Nokia vs Huawei

Analysis:
In what follows, you will see a personal analysis of the results of the fiercest competitors in the
telecom domain those years, Nokia and Huawei. They are not the fiercest because they are
leading together more than 25% of the telecom providers business of the world, but because they
are competing aggressively with each other to gain the second place after Ericsson and get close
to it in terms of market share.

This ratio analysis gives a close eye on how those 2 companies are acting in the market. It is
based on the 2 exhibits shown at the end of this paper and that are withdrawn from the published
annual reports of both companies for the last 5 years.

Liquidity Ratios
Current Ratio

For 2005 and 2006, Nokia was better positioned in

front of Huawei in terms of its assets compared to
its liabilities. In 2007, with the merger of Nokia
Networks and Siemens Communications and the
decision to translate the financial figures of the
new Nokia Siemens Networks as part of Nokia
financials, one can notice clearly the effect on the
current ratio. However, after crossing the first 2
years, Nokia is getting back its stability. On the other side, Huawei is keeping the same trend
approximately for the last 5 years.

Quick Ratio

Huawei has been always with a ratio close to 1.

This, according to lot of experts, is not a healthy
situation. At any time the company may have to
pay a certain considerable amount or if customers
delay their payments due to a worlwide crisis
affecting the telecom, the company may be at risk
to suffer. As for Nokia, even though it
experienced a hard year after the merger, it was
and still looks in better shape than huawei in terms of cash.

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Activity and Efficiency Ratios

Inventory Turnover Ratio

Looking at this comparison aspect, Nokia seems

to be way better doing than Huawei. On average,
Nokia’s turnover seems to be 4 times quicker than
that of Huawei. Nokia has an average of 0.85
months’ cost of sales, where as Huawei seems to
have an average of 3.4 months’ cost of sales. This
shows that Huawei produces and stores a bigger
percentage of inventories than Nokia does. It also
looks like Nokia produces what its market needs where as Huawei tries to either have a ready to
deploy production or to flod the market with free systems such as free trials hoping to get out of
the customers with long term maintenance contracts. On the ground, if Huawei’s intention is
explained by the free trials approach, it seems it is proving its efficiency as Huawei contractual
market shares is increasing year after year, especially in the telecom field, without forgetting its
networking department effect too.

Average Collection Period

Again here, Nokia appears to be a better

performer when compared to Huawei. Their
average collection period is approximately 2.5
times less than Huawei’s. Nokia usually gets its
money from the market and closes its accounts
receivables after about 65 days on average,
following the last 5 years trend. On the opposite
side, Huawei, who is following the same approach
of free trials, is allowing its customers to take more time to pay their money; they are giving
them approximately 155 days to close their outstanding balances. If we look at the market, we
can notice that by the payments’ facilities Huawei is presenting to its customers worldwide, a
thing Nokia won’t be able to do without a governmental support like the one Huawei is getting.

Total Assets Turnover Ratio

5 years ago, the total assets of Nokia were making

better sales in percentage when compared to those
of Huawei. With the introduction of Nokia
Siemens Networks to the market and translating
its figures in Nokia’s, one can notice the dive in
this ratio. The merger made Nokia to suffer as the
telecom assets are a bit crutial to sales. Huawei,
on its side, is keeping a continuous slight increase
but still close to 1.

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Fixed Asset Turnover Ratio (Sweat Factor)

In 2005 and 2006, Nokia was way at ease

compared to Huawei. The creation of NSN added
considerable weight on the shoulders of Nokia. It
dramatically brought this ratio to an unstability
level. In other terms, it made it literally sweat.
After the first 2 years of NSN age, and the
creation of NavTeq, another company owned by
Nokia group, Nokia was able to stabilize this risk
for 2009 even during the financial crisis. At the contrary, Huawei got benefit of what was
happening with Nokia and Siemens, and drove aggressively its business. It was gaining market
shares from both companies during the phase they were preparing for the merger of their telecom
businesses. This brought them to the same relaxation point where Nokia was in 2005.

Individual P&L items as a percentage of Sales

COGS vs Sales

Percentage-wise, the 2 companies are not far from

each other; however, a slight difference can be
recognized when looking at the graphs. This
difference can be explained by the cost of man-
working hand. The majority of the people working
in Huawei are local Chinese people with low
salaries; whereas, in Nokia, there are a
considerable number of employees who come
from the EU nations and from northern America. Add to this that more than 40% of Huawei
employees work in R&D mainly located in China with not more than 25% of them spread in
Europe and other parts of the world, a case that is the opposite for Nokia.

Operating Expenses vs Sales

As Huawei was not publishing in its financial

reports before 2009 neither its marketing and sales
costs nor its R&D costs and replacing them by a
combined entry called Operating Expenses,
though it has been decided to do the comparison
in this study on this factor compared to the Sales.
For the 2 companies, their operating expenses are
somehow of the same percentage out of their
respective sales. The difference is that in the 2009 crisis, a slight switch in the polarity can be
seen. Nokia’s percentage of operating expenses vs sales jumped above Huwaei’s. Nokia has to
get back the control on its expenses as its sales are not increasing with the same rate, otherwise,
they will be facing some unpleasant situations in the coming years. On the opposite, Huawei are
playing a good role on this control.

