Nokia (B): Business Interests vs German Pressures

I. The Trends in the Mobile Handset Industry Saturation in the developed markets and growing number of consumers in emerging economies Demand for low-end, inexpensive models in the emerging economies A lot of manufacturers to share costs outsourcing some or all stages of a handset production Shift of economic activity between and within regions in Asia to China and India, and in the European Union to Eastern Europe. Low-cost production was an option being explored by many companies. This had been made possible as a result of globalisation. What were the different aspects of globalisation and what did companies need to understand in order to be successful globally? Increased globalisation has seen the fragmentation of the value chains and the relocation of industrial activities. If globalisation is interpreted as opening the space for strategic action of corporate actors, it is also an extended and intensified cultural exchange. It tends to put into question the takenfor-granted assumptions and beliefs concerning corporate structure and strategy. Companies do not necessarily have to abandon their original guiding ideas but they do need to compare it with alternatives elsewhere or the socially constructed global best practices.

In a global world, it is very important for any country to be sensitive to the differences in business practices. What works for US corporates may not necessarily suit their Japanese counterparts. Even within continents, if a certain practice is followed in Finland, the same may not be applicable to Germany. Production is being moved to low-wage countries where the difference in wages can be ten-fold or sometimes even more. Relocation decisions do not just mean looking at a low-cost option; they are more complex than that. Cost-considerations should not be the only factors influencing plant relocation decisions.

 Plant relocation decisions based on just wages and material cost tend to be short term in nature. Wage rates after sometime will increase in those countries also and then the company savings may not be significant. As is the case with the Eastern European countries. Even though it may not happen in the very near future, these countries stand to lose their competitiveness because of an upward trend in costs There is danger in using a low-wage country as a short-term response to a competitive threat. It is not for long that a company will be able to level the playing field Looking at only the manufacturing function in the plant. This means focusing only on reduction in direct labour costs and not looking at reducing costs across the entire business system. The impact that the decision can have on the company could thus be underestimated

A companys plant situated at a distance from its other major functions can affect the important relationships that sustain the companys proficiency in those critical hard-to-develop business processes that deliver value to customers The company when planning relocation needs to consider all the costs that it might have already incurred in the current plant i.e., the cost of building the plant, the cost of the facility, the cost of trained personnel, etc. Along with this, even the goodwill that the company must have built over a period of time is at stake. After discussing the factors influencing plant relocations, I moved on to discuss the same for Nokia. Nokia opened its factory in Germany in 1987, why do you think it made that decision then and what about the costs that it must have incurred till now? If we consider the time period of 1987, then mobile devices were not the ubiquitous devices that they are today. As the developed markets are saturated, the mobile handset industry has also become increasingly commoditised. In the 1980s, mobile handsets were within the reach of a few and because of the complexity of technology, high-level of technical expertise must have been required. German engineering has always

been associated with high-quality, as is exemplified by the image that German cars evoke. This could have been Nokias reason for starting a factory there. Now, the need is to supply low-cost handsets. This requires volume production for which a plant in a low-wage country would be more economical. Currently, out of 10, Nokias seven device sites are in low-cost countries. The company has prior experience of being in a low-wage country and going by Nokias profit in 2007, the company has also benefitted from this. Thus, apart from wage considerations, other reasons for plant relocation could be: Nokia gets to build its factory from scratch and the company can then integrate various functions. Nokia has plans to develop the area to make it attractive for Nokia suppliers to move their production there. This will further afford the company with supply chain efficiencies The handsets that will be produced in the Romanian factory are for the Middle East and Africa. The location could also provide more geographical proximity to the target markets Demand in the developed countries has already saturated. Eastern European markets however still have a lot of potential and this could have also influenced Nokias decision. The company could be looking to tap the first-time users there. Given the above reasons and even otherwise, Nokias decision to relocate its factory is perfectly legitimate. Being a Finnish company, if it can move from Finland to Germany, so can it from Germany to Romania and anywhere else it pleases. Strategic location decisions are always business decisions which corporations must take. The mobile phone market is getting increasingly competitive and to survive, companies have to look at cost-cutting measures. All said and done, economically, it may be a very sound decision for Nokia but what is perplexing is how clumsily it was handled. This, in large part, is responsible for all the criticism that the company is getting.

