The Nordic Connection

HOW NOKIA AND ERICSSON HAVE RUNG RINGS AROUND THE WORLD

ONE DAY soon you will be able to read this on your mobile phone, while at the same time checking the latest football scores and receiving a digital postcard from a far-away friend. The design and precise technical details of the device that will usher in the new era of mobile communications are still unknown, but one of its features is almost certain: in many instances it will have the name Nokia inscribed on the front of its case. According to the vast majority of telecommunications experts, the Finnish company is ahead of its competitors in the development of "third generation" equipment - a new breed of phones capable of surfing the Internet, receiving video images and storing huge amounts of data. If these promises are fulfilled, Nokia - which topped the market by selling 41 million of the 163 million mobile phones sold around the world last year - should be able to launch the first series of these "total communicators" within three years, opening a new market for telecommunications and information technology products.

And if the mobile phone of the future in your hand does not say Nokia, there is a good chance that it will be made instead by that other Nordic telecoms giant, Ericsson, manufacturer last year of 25 million mobile handsets, and the world leader in the network systems technology that underpins mobile communications. Nokia and Ericsson are also partners in the Symbian joint venture to establish the technology developed by the UK group Psion as the new global standard for wireless communications.

Finland and Sweden's dominance of in the mobile communications market is no accident. Throughout the 1980s, Nordic countries had been working on a common technical standard for mobile phones which would enable customers to use their handsets anywhere in the region. The 1981 launch of the Nordic Mobile Telephone service (NMT) gave local mobile makers an important competitive advantage.

While the UK and other European countries were still debating the merits of privatising their state-owned fixed line companies, Nokia, Ericsson and a swathe of smaller firms stole a march on their rivals by acquiring the technical and marketing expertise to sell mobile phones to a mass market.

The Scandinavians' headstart meant that they were the quickest to exploit the development in the mid 1980s of GSM, the pan-European standard for mobile telecommunications. As demand for mobile phones throughout Europe mushroomed, Nokia and others were ideally placed to feed a public hungry for high-quality devices at relatively low prices.

Sven-Christer Nilsson, Ericsson's chief executive, states an important truth, equally applicable to Silicon Valley's success in the US, about how companies from two small Nordic countries have come to dominate the mobile communications industry. "I believe we have been very lucky to have the competition," he says of Nokia. "It's benefited both companies by sparking innovation".

Nokia's desire to continue its winning run is nowhere more evident than in its factory and research centre in Salo, a small town 80 miles northwest of Helsinki. This community of around 20,000 inhabitants revolves around Nokia's operations, with more than 5,600 employees living in and around the town. The mobile phone factory on the outskirts of the town is one of the company's most technically sophisticated plants. As the workers on the silent production lines put together the handsets - the average phone takes two hours to make - the middle managers and senior engineers sit alongside them, ready to intervene if anything goes wrong. There are no physical barriers between skilled and unskilled staff.

The Ericsson experience is to be found at Kista Research Park, a dormitory town 10 miles north of Stockholm. Ericsson executives have nicknamed Kista "the heart of mobile valley", and Swedes like to boast that it is the fifth biggest technology business cluster in the world with more than 10,000 employees. Though architecturally unremarkable, Kista is reminiscent of the low-rise business parks scattered around Mountainview or Santa Clara in California's Silicon Valley.

Recently, the Swedish company has been caught out by the lightening-fast growth - and the blazing pace of its Finnish competitor - in the mobile handset market. (Nokia, whose mobile phones are termed "the N-phone" by tight-lipped Ericsson executives, is a sensitive subject in Stockholm.) But, with 40 per cent of the world's mobile phone network systems sales, Kista is now the base for work on refining the technology known as wide- band code division multiple access, or WCDMA, that will bring Internet, video, and an array of interactive services to the next generation of mobile phones - including Nokia's - beginning in 2001.

It is the story, however, of Nokia's extraordinary corporate metamorphosis, which transformed a nondescript forestry conglomerate into the world's largest maker of mobile phones in less than a decade, that best illustrates the full impact of the mobile communications revolution.

Founded in 1865 in the tiny Finnish town that gave it its name, Nokia spent the first 120 years of its history amassing a wide array of business around its core paper-making operations. Through a series of mainly domestic acquisitions, the company became a manufacturing conglomerate with interests ranging from toilet paper to rubber boots and tyres.

During this quest to expand, Nokia acquired a couple of telecommunications and electronics companies in the late 1970s. Under the leadership of the then chief executive Kari Kairamo, the businesses started working on cellular phones, and in 1982 the company launched its first "portable" product, the Nokia Senator, a handset attached to a bulky suitcase weighing nearly 22lbs. But despite the early breakthrough, the phones subsidiary was seen simply as a means of diversifying the group's earnings stream and for years it was confined to the outer reaches of the Nokia empire. This situation was to change dramatically in the late 1980s when a series of internal and external shocks forced a U-turn in Nokia's corporate strategy. On the internal front, the company was rocked by the suicide of Mr Kairamo and the death of Timo Koski, its chief strategist.

The leadership gap opened just as the unraveling of the Soviet Union, Finland's powerful neighbour and main trading partner, was plunging the Finnish economy into a severe recession that threatened to destroy its industrial backbone. As one Nokia executive recalls: "The effects of the USSR collapse were almost immediate. We lost a huge chunk of business overnight."

The economic troubles made the power vacuum in Nokia's boardroom all the more evident and triggered a complete shake-up of its top management. In 1992, Jorma Ollila, the 42-year-old head of the mobile phone division, was appointed group chief executive in a move that was to have profound repercussions for the company.

