Apple takes another bite out of Nokia
Apple has taken another bite out of Nokia. As customers stampeded for the new iPhone, the Finnish cellphone giant warned of disappointing sales and operating margins. It lost another 9.7 percent, or about $3.5 billion, of its market capitalization on Wednesday. Nokia is increasingly at risk of becoming just a commoditized, low-margin manufacturer.
Nokia pinned the blame for its lower expectations on several causes: competition in high-end phones; the weak euro increasing the cost of goods sold; and a shift in product mix to low-margin devices. But it is smartphone competition that is really vexing the Finns.
In electronics, the highest margins are typically found in bleeding-edge products. Customers are willing to pay a premium for the shiniest devices, while competition is fiercer in more easily produced, lower-end ones. Nokia is losing this battle. While it appears to be slashing prices to keep market share, Apple’s customers are whining they can’t get their hands on the new iPhone fast enough.
The dichotomy in margins is clear. Nokia says its devices and services unit will be lucky to get 11 percent this year. Largely thanks to the iPhone, it seems, Apple should achieve about 30 percent overall.
Nokia has two hopes. First, it still controls about a third of the global market for handsets. Economies of scale mean it can still squeeze out a profit even on extremely cheap devices. Second, Nokia is increasingly bundling services such as email and music into phones, as well as introducing a better operating system later this year. Success would mean Nokia’s margins are currently near bottom.
Yet history suggests margins could go lower still. Take electronics makers such as Sony or Toshiba. While their brands still have a quality reputation, selling largely undifferentiated PCs, televisions and MP3 players isn’t a very profitable business due to intense competition. Operating margins often come in below 5 percent despite continued attempts to restructure. Nokia needs to find an answer to Apple soon if it wants to avoid turning Japanese.