UPDATE: Nokia Co. (NOK) President and CEO Pekka Lundmark said in an interview that the company is expected to continue to benefit from geopolitical tensions between the United States and China, which have recently criticized advanced Export restrictions on semiconductors and chip-making equipment will give Nokia another boost.
The U.S. government has managed to get allies to exclude Chinese telecommunications equipment maker Huawei Technologies Co. from buying 5G network equipment, making Nokia and Sweden's Ericsson (ERIC ) the main beneficiaries, and is expected to follow. This trend will continue in the future as the Biden administration introduced semiconductor export controls to China last October.
“What we are seeing now is that the market share of Chinese suppliers outside of China has started to decline. This trend did not happen overnight, but gradually, but I think the general trend will continue to benefit us in the future ,” Lundmark told Dow Jones Newswires on the sidelines of Mobile World Congress in Barcelona.
Given the close ties between Chinese and Western economies, it is understandable that countries and companies seek to de-risk their supply chains and avoid over-reliance on any one particular region or country, rather than decoupling entirely, Lundmark said.
Nokia's own supply chain is showing signs of improvement after being constrained last year, although the chief executive said the company would need to supply some supplies well in advance, given lead times of more than a year in some cases. The merchant places an order. But Lundmark said he expected the long lead times and their impact on Nokia's cash flow to be temporary.
Lundmark said: "Overall, we are close to normal. Although there are still bottlenecks in some links, it has improved significantly now."
A key concern analysts have for Nokia, as supply chain issues ease, is changing regional trends and their impact on the company's profit margins. In the fourth quarter of 2022, India was Nokia's fastest-growing region, while the company's sales in North America declined year-on-year.
Lundmark said: "Although the Indian market has a low gross margin, it is very large. We calculated that without India, our operating margin would be lower because of volume and scale effects."
Meanwhile, the U.S. market is currently going through a process of normalization after an unusually sizable wave of investment by carriers over the past two years and the deployment of previously accumulated telecom equipment inventories. Lundmark said the 5G investment cycle in the U.S. still has room to run further, and the firm expects a weaker U.S. performance in the first half of the year and an improvement in the second half as the economic outlook may be better than previously thought.
"The economy appears to have avoided the worst-case scenario people had feared," Lundmark said.
