As filed with the Securities and Exchange Commission on March 5, 2009.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2008

 

Commission file number 1-13202

 

 

 

 

Nokia Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

 

Republic of Finland

(Jurisdiction of incorporation)

 

Keilalahdentie 4, P.O. Box 226, FI-00045 NOKIA GROUP, Espoo, Finland

(Address of principal executive offices)

 

Kaarina Ståhlberg, Vice President, Assistant General Counsel

Telephone: +358 (0) 7 1800-8000, Facsimile: +358 (0) 7 1803-8503

Keilalahdentie 4, P.O. Box 226, FI-00045 NOKIA GROUP, Espoo, Finland

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”):

 

 

 

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Exchange Act: None

 

Indicate the number of outstanding shares of each of the registrant’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Shares: 3 800 948 552.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x  No o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes o  No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued by the International Accounting Standards Board  x

 

Other o

 

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o  Item 18 x

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o  Item 18 o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

 

 

TABLE OF CONTENTS

 

 

Nokia Corporation is a public limited liability company incorporated under the laws of the Republic of Finland. In this document, any reference to “we,” “us,” “the Group” or “Nokia” means Nokia Corporation and its subsidiaries on a consolidated basis, except where we make clear that the term means Nokia Corporation or a particular subsidiary or business segment only, and except that references to “our shares,” matters relating to our shares or matters of corporate governance refer to the shares and corporate governance of Nokia Corporation. Nokia Corporation has published its consolidated financial statements in euro for periods beginning on or after January 1, 1999. In this annual report on Form 20-F, references to “EUR,” “euro” or “€” are to the common currency of the European Economic and Monetary Union, or EMU, and references to “dollars,” “US dollars,” “USD” or “$” are to the currency of the United States. Solely for the convenience of the reader, this annual report contains conversions of selected euro amounts into US dollars at specified rates, or, if not so specified, at the rate of 1.3919 US dollars per euro, which was the noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2008. No representation is made that the amounts have been, could have been or could be converted into US dollars at the rates indicated or at any other rates.

 

Our principal executive office is currently located at Keilalahdentie 4, P.O. Box 226, FI-00045 Nokia Group, Espoo, Finland and our telephone number is +358 (0) 7 1800-8000.

 

Nokia Corporation furnishes Citibank, N.A., as Depositary, with consolidated financial statements and a related audit opinion of our independent auditors annually. These financial statements are prepared on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union (“IFRS”). In accordance with the rules and regulations of the US Securities and Exchange Commission, or SEC, we no longer provide a reconciliation of net income and shareholders’ equity in our consolidated financial statements to accounting principles generally accepted in the United States, or US GAAP. We also furnish the Depositary with quarterly reports containing unaudited financial information prepared on the basis of IFRS, as well as all notices of shareholders’ meetings and other reports and communications that are made available generally to our shareholders. The Depositary makes these notices, reports and communications available for inspection by record holders of American Depositary Receipts, or ADRs, evidencing American Depositary Shares, or ADSs (one ADS represents one share), and distributes to all record holders of ADRs notices of shareholders’ meetings received by the Depositary.

 

In addition to the materials delivered to holders of ADRs by the Depositary, holders can access our consolidated financial statements, and other information included in our annual reports and proxy materials, at www.nokia.com. This annual report on Form 20-F is also available at www.nokia.com as well as on Citibank’s website at http://citibank.ar.wilink.com (enter “Nokia” in the Company Name Search). Holders may also request a hard copy of this annual report by calling the toll-free number 1-877-NOKIA-ADR (1-877-665-4223), or by directing a written request to Citibank, N.A., Shareholder Services, PO Box 43124, Providence, RI 02940-5140, or by calling Nokia Investor Relations US Main Office at 1-914-368-0555. With each annual distribution of our proxy materials, we offer our record holders of ADRs the option of receiving all of these documents electronically in the future.

 

It should be noted that certain statements herein which are not historical facts, including, without limitation, those regarding:

 

 

are forward-looking statements.

 

These statements are based on management’s best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors that could cause these differences include, but are not limited to:

 

 

 

as well as the risk factors specified in this annual report under Item 3D. “Risk Factors.”

 

Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Nokia does not undertake any obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.

 

Not applicable.

 

Not applicable.

 

The financial data set forth below at December 31, 2007 and 2008 and for each of the years in the three-year period ended December 31, 2008 have been derived from our audited consolidated financial statements included in Item 18 of this annual report. Financial data at December 31, 2004, 2005, and 2006 and for each of the years in the two-year period ended December 31, 2005 have been derived from our previously published audited consolidated financial statements not included in this document.

 

The financial data at December 31, 2007 and 2008 and for each of the years in the three-year period ended December 31, 2008 should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements.

 

The audited consolidated financial statements from which the selected consolidated financial data set forth below have been derived were prepared in accordance with IFRS.

