Finland is a Nordic country with a population of about 5, 4 million. It is part of the European economic and monetary union and is hence part of the group euro-area 17. Finland’s economy is based on free-market implying that the country is open to trade with other countries or regions. It is therefore eventually more or less vulnerable to any economic conditions or threats affecting the euro area. China is one of Finland’s most important trade associates and also the biggest one that Finland has within the developing Asia it will be mainly used in this report when investigating the effects.
Effect of a slowdown in GDP growth in developing Asia
The developing Asia region includes countries such as China, India, Indonesia, and Thailand. Developing Asia is currently experiencing an economic slowdown which is likely to impact countries in trade partnership with the region. According to Asian Development Bank, the region is likely to witness a slowdown in its economic growth. In 2011, the economy of developing Asia was expanding at a rate of 7.2 percent while in 2010 growth rate was at 9.2 percent. However, this rate has reduced to 6.9 percent this year and thus the slowdown. Since China is one of Finland’s largest trade partners within developing Asia, a slowdown in GDP growth in Developing Asia has direct impacts on Finland’s current account, trade, investment and financial flows. The indirect effects can be seen in unemployment and eventually as a slowdown in GDP growth. The slowdown in developing Asia GDP will also affect the entire Euro area.
Finland and China have for a long time been in trade agreement. The agreement focused mainly on technological cooperation, scientific and industrial cooperation. One of the trade areas which have grown between the two countries is information technology with Finland’s Nokia Corporation relying on the Chinese market to sell its products. Similarly, China’s rapid industrial development and its IT sector greatly rely on Linux, an open source code developed in Finland. China is therefore one of Finland’s most important trade associates and it is estimated that the total investments in China are approximately 8 billion euros (2010), also many Finnish companies operate in China with approximately 60 000 employees. More than 1200 Finnish based enterprises exports their products to China while almost 5000 Finnish enterprises directly import goods from China. There is an additional 2700 Finnish enterprises which import Chinese goods through other European countries. There are also 200 Finnish owned enterprises that operate daughter companies in China. In 2011, the bilateral trade between China and Finland increased by 29% just within the first four months to reach 2.3 billion euros. Goods export values to China reached 2.7 billion euros in 2011 while the value for service export reached 1 billion euros
However it can also be argued that the slowdown in Developing Asia could also give the euro area an advantage as the Developing Asia has constantly been increasing its share on the worlds GDP and now has passed the euro area. It is estimated that the total Finnish investments in China are approximately 8 billion euros (2010). In 2011 Finland’s exports to China were 2.6 billion Euros, however that was 3 percent less in comparison to the previous year. This certainly has an effect on Finland’s aggregate demand as the exports are affected. There are also many Finnish companies that operate in China and employ approximately 60 000 employees.
The slowdown also has direct effects from the exports and indirect through the global economic conditions (mainly the European Union). This may have an indirect effect on Finland’s GDP growth.
AD/AS Curves
The following aggregate demand and supply curves will show.
Table 1. A decrease in aggregate demand
On the above table it can be seen that the national output (Y1) shifts leftward (Y2) as there is a decrease in aggregate demand. The reduction in national outputs leads to recession. This is caused by the decrease in net exports.
The decrease of exports will then naturally effect both the unemployment rate and national output.
Real life figures
The below table shows the actual data (GDP, inflation, unemployment, inflation, volume of import/export goods and the current account) that has been gathered from the years 2006-2011.
Table 2 (source: http://www.imf.org/external/data.htm,)
During years 2008 and 2009 the world economy was in crisis so these years are not good for comparing the effects of slowdown in Developing Asia’s GDP growth. Since it is reported that developing Asia began witnessing a slowdown in 2011, the year will therefore be used to compare the effect the slowdown on Finland’s economy. Evidence of a slowdown is seen in the decline of exports goods and imports in the region. Similarly, even though the GDP current prices shows increase, the rate of increase is however very slow compared to earlier periods of 2006/2007. A similar scenario is seen in China, one of the largest contributors to the growth of Developing Asia and also one of the largest trading partners of the EU.