II. Was the German backlash against Nokia justified? How can nations make themselves more competitive? Globalisation implies a changing role for not only companies but also for countries. The Western European countries are seeing increasing trends of offshoring because they are not competitive where wages are concerned. In an increasingly globalised world, it is important for countries to put into place fundamentals underpinning economic growth and development. The Global Competitiveness Report defines competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country. It examines the factors enabling national economies to achieve sustained economic growth and long-term prosperity. Some of the factors that determine a nations competitiveness are: Institutions: This forms the framework within which private individuals, firms and governments interact to generate income and wealth in the economy Infrastructure: High-quality infrastructure ensures the efficient functioning of the economy. By reducing the effect of distance between regions, it integrates the national market and connects it to the markets in other countries and regions Macroeconomy: The stability of the macroeconomic environment which comprises factors such as inflation, government debt, national savings rate, etc., is also necessary Higher Education and Training: This is important for nations that want to move up the value chain beyond similar production processes and producers Goods Market Efficiency: Healthy market competition both domestic and foreign, is important in driving market efficiency Labour Market Efficiency: The efficiency and flexibility of the labour market are critical for ensuring that the workers are allocated to their most efficient use in the economy Technological Readiness: The ease with which an economy adopts existing technologies to enhance the productivity of its industries is also critical. In the case of Germany, we see that the country has made efforts to make its business environment more attractive for companies. The average wage of workers has come down. Still, this is no match for the really

low-wage countries (Exhibit V of the case study). A difference of ten times is a huge gap and one that may eventually be bridged with either Germany lowering wages or the other countries coming at par with the developed nations. Yet, that is something that will take a long time. Germany is not competitive where wages are concerned. Do you think, the hue and cry over Nokias announcement to close its German plant can further erode the countrys competitiveness? Germany as a result of its stringent labour laws and high wages has already seen the exodus of a number of companies. From Exhibit V of the case study, we find that the condition regarding wages and competitiveness is only deteriorating. At least on the wage front, companies are going to get no respite. The Nokia episode will only mar the countrys reputation making companies sceptical about going there. In a free-market economy, plant closure is an unavoidable occurrence. This incident serves as a red flag to anyone else who may be thinking of investing in that region because now they know what to expect, if they ever have to close down their investment. There has also been an anti-Finnish sentiment in the country. This can be harmful for the cultural ties between the two nations and also show that Germany is not very hospitable towards companies from other countries. This is when the jobs are going to another European nation and not to some low-cost location in China or India. If the latter would have been the case, then the ruckus created would probably have quadrupled.

Germany is also the biggest contributor to EU funds that has the goal of harmonising the standard of living in all its member states. Therefore, it will be in the interest of the German trade unions and German politicians if their eastern neighbours catch up as rapidly as possible. Countries give subsidies to attract companies, so now is it justified to make an issue around it?

The row over the subsidy seems to be a ploy of the local politicians to punish and embarrass Nokia over its decision to close the plant. In this entire episode, nowhere have they mentioned that the plant must not close. All the interest seems to be in getting the company to pay back what it got from the state. The move in no way resembles an attempt to help the workers of Bochum. It is ironic that the same people who must have had a say in granting the subsidies should now question the effectiveness of the policy. The state already must have reaped benefits from the jobs created and the taxes that Nokia gave. This row could also jeopardise the jobs of those workers who are employed in other Nokia units in Germany. Furthermore, subsidies are in no way a guarantee of a companys life-long fidelity. There can be a debate on, whether the economy as a whole fares better if there are no state subsidies. However, for each nation, subsidies remain a carrot that they dangle to attract companies to set shop there. The benefits far outweigh the cost of subsidies. All countries, whether within the EU or outside compete fiercely in real life over new industry settlements and investments that create new jobs. It is precisely for this reason that contracts are signed and some sort of a lock-in period created. Accusing Nokia of caravan capitalism seems odd in a free market economy. Private companies cannot be blamed when they make the most efficient use of state subsidies in order to maximise their profits. Government policies are responsible if this leads to subsidy hopping. Moreover, the charges on Nokia regarding the subsidies are much after the expiry of the term of contract; making the motives of those who are using subsidies as a weapon dubious. Can Nokia be forced to change its decision? Despite the Bochum plant being highly productive and not making any losses, after the expiry of Nokias subsidy contract with the German government, there is no way that it can be forced to stay there. Public policy can make the framework conditions as attractive as possible by means of taxes, infrastructure, regulations and educational efforts. But, if a company decides upon a different location anyway, then that is

just as legitimate as it is necessary for an efficient, competitive economy. If the German companies themselves have moved to the Central and Eastern European nations, then there are no grounds for stopping Nokia.

