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By turning the cell phone into a fashion accessory, Nokia has been pivotal in pushing the notion that a cell phone is much more than just an instrument for voice communications.

Size does matter in cell phone manufacturing. You can never really be too small when it comes to packing circuitry into those itsy-bitsy phones. Consumers, after all, tend to favor tiny, sleek handsets. Yet when it comes to production, you can never be too big. The manufacturer that captures the economies of scale with the largest production runs has an inherent advantage.

On both fronts, Nokia, the world's largest manufacturer of mobile phones, has distanced itself from its competitors. In design, the Finnish company has consistently come up with popular models for those consumers that like to boast, "Mine is smaller than yours." In manufacturing, Nokia retains a commanding lead with a 35% share of the market - almost three times the volume of its nearest rival, Motorola (see figure on page 68).

Nokia shipped 128 million phones last year and registered sales of $26.1 billion, earning pretax profits of $5.25 billon. According to statistics from Lehman Brothers, the average wholesale price of a handset is about $140. Now Nokia's margins are close to 20% - about $28 per phone. Compare that with the 2% margin for Motorola - less than $3 per unit. Indeed, Nokia remains the sole handset manufacturer of any size to see a substantial profit from its mobile-phone operations.

"Nokia is in an enviable position. It's a well-run company that's extremely nimble from a manufacturing and design standpoint," says Richard Siber, partner of communications and high tech for Accenture.

The manufacturer certainly has to rely on its agility these days to maneuver in an increasingly hostile telecom market.

'We are extremely conservative with vendor financing. We merely act as the middleman or matchmaker between the operator and the financial institution. It's important to understand that a vendor like Nokia cannot be the only financier of a project.'

- Arja Suominen, Nokia

"We are extremely satisfied with the solid growth and profitability Nokia achieved... especially during these challenging market conditions," Nokia Chairman and CEO Jorma Ollila said during an earnings call this past spring. "I haven't seen anything that would change the basic parameters that will continue to make us successful in the next two or three quarters."

'Finns are very resourceful, and we have an open atmosphere that promotes innovation. Our executives can try their wings, and even if they don't fly at first, they will get a second or sometimes a third chance.'

- Kari-Pekka Wilska, Nokia

Last month, however, Nokia announced flat market growth in the second quarter. It expects sales growth year-on-year in the quarter to slip to less than 10% - a far cry from its forecast of 20% growth. Nokia has scaled back its projections for handsets this year, anticipating global sales for mobile phones to be 405 million units - about the same amount sold last year. Just months earlier, it predicted sales of its handsets to climb 25% to 35% annually through 2003.

The Nokia name is considered by consumers to be the Mercedes-Benz of handsets. In fact, consulting firm Interbrand designated Nokia the world's fifth most valuable brand after Coca-Cola, Microsoft, IBM and Intel. Nokia was the only non-U.S. company in the top 10.

All the more remarkable is that Nokia has come to dominate a high-technology market from the hinterlands of Europe with a small home market, relatively high labor costs and limited access to capital and talent. Though the name Nokia sounds Japanese - and for a long time consumers mistook the nationality - the company is thoroughly Finnish.

"Finns are very resourceful, and we have an open atmosphere that promotes innovation," says Nokia President Kari-Pekka Wilska, who is responsible for all business operations for North and South America. "Our executives can try their wings and even if they don't fly at first, they will get a second or sometimes a third chance." A 28-year veteran of the company, like others on the tightly knit executive team, Wilska has regularly rotated jobs, doing stints in Finland and abroad.

A 136-year-old company, Nokia takes its name from a small river near the Finnish city of Tampere. It started business as a paper producer; over the years it has manufactured rubber boots, tires, and television sets and generated electricity. Nokia gravitated to telecommunications in the early 1960s. Led by Ollila and Pekka Ala-Pietilä, the company president, Nokia began to sell off much of its noncore businesses in 1992 so it could put all its efforts into mobile phones and the wireless networks that support them.

"Finland is a good testing ground," says Hans Tiger, development manager of mobile networks for Sonera, Finland's largest mobile carrier. "We've always had many phone companies and not just one national supplier. A company like Nokia has had to innovate just to serve the home market."

To its chagrin, however, Nokia has yet to supply Sonera's general packet radio service (GPRS) network. The carrier began trial runs in the spring with GPRS handsets supplied by Motorola.

By year-end, Nokia said it plans to have its faster data phones available in the Nordic countries. But there could be a lot at stake in the coming year. Today, Nokia's sentiments about the handset market reflect what other vendors are saying - that a technology transition has caused a lot of people to hold off purchasing phones until more advanced ones are ready. If new GPRS handsets aren't adopted quickly, analysts say vendors like Nokia are in for a painful ride.

Nokia also continues to struggle for acceptance among CDMA carriers in the U.S. Gartner Dataquest says the handset giant holds just a 7% market share in the U.S. CDMA handset business. The company is working diligently to improve its dismal market share in the CDMA handset market and rebound from technical glitches that plagued its earlier products.

Given the sparse populations of Scandinavia, the Nordic countries have been hotbeds of wireless development. Side by side, the powerhouses of Nokia and Sweden's Ericsson have laid the groundwork for analog and digital advances.

In the early 1980s, the two companies helped launch the Nordic Mobile Telephone standard for the analog mobile system, the first system to allow seamless roaming across national borders. Nokia has been a key beneficiary in the European adoption of GSM. The first GSM call ever made was on a Nokia phone over a Nokia network in 1991.

From its strength in GSM, Nokia has covered the world with mobile phones for every standard. Furthermore, by turning the cell phone into a fashion accessory, Nokia has been pivotal in pushing the notion that a cell phone is much more than just an instrument for voice communications. In Helsinki, Finland, the mobile phone penetration for older teens is close to 100%. The chic silver 8850 with its retractable phone pad is the coolest item among affluent teens, selling at $700 and up.

"When we started, we wanted the phones to be as visible as clothing with many styles and colors," says Wilska. "The dealers at first wouldn't store multiple skews of colors. So we designed in the early 90s basic handsets with faceplates that could be changed at the time of purchase."

Nokia was also the first manufacturer to introduce different ring tones.

"There's no denying that Nokia has done a good job with user interfaces. And it's very astute at gauging consumer preferences," says Tole Hart, senior analyst for Gartner Dataquest.

To that end, Nokia is pumping up its Club Nokia portal, a collection of services for those who own its phones. The club lets Nokia users download games and different ring tones, receive online help with phone problems and preview new models. Nokia is expected to add new applications as they are developed.

Club Nokia was launched in Europe in the mid-1990s and is scheduled to be rolled out in the U.S. and Asia this year.

Accenture's Siber notes that by moving into the mobile services market with its portal, Nokia is going to come to loggerheads with operators. "There are several million Club Nokia subscribers. But guess what: There are 500 million Nokia phones out there. By putting itself in the value chain with services, it can make the carrier nothing more than a transport layer," he says.