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Leverage

Gearing Ratio (Leverage)

Both companies are running their business at a

high risk. Their debt ratio is increasing and has
already reached 63 and 69 % of their Assets
values. This explains the risks Nokia and Huawei
are taking to finance their assets through
borrowings. It is a tricky game they are playing
here. At any time, they may not be able to fulfill
their commitments and paying their interest, and
therefore, they may be facing unpleasant situations. However, in their business, and with the fast
trend of technology shifts from one standard to another new one, all companies working in this
field, they are on the same trend. They have to borrow to finance their operating expenses and, to
keep or gain market shares, they have to give their customers some financial facilitation, and all
this lead to the leverage values we are seing.

Profitability Ratios

Gross-Margin Ratio

On the average, both companies are maintaining a

stable Gross Margin somehow with a small
advantage for Huawei over Nokia’s percentage;
however, Nokia slipped a bit in 2009 and shall try
their best to recover the soonest otherwise, it will
be hard to regain the lost margin if time passes.
Huawei, even though slipped in 2006, the year or
their remarkable expenditures in the world, they
were able to recover to the same marginal level in 2 years time and kept a stable path for the next
year of 2009.

Profit before Tax vs Sales

Based on this ratio calculation, one can see that in

2005, both companies were doing approximately
the same in terms of percentage of profit out of the
sales size. 2006-2008 was a tough period for
Huawei that lost approximately 50% of that
percentage performance; however, after the
acquisition it made in 2008 for their
semiconductor provider, and after the fierce
expenditures it was working on during 2007 and 2008, it was able to recover all the margin lost
and even increase its profit to sales ratio. On the contrary, Nokia, since the introduction of NSN,
is struggling heavily. In 2 years, their profit to sales ratio dropped by 8 times. Dramatic measures

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shall be taken by that company in order to recover; otherwise, they will be in a seriously critical
situation in 2011 and 2012.

Return on Equity

The same observations driven out in the previous

paragraph can be concluded from the return on
equity ratio too. Our graph shows the deep dive
Nokia is taking since 2007, and the recovery
Huawei enjoyed in 2009. May be nokia shall think
of reducing their equity dividends to keep some
cash for their next year operation.

Return on Assets

This ratio shows the same behavior for both

companies as the 2 previous ones. It translates in
numbers the relationship between the profit and
the assets of the company that generated this
profit. Clearly, we can see that Huawei has found
in 2009 a more efficient way to benfit from their
assets in comparison to the mode of work Nokia is
following.

Earning per Share (EPS)

Huawei is a company that is 98.58% owned by the

employees and 1.42% by its founder. It has no
shares in issue on the stock market yet. For this,
we can only study the EPS of Nokia. Since the
2007, the year of the big merger, the EPS of Nokia
is going dramatically down. In fact, it is not the
effect of the merger but also of the aggressiveness
previously major telecom companies are getting
from their Chinese partners, Huawei and ZTE.

Sales per Employee

We can see over the last 5 years that Nokia’s

workforce is still keeping a clear advantage on
Huawei’s in terms of generating sales. However,
the dive Nokia’s figures are showing since 2006
draw a big question mark on the efficiency of the
sales strategy and pricing they are following.
Another explanation of this dive could be the lost
of market shares to their main competitor,

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Huawei.

NB: Huawei didn’t use to report clearly the number of employees prior to 2008. The figures used
for 2005 and 2007 are a rough estimate with a comparision to the size of their R&D that is
reported in more than one place. Unfortunately, nothing was mentioned for 2006.

Working Capital

Even though Nokia has been keeping a

considerable working capital in comparison to
Huawei over the last 5 years, the behavior of that
working capital is not stable. It was fluctuating up
and down in a remarkable way giving an unstable
picture of the company financial. But, Nokia is
able remarkably to maintain a considerable
amount in their working capital which is
supporting the trust of lenders in its ability to
weather hard times. In parallel, although the figures of Huawei are not as high as of Nokia, but
that company is showing, year after year, that it is a strong player on the technology field, and
that it has a strong long term vision to develop a considerable backup capital to gain the
borrowers trust when needed. It has come a long way during the last 3 years and was able to
increase its working capital by a multiple of more than 4.

Final Thought

After reviewing this analysis, we can see that Nokia has advantages over Huawei in terms of its
Liquidity, Inventory Turnover, Collections, Sales per Employee and Working Capital, but
Huawei overachieves in terms of its Assets Turnovers, COGS, Operating Expenses and
Profitability. On the overall picture, Huawei is showing a more stable and constant improvement
over the last 3 or 4 years, however Nokia is still showing a better cash stability that allowed it to
sign down, in 2010, a contract buying Motorola wireless departments for 1.2bn Euros, a deal
Huawei was trying to secure also from their side.

