's former employer Microsoft the company has only one way out - coming up with a killer product that makes the Nokia brand fashionable again.
The current range of Lumia phones won some good reviews, but has had relatively little success among consumers.
Analysts and brand specialists say Nokia needs a new, more revolutionary product to turn heads.
"People want Nokia to succeed, people love the brand, but they need an excuse to do that and the excuse is that product," said Peter Walshe, a director at Millward Brown whose Brandz study last month saw Nokia falling out of top 100 most valuable global brands.
CHEATING DEATH
Some analysts, however, said bigger wasn't necessarily better and that the focus on Windows Phones may actually help.
Even with massive research and development and a strong set of intellectual property patents, Nokia struggled to produce the right goods and last hit model, the N95, was sold before the iPhone entered the market.
However, Elop has been credited with speeding up the product launch process and some analysts still expect him to turn the company around.
Optimists point out that Nokia has repeatedly survived near-death experiences through its 147-year history.
In the early 1990s Nokia - which was then manufacturing rubber boots and lavatory paper as well as electronics - hit the wall when the collapse of the Soviet Union halted its highly profitable cross-border trade with its eastern neighbor.
Then-leader Jorma Ollila decided Nokia should focus on cellphones, and by the 1990s the company overtook Motorola as the world's largest handset maker and became a Wall Street darling.
CASH BURNING UP
But markets aren't betting on a corporate miracle this time around. Nokia shares have fallen 80 percent since Elop announced the shift to Windows 16 months ago and on Friday credit rating agency Moody's followed its rivals S&P and Fitch in slashing its rating on Nokia debt to "junk", citing worries that lay-offs would hurt its cash position more than expected.
"Nokia's far-reaching restructuring plan ... delineates a scale of earnings pressure and cash consumption that is larger than we had previously assumed," Moody's analyst Wolfgang Draack said in a note.
Fitch also said on Friday that Nokia had little time left to turn itself around.
At the end of the March Nokia had 4.9 billion euros of net cash and already before factoring in charges from the latest round of restructuring some analysts had said the company could run out of cash next year. On Friday the price of insuring Nokia debt in the credit default swaps market put the probability of default at 54 percent.
"Cash flow is the problem right now," said Morgan Stanley analyst Ehud Gelblum, while analysts at S&P Equity Research said there is a 30 percent chance of Nokia's share of the phone market spiraling down to nothing.
Meanwhile Nokia's shares traded at around 1.90 euros late on Friday, up 4 percent from the previous day when they breached the psychologically-important two-euro level for the first time since 1996.
"With tech companies, as long as the company's heading down, there's no such thing as undervalued," Gelblum said.
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