On December 5th, a partnership between China Mobile and Nokia (NOK) regarding Lumia 920 was announced. While the story was big, there was a lot of skepticism around it. The analysts at Bank of America even went as far as calling the deal "unimpressive" because Nokia has been losing market share in China. In the USA, mobile carriers usually subsidize mobile phones so that people don't have to pay the full price for them. Of course, eventually the users will end up paying the full price by the end of the contract period, but it is still nice knowing that one doesn't have to pay the full price upfront when purchasing a new phone that might cost as much as $750. In China, it is very rare for mobile carriers to subsidize smart phones. Usually the users will pay the full price upfront and buy the phone if they can afford it. Obviously, in a country where average monthly income is a few hundred dollars, selling costly phones becomes a challenge.
China Mobile is the world's largest mobile phone carrier company with 707 million members. The company has an interesting habit. While China Mobile will not subsidize most phones, the company sometimes offers subsidies for certain select phones. For example, earlier this month, the company's president Li Yue hinted that iPhone 5 would not be subsidized by China Mobile because Apple's demands were not reasonable. Because China Mobile is mostly owned by the Chinese government, it will be very picky about which phones it subsidizes and which phones it doesn't subsidize. Back in August, China Mobile announced that it has a set-budget for phone subsidies and the limit for the year 2012 was 26 billion Yuan, which can be translated in $4.1 billion. Because of the limit, it is very important for a company to have its phones to be included in the subsidized group. It is obvious that subsidized phone models will sell far more copies than the phones where the users have to pay the full price and subsidies usually have no additional cost for the phone makers.
Recently, one of my readers pointed me to an article published on Daily Finance regarding the details of the agreement between Nokia and China Mobile. Here is the story:
Which brings us to the latest news coming out of China. China Mobile is taking pre-orders of the Lumia 920T at the $740 price point until it receives stock from Nokia in January of 2013. However, China Mobile announced that it intends to subsidize the cost of the 920T for customers that sign up for a two-year data plan. What will the Lumia cost customers, after subsidies, in China? All of 1 Yuan.
I think this is huge news. Getting a subsidy by China Mobile is the difference between selling 1 million phones and 10 million phones in the country. This move can definitely turn things around for Nokia, who has been suffering huge market share loss in the country. While many companies see China has a driver of growth, Nokia suffered shrinkage in the country year after year. For example, in the third quarter of 2012, the company's revenues in China fell by 78% compared to the same quarter in the year of 2011. In the third quarter of 2010, Nokia sold 20.2 million phones in China, followed by 15.9 million in the same quarter of 2011 and 5.8 million phones in the same quarter of 2012.
If Nokia wants to have a successful turnaround story, it has to make a comeback in markets like China, India, Russia and the Middle East. For many years, Nokia was known as the company that produces indestructible cheap phones that one could use for years. Now the company is proving itself again to the world as it shows everyone that it can build a phone that is as good as Apple's (AAPL) and Samsung's flagship phones, if not better in many ways.
Nokia's turnaround is not completed yet. It is far from over. The company's share price has nearly tripled since it bottomed at $1.68 last summer, but there is still a lot of road to go, a lot of walls to climb and a lot of work to do. I am glad that the sentiment on Nokia is much better than how it was 6 months ago, but there is still a lot of room for improvement. First, Nokia needs to breakeven, which should happen in the first half of 2013; and then, it needs to become profitable, which should happen in the second half of 2013. There are a lot of threats and dangers in front of Nokia, but the company's management is well-positioned to convert most of those threats into opportunities in the medium and long term.
I am still bullish on Nokia and I am still holding onto my shares. If the share price falls below $3.00, I will back the truck up to get more shares.