NSN Weighs Heavily on Nokia and Siemens

Announced today, Nokia’s latest quarterly financial results are not good. Its loss in the third quarter was more than market watchers expected, Nokia’s first since it began reporting quarterly results in 1996.

Known primarily as a vendor of mobile handsets, Nokia is trying to put a positive spin on things. It’s saying that consumer interest in high-end mobile devices is growing, that industry unit shipments in 2009 won’t fall as much as the company originally projected, and that it has some snazzy smartphones reaching market in the fourth quarter.

Nonetheless, Nokia’s global market share is stagnant, and it remains susceptible to competitive incursions at the low and high ends of the market. It’s still reasonably strong in Europe, but it is losing ground in China and Asia, and it has utterly failed to establish market prominence in North America. The company’s mobile strategy doesn’t seem clearly articulated, and it is difficult to see how Nokia will redefine itself as it comes under increasing attack from above and below.

Despite those problems, Nokia’s mobile-device business is solid as a rock relative to its Nokia Siemens Networks (NSN) telecommunications-equipment joint venture with Germany’s Siemens AG.

In the just-ended quarter, Nokia took a goodwill writedown of 908-million euros on Nokia Siemens Networks. It said the business unit’s market share will drop more than expected this year, as it yields to constrained telecommunications budgets, pricing pressure, and competitive encroachments from vendors such as Ericsson, a practically “normal” Alcatel-Lucent, and ascendent Chinese vendors Huawei and ZTE.

Compared to the same period last year, Nokia Siemens Networks’ third-quarter revenue dropped a vertiginous 21 percent. Nokia says it remains fully committed to the joint venture, that restoring revenue growth and market share at Nokia Siemens Networks are among its foremost priorities. Still, an impairment charge of approximately $1.36 billion can’t sit well with Nokia’s executive team or its board of directors.

One can only wonder how Nokia’s JV partner will respond. According to a source that spoke with Dow Jones Newswires, Siemens is confronting an impairment writedown of 1.6-billion euros for Nokia Siemens Networks.

Joe Kaeser, Siemens AG’s CFO, opined recently that information technology is “not a great place to be in these days.” He disclosed that Siemens will review its joint ventures, including NSN, which he candidly said was not meeting Siemens’ performance targets.

At this juncture, Siemens probably will remain committed to the joint venture, taking the heavy impairment hit while trying to figure out how it can work with Nokia to get the business back on track.

Can that be done, though? At what point, if the joint venture keeps losing market share and money, does Siemens decide that it will no longer wishes to throw good money after bad?

The question isn’t hypothetical. Ericsson is firing on all cylinders, doing very well competitively, and the perpetually embattled Alcatel-Lucent finally seems to be back in the game. Then there’s Huawei, which is now aggressively pursuing and winning carrier customers worldwide, including some in the USA. Meanwhile, ZTE looms as another Chinese threat in the telecommunications-equipment space.

As always, the numbers will tell the story. Right now, the numbers for Nokia Siemens Networks are telling a terrifying story. Before long, Siemens might decide it can do without the fright.

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