POV: The latest investment in HMD Global might be the first step in creating a European mobile giant

On 11th August this year, HMD Global announced a strategic investment in the company by well-known Western companies and other investors that did not want to be named. The investment of 230 million dollars will be used to improve HMD Global’s business in bringing new Nokia devices and services to the market. A question that arose after the investment was announced was what worth did companies like Google or Qualcomm saw in a company that hasn’t really succeeded in its initial plans of dominating the smartphone market?

In 2016, HMD Global was founded to become the exclusive licensee of the Nokia brand for smartphones and tablets. During the same year, the company also acquired the license for the Nokia brand on future phones and the future phone business from Microsoft, that got hold on it with the acquisition of Nokia’s historic Devices and Services business back in 2013. In 2017, when HMD Global announced their first smartphones at MWC2017 the Nokia 3, 5 and 6, different executives commented about the company’s future, saying, for example, that they aim to be one of top 3 smartphone players globally in 3 years – a goal that was later adjusted to top 5 in 4 or 5 years, depending of the executive asked and time of the interview.

The Finnish startup was off to a good start, one has to admit that. Even though the first announced devices hit the market during the end of summer (roughly 4 to 6 months after announcement), in the fourth quarter of 2017 HMD Global shipped 4.4 million smartphones, gaining significant marketshare in Europe for a “newcomer” and even becoming the 3rd biggest smartphone brand in the UK for the quarter.

In terms of shipments, one can argue that it went downhill not long after that, with sales of smartphone shipments dropping quarter-by-quarter or stagnating, forcing the company to restructure their strategic relationship with Foxconn and the whole manufacturing and distribution chain. In Q1 2020, HMD Global shipped around 1.7 million Nokia smartphones and 8.6 million feature phones, which constituted the lowest smartphone shipment since Q2 2017 and the lowest feature phone shipment since HMD entered the market. We have to be clear that some of Nokia devices were quite good, with the Nokia 7 plus being named one of the best midrange phones on the market by many publications. My guess is an ever-expanding portfolio and following trends (glass, notch…) instead of making trends was one the reason why the increase of devices didn’t cause an increase of sales, though they are other elements in there as well – like time to market, component choice, aftersales services in some region, software, etc.

That really begs the question how much worth does a relatively small smartphone maker and one of the biggest feature phone makers on the market has to Google and Qualcomm that they are willing to invest, even though Google has its own smartphones and Qualcomm has active partnerships with basically all smartphone manufacturers. Finnish Nokia was also mentioned as one of the big investors, but the Finns investment is easier to explain – after all, the Nokia brand is owned by Nokia and success or failure of products that carry the Nokia brand also reflect on the networking giant Nokia.

About a year ago, Nokia Mobile (HMD Global) intensified its marketing focused on the European heritage of the Nokia brand. That came at a time where the US-China trade war escalated into a tech war, with Huawei being put on the entity list and cut off from essential resources needed to dominate the Western smartphone market, mainly Google Mobile Services. Also, the tensions between India, a historically important market for Nokia phones, and China were rising, and we recently saw India banning Chinese network vendors Huawei and ZTE from their 5G networks, as well as banning Chinese apps like TikTok.

In such an environment, the involvement of Google and Qualcomm in HMD’s ownership structure does make sense. In Q2 2020, six out of ten biggest smartphone vendors where from China, with a combined market share of the six being 52%, which represents a majority on the market. On some markets, like in India for example, the combined marketshare of Chinese smartphone vendors was 72% in Q2 2020. In a scenario where the US cuts off all Chinese vendors from Google services, these companies have a large enough user base to come with a joint Google Play Store competitor. A fair point is that China alone represents a huge market for Chinese vendors and that they are less dominant in other parts of the worlds, but we are still talking about half of the global smartphone shipment coming from vendors that have their HQs in China. That marketshare grows further if we take iPhones out of the equation and basically get that Samsung with around 20-25% of global market share is the only competitive vendor shipping devices with Android. Of course, we do have LG, Sony, HMD Global itself and a lot of small regional companies, but on a global scale Google is left only with Samsung.

