Reaching for the Finnish line

Nokia's iron grip on China handset market has started to slip – fast


15 Jul 2011
Week in China

Nokia wasn't always a handset maker. In earlier days it tried its hand at everything from toilet paper to televisions. It wasn't until the 1990s that it lasered in on mobile phone manufacturing, a decision made by Jorma Ollila, chief executive at the time. Under his leadership, the Finnish company overtook Motorola to become the world's largest handset producer – a position it clung to until the first quarter of this year.

Nokia is now facing stiffer competition across all of its product segments. Its first mover advantage in rural China is being chipped away, and its market share has shrunk to 19% from 33% two years ago.

Then Apple took over as leading phone vendor by revenues. Sales of the iPhone rose to $11.9 billion during the period, while Nokia's slipped to $9.4 billion, says the research firm Strategy Analytics.

But it is far too early to write Nokia off. A survey from Baidu, China's leading search engine, revealed that when it comes to internet searches, Nokia is still the leading brand, with Samsung in second place and the Taiwanese firm HTC third. (Apple ranked fourth and BlackBerry eighth.)

Nokia's 5230, its newest touch screen smartphone, got the highest search volume on Baidu, beating Apple's iPhone 4 into second.

Today China contributes around $8 billion, or 20%, of Nokia's total sales. The company opened its first office (in a former Beijing movie theatre) in China 26 years ago, adding 90,000 sales outlets, 1,000 customer-service centres and an army of salespeople around the country since then.

Exploiting its size and production costs, Nokia focused first on selling low-tech but nifty-looking phones that appealed to local tastes. It was also the first to let users write characters with a stylus, which sold well in the countryside, where users were not familiar with the romanised transliteration system that most phones use to input Chinese for text messages.

By wooing customers with entry-level products, Nokia was hoping that users would stick with a brand they became familiar with. The strategy paid off. Sales from replacement phones were soon making up a huge percentage of their business. As China grew richer, so Nokia's bottom line improved, as customers upgraded their handsets to more expensive models.

Still, the Scandinavian firm is now facing stiffer competition across all of its product segments. Its first mover advantage in rural China is being chipped away, and its market share has shrunk to 19% from 33% two years ago, says research firm Analysys.

Competition against the country's shanzhai manufacturers (i.e. makers of counterfeits) has also been frenetic (although, as we reported in WiC101, Chinese consumers are less keen on counterfeit phones than they once were).

In fact, the battleground is shifting as shanzhai makers look to export to other emerging markets, threatening Nokia again.

"Three years ago Nokia's position in emerging markets looked impenetrable, but low-cost chip sets and growing scale has helped a number of Asian manufacturers to price aggressively and seize market share," Geoff Blaber, an analyst at the mobile communications research firm CCS Insight in London, told Reuters. Other commentators say Nokia has been distracted by the smartphone challenge from Apple, and needs to get back to selling affordable handsets in larger volumes.

In response Nokia has invested in products like money transfer, and news and education services specially designed for rural users in developing markets. In China the lead offering is Ovi Life Tools, a phone app launched last May. With it, customers can pull up information on topics like pregnancy care, says Zhongguancun Online. Phil Kemp, Nokia's head for the services sector in Greater China, says the app is already one of its "most successful services" in the country. If Nokia is to rekindle its market share, it will need to become the farmer's favourite phone once again.

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