Nokia: What If Europe Wasn't In Recession

| About: Nokia Corporation (NOK)

Since 2008, Europe has been in a deep recession with the exception of the year of 2010. The continent, particularly the eurozone, lost a lot of jobs and a lot of economic activity during this period. Furthermore, due to the austerity measures, many people didn't have the luxury to spend a lot of money on items that are not seen as absolutely necessary. Interestingly enough, Europe is one of the markets where Nokia (NYSE:NOK) has the strongest brand name and most presence. While there are many factors in play, the current state of the European economy is at least partially at fault when it comes to Nokia's less than desirable performance in the last few years. If Europe wasn't in recession, Nokia's turnaround efforts would have been a lot more fruitful. Having said that, once Europe gets out of recession, Nokia should benefit greatly from this.

Of course, I am not saying that all of Nokia's problems should be blamed on the European recession. The company has made a lot of mistakes including sleeping at the wheel for so long. Between 2006 and 2010, as Apple was growing its market share and dominance so rapidly, all Nokia did was to watch and see its market share deteriorate. Many people think that Nokia held onto a sinking ship (i.e., the Symbian operating system) for too long and failed to make the jump to a more viable alternative (i.e., either Windows Phone or Android) until too late. While some of these are valid points, it is important to note that Nokia would be in a much better position today if the European economy wasn't in a deep recession, which tells me that the company's business will improve greatly once the recession is over.

For example, take Ford (NYSE:F). Last quarter, the company (along with other major car companies) reported its worst sales figures in Europe since 1993. In 2007, Ford sold 1.97 million cars generating $36.3 billion in revenues in Europe. In 2012, the company sold 1.35 million cars generating $26.6 billion in revenues. This is a decline of 31.47% in volume and 26.72% in revenues. The decline was not a result of bad operations by the company - rather a result of the fact that Europeans have less money to spend on things like a new car or a new cell phone.

In many countries, GDP per capita fell sharply between 2007 and 2013. For example, the GDP per capita fell from $38,563 to $36,130 in Italy, one of the largest economies in Europe between 2007 and 2013. This is a decline of 6.3% not accounting for inflation. In Spain, the figure fell from $34,977 to $31,984 during the same period, representing a drop of 8.55%. In Finland, Nokia's home country and one of the most stable economies in Europe, GDP per capita fell from $51,186 to $48,811. In Ireland, there was a dramatic drop from $59,573 to $47,478 during the same period. In Germany, the figure stayed flat as it changed little from $44,132 to $44,021, whereas France saw some decline as the figure fell from $43,992 to $42,379. Finally, the figure in the UK fell from $43,146 to $38,974, representing a decline of 9.66%. During this period, the average annual inflation rate across the continent was around 2% and if we include this figure in our calculations, things get even worse.

In 2008, Europeans spent $253 billion on consumer electronics which includes smartphones, tablets, laptops and other devices. In 2013, they are expected to spend a sum closer to $200 billion. This figure keeps currency exchange rates constant but doesn't account for inflation or population increase rates. The high unemployment rates in Europe among the younger population make it difficult for consumer electronics companies to sell many products in the continent. In the European Union, every 4th person between ages 18 and 30 is unemployed.

Currently Nokia's market share in smartphones in the largest 5 European countries is close to 7%. Before the recession, Nokia used to generate nearly 40% of its revenues from Europe. Today, Europe accounts for less than 30% of the company's revenues.

Even though much of Nokia's lunch is being eaten by Apple and Samsung today, the company was heavily affected by the European recession. It is difficult to pinpoint the exact effect of the recession on the company's revenues, but it is likely to be a significant amount.

When the European economy goes back to the growth mode, many Europeans that have been holding onto their earnings will be more comfortable to spend money to update their phones. Before the recession, roughly a quarter of Europeans had a habit of replacing their mobile phones every year and Nokia profited greatly from that for years.

Currently, Windows Phone is gaining market share in Europe. Even if its shares remain flat in the continent, a growth of the European economy will help Nokia a lot in the following years. In 2011, there were 456 million Europeans who owned a total of 656 mobile phones (yes, many individuals owned more than one mobile phone) with a penetration rate of 128% (which is the highest in the world). This is a huge market that's been in a sleep mode for the last few years. Currently, the European mobile communications market is nearly as large as $250 billion which presents a lot of opportunities not only for Nokia's handset business but also for Nokia Siemens Networks. It may take a few years before the European economy recovers, but when that happens, Nokia will be one of the biggest beneficiaries.

Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.