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« My Thoughts On Nokia Handset Unit Sales to Microsoft - In Short: Is Bad WAY to Sell Something and thus gets you bad bargain | Main | Nokia Under Elop - His 3 Years: Performance Review - Worst CEO of All Time - All the Facts - In Pictures »

November 08, 2013



"And I don't think Microsoft and Nokia failed at all. This whole idea that Nokia and Microsoft would surpass Apple and Android is total fantasy."

Rewriting history again. Sorry, but we were there when it happened, and we remember.

Windows Phone will beat Android in 2013, analyst explains

Windows Phone will pass iPhone by 2016, IDC says


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@B a r o n 9 5 (the real Baron95?) wrote "What first world country had Nokia smartphone sales increasing at the time of the Memo - which would only impact orders for handsets to be sold in Q2/2011 and later?"

You tell me. I only said that it caused damage to operator relationships.

"Either way, the memo was probably the only way to get the multiple Nokia fiefdoms to pull in the same direction."

(I had to search for a copy of the text to remind myself what he said, and I found this recent article quite interesting:

The memo might have succeeded if the follow-on step hadn't been to throw out the baby with the bathwater. Why write a memo whose purpose is (presumably) to refocus and rally the company, then effectively make most of your audience redundant with the next announcement? What's strange is that he inadvertently identified some of the systemic problems with Nokia in his memo but, instead of addressing them, he just chose what seemed to be the easy option. Either it was an act of desperation to switch to Windows, or it had already been decided well in advance.

Elop wrote something on his internal blog not that long after about the Windows decision - the internal PR machine tends to kick in on occasions like these. The part that stuck in my mind was that he said the decision had been made many months before. You can argue about whether he meant switching away from Symbian/MeeGo or switching to Windows. Personally, I can't believe that Android was ever seriously considered - I think too many people in middle/upper management had axes to grind.

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On top, it looks like a pretty fundamental issue, with a solution that ought to be readily obtainable.


"Apple is spending more money on machine tools"

Yup, which reminds me that one of the most vocal commentator here berated Nokia and other device vendors for foolishly owning their means of manufacturing. My reply then was that Apple was itself buying the necessary production equipment and that direct capital (i.e. equipment, means of production) ownership instead of complete production outsourcing makes perfect economic sense and is a crucial advantage in industry. Hope that the reference you put nails down the message and close this specific argument.

B a r o n 9 5

Nokia did not own the means of manufacturing. They owned ridiculous plants. Including in Finland, Germany, Poland. That is totally ridiculous and uncompetitive. Apple invest in unique tooling that are control points and place them in factories operated by Hon Hai, Compal, etc.

There is a world of difference. Apple invests in control points. Nokia was investing in buildings and expensive, unproductive people on direct payroll for production. Buildings and expensive productions personnel are not control points. They are boat anchors that will sink any ship.

B a r o n 9 5

@Winter - Microsoft selling Windows Phones at a loss.

Even if true, so what?

Google produces Android at a loss and gives it away for free. They make Nexus phones at a loss. Is that bad?

Amazon loses money on every Kindle. Is that bad?

You are so clueless.

You think Amazon, Microsoft and Google's play in this space is to make a few bucks on a phone or tablet?

They are playing to control entire ecosystems of OS, Network SW, Applications, Cloud Services, Music, Video, Books, etc, etc, etc.

Did you miss that last quarter iTunes generated the same revenue for Apple as the Mac line? And it is growing at 80%+?

There may be in deed a point where devices are given away for free.

I'm so sorry for you and Tomi. You are fighting 1990s GSM battles while Apple, Google, Microsoft are fighting 2020 World Word III.




"Apple invest in unique tooling"

Yeah, because you think Nokia plants were empty? Nokia invested in entire plants -- equipment and "unique tooling" included.

"unproductive people on direct payroll for production"

Huh? Production personnel is by definition productive. It is all those "business developers" and vice-presidents and other overhead at HQ who are unproductive.

"expensive productions personnel are not control points"

On the contrary. The more the product is high-tech and uses advanced production tools and processes, the more qualified, ans yes, expensive, production personnel is a control point.