From the table, it can be noted that the volume of imports has decreased significantly in the year 2011. This decrease is attributed to the slowdown of economic growth in developing Asia. Similarly, there was a decline in the volume of exports between 2010 and 2011. This decline can also be attributed to the economic slowdown in Developing Asia. Inflation in Finland has increased between 2010 and 2011. A rise in inflation during a crisis is primarily caused by the hard economic situation. This will require a move by central government to issue a stimulus package to reduce inflation and other macro economic factors affecting the economy.
Slowdown of GDP in developing Asia causes global effects, slowdown for exports to Asia however the world economies are affected by Asia. Domestic demand also plays an important part in Asia. What Finland has to offer to Developing Asia is technological expertise, both in terms of product and services.
Nokia
Nokia is a Finnish multinational company whose principle products are mobile phones and other portable information technology devices. The company also offers additional services which include navigation services, digital map information, messaging, media, application, games, and music through its Ovi store platform. The company is in a joint venture agreement with Siemens for the supply of telecommunication network services and equipments. Being a multinational corporation, Nokia has branches in 120 countries and sales its products to over 150 countries. Nokia generates annual revenue of approximately 38 billion euros and has a 22.5 percent share of the global mobile phone market. However, due to exposure to macroeconomic factors, Nokia has seen its performance decline over the past few years.
Impact of macroeconomic exposure on performance (2006->2012)
Nokia’s performance since 2006
Nokia (Euro million)
Net sales
Overall business operating profit
Performance of major business units since 2006
Sales from devices and services
Sales from Nokia Siemens network
Major market net sales (In million euros)
The decline witnessed in 2008 can be attributed to the global financial crisis that affected almost every economy and industry. However, the company made a rebound from the impact of the global financial crisis in 2010. This rebound was however cut shot in 2011 when the company started operating on losses. In the last quarter of 2011, the company had made a loss of 1.3 billion dollars. This figure increased to 1.7 billion dollars in first quarter of 2012. However, in the second quarter of 2012, the company managed to trim its losses to $1.01 billion and a further trim by $0.25 billion in the third quarter of 2012. Several financial measures were put in place to counter the situation. These measures seem to be working and helping the company regain its profitability.
A look at the company’s major market, China and India form the two largest markets implying that economic situation in these two countries can have an impact on Nokia’s performance. Both china and India form the two largest economies in the developing Asia region. The slowdown in economic growth in Developing Asia might have an impact in the performance of the company. The slowdown began specifically in 2011 and it is during time that Nokia’s performance also dropped.
Vulnerability Assessment
For many years, Nokia has been aligned to the economic growth of Finland. In 2000, Nokia made a four percent contribution to Finland’s annual gross domestic product however this figure shrank to 0.8 percent in 2011. Since 1998 Nokia has been a leading manufacturer of cell phones controlling a significantly large amount of the market share. However due to impacts caused by macroeconomic factors, Nokia has seen its growth decline at an alarming rate. From the performance data presented, it is obvious that Nokia is struggling to keep up with the pressure from its competitors.
In relation to business vulnerability assessment, there are risks that threaten the company on the verge of a performance decline. The major risk faced by Nokia is the risk of competition. Already the company has lost a significant share of the global mobile phone market to its strongest and emerging rivals. Nokia’s competitors include Apple Inc., Samsung electronics, HTC. The company has been overtaken in the smart phone business section as most consumers prefer Apple products and other devices that run on Google’s Android OS. The Symbian OS, which most Nokia cell phones run on, does not seem to support the company’s prospects for growth. The entry level devices also seem to be undercut by Samsung’s products targeting the market segment and Chinese rival companies. Unless Nokia changes the operating system that runs on its cell phone devices, the company will continue witnessing a decline in growth. So far, Nokia has responded effectively by striking a deal with Microsoft to have its smart phones use windows mobile OS.
The largest market for Nokia’s devices and products is also a threat to its future growth. Developing Asia is currently Nokia’s largest market in addition to being its production and manufacturing centre. In a bid to reduce cost of production, Nokia has its production centre in China.
