Nokia's success tied to emerging markets

What separates the mobile handset winners from the losers? The answer seems to be success in developing markets like China, India, the Middle East, and Africa.

On Thursday Nokia announced that it had sold a record 133.5 million mobile phones during the fourth quarter of 2007. This figure was up by more than a quarter from the same period a year earlier, boosting its overall market share to 40 percent.

Meanwhile, Nokia rival Motorola reported Wednesday that shipments of its handsets had fallen 38 percent during the quarter, pushing its market share down yet again to 12 percent, the lowest level since 2001. But Motorola isn't the only handset maker struggling; Sony Ericsson has also had trouble growing its market share. The company, which targets the high-end market in Europe, only grew its market share in 2007 by 2 points to 9 percent.

So what has Nokia been doing right and Motorola and Sony Ericsson been doing wrong? The main difference seems to be in how the companies are addressing the developing markets.

Nokia reported that it saw the strongest growth in sales in the Middle East and Africa. Shipments here were up 52.3 percent. Asia-Pacific and China also saw strong sales growth, while sales in mature markets like North America fell during the quarter.

But what is different about Nokia is that it's also been making money in these markets. For the fourth quarter of 2007, Nokia boosted profit by 44 percent, to $2.68 billion, on sales of $23 billion. While Nokia clearly benefits from the high production volumes, the company has also been aggressively working to keep costs down. This has meant changing packaging for products sold to emerging markets and closing a factory in Germany in an effort to reduce overall costs.

Meanwhile, most of Nokia's competitors, including Motorola, Samsung, and Sony Ericsson, have had problems addressing the low end of the market. Part of the problem is scale. Producing products in higher volumes allows companies to get better deals on components so that they can produce individual phones more cheaply. So as Motorola's sales volumes go down, it actually hurts the company as it tries to address the cost-competitive low end of the market.

Motorola's executives see scalability as an issue going forward. But Motorola CFO Tom Meredith said that the company also needs to build more targeted products at the right price points.

"We need to be not so much a producer of volume to get scale," said Meredith during the company's conference call with analysts and investors on Wednesday. "We've got to produce the right design point with the right features and functionality at the right cost. And if we do that, scale will be less of an obstacle than it is perhaps today."

Even though Nokia currently dominates markets like China and India, competition is on the way. Sony Ericsson on Thursday said it plans to launch four handsets over the summer that will target India, a country that added more than 8.2 million cell phone users last month. But most experts agree it will take a long time before Sony Ericsson or anyone else can catch up to Nokia.