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CONFIDENTIAL Mobile Handset Competitor Analysis: Nokia SAMSUNG ELECTRONICS CHINA (SEC China) August 20, 2001 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey it is not a complete record of the discussion. OVERVIEW OF COMPETITOR ANALYSIS FRAMEWORK 1. Background information Location Registered capital Management team Equity structure Starting year Number of employees Era analysis 4. Value chain strategy 5. Organization and ownership 6. Financial performance Focus on Marketing, advertising and promotion Distribution (channel and sales force) Organization structure Ownership structure Sales Profit 2. Strategy 3. Product/market Mission Vision Corporate strategy Market position Key product offerings Key customers Value proposition Geographic focus Pricing 2 KEY ISSUES TO PROBE - NOKIA Strategy Product/market Value chain strategy Organization HOWEVER IT HAS GROWN RAPIDLY TO BECOME A MARKET LEADER IN MOBILE COMMUNICATION BackgroundImplication Location Based at Finland, with offices in China, e.g. Beijing China is Nokias strategic location because it is Nokias second largest market, second only to US Investment Invested more than USD1.7 billion in China Business Two main business units: Nokia network and Nokia mobile Starting First office in China in 1985, first JV in China in 1994 Employees 60,000 staff in 130 countries More than 20 offices in China, 7 JVs, 1 WOFE and 1 R however Nokia is relatively weak in the fourth-tier cities KEY MESSAGES - PRODUCT/MARKET 12 MOBILE HANDSET IS NOKIAs BIGGEST PRODUCT OFFERING AND ITS ESSENTIAL PART OF TOTAL SOLUTIONS IN MOBILE COMMUNICATION Nokia mobile handsets Nokia product offerings Nokia network ProductsNow and future Nokia 3310 for young people Nokia 8210 for fashion chaser Nokia 6210 WAP for business professional Nokia 7110 WAP with full Chinese interface Nokia 9210 as personnel communicator Nokia 8310, 6310 for GPRS and WAP Mobile network Broadband network IP network Largest mobile handset supplier in the world with above average growth in sales and more than 30% global market share Views mobile handset as a digital convergence point for multimedia services Supports blue tooth between mobile handset and PC in Nokia 6310 for mobile professional Develop WCDMA handsets with DoCoMo Develops homenet products such as multimedia terminals in Nokia Zhongxin Provides multimedia service network solutions for operators and ISP entering the mobile communication fields Nokia network covers many cities and areas in China including Beijing, Shanghai, Hong Kong and Taiwan etc. Aims to be a total solution provider for mobile communication 13 NOKIA EMPHASIZES ON CONSUMER-ORIENTED DESIGNS AND FUNCTIONS Fashion Business Basic Fun Changeable cover Sub-100g Voice-dial Recording Vibration Tri-band WAP Built-in modem IR-port Chinese input Li-Ion battery SMS messaging Games Composable/ downloadable ringer tone 82106210P7689L2000V998+L2000WWW FashionClassic Price in China (RMB) 26522878236918001435*1452 Equivalent features, Nokia more fun/fashion vs. Motorola more functions Motorola offers lower price models with similar features, tri -band and WAP *Nov. 2000 price Key Differences 14 WITHIN CHINA, NOKIAs FASHION PHONES PERFORM BETTER IN SOUTH CHINA AND LARGE CITIES North region East region South region China average Beijing Shanghai Shenzhen Guangzhou Market share Percent, 2000 Source: McKinsey Analysis 15 Tier 1Tier 2Tier 3Tier 4 Nokia Motorola Others NOKIA IS RELATIVELY WEAK IN THE IMPORTANT 4TH TIER CITY MARKET Percent market share, 2000 Ericsson Siemens 18%19%23%40%Tier size as % of total 100%= Million units 6.77.08.514.8 Source: McKinsey Analysis 16 Source:Retail Audit, McKinsey analysis AND THIS WEAKNESS IN 4TH TIER CITIES SPANS MOST PROVINCES Inner Mongolia Hunan Yunnan Anhui Guangdong Fujian Zhejiang Heijongjiang JilinHenan Jiangxi Hebei Shanxi Liaoning Sichuan Shandong Jiangsu Shanxi Hubei Gansu Guizhou Percent market share, Nokia Market share Percent Province Tier 1/2/3 city Tier 4 city 17 VALUE CHAIN STRATEGY 1. Background information Location Registered capital Management team Equity structure Starting year Number of employees Era analysis 4. Value chain strategy 5. Organization and ownership 6. Financial performance Focus on Marketing, advertising and promotion Distribution (channel and sales force) Organization structure Ownership structure Sales Profit 2. Strategy 3. Product/market Mission Vision Corporate strategy Market position Key product offerings Key customers Value proposition Geographic focus Pricing 18 Nokia is not regarded as a technology leader, as compared with Motorola; however, it spends a great amount of effort in understanding customer requirements and tailors its product to meet these requirements. Nokia employs PTAC, CellStar, Beijing Telecommunication Equipment Factory, Bright Point, Express Fortune, and Tech Glory as the first-tier resellers to distribute handsets through authorized stores and counters. The distribution channels are relatively flat. While its retail shops are growing rapidly to approximately 900 around the country, Nokia also develops exclusive specialist shops in order to provide “one- step” solutions to end users Nokia implements a highly efficient customer service system with 250 service stations and mobile service stations for rural areas. It provides good pre- and after sales service KEY MESSAGES - VALUE CHAIN STRATEGY 19 NOKIA IS STRONG AT MARKETING, SALES AND SERVICE, BUT WEAK AT TECHNOLOGY Manufac- turing and supply chain Sales and distribution Marketing and branding R&D Strengths Levers for improvement Established