Developing Asia has been projected to have a slow expansion rate which translates to future moments of struggle for Nokia. The slowdown in growth rate will impact on business outcome for Nokia. There will be reduced cash flow and reduced demands for their products. As a result, sales in the developing Asia region will be affected. Therefore, any economic recession that occurs within the region is likely to have a negative impact on the company. The severity of this risk however is not extreme since Nokia has the option of expanding its business in other emerging markets such as South America and Africa.
Another major risk faced by Nokia is technological failure. This risk has seen Nokia’s competitors take advantage of its weakness and succeed in gaining a significant amount of market share. As mentioned earlier, Nokia lost its dominance in the smart phone business since consumers of these devices preferred Apple products and other devices running on Google Android. Most mobile applications that have popularity among consumers are only supported by IOS, Google Android, and Windows mobile. Nokia therefore has to respond to the technological failure it faced as a risk to its business growth.
Market Exposure and “strategic hell assessment
Nokia is increasing its market exposure in bid to rebound from the recent failure of its products within the global market. A deal to have its phones powered by the technology giant, Microsoft, is seen to help Nokia regain its dominance in the cell phone market. However, this effort has not yet bore much fruits to lift the company from the recent series of losses. Nokia is increasing its market exposure by developing a range of new products that would appeal to both its loyal customers as well as other customers loyal to rival products. Already, Nokia has established its brand image among customers in both end of the market. Nokia has impressive products for the high end market with smart phones having applications for both personal and enterprise solutions.
In 2012, 17 percent of Nokia’s generated sales were from the Chinese market, 7 percent from India, 4.1 percent from Russia, 3.8 percent from the US, and 3.6 percent from the Brazil. Nokia has also seen its share prices plunge to as low as$3 up from $70. The decline in market share does not translate well for the company to its stakeholders and customers. However, the deal to join forces with a technological titan, Microsoft, is seen to help boost the company’s image among stakeholders and customers. This move is deemed strategic for the revival of the company. Even though Nokia still commands a significant amount of the market share, perpetual losses reduces its market exposure and confidence among customers. There is still need for more efforts aimed at reviving the company’s dismal performance through product development. The company requires to have a strong presence in the smart phone business section. This is because the section holds a lot future prospects for growth both for enterprise and personal use. In the entry level, other companies are increasingly making cheap devices with impressive features that attract the low end of the market. Since smart phones are a little bit expensive, there is need to give customers in the low market a feel of some of the feature incorporated into smart phones. This move is likely to increase sales bearing in mind that emerging economies account for the largest share of the company’s revenue.
Cracking the US market has also been a problem for Nokia. In the US, consumers still prefer to use one of their own, Apple products. Even though the company has made a deal with AT&T as a means to increase its market exposure in the US, this effort has not yielded much fruits. One business area that has however succeeded in the US market is the licensing of map content to Amazon and other similar companies. This action plan has seen popularity dwindling of GPS units. The Siemens network has shown a lot of prospect in growth. A look at the performance of this business unit, it has registered increases in sales contrary to the performance of the other business units. The deal with Microsoft also has implication of revenue generation for Nokia. There are regular checks from Microsoft which help Nokia go through the transition period into profitability. The arrival of windows 8 phones shades some light for the Nokia as this operating system will be used to power one of its smart phones, preferably a new member in the Lumia brand. The experience to have a phones running on windows 8 is much awaited for by customers.
Assessment of protection
Financial performance of Nokia is marked with cheap share price, record losses, reduced sales, and reduced revenue. In 2012, the company reported first increase in overall sales after launching out a smart phone to compete with other similar devices from rival companies. The phone, Nokia Lumia, is the first smart phone ever produced by Nokia which is supported by windows mobile OS. However, despite the increase in sales, the company still reports a net loss, although lower than the previous losses witnessed in the last quarter of 2011 and the first quarter of 2012. The company is however, still projecting an increase in the sales within the final quarter of 2012. This seems to the way in which the company will revive its positive operating cash flow. It has to continue making devices that target various segment of the global cell phone market. A similar strategy is used by its key rivals thereby counteracting their move, would require a lot of diversity Summary
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