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6 March 2020

Nokia’s Suri to step down – what went wrong, and what can Lundmark do?

As Nokia explores its options (see previous item), the company also announced that its CEO, Rajeev Suri, would step down this summer after over a decade at the helm, and 25 years with the company. He will be succeeded by Pekka Lundmark, who like most Nokia chiefs is a one-time veteran of the firm, but is unusual experience for having been out of the company for 20 years. He is currently heading up Finnish energy firm Fortum, a role that should enable him to bring some valuable insights from another industry sector.

Suri became CEO of Nokia Siemens Networks (NSN) in 2009, succeeding Simon Beresford-Wylie. This morphed into Nokia Solutions and Networks when Siemens exited. In 2014, he became CEO of Nokia, following the completion of the break with Siemens, and the sale of the Devices business to Microsoft under the auspices of previous CEO, Stephen Elop.

Suri has been, for the most part, an impressive leader, first of the Nokia Siemens joint venture and then Nokia as a whole. Before that, he ran the services business, an experience which enabled him to bring a new perspective to a job which, in recent times, had tended to be filled by people whose main focus was technology and products.

However, his luck ran out when he endorsed the strategic decision to make a homegrown silicon platform, Reefshark, a key differentiator for Nokia’s products, from routers to base stations. The launch of a very high end router platform based on an inhouse processor was applauded, giving Nokia a stab at selling equipment to the webscalers as well as to telcos. But when the same approach was applied to 5G base stations, Nokia was risking the absolute heart of its business – the radio platforms which are the central element of its experience, and the 5G platforms that are essential to growth in the 2020s.

The FPGA-heavy platform was expensive and did not, at least in early deployments, deliver differentiation – indeed, early adopters such as Sprint hit performance problems. Suri acted quickly to acknowledge the mistake, rather than obscure it, and to reverse the strategy in favor of partnering with Intel and Marvell (see separate item). But the revised designs will take 12-18 months or more to have visible impact on customer deployments or finances, and the blow to confidence at a critical time for vendors – the early, closely watched roll-out phase of a new technology generation – could not be put right so decisively.

This, then, was likely the trigger that forced Suri out, though he claimed to have been thinking about a change for some time, saying in a statement: “After 25 years at Nokia, I have wanted to do something different.”

But beyond the chip issue, there is also a sense that he is a very safe pair of hands, but not delivering the decisive turnaround for which Nokia has been striving for so long. His mighty achievement at Nokia was to oversee the acquisition of Alcatel-Lucent, which had all the ingredients to turn into another legendary saga of mismanaged integration – as the merger of Alcatel and Lucent themselves had been. Instead, the portfolio was rationalized effectively; the mobile-only stance of pre-merger Nokia was changed for a deep focus on convergence adroitly; reorganization took place far more smoothly than is usual for two companies of this size and contrasting cultures.

Some issues of product cost and complexity do still date to ALU, and there are some who argue that Nokia should have stuck to its mobile-only stance – but that ignores the contribution that ALU’s routers and its cloud platforms have made to bolstering its new parent in core areas of 5G era investment, much of which is focused on virtualization and convergence rather than the radio itself.

All this highlighted Suri’s reputation for being a turnaround master – something that has often been forgotten in recent years when Nokia has needed to take a break from constant reorganization in order to consolidate the gains from such changes. But perhaps that phase of consolidation did not play to his strengths, and certainly, in the past few years, having executed the ALU merger and improved many aspects of Nokia’s performance, he has not delivered a decisive victory over Huawei and Ericsson, despite their own challenges. Many of the KPIs he set have not been achieved, and the latest setbacks will just delay that further.

Suri will not leave his role until August 31, and will remain as a strategic advisor to the Nokia board until January 2021. Nokia chairman Risto Siilasmaa also plans to leave his role next month. He will be replaced by Sari Baldauf, vice chair of the board.

During a press conference, Lundmark said he was not returning to Nokia with any preconceived ideas about the strategy or outlook, but he will, of course, be keeping a close eye on the work to explore new options and possible divestments or mergers.

Siilasmaa said, trying to downplay talk of a deep strategic review: “We are very convinced that our broad product portfolio is a good choice. We also believe that our expansion into software and enterprise are the right way to go, and therefore we are not currently working on any strategic reassessment. But of course we expect the new CEO to do his review of our strategy and he may propose changes to that strategy to the board in due course.”