R&D center in 98/99 in Beijing for China market, with 150 research staff Strong in low end development Good product quality and design Weaker position in high end segment and high end technology Position in low end under attack Scalable local production Optimized logistics Country-wide distribution channels and strong channel management High retailers preference Lower rating of retail support Retailer preference not translating into higher market share Strong brand awareness and preference Promotes “technology based on people” Awareness and preference lower than Motorola Brand in young market under attack Low technology image Service Highly efficient customer service system with 250 service stations and mobile service stations for rural areas Good pre- and after sales service, e.g. “one hour repair” service 20 .on Nokia on Motorola NOKIA HAS REPUTATION GAP AS TECHNOLOGY LEADER, AND TARGET DIFFERENT CUSTOMER SEGMENTS FROM MOTOROLA Nokia has good product designs Nokia phones are for female or younger people Nokia is second to upgrade products Motorola products are more formal Motorola always introduces new technology to the market first Loyal user is white-collar worker .on technology leadership and innovation .on design on typical loyal users 21 NOKIA DISTRIBUTES THROUGH SIX FIRST-TIER RESELLERS AND DEVELOPS EXCLUSIVE SPECIALIST SHOPS Nokia Channel Structure Late entry to the China market with less historic overhead Flat distribution channels Develops exclusive specialist shops Provides after-sale services Source: China Computer Journal Vendor 1st-tier resellers Consumers 2nd-tier resellers Retailers/retail chain stores 6%3%91% 22% 33%36% 6%33% 58% Rationales Nokia employs PTAC, CellStar, Beijing Telecommunication Equipment Factory, Bright Point, Express Fortune, and Tech Glory as its 6 first-tier resellers Nokia requires resellers to report the promotion plan and product ordering plans a quarter in advance, and since the demand for handsets tends to fluctuate across promotional programs, this inflexible strategy generally limits the potential gain when market demand changes across promotions Close to 900 retail shops and counters country-wide, with 50% growth from 1999 Form exclusive specialist shop to provide one-step solution to end users 22 ORGANIZATION AND OWNERSHIP 1. Background information Location Registered capital Management team Equity structure Starting year Number of employees Era analysis 4. Value chain strategy 5. Organization and ownership 6. Financial performance Focus on Marketing, advertising and promotion Distribution (channel and sales force) Organization structure Ownership structure Sales Profit 2. Strategy 3. Product /market Mission Vision Corporate strategy Market position Key product offerings Key customers Value proposition Geographic focus Pricing 23 Nokia has 7JV and 1 WOFE in China, among which Nokia Beijing and Nokia Dongguan are manufacturing mobile handsets. Nokia Beijing has annual production capacity of 30 million units in 2001. The main drivers for Nokia to setup JVs and WOFEs in China include building local alliances, localizing manufacturing to meet domestic market demand and increase exports, and technology transfer encouraged by the Chinese government With a narrow product portfolio, Nokias organization is product focused with coordinated sales and marketing effort across JVs that manufacture the same products KEY MESSAGES - ORGANIZATION AND OWNERSHIP 24 NOKIA HAS 7 JVs AND 1 WOFE IN CHINA, AMONG WHICH 2 JVs ARE DEVOTED TO MOBILE HANDSETS Main drivers Builds successful alliance with Chinese partners Localizes manu- facturing for major products Meets domestic market demand and increases exports Realizes technology and skill transfer in development, manufacturing and management Helps Chinese partners improve competitiveness in China and globally Nokia international Nokia Beijing mobile commu- nication Nokia Dongguan mobile phone Nokia Fujian mobile communication technology Nokia Beijing, Hangxing telecom Nokia Dongda telecom technology Nokia Zhongxin digital technology Nokia Suzhou telecom Nokia Chongqin telecom Established year Product offering 1995199519971994200019991998 GSM system and equipment Mobile handsets Mobile handsets GSM 900/1800 network services Mobile switches Wireless applications solutions and services Digital multimedia terminals GSM base station Cellular network transmission products 50% with Shouxin 70% With Dongguan Wanxin With Fujian mobile With Beijing Hangxing With Dongruan With Zhongxin and broadcasting science institute 100% 25 NOKIAs ORGANIZATION IS MAINLY PRODUCT FOCUSED WITH A NARROW PRODUCT PORTFOLIO AND COORDINATED SALES AND MARKETING Nokia international Nokia Beijing mobile communi- cation Nokia Dongguan mobile phone Nokia Fujian mobile communic- ation technology Nokia Beijing Hangxing telecom Nokia Dongda telecom technology Nokia Zhongxin digital technology Nokia Chongqin telecom Marketing Nokia China office Nokia China office SalesService Manufa- cturing Sales and Services Manu- facturing R&DService Manufa- cturing Sales and Services R&D Impleme- tation Sales and Services Manufa- cturing Sales and Services Nokia Suzhou telecom Manufa- cturing Sales and Services GSM system and equipment Mobile handsets Mobile handsets GSM 900/1800 network services Mobile switches Wireless applications, solutions and services Digital multimedia terminals GSM base station Cellular network transmission products 26 FINANCIAL PERFORMANCE 1. Background information Location Registered capital Management team Equity structure Starting year Number of employees Era analysis 4. Value chain strategy 5. Or