Mr Ollila, a former Citibank executive with a masters degree from the London School of Economics, refocused the company on mobile telecommunications. The new chief executive, a tall, forceful man, described by former colleagues as a tough boss driven by a fierce determination to succeed, overhauled Nokia, selling off its non-telecom businesses and investing heavily in the research and marketing of mobile phones.

Seven years later, Nokia is a pure telecoms company quoted in Helsinki, London and New York, with 1998 sales of more than 79bn Finnish markkas (pounds 8.7bn ), pretax profits of pounds 1.5bn and margins consistently higher than its main rivals. Its shares have had a spectacular run, showing a near 200-fold rise over the past seven years as earnings grew at a yearly rate of around 25-30 per cent. More importantly, it has overtaken the industry giants Motorola of the US and Ericsson as the world's largest maker of mobile phones.

Matti Alahuhta, the current head of Nokia mobile phones and one of Mr Ollila's most trusted lieutenants, said the break with the company's century- long past was key to its success. "We were a Nordic diversified conglomerate and we were not a truly global business in any of our operations. We had to decide which businesses to focus on and start to expand both in sales and geographical terms as fast as we could."

Europe is now Nokia's largest market, accounting for more than half of group sales, and is expected to grow strongly over the next few years on the back of a exponential rise in mobile phone use. But despite its undisputed global reach, Nokia' success is inextricably linked to Finland. Mr Ollila's mantra, often repeated by his employees, is: "No matter how international we become, our roots are Finnish." Finland accounts for just 5 per cent of Nokia's sales, and yet around half of its 44,000 workforce is Finnish, including the bulk of its senior management. Nokia is easily Finland's biggest company, accounting for around 10 per cent of the country's GDP and its shares make up nearly half of the Helsinki stock exchange

What the numbers and buildings do not tell is how important Finland has been in shaping Nokia's destiny. This country of just five million people has a passion for mobile phones unmatched anywhere in the world. Around 60 per cent of the population owns a mobile, compared with just 26 per cent in the UK. This love of the mobile has been attributed to a variety of causes, including the need to keep in touch in the country's vast open spaces and its excellent education system. But the real reason might have more to do with Finnish people's attitudes towards technology. As one Nokia employee put it: "The Finns are technology freaks. They are practical, pragmatic people who are open to change. Flexibility is something you grow with in Finland." Nokia sees Finland as a laboratory where trends in the mobile phone market can be previewed. A typical example is the explosion in portable phone use by teenagers.

Both Ericsson and Nokia forecast that the number of global mobile phone subscribers will increase from the current 300 million to a billion by 2003, driven by a huge rise in the number of young users. In central Helsinki, the ring of mobile phones is a constant soundtrack for the hundreds of youngsters basking in the midnight sun.

As one Finnish parent said: "In my youth, wearing jeans was required to be accepted by your friends. Now the prerequisite for being cool is to have a mobile phone. It is totally uncool not to have one or to have the wrong brand.'' But personalised ringing tones - anything from the Rolling Stones to Nessun Dorma - are only part of the story. Finnish teenagers use their handsets for a lot more than chatter. The latest fashion is to use phones to send messages, a practice which accounts for half of young users' mobile phone bills.

According Nokia's senior marketing manager Simon Bennett, the key to marketing success lies in segmentation of the market. Nokia tailors its products to perceived customer types, offering "high-flyers" its Communicator - a phone that opens up into a palmtop computer capable of receiving e- mails, sending faxes and storing numbers; while the "posers" -fashion- conscious individuals keen to get their hands on the latest fad - should be attracted to the Nokia 8110, also known as the "Zippophone", a tiny handset with a sleek, silvered-coloured case.

Nokia is two months away from launching the first "media phone" which uses wireless technology to issue weather reports, send picture messages and calculate biorhythms.

But for all its marketing prowess, Nokia's years of success could be destroyed by the latest health fears over mobile phones. Recent studies suggesting a link between mobile phone use and brain tumours are a sensitive issue among Nokia's top echelon. During an interview, a question on the cancer issue caused a rare loss of cool in the unflappable Mr Alahuhta. After a tense silence, he replied: "So far, no scientific evidence has proved that there is any kind of risk associated with the use of mobile phones." Any other attempt to elicit a comment on the findings of the more recent studies met with a stern refusal to comment.

Health issues aside, the future of both Nokia and Ericsson will hinge on technological changes. Throughout its recent history, Nokia has been able to outpace its competitors by being first with the latest handsets. Now that the "third generation" that will bridge the gap between mobiles and the Internet is beckoning, Nokia will have to contend with a swathe of high-technology companies with an interest in the Net, such as Bill Gates's Microsoft, as well as with its traditional telecoms rivals. Mr Ollila is acutely aware of the challenge. "The telecom industry is in the midst of turbulent change. The opening of markets, the digital convergence and wireless (technology) are opening the door to vast opportunities, especially for those who possess the industry's top expertise. Nokia wants to be one of those experts," he said.

Analysts believe that the battle to find the third generation "killer product" will determine the industry's winners and losers after the millennium. Nokia's 44 research and development centres spend more than 8 per cent of group sales - around pounds 400m - every year on R&D.

At Kista Research Park, Ericsson's Mr Nilsson sat in a moving van to show off the test high-speed wireless transmission system, which accesses the web at 300-plus kbs - about 10 times faster than a regular phone line. "I think I could do this all night,'' he said, downloading a Beastie Boys single from the Internet.

While Ericsson is still targeting its traditional European telecoms clients who are spending billions upgrading old fixed-line networks, it is also trying hard to build up a presence providing infrastructure for Internet data routing and web access through the wireless technology.

Nokia's vice-president for the Salo research and development centre, Arto Kiema, said: "Research is like kissing frogs. One out of 10 will be a prince. To find him out we have to keep kissing and that is why we work like dogs.

"If we get it right we are alive and kicking, if we don't we are dead."