Nokia to Sacrifice Network Margins to Improve 5G Technology

Nokia Oyj said it expects the margin for its networking business to be zero next year as it develops more competitive products for fifth generation wireless technology.

“We are now putting so much money in R&D that we are sacrificing a little bit of the short-term profitability to get to where we want to be in the long term,” Chief Executive Officer Pekka Lundmark said in an interview on Wednesday after Nokia unveiled more details about its strategic overhaul. Still, “we are only taking contracts that make commercial sense,” he said.

The Finnish company has increased its research and development budget for 5G by 40% since January 2019, Lundmark said.

Nokia to Sacrifice Network Margins to Improve 5G Technology

Lundmark, who took over as CEO in August, is driving a reorganization at the telecommunications gear maker as the roll out of 5G networks gathers speed. The company said its overall outlook for next year is unchanged and it expects a margin, excluding some items such as restructuring costs, for the entire business of 7% to 10% in 2021.

The break-even margin implies that the “Mobile Networks’ present status seems worse than feared,” analyst Daniel Djurberg at Svenska Handelsbanken AB wrote, even as Nokia seeks “a significant improvement over the longer term” for the unit. Djurberg said he had expected a low single-digit margin.

The company has been losing out on contracts for carriers’ 5G build outs, including missing a deal to provide the technology to Verizon Communications Inc. earlier this year after the U.S. carrier chose Samsung Electronics Co.

After spending years digesting the $18 billion deal for Alcatel Lucent, Nokia was late to produce its own 5G chipsets, forcing it to buy more expensive alternatives and eating into the resources left over to invest in development. It will probably take until 2022 to fully replace the more expensive generation of chipsets with Nokia’s own system-on-a-chip, Lundmark said.

A growing ban on Huawei Technologies Ltd. may provide Nokia’s new CEO an opening to take market share. A trade war between the U.S. and China has contributed to many American allies prohibiting the Shenzhen-based network gear maker from providing technology for their phone networks.

In addition to the traditional network gear, the company will develop its products for so-called Open RAN, a type of architecture that allows operators to use equipment from multiple vendors, and virtual RAN, which can be run as software on generic hardware.

“Customers are using a best-of-breed approach to build these networks, selecting network elements from multiple individual vendors who are able to offer the best performance per total cost of ownership,” Lundmark said in the statement. “Nokia is aiming to be the technology leader in the areas it chooses to play in.”

Nokia will provide more details on its strategy via a webcast at 3 p.m. on Wednesday in Helsinki, and has planned a Capital Markets Day on March 18.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.