You obviously neither know, nor understand what you are talking about.

When it comes to Apple, the economics can be summarized as follows:

1) The objective is to extract as much value from the entire production chain.

2) Production facilities constitute a fixed investment. The more, and the longer you produce on them, the less the CAPEX weigh in the final cost -- your operating margin increases (but you really must be successful at selling masses of products -- which Nokia was, Samsung and Apple are, all of which own(ed) their production equipment).

3) If you outsource the production, the contractor is basically paid in proportion of units ordered. Hence, if the subcontractor owns the facilities, it also captures the increasing returns to capital due to growing production.

4) By owning the tools, Apple basically reduces the revenue of subcontractors to purely variable costs (i.e. labour, energy, materials) and a tiny profit margin. The profit accruing to decreasing CAPEX in the final unit costs is captured by Apple.

5) Apple can also determine exactly the equipment it wants to be used -- to cater for the way Apple products are designed (which often requires special materials, etc).

6) By not employing production personnel what Apple does not capture are increasing returns to labour productivity (deriving from learning curve). Apple does not seem to care much, as Foxconn & co mostly rely upon masses of low-productivity, low-paid, little trained factory workers. Hence not many competences to retain. If the production was more automated, things would look different. By the way, I suspect this arrangement is mostly for assembly and less high-tech components -- production of CPU for instance is probably a completely different matter.

The results regarding quality are telling: what I keep reading are low yields on the Apple-dedicated production lines. There was an article in BusinessWeek about Apple subcontractor Foxconn in Malaysia ("An iPhone Tester Caught in Apple's Supply Chain"). The factory that produces optical components for the iPhone was eventually closed, with 70% of components being rejected at QA. An incredibly low yield -- I got a confirmation from somebody with long experience in electronics manufacturing that such a rejection rate means your production process is completely out of control. Outsourcing production personnel on the cheap is not so productive after all...


"You think Amazon, Microsoft and Google's play in this space is to make a few bucks on a phone or tablet?"

On this very specific point, Baron95 is right. The game is multidimensional, and the players have several cards to play (MS: business services + games; Amazon: pay for content + cloud services; Google: ads mainly, but also some commercial cloud offerings).

B a r o n 9 5

@Ecasais On your Essay on Production

You are completely wrong on several points. Assembly labor for phones is a commodity - the more advanced the tooling, the more comoditized labor becomes. Factory buildings for phones are a commodity - unlike say a 777 plane assembly building or a semiconductor fab. There is little advantage for owning either.

Ownership of advanced tooling, that is unique and prevents contract manufacturers from using them to produce competitive products, on the other hand, are a huge control point. Apple, under Tim Cook (when he was running manufacturing, supply and operations) figured out the formula perfectly. To have control of production, without owning the commoditized portion of the production chain.

We have not (yet) experienced a smartphone severe downturn or price war. But, it is inevitable. When it comes it will be vey painful for companies like Samsung.

Apple can adjust orders to its contract manufacturers very quickly. Samsung will have to shutdown huge factories and layoff tens of thousands and face labor strikes, etc. It will be messy.

Just because you haven't seen a downturn yet, doesn't mean one is not coming. When it does. I want the companies I invest in to be able to turn off production quickly. You can keep all your buildings and people. I'll hold Apple stock, thank you.


@B a r o n 9 5: "Nokia was investing in buildings and expensive, unproductive people on direct payroll for production." - well, you talk about Nokia factories without knowing anything from them...

I've seen with my own eyes them and I can tell you, they are _extremely_ effective stuffs. Maybe not _so_ effective as some factory megapolis - where all kind of component is manufactured in the 'nearby' factory - in China but still.

I know capitalism is not about social responsibility but latter one was one of company values of Nokia - and I see it absolute positive...

"Apple can adjust orders to its contract manufacturers very quickly. Samsung will have to shutdown huge factories and layoff tens of thousands and face labor strikes, etc."

Wow, what an ethic... The cool clever guy just 'adjust his contract' and done - no stupid workers to be sacked. At least not directly because those poor guys will be sacked by its contractor, anyway...

This mentality leads to the situation of e.g Detroit in your own home county, man!



