Nokia job cuts don't and won't impress anyone

Bolaji Ojo

The announcement earlier today by Nokia Corp. that it will eliminate one of every five jobs in its mobile handset division and remove three senior executives didn't impress investors who promptly dumped the stock, driving down the company's market value by more than 15 percent in intraday trading.

CEO Stephen Elop might have meant to signal resolute leadership in the midst of an ongoing crisis at the wireless handset vendor but nothing in today's announcement adds clarity to what the future holds for the company or confirm it will be able to right the sinking ship. Investors have seen reorganization actions like these before at other endangered companies and they know where it's leading Nokia. By the end of the current year, Nokia will be a much smaller company on a revenue and stock valuation basis and its future will be even more in doubt notwithstanding the modest success its Lumia phone has recorded in the market.

There's some disheartening history behind this tough assessment. The actions instituted by Nokia are eerily similar to steps taken by other enterprises that slowly diminished in importance after once-dominating their market sectors. While it is unlikely Nokia would disappear into technology's historical bin, the job cuts, management changes and other strategic initiatives implemented so far by Elop reminds me of similar actions taken by Palm Inc., Motorola Inc., Nortel Networks, Lucent Technologies and many other former tech giants that misread their markets and tumbled into oblivion. Blackberry maker {complink 4644|Research In Motion Ltd. (RIM)} is in a similar funk and its reorganization efforts so far have not paid off as expected.

If this assessment appears harsh, follow the trajectory of Nokia's sales but look more closely at other more important factors, including why the company is where it is today, what is happening at rivals, the monumental changes occurring in its market, the rivals it faces (Apple, Samsung, HTC) and what could make it competitive again. Also, consider the fact that while Nokia is cutting jobs and reorganizing operations (necessary actions if it is to survive) it is also demoralizing employees, sending mixed signals about its future to contractors and suppliers as well as other third-party support companies it requires for future growth.

By now, Nokia suppliers in the communications IC market, for instance, who recall how their profitability and long-term viability were horribly threatened as companies like Motorola declined know by now they've got to pull up the stakes and throw operational and product support behind rivals. As Nokia totters, the eco-system it needs to survive is feeling the heat and rushing for the exit. This means critical internal engineering employees will be firing off resumes to Nokia rivals while application developers the company needs to support the role out of services for the Lumia and other devices in the pipeline will devote more resources first to rivals before considering the wounded company. The Nokia-effect is already being felt at companies in its extended supply chain. DSP chip vendor Ceva Inc., for instance, recently slashed its 2012 sales and profits estimate "due to weaker-than-expected sales at key customer Nokia." What many suppliers see now is the possibility of getting crushed under the tottering giant.

Consider this: Nokia is a fast fading shadow of its former self and no amount of employee retrenchment and management reshuffling will send the market a different message. What today's announcement confirmed is clearly that the company is burning more money than it is making. Nokia said in a press statement it expects the "non-IFRS Devices & Services operating margin in the second quarter 2012 to be below the first quarter 2012 level of negative 3.0%. This compares to the previous outlook of similar to or below the first quarter level of negative 3.0%"

By the way, "Nokia expects competitive industry dynamics to continue to negatively impact Devices & Services in the third quarter of 2012," the company said. It should have added that the situation won't improve that much for the rest of the year. Prior to today's announcement, analysts had reduced their 2012 revenue estimate for Nokia to about $49.2 billion (39 billion euro). If their prediction turns out correct (I think sales will be even lower) that would be flat from 2011, down from 42 billion euro in 2011 and as high as 50.7 billion euro in 2008.

The job cuts will reduce the break-even revenue target for Nokia and relieve pressure on the balance sheet at a time cash conservation is becoming a major priority. They won't cure what really ails Nokia and that is its inability to catch up with Apple and Samsung combined with the unwise decision to abruptly terminate Symbian operating system-based products in favor of Windows OS. The move stopped Nokia cold and for that CEO Elop himself deserves the axe.