|
Headline: Debt-free Nokia looks to a prosperous future Source: Euromoney Date: January 2002 Author: Jonathan Brown Nokia enjoyed a relatively good 2001. It’s fourth quarter earnings were expected to exceed its forecasts, with handset sales rising 20% on the previous quarter and just about matching 2000. A key to Nokia’s apparent health is that since committing itself to the mobile phone world in the 1980s, its consistently high sales have generated such strong cashflow that it has been able to steer clear of issuing debt altogether in recent years. “We still had debt back in the early 1990s,” says Timo Ihamuotila, corporate treasurer at Nokia, “but our cashflow situation since then has enabled us to pay this down and it has become one of our main tactics to remain purely equity funded.” Although the company has cautiously decided to maintain its debt rating of single A, it has no plans to borrow. Ihamuotila says that the company would, at present, only consider using debt finance as a bridging facility should the need arise. This seems unlikely under present conditions. Thus Nokia has avoided being caught in the spiralling debt that so many telecommunications companies have been sucked into. As Ihamuotila puts it: “In the high-technology environment, the benefit from maintaining financial flexibility is much higher than if you use traditional kinds of leverage.” Crucially important in Nokia’s new product success is its R&D business. Ihamuotila explains that the business is not so much a capital-intensive venture as research-driven. The company has R&D centres throughout the world that it claims keep it close to its customers in every market. While analysts worry about the take-up of 3G services, Nokia sees its products as much more than phones. The latest 5510 model offers an MP3 music player, enhanced gaming facilities and a full, if tiny, keyboard. Even though Ihamuotila speaks of Nokia being equity financed, there has been no new public offering of shares in the company since 1994. The geographical breakdown of Nokia’s shareholders makes for interesting reading. Despite its origins and continued home in Finland, only 10% of Nokia’s shares are now owned by Finns. The UK accounts for approximately another 10%, as does Germany. But by far the largest proportion of Nokia shares are held in the US – testament to Nokia’s global appeal to institutional and retail shareholders. Ihamuotila estimates that around 1.5 million US householders own shares in Nokia. As Ihamuotila points out: “We’re now among the top five most recognized brand names in the world.” Considering that the other four are all American, this is no mean achievement. In its home market, Nokia dominates the Helsinki stock exchange. Almost two-thirds of trading volume and value on the exchange is accounted for by Nokia shares. Nokia’s value to the Finnish economy is difficult to estimate but it is clearly the largest corporation ever to come from this relatively small country and employs some 23,000 Finns. Given the increasingly globalized nature of Nokia’s activities and its presence in the US and other regions (it is soon to open an R&D centre in China, for example), might Nokia be tempted to relocate to the US, as certain other Scandinavian companies have done? According to Ihamuotila, this is virtually impossible. “There’s simply no need any more,” he says. With the very nature of communications networks, which Nokia itself has played so large a part in forming, geography is not the issue it once was. Ihamuotila also argues that Helsinki is pretty well placed for flying to the US and Asia, Nokia’s largest markets. Asia is at the heart of Nokia’s strategy. Although the it does not have a significant position in Japan, China has become the country with the largest number of mobile phones and Nokia is confident that it will grab its share of a rapidly growing market. “China and the rest of the Far East is very important to us,” says Ihamuotila. Around 80% of manufacturing is done in-house at Nokia’s worldwide factories. The company believes that it still makes the hardware far better than any sub-contractor could. Until this changes, outsourcing production will not play a major part in strategy. Could even Nokia stumble? It firmly believes that 3G is the next big thing, despite the opinion of others that it will be obsolete before it is even fully operational. Infrastructure deployment has already started and the first systems should be operational in the second half of 2002. 3G enables far more information to be sent via the network than existing systems, allowing features such as multimedia messaging and video clips to be sent phone to phone. “We feel that this technology will completely change the way people communicate,” says Ihamuotila. The company points to the explosion of text messaging (SMS) as an example of how these innovations can take off after a slow start. So far the signs are not encouraging. The disappointing uptake of WAP – “People have it but don’t use it,” admits Ihamuotila – may indicate that the market is happy with its phones the way they are. Do we really need to zap video back and forth? If consumers conclude that such services are superfluous, Nokia could be in for a rude awakening. Already, 3G has taken a battering, with companies paying outrageously inflated prices for network licences. Ihamuotila admits the market may have been overoptimistic: “At the time of the auctions, 3G was definitely over-hyped. Now interest has gone right down but it should grow again.” This hype could come back to haunt Nokia through its exposure to vendor finance. The practice of lending customers the finance to buy one’s products can be beneficial for all parties. But the economic downturn may lead to companies defaulting on loans and leaving creditors in the lurch. Given the woes of many of Nokia’s telecoms customers, it would seem that it is a prime candidate to fall victim. Ihamuotila, however, argues the risk is minimal: “Yes, we are involved in some vendor finance, but we have only done this where there is a clear strategic advantage in doing so. We are generally very conservative on this.” He continues: “We only ever do such deals with our networking business, usually in the form of bridging while building the technology. For example, we did a deal in Brazil to support the development of GSM technology in the region. We believe the risks here are minimal.” Ihamuotila stresses that such deals play a small part in Nokia’s overall financing strategy, driven as they are by the exceptional cashflow that the corporation enjoys. Nokia has vendor finance commitments of e4.2 billion. Should mobile sales decline and 3G fail to take off, it will be interesting to see if the company has sufficient financial resources to weather the storm. |
|
Related
Corporate banking
Challenger banks redefine SME banking
Retail banking