Nokia Eyes China’s Booming Market For Its Lumia Comeback Bid

With low 3G penetration and a smartphone market that has already leapfrogged the U.S. as the biggest in the world, China is shaping up to play a big role in determining the future of the smartphone industry. This fact has not been lost on two players desperate to make a comeback in the mobile industry. With the newly launched Windows Phone 8, Nokia (NYSE:NOK) and Microsoft (NASDAQ:MSFT) have been looking to make inroads in the largest smartphone market of the world through strong carrier partnerships. Just last week, Nokia announced that the Lumia 920T will be launched on the largest carrier in the world, China Mobile (NYSE:CHL), before the end of the year. This was followed by a similar deal with the second largest Chinese carrier, China Unicom (NYSE:CHU), also for the flagship 920. ^[1] Microsoft later announced a partnership with China Unicom that will help it promote Windows Phone and boost the sales of devices built on the platform in the Chinese market.

See our complete analysis for Nokia stock here

These deals give both Nokia and Microsoft more than just a foothold in China’s booming smartphone market with an opportunity to address a huge combined subscriber base of close to 950 million, of which only about 16% use 3G currently. Of course, a vast majority of these subscribers will not be able to afford the high-end Lumia but with these partnerships in place, Nokia will look to bring the cheaper Lumias such as the 820 and the 620 into the Chinese market soon. A big part of Nokia’s future strategy will be to push Windows Phone down to lower price points, and how quickly it manages to do so in order to counter Android’s growing popularity in the emerging markets could prove crucial in the long run.

In this quest to create a niche for itself and Microsoft, Nokia faces an uphill task against the two well-entrenched ecosystems of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), but more carrier partnerships and better app support to drive Lumia sales will be key to its resurgent hopes. We have a $4.50 price estimate for Nokia, about 25% ahead of the current market price.

Nokia Has Carrier Backing

The need for more competition in the smartphone market, not only in terms of hardware but also software, is being increasingly felt by both customers and carriers alike. A competitive third mobile ecosystem will increase the number of choices for customers and foster innovation in the industry. More competition will also put less burden on the carriers who are increasingly feeling the pinch of smartphone subsidies on their margins. It is no surprise therefore that wireless carriers in both the U.S. and China have jumped on to Nokia’s latest offerings to counter the growing dominance of Android and iOS in both these markets.

In the U.S., T-Mobile and AT&T were the early Lumia backers with AT&T giving the phone a “hero” status at its stores and making it the exclusive free phone for all AT&T employees to generate awareness. The marketing push ensured that the Lumia 900 was among the top three best-selling handsets at AT&T until July, a period of four months since launch. ^[2] With Lumia WP8, Nokia has signed on Verizon to gain more visibility and better its chances of penetrating the U.S. market

As for China, its smartphone market is expected to be the largest in the world by the end of the year. With 3G penetration at less than 20%, the growth potential is huge. Even the carriers here are actively trying to transition their huge 2G base to 3G. Earlier this year, China Telecom launched the Lumia 800C. Now China Mobile is in need of a flagship smartphone to promote its 3G network, an area where it has lagged behind its competitors. (see China Mobile Needs To Step Up As 3G Growth Slows) It is pursuing an Apple iPhone deal, but government concerns over the high subsidies associated with the iPhone is a big deterrent. However, it may not be long before the iPhone arrives on China Mobile, so Nokia will be looking to make the most of the opportunity.

Still, while selling the iPhone is more lucrative considering its incredible popularity among buyers, emerging market carriers are wary of margin pressures that selling such an expensive phone entails. Nokia can alleviate these concerns by offering more handset choices at lower prices, or packing in more features at the same price. While the iPhone retails at an unsubsidized $775 in China, Nokia has cheaper Lumia offerings such as the Lumia 800C and the Lumia 620, which it will be launching in China soon.

WP8 Has Essential Ingredients For Success

Overall, the Lumia has seen decent traction build up with carrier support in the U.S. and China helping Nokia sell about 11 million units in all, with sales doubling in the first three quarters since its launch late last year. However, where carrier partnerships have not been hard to come by, getting people to warm up to the Windows ecosystem has proved increasingly tough, considering how well-entrenched Android and iOS have become as mobile ecosystems. The iTunes store and Google Play boast close to 700,000 apps respectively while there are only about 120,000 available in the Windows Phone Marketplace.

This is where WP8 offers both Nokia and Microsoft their best chance to find a place in the growing mobile market. While building Windows 8 and WP8, Microsoft ensured that both shared the same kernel and therefore inherited the same rich features that has made Windows a household name in the PC industry. This has helped integrate the two platforms, thereby making apps developed for either platform easier to port. Having a huge user base for its Windows PC software will help Microsoft generate significant support for the new integrated Windows8/WP8 user experience, from both developers and users alike. Thereby driving the sales of Windows Phones in general and the Lumia in particular.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Unicom Announces First Nokia WP8 Smartphone, SinaTech, December 5th, 2012 [↩]
2. Apple’s iPhone 4S is no longer the top-selling smartphone in the U.S., BGR.com, September 4th, 2012 [↩]