Nokia reduces headcount, factories in cost reduction drive

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In a press release this morning, Nokia has revealed plans to "sharpen its strategy, improve its operating model and return the company to profitable growth". The company will be cutting up to 10,000 jobs by the end of 2013, closing its famed Salo factory in Finland, making a series of targeted investments around location and product experiences, making changes to improve the competitiveness of its feature phone business and making chnages to its leadership team. 

Nokia also updated its financial guidance for Q2 2012, indicating that competitive industry dynamics are negatively affecting its smartphone business to a greater extent than previously expected. As a result non-IFRS Devices & Services operating margin will be below the Q1 2012 level of -3%.

Stephen Elop, Nokia's CEO noted:

"We are increasing our focus on the products and services that our consumers value most while continuing to invest in the innovation that has always defined Nokia," said Stephen Elop, Nokia president and CEO. "We intend to pursue an even more focused effort on Lumia, continued innovation around our feature phones, while placing increased emphasis on our location-based services. However, we must re-shape our operating model and ensure that we create a structure that can support our competitive ambitions."

"These planned reductions are a difficult consequence of the intended actions we believe  we must take to ensure Nokia's long-term competitive strength. We do not make plans that may impact our employees lightly, and as a company we will work tirelessly to ensure that those at risk are offered the support, options and advice necessary to find new opportunities."

Factory closures, job losses aim to reduce operating costs

Nokia is planning to "rescale the company by making additional reductions in its Devices & Services division". These include reduced spending in certain research and development projects that will results in the closure of facilities in Ulm (Germany) and Burnaby (Canada); the consolidation of manufacturing operations, which will result in the closure of Nokia's Salo factory; focusing of marketing and sales activities, which will include prioritising key markets; streamlining IT and corporate support functions; and reduction related to non-core assets, including possible divestments.

Activities in Ulm relate to Qt development, smartphone testing and a number of other research and development functions. Activities in Burnaby relate primarily to software engineering research and development. The closure of the Salo factory is blow to the pride of Nokia and will be unpopular in Finland, but is not surprising giving the movement of most manufacturing activity to Asia earlier this year.

These changes will result in up to 10,000 job losses across the company by 2013. This is in addition to job losses announced earlier this year and last year.

The aim of these changes is to reduce Nokia's operational expenditure to allow the company to return to positive margins in its Device & services division. The company now expects to reduce operating expenses to €3 billion (annualised rate) by the end of 2013, down from €5.35 billion in 2010. As part of previously announced plans operating expenditure had already been reduced by €700 million by the end of Q1 2012; this means the company is aiming to implement a further cut of €1.6 billion by the end of 2013.

Targeted investments

Nokia is planning to broaden the price range of its Lumia devices and will differentiate its products with the Windows Phone platform, new materials, new technologies and new location based services. Nokia plans to make a number of targeted investments to facilitate this strategy.

The first announced investment is the acquisition of imaging related assets from Swedish company Scalado, which is aimed at strengthening Nokia's imaging assets.

Nokia also expects to invest in its location-based platform (Nokia Where) and will use it to differentiate its Lumia portfolio through location based services such as navigation (e.g. Nokia Drive and Nokia Maps) and visual search applications (e.g. Nokia City Lens). It also plans to extend the platform to multiple industries, which it expects to "strengthen the platform and generate new revenue".

The company aims to "improve its competitiveness and profitability" in Mobile Phones (feature phones), further developing Series 30 and Series 40 and investing in technologies like Nokia Browser (a proxy based mobile browser solution that reduces data consumption and the time taken to load pages). 

Revised financial outlook

As a result of the strategy changes outlined above Nokia expects to book charges of €1 billion related to the restructuring of activities in Devices & Services. This covers the cost associated with job losses including compensation and retraining.

The over-reaching aim is to return the Devices & Services division to sustainable operating profitability as soon as possible. However, before the gain comes further pain as Nokia has revised its outlook for Q2 2012 saying that it expects non-IFRS margins to be below -3%. This is lower than the previously anticipated level of around -3%.

Leadership changes

Going along with today's announcement is news of several changes to the leadership that run the company. Juha Putkiranta, previously senior vice president supply chain, becomes executive vice president of Operations. Timo Toikkanen, previously vice president, business development, programs and special projects, replaces Mary McDowell as executive vice president of Mobile Phones. Chris Weber, previously senior vice president Markets, America, becomes executive vice president of sales and marketing. Tuula Rytila, previously  senior vice president of portfolio and business management, takes over from Jerri DeVard as senior vice president and chief marketing officer. Susan Sheehan, previously vice president of communications, becomes senior vice president of communications.

Jerri DeVard and Mary McDowell will step down from the leadership team and leave the company by the end of the month. Joining them is the long serving (15 years) Nikklas Savander (executive vice president of Markets). The changes leave Timo Ihamuotila (Chief Financial Officer), Dr. Kai Öistämö (Chief Development Officer), Juha Äkräs (EVP, Human Resources) and Esko Aho (EVP, Corporate Relations and Responsibility) as the only members, from a leadership team of 15,  to have served under a previous Nokia CEO.