Nokia Handles Shock With Aplomb
As Ericsson of Sweden Gets Burned
By ALMAR LATOUR
Staff Reporter of THE WALL STREET JOURNAL
Caused by a lightning bolt, the blaze in an Albuquerque, N.M.,
semiconductor plant burned for just 10 minutes last March. But far
away in Scandinavia, the fire touched off a corporate crisis that shifted
the balance of power between two of Europe's biggest electronics
companies, both major players in the global electronics industry.
Nokia Corp. of Finland and Telefon AB L.M. Ericsson of neighboring
Sweden both bought computer chips from the factory, which is owned
and operated by Philips Electronics NV of the Netherlands. The flow of
those chips, crucial components in the mobile phones Nokia and
Ericsson sell around the world, suddenly stopped.
Philips needed weeks to get the plant back up to
capacity. With mobile-phone sales booming around
the world, neither Nokia nor Ericsson could afford
to wait.
But how the two companies responded to the crisis
couldn't have been more different. Nokia, which was
Europe's largest corporation by market
capitalization at the time, met the challenge with a
textbook crisis-management effort -- the kind
companies of all stripes are finding essential as the
pace of global commerce quickens.
Nokia officials outside Helsinki noticed a glitch in the
flow of chips even before Philips told the company there was a problem.
Nokia's chief supply troubleshooter, an intense 39-year-old Finn who
runs marathons and plays rock guitar in his spare time, was on the case
within days. Within two weeks, a team of 30 Nokia officials fanned out
over Europe, Asia and the U.S. to patch together a solution. They
redesigned chips on the fly, sped up a project to boost production, and
flexed the company's muscle to squeeze more out of other suppliers in
a hurry. "A crisis is the moment when you improvise," says Pertti
Korhonen, Nokia's top troubleshooter, a man whose electric-guitar
collection includes two classic Fender Stratocasters.
Ericsson, Sweden's largest company, with
annual revenue of more than $29 billion, moved
far more slowly. And it was less prepared for
the problem in the first place. Unlike Nokia, the
company didn't have other suppliers of the
same chips, known as RFCs, for radio frequency
chips. In the end, Ericsson came up millions of
chips short of what it needed for a key new
product. Company officials say they lost at least
$400 million in potential revenue, although an
insurance claim against the fire may make up
some of it.
"We did not have a Plan B," concedes Jan Ahrenbring, Ericsson's
marketing director for consumer goods.
On Friday, the fallout from the New Mexico fire and other component,
marketing and design problems reached a climax, as Ericsson
announced plans to retreat from the phone handset production market.
It said it plans to outsource all its handset manufacturing to Flextronics
International Ltd.
Ericsson said a slew of component shortages, a wrong product mix and
marketing problems sparked a loss of 16.2 billion kronor ($1.68 billion)
last year for the company's mobile phone division. Overall, the company
reported an operating loss of 1.5 billion kronor. The company will take
an additional restructuring charge of eight billion kronor to finance
further restructuring of its mobile-phone unit. The news sent Ericsson
shares falling 13.5% and shook other high-tech stocks around the
world.
| Nokia | Ericsson | |
| Motto | "Connecting people" | "Make yourself heard" |
| Headquarters | Espoo, Finland | Telefonplan, Sweden |
| Employees | 60,000 | 100,000 |
| Total Sales | $27.7 billion* | $28.5 billion |
| Network sales | $7.0 billion* | $20.3 billion |
| Handset Units sold | 128 million | 43.3 million |
| Founded as | Woodpulp producer in 1865 | Telephone manufacturer in 1876 |
| Products | Networks, mobile handsets | Mobile handsets, networks |
| Saunas at head office | 6 | 2 |
*Analysts forecast
Note: Figures are converted from local currency to U.S. dollars at
current rate
Source: The companies
When the company revealed the damage from the fire for the first time
publicly last July, its shares tumbled 14% in just hours. Since then, the
shares have continued to fall along with the declining fortunes of many
global telecommunications stocks. Ericsson shares are trading around
50% below where they were before the fire. The company has also
overhauled the way it procures parts, including an effort to ensure that
key components come from more than a single source. "We will never
be exposed like this again," says Jan Wareby, who oversees the
mobile-phone division as head of the company's consumer-goods unit.
