In response to a sharp decline in demand for 5G equipment, Nokia, a global leader in telecom network equipment production, has announced its intention to cut up to 14,000 jobs as part of a cost-cutting initiative.
This announcement came after the company reported a staggering 20 percent drop in third-quarter sales. The global telecom equipment industry, which includes Nokia, faces a challenging landscape, and the company does not anticipate a swift market recovery.
Research firm Dell’Oro Group says business conditions are expected to remain challenging in 2024 before stabilizing in 2025. Worldwide telecom Capex is projected to drop 7 percent by 2025, relative to 2022 levels.
Telecom Capex, the sum of wireless and wireline telecom carrier investments, experienced a slowdown in growth during the first half of 2023, says Stefan Pongratz, Vice President of the Dell’Oro Group.
“Operators can raise capital intensities over the short-term, but there is a reason the trend line has stayed flat over the past 10+ years. Since we are now operating at elevated ratios, Capex acceleration remains a transitory phenomenon in a world where neither 4G nor 5G has been able to change the revenue trajectory,” Stefan Pongratz said in a note.
Nokia’s annual report for 2022 indicates the number of employees in key markets: 37,700 in Europe, 16,800 in India, 10,500 in North America, 11,400 in Greater China, 4,400 in Asia Pacific, 3,200 in the Middle East and Africa and 2,900 in Latin America during the end of last year.
Nokia’s primary competitors in the industry include Huawei, Ericsson, ZTE, and Samsung. This fierce competition has further exacerbated the company’s woes, making cost-saving measures a necessity. Despite the challenging business conditions, Huawei has retained its number one position in the telecom market.
A significant factor in Nokia’s recent struggles is the slowdown in the United States, a critical market for the company, where it serves major telecom giants like Verizon and AT&T. The reduced profitability in this market has led Nokia to seek growth in other regions, notably India. However, even the Indian market, which saw exceptional growth in 2022, is now expected to normalize.
Pekka Lundmark, Nokia’s Chief Executive, expressed the severity of the market challenges, particularly in North America. He told Reuters, “The market situation is really challenging, and it is witnessed by the fact that in our most important market, which is the North American market, our net sales are down 40 percent in Q3.”
Nokia aims to achieve cost savings ranging from 800 million euros ($842 million) to 1.2 billion euros by 2026. To reach this goal, the company plans to reduce its employee base from 86,000 to between 72,000 and 77,000 employees, signifying job cuts of up to 16 percent.
Pekka Lundmark emphasized the importance of preserving research and development during this restructuring. The company is optimistic about achieving at least 400 million euros in savings by 2024, with an additional 300 million euros expected in 2025.
Ericsson, Nokia’s industry peer, has also resorted to employee layoffs this year, and it predicts that the uncertainties impacting its business will continue until 2024.
The ongoing sluggishness in the industry has led telecom operators to confront budget constraints, driving them to implement their own cost-cutting measures. Earlier this year, BT Group in the UK announced plans to cut 55,000 jobs, while Vodafone plans to reduce its workforce by 11,000 positions.
Kester Mann, an analyst at CCS Insight, noted, “This should be an industry that’s flying high, buoyed by unrelenting demand for its services … instead, countless questions continue to be posed around operators’ relevance and long-term future.”
Lundmark stressed that to facilitate market recovery, the industry needs to invest in faster mid-band equipment to handle the surging data traffic. Currently, only 25 percent of 5G base stations worldwide, outside of China, are equipped with mid-band technology. While low-band gear is cheaper, it offers slower speeds compared to mid-band equipment.
Despite some signs of demand improvement, Lundmark cautioned against prematurely declaring a broad-based trend. Nokia reported quarterly comparable net sales of 4.98 billion euros, down from 6.24 billion euros in the same period the previous year.
The telecom industry faces turbulent times, and Nokia’s strategic workforce reduction is a response to the evolving market conditions. The company will now engage with employee representatives as it proceeds with these changes.
