Nokia weakness highlights other key market: China

If Nokia has any shot at a comeback, its Lumia smartphones will need to make a real dent in the Chinese market.

Nokia is currently working with one Chinese carrier, China Telecom, but plans to expand to others, CEO Stephen Elop said during a conference call today to discuss its first-quarter warning and second-quarter outlook.

"We plan to broaden it to other operators" in China, Elop said. "There are a number of different elements at play."

With the buzz surrounding Nokia's potential comeback in the U.S., it's easy to forget that China represents an even more important opportunity down the line. With 1 billion mobile phone subscribers, the base of potential Chinese consumers dwarfs the same in the U.S., and is just as critical -- if not more -- to the company's long-term success.

But unlike the U.S., which relies on flashy flagship smartphones and the latest and greatest specs, the Chinese market skews toward low-end devices.

Nokia said in March that it plans to sell the Lumia 800 and its budget-friendly Lumia 610 through China Telecom. The Lumia 800 is set to start selling this month, while the 610 is expected later this quarter. It's unclear how the Lumia 800, which is its upper-mid level phone, will fare, but the Lumia 610 could be competitive.

The Lumia 610 is one of the initial phones to use Microsoft's revamped specs, allowing for lower-end parts and a more affordable overall price. Nokia has said it will retail for 189 euros ($254) without any subsidy, so even a modest subsidy from a carrier would bring it down to $50. It could conceivably be given away for free.

That's important as Nokia attempts to break the hold of aggressive Chinese handset vendors already entrenched in the market. Elop said phones used to be sold unsubsidized in China, but the market has slowly moved toward a subsidy model like in the U.S. The difference is that there is an element of Chinese government support backing the local carriers and handset vendors.

"These are trends we're trying to understand," Elop said.

Another dilemma for Nokia is the multiple wireless standards that the carriers in China operate in. While there are two dominant standards in the U.S., there are three in China. Some of Nokia's devices in those standards are at the high end and aren't competitive with the local offerings, Elop said. Nokia is working to change that, he added.

Nokia's warning today is a prelude to what the company could look like if it doesn't turn its ship in the right direction. It issued a profit warning today and added that the second quarter could look similar, if not worse, despite the introduction of new products.

Nokia blamed "competitive industry dynamics" in emerging markets such as India, China, Africa, and the Middle East for the shortfall. Elop noted that a lot of the gross margin declines were coming from Symbian, rather than from its Windows Phone products.

Elop asked for a bit of patience and noted that the money and resources being poured into the company now will pay off down the line.

"We are in the heart of our transition," Elop said.