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Can Nokia get back on track?

Nokia's sharp loss of global market share in handsets last quarter sparked worries that the market leader may be losing its golden touch.
/ Source: Reuters

Nokia's sharp loss of global market share in handsets last quarter sparked worries whether the market leader can recoup its losses -- or even prevent more setbacks -- in the second half, analysts said on Wednesday.

Its shares lost 20 percent in just two sessions after Tuesday's surprise announcement that the number of handsets it sold in January-March rose only 19 percent, lagging market growth of more than 25 percent, as it lacked attractive mid-priced models in Europe and North America.

Given ferocious price pressure for every phone sold, first-quarter revenues are now set to fall, despite a market boom.

Nokia has warned of falling sales and trimmed earnings guidance several times in past years, but it had never lost so much market share.

The news left investors anxious that Nokia could be losing its magic touch.

The company's logistics still remain impressive, with some four million handsets churned out every week, but analysts said its product design is no longer ahead of the curve.

For starters, Nokia has stubbornly refused to embrace the foldaway designs with big screens that are the gold standard in Asia and are gaining ground in Europe and North America.

Clamshell game
"The investor community has been asking for almost three years about when they will launch clamshell handsets and up until late last year their message was that the clamshell is not a dominant design, that it is going away," said Evli Bank analyst Karri Rinta.

"This clamshell denial is not the only factor behind these market share losses, but it's one concrete example," Rinta added. He lowered his recommendation for the stock to "reduce" from "accumulate" on Wednesday.

But there are other problems, eroding the strengths on which Nokia established its reputation.

The firm grew from a relatively minor player, trailing U.S. rival Motorola, into a global market leader with a 35 percent market share in 2003, boosted by close ties with mobile operators and affordable products with trend-setting features such as long battery life, compact sizes, internal aerials, world-class logistics and simple user interfaces.

This helped the company turn in healthy profit margins in the slow years since 2000 when handset sales stagnated.

But just when Nokia needs that smooth-running engine to boost sales and profits again, to take advantage of a camera-phone craze and booming demand in developing markets such as India and China, Europe's top technology firm seems to be running low on fuel.

Samsung strikes
Worries that Nokia is not taking its share of the growing handset pie started mounting last week when the company remained mum on its earnings guidance at its annual shareholder meeting, despite upgraded outlooks from rivals like South Korea's Samsung Electronics, the global number three.

Even on Nokia's home turf, customers have started voting with their feet, said a salesman in a mobile phone store in central Helsinki.

"People used to talk about how Nokia's design was so great, but they're not doing that anymore. Sales have become more active and people are asking for other models rather than Nokia's."

Analysts said Samsung was the most likely phone maker to have grabbed market share from Nokia, with Nokia's main rival, Motorola, and fourth-largest global handset maker Siemens also seen benefiting from the company's problems.

Rivals even beat Nokia to the market with new and popular features such as color screens and high-resolution cameras. They also beefed up designs and improved their user interfaces.

Market research group Strategy Analytics said Nokia's warnings highlighted mobile operators' growing preference for smaller suppliers, who are more flexible to customize their products.

FIM Securities analyst Jussi Hyoty added there was also a power struggle between Nokia and the operators.

"The operators seem to favor the other players. It's the brandmaking. They want to pronounce their own brand, and Nokia's brand is so strong. I think they would like to see Nokia not so powerful."

Hyoty, who lowered his recommendation on Nokia shares to "accumulate" from "buy", said he still remained confident Nokia would improve its product offering later this year, but it would not be able to catch up quickly with the market.

"This year's roadmap is already there. You can't make big changes this year. They can start reading the market more carefully for next year."