 

 

 

 

Distribution of Earnings

 

We distribute retained earnings, if any, within the limits set by the Finnish Companies Act. We make and calculate the distribution, if any, either in the form of cash dividends, share buy-backs, or in some other form or a combination of these. There is no specific formula by which the amount of a distribution is determined, although some limits set by law are discussed below. The timing and amount of future distributions of retained earnings, if any, will depend on our future results and financial condition.

 

Under the Finnish Companies Act, we may distribute retained earnings on our shares only upon a shareholders’ resolution and subject to limited exceptions, in the amount proposed by our Board of Directors. The amount of any distribution is limited to the amount of distributable earnings of the parent company pursuant to the last accounts approved by our shareholders, taking into account the material changes in the financial situation of the company after the end of the last financial period and a statutory requirement that the distribution of earnings must not result in insolvency of the company.

Subject to exceptions relating to the right of minority shareholders to request for a certain minimum distribution, the distribution may not exceed the amount proposed by the Board of Directors.

 

Share Buy-backs

 

Under the Finnish Companies Act, Nokia Corporation may repurchase its own shares pursuant to either a shareholders’ resolution or an authorization to the Board of Directors approved by the company’s shareholders. The authorization may amount to a maximum of 10% of all the shares of the company and its maximum duration is 18 months. Our Board of Directors has been regularly authorized by our shareholders at the Annual General Meetings to repurchase Nokia’s own shares since 2001, and during the past three years the authorization covered 405 million shares in 2006, 380 million shares in 2007 and 370 million shares in 2008. The amount authorized each year has been at or slightly under the maximum limit provided by the Finnish Companies Act.

 

On January 22, 2009, we announced that the Board of Directors will propose for shareholders’ approval at the Annual General Meeting convening on April 23, 2009 a new authorization to repurchase a maximum of 360 million shares. The maximum amount corresponds to less than 10% of Nokia’s share capital and total voting rights. The repurchase authorization would be effective until June 30, 2010 and it is proposed to terminate the corresponding authorization resolved by the Annual General Meeting on May 8, 2008. The repurchase authorization is proposed to maintain flexibility, but the Board of Directors has no current plans for repurchases during 2009. Nokia has not repurchased any of its own shares since September 2008.

 

The table below sets forth actual share buy-backs by the Group in respect of each fiscal year indicated.

 

 

For more information about share buy-backs during 2008, see Item 16E. “Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”

 

Cash Dividends

 

On January 22, 2009, we announced that the Board of Directors will propose for shareholders’ approval at the Annual General Meeting convening on April 23, 2009 a dividend of EUR 0.40 per share in respect of 2008.

 

The table below sets forth the amounts of total cash dividends per share and per ADS paid in respect of each fiscal year indicated. For the purposes of showing the US dollar amounts per ADS for 2004 through 2008, the dividend per share amounts have been translated into US dollars at the noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”) on the respective dividend payment dates.

 

 

 

We make our cash dividend payments in euro. As a result, exchange rate fluctuations will affect the US dollar amount received by holders of ADSs on conversion of these dividends. Moreover, fluctuations in the exchange rates between the euro and the US dollar will affect the dollar equivalent of the euro price of the shares on NASDAQ OMX Helsinki and, as a result, are likely to affect the market price of the ADSs in the United States. See also Item 3D. “Risk Factors—Our sales, costs and results of operations, as well as the US dollar value of our dividends and market price of our ADSs, are affected by exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Japanese yen, the Chinese yuan and the UK pound sterling, as well as certain other currencies.”

 

Exchange Rate Data

 

The following table sets forth information concerning the noon buying rate for the years 2004 through 2008 and for each of the months in the six-month period ended February 28, 2009, expressed in US dollars per euro. The average rate for a year means the average of the exchange rates on the last day of each month during a year. The average rate for a month means the average of the daily exchange rates during that month.

 

 

On February 27, 2009, the noon buying rate was USD 1.2662 per EUR 1.00.

 

Not applicable.

 

Not applicable.

 

Set forth below is a description of risk factors that could affect Nokia. There may be, however, additional risks unknown to Nokia and other risks currently believed to be immaterial that could turn out to be material. These risks, either individually or together, could adversely affect our business, sales, results of operations, financial condition and share price from time to time.

 

We are a global company and have sales in most countries of the world and, consequently, our sales and profitability are dependent on general economic conditions globally and locally. The impact of the current global economic turmoil and any further deterioration of global economic conditions, as well as the related financial crisis, on us, our customers and end-users of our products, services and solutions, our suppliers and collaborative partners may have a material adverse effect on our business, results of operations and financial condition.