At Nokia, the main cost has been frayed nerves on the crisis team.
Production stayed on target, despite the fire. And although the
company's shares have fallen recently amid concern that demand for the
mobile phones that make up its core business could decline, Friday's
close of 40.25 euros ($37.21) was only about 18% below where the
shares were trading the day before the fire.
The company has successfully taken advantage of Ericsson's problems
to cement its position as Europe's dominant technology company and
boost its share of the world market in mobile-phone handsets. Nokia's
share is now about 30%, up from about 27% a year ago. That's more
than double the share of its nearest rival in the handset market,
Motorola Corp. And most of that gain came from Ericsson, whose share
of the market has fallen to 9% from about 12% last year.
The Upstart Finns
Score another victory for the upstart Finns, who have wrangled for
centuries with their larger Swedish neighbors. In part, the companies'
contrasting responses to the fire reflect the national character of the
countries that spawned the two companies. Cautious and comfortable in
groups, Swedes often move together. Finns, on the other hand, have a
reputation for individualistic derring-do. During the short Nordic
summer, for example, both Finns and Swedes entertain themselves with
boating expeditions across a 400-mile gulf of water that separates the
two countries. Swedes often sail in convoys, while Finns tend to strike
out solo.
So it was with Nokia and Ericsson. "Ericsson is more passive. Friendlier,
too. But not as fast," said one official who dealt with both companies
in
the fire's aftermath.
This also isn't the first time in recent years that Finns, who haven't
forgotten they were once under Swedish control, have outdone their
neighbors. Swedish fans were so confident they would defeat the Finns
in the 1995 world hockey championship that many sang a taunting
victory song before the game. When Finland pulled off an upset, Finnish
fans stood in the Stockholm arena and sang the song right back -- in
Swedish, a language all Finns study in school.
Nokia's esprit de corps -- employees call themselves "Nokians" -- grows
out of that same Finnish pluck. Born as a producer of wood pulp in
1865, Nokia has grown to become one of the world's leading electronics
concerns with revenue of roughly $19.9 billion for 1999. More than 70%
of its revenue comes from the sale of mobile phones, a product for
which demand has been exploding from Europe to Japan.
Founded 11 years after Nokia, Ericsson has evolved into a more
engineering-heavy company. Aside from making mobile phones, which
account for about 30% of its revenues, the company is a leader in
commercializing complex technologies such as WAP, the software
system that most European mobile phones use, and the so-called
third-generation, or 3G, networks that may eventually put applications
such as video on mobile phones.
Competition between these two national standard-bearers can be
intense. Nokia floats hot-air balloons stamped with its name over
Stockholm, while Ericsson splashes its name on billboards all over
Helsinki. But both companies went global decades ago -- which is why a
thunderstorm 4,000 miles away mattered so much.
Struck by Lightning
At about 8 p.m. on March 17, the lightning bolt hit an electric line in
New
Mexico, causing power fluctuations throughout the state. It was either
a
sudden drop or surge in power -- authorities don't know which -- that
started the blaze in Fabricator No. 22. Philips workers quickly smothered
the flames, but the damage was done.
Plastic ceiling lattices were strewn about the floor. Eight trays of silicon
wafers, enough to produce chips for thousands of mobile phones, were
stuck in the furnace where the fire was concentrated. All were ruined.
Water damage, from sprinklers that went off throughout the plant, was
extensive. Smoke particles had spread into the sterile room in the heart
of the factory, contaminating the entire stock of millions of chips stored
there. These tiny squares of etched silicon, smaller than the nail on a
baby's pinkie, allow a mobile phone to do anything from sound
amplification to finding radio frequencies, depending on how they're
coded.
It was immediately clear that repairing the damage would take at least
a
week, possibly longer. "It's as if the devil was playing with us," said
one
senior Philips manager who was involved in the clean-up. "Between the
sprinklers and the smoke, everything that could go wrong did."
