This excerpt taken from the NOK 20-F filed Mar 20, 2008.
Ongoing factors affecting Nokia Siemens Networks performance in infrastructure
Nokia Siemens Networks performance in the infrastructure business is determined by its ability to satisfy the competitive and complex requirements of the market and its current and potential customers. Nokia Siemens Networks will need to continue to leverage and, in some cases, improve its scale, technology and product portfolio to maintain or improve its position in the market. Nokia Siemens Networks will also need to achieve the estimated EUR 2 billion in annual cost synergies it is targeting in order to maintain a competitive cost structure, substantially all of which are targeted to be achieved by the end of 2008.
Nokia Siemens Networks net sales depend on various developments in the mobile and fixed infrastructure market, such as network operator investments, the pricing environment, Nokia Siemens Networks market share and product mix. In developed markets, operator investments are primarily driven by capacity upgradeswhich are driven by greater usage of the networksboth for voice calls and increasingly for data usage. Also, in developed markets, operator investments are driven by 3G/WCDMA deployments. The initial deployments of 3G/WCDMA have been largely completed and additional deployments in 2008 will occur where there is a need for greater capacity. In emerging markets, the principal factors influencing operator investments are the growth in mobile usage and the growth in the number of subscribers.
Nokia expects very slight growth in the mobile and fixed infrastructure and related services market in euro terms in 2008. The market is expected to be driven by continuing subscriber growth, growing minutes of use and the growth of the services market. Nokia and Nokia Siemens Networks are targeting that Nokia Siemens Networks will grow faster than the market in 2008.
Nokia Siemens Networks net sales are also impacted by pricing developments. Like our mobile devices business, the products and solutions offered by Nokia Siemens Networks business are subject to price erosion over time, largely as a result of technology maturation and competitive forces in the market. Nokia Siemens Networks net sales are also affected by the product mixthe mix of hardware
sales, software sales and services sales. Net sales are also impacted by regional mixthe mix of developed and emerging markets sales.
There are several factors that drive the profitability at Nokia Siemens Networks. First, are the drivers of net sales as already discussed. Scale, operational efficiency and cost control have been and will continue to be important factors affecting Nokia Siemens Networks profitability and competitiveness. Nokia Siemens Networks product costs are comprised of the cost of components, manufacturing, labor and overhead, royalties and license fees, the depreciation of product machinery, logistics costs as well as warranty and other quality costs. Nokia Siemens Networks profitability is also impacted by the pricing environment, product mix and regional mix. The pricing environment in the markets where Nokia Siemens Networks competes continued to be intense in 2007, and we expect that these general market conditions will continue in 2008.
Nokia Siemens Networks profitability in 2007 was negatively impacted by several factors. Delays in the formation of Nokia Siemens Networks, caused primarily by the ongoing criminal and other investigations at Siemens, caused disruption internally but also likely with customers. Certain customers, which were customers of both our former Networks business group and Siemens carrier-related operations for fixed and mobile networks and due to the formation of Nokia Siemens Networks then had Nokia Siemens Networks as their sole supplier, have sought to diversify their supplier risk which also negatively impacted Nokia Siemens Networks profitability in 2007. Nokia Siemens Networks also terminated relationships, originated in the Siemens carrier-related operations, with certain business consultants and other third party intermediaries in some countries as their business terms and practices were contrary to Nokia Siemens Networks Code of Conduct. These factors may have caused a certain amount of lost sales and business opportunities generally. Nokia Siemens Networks margins were also negatively impacted by the continued aggressive price competition in the market and a higher proportion of net sales from the emerging markets and services sales, both of which have lower margins.
We believe the current and continuing dynamics in the infrastructure market provide further validation for the creation of Nokia Siemens Networks. The formation of Nokia Siemens Networks is designed to provide the new company with needed scale and a more competitive convergence portfolio. The scale advantages, together with the significant ongoing restructuring program, are expected to deliver margin benefits leading to improved profitability.
Efficiency of operating expense is also an important driver for Nokia Siemens Networks profitability. For 2007, the research and development expenses related to Nokia Siemens Networks were EUR 2.7 billion and represented approximately 21% of Nokia Siemens Networks net sales. In 2007, the sales and marketing costs related to Nokia Siemens Networks were EUR 1.4 billion and represented approximately 10% of Nokia Siemens Networks net sales. In 2007, R&D and sales and marketing expenses for Nokia Siemens Networks included a total of EUR 588 million of costs associated with restructuring. Nokias first quarter 2007 results included our former Networks business group only.