III. What issues should companies consider when making strategic business decisions like plant closure? How should companies, especially ones as high-profile as Nokia, handle such large-scale restructuring moves?

Plant closures are inevitable but the way in which they are handled differs from company to company. So, how should someone who has decided to relocate the plant to an Eastern European country go about closing an existing plant in another country?

Plant closures can be hard to manage and companies should consider the challenges associated with disposing of such a business while optimising the value of assets and managing costs. The problems that can arise are legal complications, cultural differences, regulatory issues and unrest among the employees if not communicated properly. However, measures can be taken to ensure a successful exit: Create a Closure Team: Along with people from the head-office, local staff can be chosen as they will know the business well. The staff will have a better understanding of the political environment, domestic employment laws and expectations of the workforce. Such factors can vary enormously from one country to another and one plant to another and any company that ignores them risks destroying a significant amount of brand image. Managing the Workforce: Human beings can be the most critical and unpredictable part of the equation. Most countries use a mixture of legislation, collective bargaining agreements, contractual provisions and

judicial practices to govern hiring and firing decisions. From Exhibit IV of the case study, we see that it is easier to implement a redundancy programme in the US and UK than in Germany. While adhering to national regulations, it is imperative to maintain the goodwill of the workforce so that they continue to be productive during the transition. An incentive programme should be decided and it should balance the impact of plant closure on an employees earnings against the value they can create or destroy during the closing down period. Conduct a First-rate Communications Programme: Communicating is vital. Many stakeholders including staff, local authorities, trade unions and other factories within the company are affected when a plant is to be closed. It is important to communicate clearly and regularly with everyone. The issue can be emotional as even those whose jobs are not on the line, may be upset by the loss of their colleagues. Clear written and oral communications can help to eliminate any misunderstandings and set a positive tone. Before announcing the closure publically, the company must comply with the statutory requirements; draw up a plan for communicating with all the different stakeholders including unions, staff associations, shareholders and the media; and put measures in place for dealing with rumours and leaks. During the closure process itself, it should consult union representatives, issue individual notifications of redundancy and provide a programme of employee counselling for those who need such support. Secure the Supply Chain: It is important to have enough stock to meet the expectations of customers as it will take time to start production at another site. It is also important to ensure that the company will get all the supplies it needs to its new plant after the move. Capture and Transfer Knowledge: It is important to capture the knowledge within the existing site and transfer it to the new factory. Plan for Contingencies: Even the best-laid plans can be jeopardised as no company can anticipate all the problems that it is likely to face when it shuts an existing factory.

The class moved on to discuss Nokias way of handling the plant closure. Nokia said that the way it handled the plant closure in Germany was how it would have done it in Finland and anywhere else. So, to what extent should a global business adopt local practices or use a company-specific approach across different countries when restructuring? How could Nokia have communicated the announcement of the plant closure? When working in the global commercial environment, knowledge of the impact of cultural differences is one of the keys to international business success. Companies strive to improve levels of cultural awareness that help build international competencies and enable individuals to become more globally sensitive.

To handle the plant closure in Bochum, Nokia had two options: Plant Closure Options

The German Way The Nokia Way Germany follows the socialist market concept. Companies operating there cannot treat their workers merely as employees but have to treat them as partners. This is a noble tenet and if followed, certainly will improve their relationships. But in all of the protests surrounding the German plant closure, there seem to be a lot of vested interests and ego issues. The unions are feeling left out as they have not been consulted. There is no evidence of whether they could have averted the crisis or not. If the BenQ closure and the ensuing drama is anything to go by, then the employees would probably have been short-changed this time as well. From the options identified in the previous question, what could have been the advantages and disadvantages? Disadvantages of the German Way for Nokia: Nokia had already made the decision and to enter into talks about closing the plant would have