He added: “Very few companies can go through the kind of radical change that Nokia has been through and emerge as an industry leader, but that is what Nokia has been able to do and it is a testament to Rajeev as a person and as a leader.”

Suri added: “Sure, we’ve had our share of ups and downs but Nokia has been around for more than 150 years and I leave knowing that there is the potential for 150 more.”

His successor is currently president and CEO of Fortum, an energy company based in Espoo, the city where Nokia is headquartered. Prior to Fortum, Lundmark was CEO of Konecranes, a global material handling company. Between 1990 and 2000 he held various positions at Nokia during another turbulent era, including VP of strategy and business development.

“With the acquisition of Alcatel-Lucent behind us and the world of 5G in front of us, I am pleased that Pekka has agreed to join Nokia,” said Siilasmaa in the statement. “He has a record of leadership and shareholder value creation at large business-to-business companies; deep experience in telecommunications networks, industrial digitization, and key markets such as the United States and China; and a focus on strategic clarity, operational excellence and strong financial performance.”

His first priority will be to convince operators that Nokia has a clear and near term plan to migrate to new platforms and address initial problems. Nokia may also need to play catch-up with Ericsson in some key technologies where it appears to be lagging, such as dynamic spectrum sharing (DSS). And to take advantage of the restrictions on Huawei and ZTE in some markets he will need to pay special attention to aspects of 5G where the Chinese vendors have taken a lead, so that operators do not feel they are being forced to buy second-best. Some MNOs have expressed particular concerns around Massive MIMO antennas, a technology where Huawei and ZTE are perceived to be leaders.

In the same week in January that Nokia announced its fourth quarter results – which actually saw finances stabilize after a tough year – reports surfaced that Deutsche Telekom had called on Nokia to up its game in terms of 5G performance, if it wanted to replace Huawei in parts of DT’s network.

The Reuters sources were anonymous, of course, but they provided leaked briefing notes written by the operator’s vendor management team, from last autumn, and neither company denied the report.

In 2017, DT backed away from Nokia in favor of Ericsson and Huawei, so it has limited Nokia installed equipment to build on, which makes a migration to Nokia kit for 5G Non-Standalone more complex and expensive. Either it involves deploying a more resource-hungry NSA architecture option that allows for 4G and 5G base stations from different vendors to share the same LTE core; or it involves a rip-and-replace, which the vendor would probably be expected to pay for, but which would take up to two years.

Documents written between July and November last year and shown to Reuters included a briefing note for DT CEO Tim Hoettges, saying Nokia “must step up” if it is to get back into the DT fold. The notes shows that DT considered Nokia to have performed less well than its rivals in 5G tests and deployments in Germany so far; that its 5G product was inferior; and negotiations were complex and drawn-out for every project.

In November, a briefing note for a meeting between DT executives and Nokia chairman Risto Siilasmaa said “assurances have been received” from the Finnish company, without giving details.

DT used to rely equally on Huawei and Nokia for RAN equipment, with each covering its own region of Germany. But in 2017 Nokia was dropped from new deployments, and now has equipment in only a handful of markets, while Ericsson picked up 30% of DT’s spending.

Nokia’s results stabilized in Q419:

There were signs of stabilization in Nokia’s fourth quarter results, with a Q4 profit of $618m, up from $223m in Q4 2018. Revenues were flat year-on-year at $7.57bn and operating profit jumped 45% to $881.5m.

In terms of its guidance for 2020, Nokia expects performance to be flat, excluding China, where geopolitics may come into play. “We have decided to exclude China, given that pursuing market share in China presents significant profitability challenges, and the region has some unique market dynamics,” said the company

Suri insisted, however: “We’re not turning our back on China; I want to be very clear about that. We are trying to change our business mix in China. We want to sell more to webscale players, to state-owned enterprises, and with the operators we want to change the business mix towards a higher proportion of core, routing, fixed access, naturally be in the game in 4G, as well as transport. With 5G…it needs to make sense to us on a 3-4 year basis.”

In Q4, total sales in China were down 26% year-on-year, while sales in North America and Europe also fell, but by smaller amounts – 5% and 2% respectively. North America remained Nokia’s largest market during the quarter, with $2.27bn in sales or 30% of the total.

The Networks division grew its revenues by 1% year-on-year to $5.97bn, representing 79% of the entire business. The Software and Technologies divisions declined by 9% and 11%, respectively, year-on-year.

Network operators comprised 84% of Nokia’s customer base during the quarter, and enterprises, which grew 33% year-over-year, represented 7% of its customer base.