Speeding the clean-up was crucial. Desperate executives in Amsterdam
joked about showing up in Albuquerque with toothbrushes to help
scrub the fabricator themselves. Instead, they assigned customers
priority levels. Nokia and Ericsson, which together bought about 40% of
the plant's radio-frequency-chip production, would get preferred
treatment, the Philips executives decided. About 30 other smaller
customers -- including such telecommunications heavyweights as
Lucent Technology Inc., which buys chips from Philips for cards used to
link computers into wireless networks -- would have to wait.
First Inkling of Trouble
Within days, Nokia officials in Finland already had their first inkling
that
something was amiss. Order numbers weren't adding up, company
officials say. On Monday, March 20, Tapio Markki, Nokia's chief
component-purchasing manager, found out why. In a phone call to his
office at Nokia headquarters in the city of Espoo, a Philips account
representative informed him of the fire, saying the company had lost
"some wafers" but the plant would be back to normal in a week,
according to Mr. Markki. Philips officials say they were passing along
the
best information they had at the time, as quickly as possible. "We
thought we would be back up after a week," said Ralph Tuckwell, a
spokesman for Philips semiconductors.
Mr. Markki wasn't terribly alarmed, but he relayed the news up Nokia's
chain of command to Mr. Korhonen, anyway. "We encourage bad news
to travel fast," says Mr. Korhonen, who has worked at Nokia for 15
years. "We don't want to hide problems."
Mr. Korhonen didn't anticipate a major problem, either. Still, he offered
to send two Nokia engineers based in Dallas to the Philips plant to help.
Philips, concerned that visitors might add to the confusion, declined.
Mr.
Korhonen then placed the five components made at the Philips plant on
a "special monitor" list, something the company does dozens of times a
year when demand for parts is running red-hot, as it was in March.
Nokia officials began checking in with Philips officials daily, and
sometimes more often, instead of the weekly monitoring the plant
usually received.
Nokia officials took advantage of other opportunities to drive their
concerns home to Philips officials. At a meeting with Philips officials
in
Helsinki, Matti Alahuhta, president of Nokia's mobile-phone division,
broke from the scheduled meeting agenda to bring up the fire. "We
need strong and determined action right now," he says he told the
Philips executives in a conference room overlooking choppy waves in the
Baltic Sea.
Mr. Alahuhta and his colleagues didn't bang on the table or yell. But
Philips executives immediately recognized a characteristic Finnish
curtness under pressure -- the Finns call it sisu -- that signaled they
meant business. There weren't many pleasantries exchanged, according
to one Philips executive who was in the room. "It was clear they were
angry," he says. "You got the idea this was a matter of life or death for
these guys. We respected that."
A Major Problem
As the number of chips coming from Albuquerque plummeted, Mr.
Korhonen started to worry that Nokia had a major problem. On March
31, two weeks after the fire, his fears were confirmed when Mr. Markki
interrupted a meeting in Helsinki to report that Philips was now saying
weeks more would be needed to repair the plant, and months' worth of
chip supplies would be disrupted.
Mr. Korhonen grabbed a calculator: Nokia could find itself unable to
produce just under four million handsets, the equivalent of more than
5% of the company's total sales at that time. And demand for handsets
was booming like never before. "We don't need this," he cried, throwing
his hands in the air.
The two men started calling other executives they thought could help,
and they scrambled to figure out who else made the parts produced in
Albuquerque. Of the five components, two were indispensable. One of
those was made by various suppliers around the globe. But the other,
semiconductors known as Asic chips (for application specific integrated
circuits), which regulate the radio frequency mobile phones use, were
made only by Philips and one of its subcontractors. "This was a big, big
problem," Mr. Korhonen remembers realizing.
Nokia officials had learned the hard way that supply disruptions are
more the rule than the exception in their business. A few years ago, the
company lost out on millions of dollars in potential sales when snags
slowed down production. Jorma Ollila, then president and chief
executive, vowed it wouldn't happen again. He instituted the practice of
aiming executive hit squads at bottlenecks and giving them authority to
make on-the-ground decisions. Mr. Korhonen himself once spent
months persuading jittery Japanese suppliers to ramp up production to
meet Nokia's aggressive forecasts. "I can't even recall how many
karaoke songs I have sung," he says.