"Assembly labor for phones is a commodity - the more advanced the tooling, the more comoditized labor becomes."

It would be nice if the equipment acquired by Apple were just for assembly lines manned by low-qualified personnel.

Unfortunately for your argument, this is not the case.

Did you care to read the article referred to by Leebase? The information is telling:

Special equipment for testing gyroscopes, for milling aluminium bodies, for laminating displays, for coating anti-reflecting surfaces, furnaces for sapphire production. High-tech, highly automated, relying upon robotics.

Commodity labour is not the issue. Not at all.

When you say

"unlike say a 777 plane assembly building or a semiconductor fab"

Precisely. Industrial buildings for electronics assembly are commoditized. I.e. relatively cheap. They will not sink the firm -- and, if not wackily oversized, they are fairly easy to disinvest. A semiconductor fab or an airplane hangar on the other hand...

I suggest you re-read carefully what I wrote, with a cool head. I did not state that Apple is stupid -- on the contrary. Apple, Samsung and Nokia procure components, subcontract some work, and own a large part of the production means. There are very strong, very well-established economic reasons to do this. Apple does it in an original way, but the underlying industrial logic is similar (keep margins accruing to CAPEX, avoid "leakage" of production capabilities to competitors, keep knowledge of product design, etc).

"When a severe smartphone downturn comes it will be vey painful for companies like Samsung."

And for Apple, whose expensive machinery will sit unused. This is the inevitable counterpart of investing in production capital.



"I think it displays the value of Apples massive cash position."

Yes, that is the major difference with other players. Apple can play the game of investing in new manufacturing processes and equipment to a much larger extent than other comparable players. But it is not the only one: companies like Intel do the same -- their business is predicated on being at the tip of the progress in manufacturing techniques and tools, into which they invest gigantic sums.

"Apple has to invent the manufacturing processes in time to manufacturer the phones"

Every major player does this to some extent, in every industrial segment, and at every level. I am still amazed when seeing SME inventing and building their own machinery to produce whatever they produce, because no tool manufacturer has what they need or supports the process for the production of their new products.

"Apple doesn't feel the need to own the commoditized portions of the manufacturing chain."

With exceptions, most firms feel the same.

"And what is cutting edge today becomes tomorrow's commodity."

Not necessarily, some cutting edge techniques are simply abandoned because something better comes rapidly to supplant them. But I see your point.

B a r o n 9 5

@Zlutor "I've seen with my own eyes them and I can tell you, they are _extremely_ effective stuffs."

Really? They are effective? You got that by looking at it? Wow!!!

What the unit production costs compared to the Hon Hail factory that builds the iPhone? How much does Nokia have to pay to fire a low performing employee? If Nokia needs to increase production and hire 50,000 workers in a month can they do it?

You have no clue what you are talking about. Hon Hai can increase/decrease workforce by tens of thousands virtually at will. Low performing people don't last even a day there. The level of productivity/competition on a Hon Hai factory vs the one in Finland is not even on the same plane. That is why the Finnish factory closed and Hon Hai is expanding.

You are just being emotional.

B a r o n 9 5

@Ecasais "And for Apple, whose expensive machinery will sit unused."

Nope. They'll be used less or re-purposed. Either way they'll be financially depreciated to offset taxes.

Meanwhile, Samsung not only faces the tooling problem, they will still have to dismantle buildings and lay of tens of thousands of work, pay severance, suffer strikes, face negative press.

In 2005, 2006, 2007, GM was generating record profits in the US. In 2008 the downturn came and they lost $40B and in 2009 were bankrupt. This is how fast things can change when you have excess capacity and employment that YOU OWN.

Apple is certainly not immune to a downturn. But they are much less exposed.

Similarly for commoditization. Apple is not immune, but they are less exposed than Samsung and other Android OEMs. The switching costs from Samsung to HTC or Moto is near zero. The switching costs from Apple are huge. All your iTunes assets, lost of iMessage, FaceTime, PhotoStream, etc with friends and family, etc, etc.

The battle is for control points. If you don't have control points you are exposed. If you have less than your competitor you are more exposed.

