FIH Mobile Limited, the main partner of HMD Global and maker of Nokia branded feature phones for the Finns, released a financial interim report for 2022. The report can be downloaded here and it is a quite nice read that will explain all the major problems FIH and HMD are experiencing. You might remember that FIH stopped manufacturing loss-making Nokia branded smartphones in 2019 which forced HMD to adopt the multi-ODM strategy. This is probably a reason why the latest Nokia smartphones have differently positioned camera modules.

In its financial analysis FIH believes that HMD may experience financial constraints and tight cash flow due to the hit of COVID-19 and city lockdowns and travel restrictions and industry-wide component supply instability and border control and Ukraine warfare and keen competition. The progress of the fundraising fund of HMD is slow and FIH is monitoring closely the progress and evaluating risk to the timely collection of trade receivable and default risk.

A good friend of the portal did a nice analysis of the report and was kind to share it with us. So, I’d like to share it with you since it is a nice continuation of the reports released by IDC and CounterPoint.

If you ask why is FIH mentioning HMD in its report you should know that FIH’s total investment in HMD Global represents 14.38% of total issued shares as of 30 June 2022. Additionally, FIH purchased the Vietnam manufacturing plant back in 2016 from Microsoft Corporation and is producing most of the Nokia branded feature phones. FIH is saying that HMD continues to face keen competition in different markets and their sales of feature phones to HMD declined. The recorded earning of feature phones in the current period was US$4.6 million which sounds nice, but when compared with the recorded earning of US$8 million for the same period last year, the alarm starts to sound.

The year-on-year decrease is due to an increase in its expected credit loss percentage for trade receivables. HMD is striving for greater market share in saturated markets and developing countries, such as India and Africa where the average income level is low. However, feature phone consumers are much price sensitive and inflation and food prices triggered by the Ukraine war are not helping. This will affect the consumption power of low-income people in those markets which will result in a decline in demand and thus affect the cash flow of HMD. HMD has to cut its own operating expenses rapidly, including personnel, and optimise gross margins. Because HMD cash is dependent on how big the revenue is and it must invest part of the savings into sell-out incentives to manage increased inventory levels and get sell-in back in growth again.

HMD increased the number of feature phones from a 2 million unit level in July to a 3 million unit level in August. HMD will continue to invest in sell-out rebates while keeping sell-in moderate to allow channel inventory levels to reach sustainable levels. HMD chose to be less active in markets struck by crisis and focus more on other markets that are in the recovery phase like India.

HMD plans to focus on improving smartphone gross margin in the future. This is strategically important since the feature phone market is declining faster than earlier predicted and moving HMD margin generation more dependent on smartphones in near future. It is fortunate that 2G chipset supply instability from 2021 had shown signs of improvement in the first half of 2022. Improvement in this sector is expected to continue in the third quarter of 2022. Nonetheless, 2G chipset supply won’t reach the levels of 2020 because chip manufacturers are focused more on popular 4G/5G and next-generation chipsets. This was confirmed by Counterpoint and now 5G phones are for the first time produced more than 4G phones.

Demand and supply for feature phones will be carefully maintained while a delicate balance within the last few key players remaining in the sector is kept. To reduce costs, HMD went to a low-tier ODM competitor and in the first quarter, two ODM rivals started supplying Nokia-branded feature phone products to HMD.

FIH is now experiencing lower volume and stronger cost erosion pressure and we can see a foreseeable impact on revenue since all of the world crises that popped up recently caused Nokia branded feature phone order cancellation. The loss of sole vendor competitive advantage made FIH in a more difficult situation in maintaining a fair profit margin with HMD. However, to lower the risk, FIH rejected lower profit margin Nokia branded feature phone projects and shifted resources for exploring non-Nokia business opportunities. However, since the feature phone business is a cash cow to HMD, FIH will balance the deal and continue supplying feature phones to HMD so that HMD can generate cash for FIH. But, all this is forcing FIH to review the existing business model with HMD to see if it can be better controlled.

The featurephone market is still alive but it is seeing some changes since it continued to decline. A 9.5% reduction to 295.7 million units shipped in 2021 is seen. The ongoing decline is primarily resulting from brand makers and mobile operators transitioning product portfolios away from feature phones to affordable entry-level smartphones.

IDC data shows that shipment from ODM companies account for 37.7% of global smartphone shipments in the first quarter of 2022 and will remain steadily growing, the ODM devices and services are mainly mid and low ends smartphones, which is the volume & price drivers. According to IDC, although the feature phones market continues shrinking, however, it is not expected to disappear entirely. IDC forecast the feature phone shipments will still remain at a total of 173.8 million units worldwide in 2026.

Thanks N for the tip!

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