Within hours of getting the bad news, Messrs. Korhonen and Markki
assembled their team of supply engineers, chip designers and top
managers in China, Finland and the U.S. to attack the problem.
Meanwhile, across the Gulf of Bothnia in Stockholm, top Ericsson
officials still hadn't realized what they were up against. Like Nokia,
Ericsson officials first heard of the fire three days after it occurred.
But
that communication was "one technician talking to another," according
to Roland Klein, head of investor relations for the company. "There were
a few bits and pieces [of information before that], but nothing formal."
"The fire was not perceived as a major catastrophe," says Pia Gideon, a
spokeswoman for the company. When word came from Philips about
how serious the problem really was, more time passed before middle
managers at Ericsson fully briefed their bosses. Mr. Wareby, who
directly oversees the mobile-phone division as head of consumer
products for the company, didn't find out about the snag until early
April. "It was hard to assess what was going on," he says. "We found
out only slowly."
By that time, Messrs. Korhonen and Markki of Nokia were on a plane
heading for Philips headquarters in Amsterdam to meet with the
company's chief executive. They were joined by Mr. Ollila, currently
Nokia's chairman and chief executive, who rerouted a return trip from
the U.S. to attend.
Mr. Korhonen says Nokia was "incredibly demanding" with Philips. He
says he told Philips' CEO, Cor Boonstra, and the head of the company's
semiconductor division, Arthur van der Poel, "We can't accept the
current status. It's absolutely essential we turn over every stone
looking for a solution."
Messrs. Van der Poel and Boonstra declined to be interviewed. Philips
spokesman Mr. Tuckwell, who confirmed the meeting took place, said "it
was exactly what we expect from a customer."
Mr. Korhonen and his team were now racing to restore the chip supply
line. To replace more than two million power amplifier chips, they asked
one Japanese and one U.S. supplier of the same chip to make millions
more each. Largely because Nokia is such an important customer, both
took the additional orders with only five days lead time, Mr. Korhonen
says. Nokia also demanded details about capacity at other Philips plants.
"This was one of the key things we insisted on," says Mr. Korhonen.
"We dug into the capacity of all Philips factories and insisted on
rerouting the capacity. We asked them, told them, to replan."
And he got results. "They didn't go into denial," he says. "The goal was
simple: For a little period of time, Philips and Nokia would operate as
one
company regarding these components."
Soon more than 10 million of the Asic chips were replaced by a Philips
factory in Eindhoven, the Netherlands. Another Philips plant was freed
up for Nokia in Shanghai.
The hit team was drumming up solutions within Nokia, as well. The
company quickly redesigned some of its chips so they could be
produced elsewhere. A project at Nokia to develop new ways of
boosting chip production was also fast-tracked. Once Philips got the
New Mexico plant operating again, this allowed the plant to make up for
two million of the lost chips.
Behind the Curve
At Ericsson, on the other hand, officials were finding themselves
increasingly behind the curve. Philips officials told them they couldn't
produce enough chips to meet their needs, at least not on time. "We
were capacity-bound," said Mr. Tuckwell, the Philips spokesman, who
noted that too much time was needed to get production going again to
meet all orders from all customers. "We found the best solutions we
could."
They had nowhere else to turn for several key parts, including Asic
chips. In the mid-1990s, the company had tried to save money by
simplifying its supply lines, basically by weeding out backup suppliers
for
many parts. By the time of the fire, many executives were new to their
jobs and unaware that the company was vulnerable. Since the fire,
Ericsson has reversed course and signed on second suppliers for key
parts, including the chips made in Albuquerque. On Friday it left the
handset production business only completely.
Nokia says it was able to meet its production targets despite the fire.
The company projects continued strong growth of handset sales for the
next year. Mr. Korhonen even had time recently to pull out one of his
guitars, leading a band of colleagues in a version of "Twist and Shout"
during an employee outing.
Write to Almar Latour at almar.latour@wsj.com