Nokia Downgraded on Increased Competition

Monday Fitch Ratings downgraded credit rating of Nokia Corp. (NOK), the largest mobile handset maker in the world. Nokia’s long-term senior unsecured debt is now assigned A- rating by Fitch, lower than its previous rating of A. At the same time, Fitch also downgraded Nokia’s short-term debt to F2 from F1. Outlook for the long-term debt remains stable.

Fitch cited major reasons for this downgrade as significant top-line volatility of Nokia, increased business and competitive risk, margin erosion, and concern related to the company’s cash flow profile. The rating agency is of the opinion that the profit margin for Nokia’s core Devices and Services segment is unlikely to re-achieve its previous level as quickly as predicted by Nokia and the Nokia Siemens Network division, which is a 50-50 joint venture between Nokia and Siemens AG (SI), is expected to further loose ground.

Severe economic recession has forced the telecom carriers to significantly reduce their capital expenditures and network upgrade plans throughout the world. This situation has resulted in a huge fall in the top-line of almost all the major telecom equipment manufacturers globally. However, we believe Nokia Siemens Network is suffering the major part of it. The company is the second largest telecom infrastructure developer of the world with 20% market share. Telecom infrastructure and related services market is likely drop by 5% -10% in 2009 compared to the previous year. Management of Nokia Siemens Network has already predicted that the company will loose its global market share more than what was estimated earlier.

In the mobile devices front, the only growing segment is the high-end smart-phones. However, in this market Nokia remains way behind Research In Motion (RIMM) and Apple Inc. (AAPL). Till today, Nokia has been unable to come out with any high-end phones that can compete with new BlackBerry or new iPhone models.