Nokia, which reported second-quarter earnings last week, has seen its mobile phone shipments in Greater China drop by 52 percent over the past year. The technology research firm Gartner estimates Nokia's China market share plummeted to 19.1 percent, down from 23.5 percent a year earlier.
Nokia also replaced a slew of senior executives and inexplicably only appointed an interim Chinese head, putting global sales chief Colin Giles in charge on an acting basis, rather than putting an executive with a long-term mandate in charge to salvage operations there.
As dire as those reports sound, the situation in China is actually even worse for Nokia because competitors like Apple are moving quickly to shore up market share in the world’s largest mobile phone market. Unless Nokia makes serious changes quickly to its operations in China – the last major market in the world where it still has a strong position – it might not be able to remain an independent company.
My firm's research suggests that Nokia controls only 10 percent of the market for upper middle class and wealthy Chinese, down from more than 50 percent as little as three years ago. Similar to western firms such as Best Buy and Home Depot that have retreated from the market, Nokia did not pay enough attention to local consumer needs.
They lost the surging upper-middle class market because of a foolish strategy to go down-market on pricing rather than understanding that even poorer consumers are often willing to pay premiums for phones. Nokia made the mistake of not understanding that the Chinese are no longer price sensitive for many products, and often buy products to show off.
In a study with 1500 consumers in eight cities about mobile phone shopping trends, my firm found that after a house or car, the mobile phone is the most prized possession for a majority of consumers. For many Chinese who cannot afford a house or a nice car, the mobile phone becomes the status symbol to show off.
They will save months of salary to buy the latest gadget, which is why many buy an expensive iPhone 4 that costs 30 percent more in China than in America. But Chinese consumers barely use their iPhones for voice calls, having saved so much money to buy the iPhone in order to gain status.
Nokia cheapened its brand by going too low-end to attract a wider range of customers. Wealthier and more aspiring consumers started to shy away from the brand because it became too common.
As one female Chinese millionaire told me, “I used to be a loyal Nokia customer, but everyone has one now, even my maid. I don’t buy their phones anymore.” Lower-end consumers also have not snapped up the phones because they were watered down versions of what they saw wealthier consumers carrying. Plus, the lower-end phones lacked the functions available in phones made by competitors and sold in the same price range.
Even with Nokia’s well-known problems globally (for instance, they spent too much time using their outdated and clunky Symbian operating system rather than adopting Google's Android, as Motorola and Samsung have done) they can still win in China. They are basically in the same position that Motorola was in three years ago, and Motorola is starting to bounce back.
But Nokia will have to move fast in the next six months. A key advantage it has over Apple is its excellent distribution network across the country, which includes third and fourth tier cities where the number of mobile subscribers is growing fastest.
Apple has grown far too slowly from a retail standpoint and is woefully behind (as the recent reports of a fake Apple Store in Kunming have suggested) because consumers want the real deal but cannot find it. If Nokia can go premium with its new handsets, it can still take back market share before Apple arrives in earnest.
Apple failed in its initial attempt into China because they took too long to introduce new products into the market. Customers instead bought apple products on the grey market or flew to Hong Kong to buy them. The company initially relied on resellers whose service was spotty.
The good news for Nokia is that younger, upper middle class Chinese consumers change their mobile phones every nine to twelve months, according to our research found. So there is still time for Nokia to claw back market share.
These consumers are also not particularly brand loyal when buying phones. They look for the latest, hottest phone that will confer status on them, and many still remember Nokia’s status as king from just three years ago. This gives Nokia an opportunity to roll out new phones in more areas before Apple is able to penetrate the market.
If Nokia is to succeed again in China it needs to take to heart that mobile phones are not a commodity item like PCs but are an important status marker for which consumers are not price-sensitive. If it can offer products again that consumers will want to be seen using it has a chance to get its groove back in the world’s largest mobile phone market.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. He is the author of the upcoming book “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World” published by John Wiley & Sons in the US. He does not own shares in any company mentioned. Follow him on Twitter at @shaunrein.