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Exhibit 1
Nokia 2005 2006 2007 2008 2009
Sales 34191 41121 51058 50710 40984
GM 11982 13379 17304 17373 13264
Nbr of Employees 56896 65324 112262 125829 123171
COGS 22209 27742 33754 33337 27720
Current Assets 18951 18586 29294 24470 23613
Fixed Assets 3347 4031 8305 15112 12125
Minority Interest 205 92 2565 2302 1661
Long Term Liabilities 268 396 1285 2717 5801
Current Liabilities (Payables) 9670 10161 18976 20355 15188
Inventories 1668 1554 2876 2533 1865
Receivables 5346 5888 11200 9545 7981
R&D 3825 3897 5647 5968 5909
Marketing & Selling 3518 3980 5560 5664 5078
Operating Expenses 7343 7877 11207 11632 10987
Equities 12155 11968 14773 13208 13088
Profit before Tax 4971 5723 8268 4970 962
Profit After Tax 3690 4366 6746 3889 260
Shares in Issue 4371 4087 3885 3744 3705

Liquidity Ratios
Current Ratio 1.96 1.83 1.54 1.20 1.55
Quick Ratio 1.79 1.68 1.39 1.08 1.43
Activity and Efficiency Ratios
Inventory Turnover Ratio 13.31 17.85 11.74 13.16 14.86
Average Collection Period 57.07 52.26 80.07 68.70 71.08
Total Asset Turnover Ratio 1.53 1.82 1.36 1.28 1.15
Fixed Asset Turnover Ratio 10.22 10.20 6.15 3.36 3.38
Individual P&L items as %age of Sales
Cost of Goods & Services/Sales 64.96 67.46 66.11 65.74 67.64
Operating Expenses/Sales 21.48 19.16 21.95 22.94 26.81
R&D/Sales 11.19 9.48 11.06 11.77 14.42
Marketing & Selling/Sales 10.29 9.68 10.89 11.17 12.39
Gearing Ratio (Leverage) 45.49 47.08 60.71 64.10 63.38
Profitability Ratios
GM Ratio 35.04 32.54 33.89 34.26 32.36
Profit before Tax/Sales 14.54 13.92 16.19 9.80 2.35
Return on Equity 30.36 36.48 45.66 29.44 1.99
Return on Assets 22.29 25.30 21.99 12.56 2.69
Earnings per Share 0.84 1.07 1.74 1.04 0.07
Sales per Employee 600.94 629.49 454.81 403.01 332.74
Working Capital 9281 8425 10318 4115 8425

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Exhibit 2
Huawei 2005 2006 2007 2008 2009
Sales 4434.71 6304.79 9519.66 13589.09 16632.11
GM 1795.80 2283.43 3635.48 5388.93 6579.80
Nbr of Employees 30000 81500 87502 95000
COGS 2638.92 4021.36 5884.18 8200.17 10052.31
Current Assets 3358.62 4542.30 7152.75 11349.92 13903.62
Fixed Assets 907.15 1015.38 1074.53 1359.65 1678.95
Minority Interest 3.64 3.18 94.56 3.63 7.03
Long Term Liabilities 205.06 48.70 408.59 504.93 1513.70
Current Liabilities (Payables) 2268.96 3528.59 4770.06 8134.50 9235.65
Inventories 900.68 1053.12 1680.96 2504.18 2783.60
Receivables 1722.06 2706.17 4068.88 6561.78 7061.05
R&D
Marketing & Selling
Operating Expenses 1187.46 1744.41 2652.63 3574.17 4185.28
Equities 1788.09 1977.20 2953.63 4066.50 4826.20
Profit before Tax 592.89 420.41 772.32 1019.39 2470.84
Profit After Tax 504.76 379.75 709.45 853.52 2039.03
Shares in Issue

Liquidity Ratios
Current Ratio 1.48 1.29 1.50 1.40 1.51
Quick Ratio 1.08 0.99 1.15 1.09 1.20
Activity and Efficiency Ratios
Inventory Turnover Ratio 2.93 3.82 3.50 3.27 3.61
Average Collection Period 141.73 156.67 156.01 176.25 154.96
Total Asset Turnover Ratio 1.04 1.13 1.16 1.07 1.07
Fixed Asset Turnover Ratio 4.89 6.21 8.86 9.99 9.91
Individual P&L items as %age of Sales
Cost of Goods & Services/Sales 59.51 63.78 61.81 60.34 60.44
Operating Expenses/Sales 26.78 27.67 27.86 26.30 25.16
R&D/Sales 0.00 0.00 0.00 0.00 0.00
Marketing & Selling/Sales 0.00 0.00 0.00 0.00 0.00
Gearing Ratio (Leverage) 58.08 64.42 64.09 68.00 69.03
Profitability Ratios
GM Ratio 40.49 36.22 38.19 39.66 39.56
Profit before Tax/Sales 13.37 6.67 8.11 7.50 14.86
Return on Equity 28.23 19.21 24.02 20.99 42.25
Return on Assets 13.90 7.56 9.39 8.02 15.86
Earnings per Share
Sales per Employee 147.82 116.81 155.30 175.07
Working Capital 1089.66 1013.71 2382.69 3215.42 4667.98

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