“SUCCESS is toxic”, says Risto Siilasmaa, Nokia’s chairman, as snowflakes swirl in the wind outside. Asked what lesson to draw from his firm’s collapse, which started a decade ago, he underlines the dangers of doing too well. In its heyday, Nokia was a monster; its market capitalisation surpassed $290bn in mid-2000 and by 2007 it accounted for 40% of global handset sales. Yet its dominance in hardware, which encouraged a relaxed attitude towards software, bred failure. It is now worth $33bn.
No executive at Ericsson, Nokia’s big European rival based some 400km to the west near Stockholm, would put it quite that way. But the experience of the Swedish firm has been strikingly similar. Early this decade Ericsson provided 40% of the world’s mobile infrastructure and its market capitalisation hovered above $40bn. Now both numbers are about half that.
Upgrade your inbox and get our Daily Dispatch and Editor’s Picks.
Donald Trump imposes levies on metal importsDemocracy in Americaan hour ago
Women’s wealth is risingGraphic detail7 hours ago
What is Donald Trump hiding? The answer may bore youDemocracy in America7 hours ago
Machines are getting better at literary analysisProspero8 hours ago
The Trump administration sues California over sanctuary protectionsDemocracy in America9 hours ago
For Dutch Jews, an overdue reassurance and an ancient dilemmaErasmus14 hours ago
The two firms are also direct competitors once again, which invites assessment of who is ahead. Another question is whether European governments will do anything to give them a boost. They are among the last of the continent’s makers of mobile devices and network equipment, which once ruled the world but are now lagging behind American and Chinese firms. If Ericsson and Nokia continue to shrink, only one European firm, Schneider Electric, would be left among the world’s 35 biggest tech companies by revenue.
Nokia has long been a master of reinvention. It started as an operator of a pulp mill in 1865. A pair of rubber boots in its small company museum highlights the firm’s varied history. But Nokia needed some luck to fall on its feet. That came in the form of a mind-bogglingly generous deal from Microsoft, which in 2013 paid $7.2bn for Nokia’s flailing handset business. That big dose of cash, plus another $2.8bn from the sale of HERE, a mapping business, “basically saved Nokia”, reckons Mr Siilasmaa. The money let the firm rebuild itself. Using its smallish network-equipment business as a base, Nokia has quickly expanded, mostly by acquisition. It bought Siemens out of a joint holding, Nokia Siemens Networks (NSN) in 2013, paying $2.2bn. Two years later Nokia took over Alcatel Lucent, a French-American vendor, for $17bn in shares.
Most previous marriages in telecoms gear had failed, because dropping products to get the efficiency gains while keeping hold of customers had been exceedingly difficult. But at the time of Nokia’s big deal the technology was changing. Networks were no longer mainly about physical connections, but more defined by software, which made merging product lines easier. As important, Rajeev Suri, Nokia’s boss, had free rein from his board to rethink strategy. He had proved himself a capable boss of NSN since 2009, a job nobody wanted.
If rubber boots symbolise Nokia’s history, Stockholm’s telephone tower (pictured) is emblematic for Ericsson. It operated in Sweden’s capital until 1913, serving over 5,000 lines. Founded in 1876 as a maker of telecoms gear, it was natural that Ericsson should stick to defending its share of that market when in the mid-2000s Chinese vendors, mostly Huawei, but also ZTE, became serious competitors. It also expanded its business of running customers’ networks. In the short term the strategy worked. While other Western firms lost business to the Chinese and were forced to merge, Ericsson expanded its market share.
Waiting for 5G
Yet neither effort did much to improve margins. When profits plunged in late 2007, the firm’s share price dropped by nearly a third. Ericsson was left more vulnerable when investment in mobile networks started to shrink in 2014. A hurried diversification strategy, including into services and software for television broadcasters, and cloud computing, did not help. Revenues fell from 250bn SEK in 2015 (then $29.5bn) to about 200bn SEK in 2017. Early that year Ericsson’s main shareholder, the Wallenberg family, brought in a new chief executive, Börje Ekholm. He has vowed to reduce costs, kill off unprofitable service contracts and sell “non-core” businesses. He wants to refocus on 5G, the next generation of wireless technology.
As a result, Ericsson and Nokia now look much alike. They have the same number of employees (about 100,000), make similar-sized profits in their networks business (gross margins of 30-40%) and have similar market capitalisations. But differences remain, which seem to favour Nokia. It is with some justification that Mr Suri calls his firm “the Western alternative to Huawei”—its product portfolio is broader than Ericsson’s, and includes gear for fixed networks. Some also consider Nokia more innovative: it inherited Bell Labs, a respected laboratory where the transistor was invented, from Alcatel Lucent. Mr Suri has big plans to use artificial intelligence to make Nokia more efficient, for instance in drafting offers to build smaller networks.
Yet the next few years could give Ericsson the edge. Some operators consider its 5G gear better than Nokia’s. More important, while Nokia has overhauled itself, Ericsson has just started to restructure in earnest. Its plans look serious. Not all analysts trust that the affable Mr Ekholm, who says such things as “I’m a big believer in evolution,” is tough enough to transform Ericsson. But the firm also has a new big activist shareholder, Cevian, whose co-founder, Christer Gardell, is nicknamed “the butcher” for his way of shaking up companies. It owns 9% of Ericsson’s class B shares.
For both firms, much will depend on the uptake of 5G. Both bosses are realistic about the outlook. They do not expect a sudden spike in 5G investment; instead, new networks will be rolled out gradually in the coming years. And then there is Huawei. It is a formidable, but not unbeatable competitor, says Mr Ekholm: “Let’s focus on what we can control: being innovative.” Mr Suri, for his part, expects that Nokia’s products will appeal to clients wary of trusting a Chinese supplier: “Security and privacy are embedded in our brand.”
Such arguments will go down well in America and other countries worried about Chinese eavesdropping devices in telecoms equipment. Yet if this is not enough to revive growth, talk about more mergers will be inescapable. Neither of the current bosses will discuss grand ambitions. Mr Suri wants to buy lots of small tech firms to strengthen his business in software to manage networks; Mr Ekholm says a large-scale merger has no place in his strategy. There is also talk of Samsung, the South Korean tech giant, buying at least part of Ericsson. A marriage of Ericsson and Nokia, sometimes raised as a possibility, is the least probable of all. A combined firm would have a monopoly in America, forcing operators there to look for a second supplier, such as Samsung.
Pressure will also grow on the European Union, which is in charge of telecommunications law, to lighten the regulatory burden for network operators. Politicians may even start calling for protectionist measures. “If Ericsson and Nokia in Europe benefited from the same support as Huawei and ZTE in China, they’d be fine,” says Pierre Ferragu of Bernstein Research, while acknowledging that such protectionism would make European telecoms less competitive in the long run.
A better approach would be to remember what made the European mobile industry strong in the first place, says Bengt Nordstrom of Northstream, a telecoms consultancy. When 2G (or GSM, as it was called back then) was introduced in the late 1980s, many European countries and operators signed up to a memorandum of understanding, agreeing on such things as the radio spectrum used, the services to be offered and when to launch them—a co-operation which is lacking today. A similar effort could now boost Nokia and Ericsson. No one these days worries about toxic success—rather of managing recovery.