See the pain that LG and HTC have been going through. Due to lack of control points. Samsung built theirs with advertising/brandawareness, volume, a somewhat differentiated UI, design speed. Most are at best loose or temporary control points.

iTunes, iCloud, iMessage etc are much more lasting and higher barrier control points.

That is all.

B a r o n 9 5

@Leebase - Advantage of cash position. Exactly.


Samsung learned it as well (being on the receiving end of Apple's cash). If you were on the Samsung earnings call, they now have $50B in cash are are "reluctant to return cash" because "they want to accurate M&A" and preserve "Strategic Options" and "Protect against a downturn in mobile". All words of their CEO.

Again. Samsung getting it and likely continuing to out-execute the Android crowd and chasing Apple-like control points.

B a r o n 9 5

LOL - Tomi is not allowing comments on his latest point on Elop's performance. He can't afford to let anyone comment that his argument for worst CEO falls completely flat when you look at the only performance metric that counts.

Nokia stock price the day Elop took over: EUR 7.12, US$9.58

Nokia stock price today: US$7.94

That is a 17% decline. So a 17% decline over 3 years in share price (the only thing that matters) on a company that got completely disrupted is a bad result how?!!???

How about the CEO of old GM (largest auto manufacturer), which presided over a 100% loss in share price - to ZERO?

Or CEO of Enron (largest Energy trader, top 5 energy companies in the world), which presided, also over a 100% loss in share price to ZERO, and went to jail.

And so many others that saw shareholders (and bond holders) totally wiped out?

17% share loss from a company that was totally disrupted is amazing. Outstanding performance. Elop should definitely be a candidate for Microsoft CEO.

Again. ignore Tomi's analysis. It is purely emotional and unit counting.



"They'll be used less or re-purposed."

a) To be profitable, capital must be used near or at full capacity. Using expensive machinery "less" means eating into margins. Fast. If you reach the point where you make losses, you can no longer amortize that capital to offset taxes anyway.

b) Special-purpose machinery, such as the one developed by/for Apple, is very difficult to re-purpose for genuinely different products. It can only be used for closely related product lines -- but since these product lines are precisely those that no longer sell well, then you are stuck.

"Samsung not only faces the tooling problem,"

If tooling is not a problem for Apple, then it is not a problem for Samsung either. Be logical.

"This is how fast things can change when you have excess capacity and employment that YOU OWN."

Wait, what? You just said the solution would be for them to use their capacity less or re-purpose it -- why didn't they do it? Face it: if excess capacity is a problem for manufacturers owning means of production, then it will be a problem for Apple, which owns its means of production. Be logical.

Either you did not read what I wrote, or you read and did not understand it, or you understood it but refuse to acknowledge it.

I explicitly stated that owning production means is economically profitable on the condition that you are able to use the capacity for mass production -- and are successful at selling this production.

Tooling is a problem for Samsung, not for Apple. Excess capacity is a disaster for others, not for Apple, which can just use its capacity "less". Apple is wonderful because it has those special-purpose machines for its specially designed products using non-standard materials, which is the strength of Apple -- but it is no problem re-purposing such special tools. Logic is definitely not your forte.

"they will still have to dismantle buildings"

Ah, buildings again.

I gather that you own Apple stock. A good tip for you: as soon as Apple announces the inauguration date of its new HQ, sell it all. There is a historically very strong relation between the inauguration of an architecturally dashing, prestigious, large HQ and the apex of a corporation. Once people move into a new grandiose HQ, it is first stagnation and then all the way down. I am not joking.

B a r o n 9 5

@E.Casais. You are being silly. Why didn't GM close down plants and lay off workers fast enough? You are seriously asking that question?

Do you know anyone who wanted to buy an auto plant in the unionized midwest in 2009? They couldn't sell it. Do you know how hard it is to fired an European or US union worker?

Do you know how easy it is for Hon Hai to downsize 10,000 workers? They can do it in one day.

If you don't think that owning plants staffed with union workers is a problem in downturns, you have no management experience.

A safire glass furnace is a valuable asset, and even if you don't need it, you likely can sell its output. 10,000 un-needed unionized or European workers are a boat anchor. If you can't tell the different you have no clue how the world works.

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