been beating about the bush The company announced the closure after the holiday season. If we consider that demand for mobile phones is cyclical or at least slightly higher during the holiday season, there could have been an ulterior motive as the company might have been afraid that workers would refuse to work at a crucial time period The production in the Romanian factory was scheduled later and hence the German plant had to continue the production. Hints of the closure could have demoralised the workers and made them lose interest in their work The vested interests of the parties could have prolonged or derailed the programme The strategy could be to take the employees by surprise, leaving less time for arguments over a compensation package. If the company would have consulted earlier, then the unions might have got more bargaining power over the company. Advantages: Nokia would have been held as a socially responsible company with a human touch If today the Nokia example will go down in textbooks on how not to handle a restructuring, then it would have exemplified how exactly to tackle a plant closure Nokia would not have soured its relations with Germany. Advantages of the Nokia Way: The companys reputation may have taken a nose dive but it has set a precedent regarding future decisions of the company.

Disadvantages Apart from the damage to company reputation, how else will the company suffer due to its actions will be known in the long-term. There may be hidden costs in terms of the destruction of a relationship with a customer or other stakeholder. Whether the company will suffer economically because there is a call for boycott of Nokia products in Germany where Nokia generates its third highest sales (Exhibit I of the case study) can really not be estimated now. Further, the issue of repayment of subsidy and a compensation

package for workers has yet to be settled and only then the final impact of Nokias decision will be known. Yet in the short-term, there will be adverse implications of Nokias decision and if it continues with its high-handed ways, there could be a lot that it stands to lose. The German politicians are asking people to boycott all Nokia products. This may be a temporary and populist measure, given that elections are imminent. But Exhibit I of the case study shows that Germany is the third biggest market for Nokia. Can Nokia afford to lose that? The plant closure in Bochum will have consequences for the entire corporation. These decisions are problematic regarding morale in large international corporations. If profitable units are closed, as in the case of Nokia, then the employees will wonder whether it is even worth to work hard and make sacrifices if in the end, that still is not enough. Such steps should be deliberated carefully. Insecurity will not boost motivation at other sites and fear will not increase loyalty. The thought will be that for all intents and purposes, they may be the next targets of a restructuring exercise. What options does Nokia have now to handle the crisis? Crisis management forms an integral part of a companys working. Nokias decision to close its plant seems irreversible; the company however can still look for the best solution for the affected parties. The options that Nokia can exercise are: Nokia can take a more human approach and open negotiations with the concerned parties to work out some compensation package for them. The company should strive to attain a fair and responsible social plan. This would also help establish that Nokia realises its responsibility towards its employees. However, in the wake of all the protests and call for boycott of Nokia products, the company may have to offer a more expensive compensation plan than otherwise To salvage the damage to its reputation, the company should establish some committee that would help find alternative employment for the Bochum personnel

 The company along with representatives of the employees and the state, could ideate on how to support employment initiatives and entrepreneurial activities in the Bochum area. This would help show that Nokia wants to contribute to the long-term development of the region and was not concerned only with the profits of the company Nokia is moving production to Romania but the company can invest in some other projects in Germany Nokia has had a poor communication strategy. The company can now try and pick up the threads and communicate better. Instead of taking an arrogant stance, it would help if the company justified its action. This would add more legitimacy to the decision Finally, Nokia can also adopt a we dont care attitude and go ahead with its plans. There is no way that it can be forced to reverse its decision. Nokia statement that it would if necessary follow the same strategy again, hints at an arrogance of power. However, the company should be prepared for the repercussions of this approach.

What lessons in managing complexities in globalised issues can be learnt from the brouhaha ensuing Nokias abrupt announcement to close its Bochum plant? Companies are global but they are expected to be local in their thoughts and actions. It is common business sense that companies have to adapt to the different stakeholders around their environment. It is very important for a company to have a proper communications strategy. No matter how big and globally successful a company is, it needs to do its homework. Nokia talks of its core values and of being a values-driven company with a human touch. However, in this case, did Nokia sideline the tenets of accountability and social responsibility? In this case, all talk about Nokia being a responsible and values-driven company sounds hollow. All that the company seems to care about is shareholder wealth maximisation. One can argue, that is the ultimate aim of all enterprises but then, what about the social responsibility of companies? What is worse is that the company is not even able to give a proper explanation as to why it is necessary to close the plant in Germany. If the plant was a loss-making unit, the reason would be perfectly understandable. The company could at least have had a proper communication strategy. However, the debate can continue that where business decisions are concerned, moral arguments seemingly have little or no value.