Nokia's life saver - the low-end handset

Financial analysts continue to remain nervous over Nokia's ability to regain its competitiveness. At the centre of this concern is its dramatic and ongoing failure to mount a realistic challenge to Apple's iPhone, and effectively combat other vendors that aspire to become players in the smartphone arena.

While there is almost universal acceptance that Nokia needs to respond to these upstarts--and quickly, opinion is divided when it comes to the company retaining a firmer grip of its market share of low-end handsets in emerging markets.

But the company still retains two key advantages--scale and deep distribution channels.

Albeit that it has over 30 per cent of the worldwide market, Nokia maintains manufacturing plants in 10 countries across Europe, Latin America and Asia, which enables it to respond rapidly to demand changes in local markets. This also allows Nokia to shift production to other regions depending upon component prices or more favourable exchange rates, and the option to quickly switch sub-contractors to obtain the best possible pricing.

Its comprehensive distribution channels in China, India and other developing markets have helped Nokia achieve around a 50 per cent share in these markets for entry-level phones. Importantly, the company would appear to earn reasonable margins at this low-end and seems likely to retain its market share as sales volumes rise.

These two factors have triggered some observers to claim that, while low-end prices in developing markets will continue to decline due to increased competition, Nokia has the ability to improve margins moderately as a result of its cost-cutting efforts and manufacturing flexibility.

However, this dominance in developing markets cannot be viewed in isolation to what is underway in mature regions. Smartphones (or their low-cost equivalent) and app stores will establish themselves in these newer markets quicker than is perhaps imagined, and could threaten Nokia's market leadership.

Nokia urgently needs to clarify its OS strategy and revamp its clunky app store to enthuse developers and attract consumers alike. Unfortunately, time is short and the company appears to be 'playing a fiddle' while the fire of competition roars around it.

What might, and I stress might, benefit the company is that mobile operators could eventually learn that it's easier--and more profitable--to work with Nokia than with Apple or Google. -Paul