Hi Tech Manufacture and the Hi Tech Ecosystem: Nokia's Cautionary Tale?

This Kat has occupied himself a bit lately on trying to better understand the recent Microsoft-Nokia transaction, where Microsoft bought Nokia's mobile phone and smart phone business, here. In my mind, however, the real macro question raised by this transaction is whether any company in this kind of field, which is not located in the U.S. (at least for the moment) has any realistic chance of succeeding in the long run? This is not say that all US companies will be winners (witness the decline and attempted remake of Kodak after bankruptcy, here, and the efforts to turn around struggling Dell Computers, including taking the company private). But it does suggest that, at the present time, "only US-based mega companies need apply."

The Nokia transaction is especially vexing to those who saw this company as a counter model to the view that the best that a small, hi-tech savvy country (such as Finland) can expect is to develop great technology and IP, which is then sold to one of the world's hi tech behemoths (read Oracle, Google, Microsoft and the like). Au contraire, it was believed, it is possible for a great small country company to succeed as a world-beating manufacturer and sale of branded products. After all, it is in ongoing manufacture and sales, rather than in a one-off exit via sale or acquisition, where a company will be most successful in the long run. Moreover, it is difficult to create a "national champion" in a start-up that is sold, no matter what the price. Given the importance of nations to be able to point to hi-tech "national champions", the rise and fall of Nokia in the mobile phone and smart phone business is especially disheartening.

But Nokia is not alone. Nortel, the Canadian telecoms company, looked and acted like a world-beater a decade or so ago (indeed, it reportedly paid billions of dollars for a small Israeli start-up in the 1990s), only to be dismembered and its patent portfolio scattered at auction among various members of the winning consortium. Staying in Canada, Blackberry/Research-in-Motion, whose smartphone seemed everywhere only a few years ago, is facing the choice of what assets to sell to whom and whether it can reconstitute itself in a different form (as Nokia claims it will be doing).

A major argument made in explaining the rise and fall of such companies is that they were doomed from the outset because of their location. That is to say, a headquarters located in Finland or Canada is simply too detached from the broader ecosystem that is necessary for it to keep its hand on the pulse on the dynamics of the industry. Stated otherwise, when the company's headquarters is removed from, e.g., Silicon Valley or Seattle/Richmond, and even if the company can overcome the risk of "company town" complacency (witness Kodak and Rochester, New York), there is not enough systematic creative tension to enable the company to maintain a dominant position.

If all of this be true, then it suggests that small, savvy hi tech countries may well have limited chances of ever succeeding in the hi-tech Premier League. At their best, start-ups will continue to be acquired, enriching the owners of the start-up (and giving a one-time tax boost to the host country's coffers), but doing little for sustained long-term growth. In certain circumstances, a manufacturing niche might be developed. I am thinking here especially of the generic drug business, where India and Israel have continued to do well. Where there is no Big Pharma industry to serve as a counter-weight in such countries, talented generic drug companies have a chance to do well.  But the generic drug business is a special case and there may not be many other industries where such development of niche manufacturing companies is possible. There is also the example of Taiwan, which has done such a marvellous job at being the hi-tech manufacturer for the world, but it has done much less well at selling its own products on a branded basis.

All of this leads to the "elephant in the room" question—so what about Samsung? The response is that Samsung may well have created the kind of ecosystem, similar to Silicon Valley, necessary for ongoing success. In that respect, Samsung is not Nokia or BlackBerry. After all, as we observed above, the predominance of the US ecosystem was not preordained nor will it necessarily continue. In addition to South Korea, think China and its hi tech industries. But the observations made above do counsel caution for companies in most countries, even with the best technology and R&D, about how far they can expect to leverage these developments into on-going manufacturing success.