This post takes a look at Nokia’s performance and future direction with regards to emerging markets such as Pakistan. According to a recent article in USA Today, Nokia and Motorola are actively working on bridging the digital divide by providing cheap phones to the masses in developing countries. The news report mentions stories of farmers or fishermen who start using cellphones to sell goods to the highest bidder instead of the lone buyer in the village. The report makes an interesting point: in one little way after another, cellphones act like extra pushes on the economic flywheels of developing nations.

In the news report the CEO of world’s largest handset manufacturer, Nokia, cites numbers from a London Business School study concluding that an increase of 10 cellphones per 100 people in a developing country translates into GDP growth of 0.6 percentage points. I would like to analyze and evaluate that report myself.

According to BMI, with mobile phone usage surging across emerging markets, Nokia has reported booming sales during the 2006. Total revenues were up thanks to a 33% increase in the number of handsets sold. However Nokia’s growth is coming mainly from emerging markets, where demand is predominantly for cheap, entry-level handsets. As a result, the average selling price of its phones fell to EUR93, down from EUR102 in 2006.

Accounting for nearly one fifth of its total handset sales, Asia is a region of great importance to Nokia. Its success in Asia, and particularly in China and India has gone a long way to account for the Finnish company’s strong results in 2006. Nokia estimates that about half of all its business in emerging markets is from upgrades, indicating that consumers are beginning to move slightly higher up the value chain as the market develops. This is certainly the case in countries such as Malaysia, Thailand, the Philippines and China, where the market becomes increasingly mature. It is unliklely to be the case in Indonesia, Vietnam, Pakistan and India quite yet.

Nowhere in Asia is Nokia’s strategy clearer than in India, which it has started to use as an export base. In March 2006, the Finnish company opened its first Indian handset factory in Chennai. The then CEO of Nokia Jorma Ollila declared “We anticipate that there will be a long-term sustainable demand for mobile telephony in the fast-growing Indian market.”

Another reason for its investment is to use the country as a production hub. Making a few million handsets each month, Nokia projects that the factory will be in a position to export handsets in the second half of 2006, mainly to South-east Asia.

There’s no manufacturing facility in Pakistan as of now, even though Nokia is the best selling handset maker there and the total mobile subscribers are close to 50 million. During a recent visit, the Hungarian Foreign Minister Dr. Kinga Goncz said that at present Nokia phones are being manufactured in Hungary and steps are being taken by the Hungarian government to start manufacturing of Nokia mobile phones in Pakistan. After so many years of false starts I certainly hope there will be action on this.

BMI report on Nokia mentions that the blend of the manufacture of ultra-low cost handsets in a market that is growing voraciously combined with the use of India as a cheap logistics centre appears to be a winning formula, allowing the company to improve its distribution and compete directly with local players such as Korea’s Samsung and LG Electronics, as well as the likes of Huawei Technologies in China. 2007 will be another fierecely competitive year for Nokia.

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