So, investing in HMD Global can be interpreted as an attempt of creating (or sustaining) an Europe-based smartphone vendor. Google’s interest here may also be feature phones and almost no software-related monetisation available for feature phones right now. With its investment in KaiOS, a popular feature phone OS used on several Nokia devices like the Nokia 8110 4G or 2720 Flip, Google got some influence in the software aspect, while an investment in HMD Global also gains some leverage in terms of hardware. Also, compared to its own Pixel devices that are limited to a dozen of markets, HMD Global as a global distribution network so Nokia phones can reach more customers. Also, Xiaomi and Motorola recently announced plans to exit Google’s Android One program, leaving HMD Global the only major manufacturer that is committed to the Android One program. To save Android One, Google has to “save” HMD.

Qualcomm’s interest, on the other hand, is probably more component oriented. Qualcomm is facing significant competition with Exynos, MediaTek and Kirin processors that are increasingly used in smartphones in favor of Snapdragon. Of course, Snapdragon remains the top pick for flagship products, but companies like Samsung and Huawei are big enough to make their silicon marketshare grow by just using it in their own products. Thanks to the geopolitical situation, Kirin is probably dead and Huawei might switch to Snapdragon as well. With 5G radio, Qualcomm, Samsung, MediaTek and others have an interest in pushing their 5G radios on as many devices as they can, so having some stake in a smartphone maker, that will guarantee the maker will use only Snapdragon 5G solutions, is a safe bet in the world of increasing tension between East and West. Of course, we will have to see if future Nokia phones will exclusively use Snapdragon 5G radios.

Some of HMD’s previous investors include Ginko Ventures, managed by Jean-Francois Baril, who is also mentioned as the Founder of HMD Global. Foxconn (FIH Mobile) is also in HMD’s ownership, as well as DMJ Asia Investment Opportunity investment fund.

Coming back to Nokia’s investment in HMD Global, I don’t see it as a first step in Nokia acquiring HMD and getting back in the smartphone business. After Nokia sold its Devices and Services business in 2013, the lack of products in the mobile space and a huge patent portfolio allowed the Finns to negotiate better licensing deals and expand their pool of licensees. For a comparison, the unit that handles patent and brand licensing Nokia Technologies reported 578 million euro in revenue in 2014. In 2019, the business reported 1.5 billion euro in revenue, which is mostly profit (85.1% operating margin). Getting back in the phones business by itself would threaten a part of that revenue stream, because other IP holders in mobile like Apple or Samsung would be able to (counter)sue Nokia and negotiate a less expensive patent license. Also, Nokia lost the continuity of mobile Research and Development (excluding network-related IP and OZO Audio), so significant resource would be required to develop technologies and features if Nokia would aim to be a top player.

Why then even invest in HMD and risk in this case? The answer is probably partially in the geopolitical side of events (even though the new CEO already stated Nokia isn’t taking sides), but also investing in its own brand. After all, the Nokia brand is owned by Nokia, so every move that helps HMD Global sell more Nokia phones is an investment in the Nokia-brand itself and Nokia needs to value and protect its brand. Also, it’s a lot nicer to demo 5G networks on a Nokia-branded smartphone or tablet, instead of using competitor products. So, I believe Nokia will continue to be primarily a brand partner with HMD, similar like it is with Flipkart for TVs or RichGo for headphones. With a more control though, because Nokia has a place on HMD’s board.

Looking long-term, this investment might be the first step in building a Western mobile giant, just like Nokia once was. There is of course no guarantee if that will actually happen and we will see on upcoming devices and moves HMD Global will make if the sales number will go up or further down. It helps having strong partners backing you, but most of responsibility is now on HMD’s leadership to execute a clear strategy to bring as many users as possible on the Nokia ship. The geopolitical situation remains unpredictable and HMD might capitalize in the chaos that could appear if US and China continue the second Cold War. In the end, better products will attract customers ( that mostly care about getting the best value for money they can), so the product needs to be the one in focus.