Nokia: Windows Phone Success In China Should Not Be Ignored

May.18.12 | About: Nokia Corporation (NOK)

Lately some good news regarding Nokia (NYSE:NOK) came from China, however we failed to see this news in American media. Michel van der Bel, COO of the Greater China Region for Microsoft (NASDAQ:MSFT) recently announced that Windows phones reached a market share of 7% in the country where Apple's (NASDAQ:AAPL) iPhone only enjoys a market share of 6%. Considering that Nokia's Lumia was launched in China very recently - less than a full quarter - this looks and smells like success to me. Similar news also came from Russia. Additionally, the phones reached a market share of 6% in Germany. Outside of the U.S., Nokia still has a great brand name and the company is still recognized as one of the best mobile phone companies in the world.

China is a huge market with a growing middle class, and Nokia's success in China will translate into the company's turnaround. As I mentioned in my previous Nokia articles, all Nokia has to do is to stop burning through cash and generate a positive cash flow. If Nokia's success in China continues, this will be very possible. Of course, Apple will continue to grow its market share in the country, especially after it reaches an agreement with China Mobile, the country's largest mobile phone network with near 1 billion members.

Currently Android has 69% of the market share in China, which means there is plenty of room for both iPhone and Windows Phones to grow. The Chinese are used to using Android, so it may take them a while to get used to these two systems. According to Mr. Van Der Bel, Microsoft is ready to increase its investments in China, particularly those related to R&D.

As Windows Phone gains market share in China, Microsoft will throw more and more money in the phone in order to see its further success. We can be sure that as long as there is some demand for Nokia phones, Microsoft will back the company up fully. From the looks of it, Microsoft is deeply committed in this partnership.

I noticed on Seeking Alpha and many other financial sites that some people believe that Microsoft is paying Nokia to build Windows Phones. The fact is, Microsoft and Nokia are partnering to build a phone and the operating system that goes with the phone. This is not a relationship where Microsoft outsources phone building to Nokia; this is a relationship where two companies are on equal grounds and working together to accomplish the same goal.

I believe that Nokia will turn to profitability in the third quarter of this year. Patient investors of Nokia will be rewarded handsomely.

Disclosure: I am long NOK, AAPL, MSFT.