 

As we are a global company and have sales in most countries of the world, our sales and profitability are dependent on general economic conditions both globally and locally. The mobile communications industry has matured to varying degrees in different markets and, consequently, the industry is more vulnerable than before to the negative impacts of the current difficult global economic conditions. The recent weakening of consumer and corporate confidence, declining income and asset values in many areas and other adverse factors related to the current deteriorating global economic conditions, aggravated by the unprecedented currency volatility, have resulted and may continue to result in our current and potential customers as well as the end-users of our products, services and solutions postponing or reducing spending on our products, services and solutions. For example, many consumers may not upgrade their devices or they may postpone the replacement of their devices or the purchase of their first device due to more limited financial resources or the expectations of lower prices in future; mobile network operators may further reduce the device subsidies that they offer to the end-users or attempt to extend the periods of contracts that obligate the consumer to use a certain device; consumers may be less willing to pay for our consumer Internet services and mobile network operators may invest less in ramping up those services; the demand for map information and other location-based content by automotive and mobile device manufacturers may decline following the contraction of the sales in the automotive and consumer electronics industry; and network operators and service providers may postpone their investments in their network infrastructure and related services.

 

The global financial crisis has also led to more limited availability of credit which may have a negative impact on the financial condition, and in particular on the purchasing ability, of some of our distributors, independent retailers and network operator customers and may also result in requests for extended payment terms, credit losses, insolvencies, limited ability to respond to demand or diminished sales channels available to us. The general difficult economic conditions combined with tightening credit markets may also cause financial difficulties for our suppliers and collaborative partners which may result in their failure to perform as planned and, consequently, in delays in the delivery of our products, services and solutions.

 

The related currency fluctuations, such as the recent severe volatility in exchanges rates, may also increase the costs of our products, services and solutions that we may not be able to pass on to our customers or impair the purchasing power of our customers in different markets; result in significant competitive benefit to certain of our competitors who incur a material part of their costs in other currencies than we do; hamper our pricing; and increase our hedging costs and limit our ability to hedge our exchange rate exposure.

 

The difficult global economic conditions may also result in inefficiencies due to our deteriorated ability to appropriately forecast developments in our industry and plan our operations accordingly, delayed or insufficient investments in our new market segments and failures to adjust our costs appropriately. Also, continuing difficult general economic conditions, negative developments in our industry, any significant underperformance relative to historical or projected future results by us or any part of our business, or any significant changes in the manner of our use of the acquired assets

or the strategy for our overall business may cause reductions in the future valuations of our investments and assets and result in impairment charges related to goodwill or other assets. Adverse economic conditions affecting us, our current and potential customers, their spending on our products, services and solutions, and our suppliers and collaborative partners may have a material adverse effect on our business, results of operations and financial condition.

 

The continuing volatility of the financial market has increased and may continue to increase our costs associated with issuing commercial paper or other debt instruments due to increased spreads over relevant interest rate benchmarks. Also, further negative developments in our business, results of operations and financial condition due to the current difficult global economic conditions or other factors could cause lowered credit ratings of our short and long-term debt or their outlook from the credit rating agencies and, consequently, impair our ability to raise new financing or refinance our current borrowings and increase our costs associated with any new debt instruments. The adverse conditions in the financial markets may also result in failures of derivative counterparties or other financial institutions which could have a negative impact on our treasury operations. Further, the deteriorating general economic conditions and continuing volatility of the financial markets may impact our investment portfolio and other assets and result in impairment charges. We currently believe our funding position to be sufficient to meet our operating and capital expenditures in the foreseeable future. However, the adverse developments in the global financial markets could have a material adverse effect on our financial condition and results of operations. For a more detailed discussion of our liquidity and capital resources, see Item 5B. “Liquidity and Capital Resources” and Note 35 of our consolidated financial statements included in Item 18 of this annual report.

 

Our sales and profitability depend materially on the development of the mobile and fixed communications industry as well as the growth and profitability of the new market segments that we target and our ability to successfully develop or acquire and market products, services and solutions in those segments. If the mobile and fixed communications industry develop in an adverse manner, or if the new market segments we target and invest in grow less or are less profitable than expected, or if new faster growing market segments emerge in which we have not invested, our business, results of operations and financial condition may be materially adversely affected.

 

Our sales and profitability depend materially on the development of the mobile communications industry in terms of the number of new mobile subscribers and the number of existing subscribers who upgrade or simply replace their existing mobile devices and the growth of the investments made by mobile network operators and service providers.

 

The impacts of the deteriorating global economic conditions and the related global decline in consumer and corporate spending have been apparent in varying degrees across all geographical markets since the latter part of 2008.

 

The mobile device industry is more vulnerable than before to the negative impacts of the current difficult global economic conditions due to increased maturity of the industry evidenced by the extent of mobile device penetration in different markets. In certain low penetration markets, in order to support a continued increase in mobile subscribers, we continue to be dependent on our own and mobile network operators’ and distributors’ ability to increase the sales volumes of lower cost mobile devices and on mobile network operators to offer affordable tariffs and tailored mobile network solutions designed for a low total cost of ownership. In highly penetrated markets, we are more dependent on our own and mobile network operators’ ability to successfully introduce services that drive the upgrade and replacement of devices, as well as ownership of multiple devices. At their current state of development, our services and growth of our services business are dependant on the success and timely launch of our mobile devices which integrate our services, as well as on our customers’ willingness to pay higher prices for such devices, as well as the level of investments by the mobile networks operators to ramp up those services. NAVTEQ is dependent on the development of a wide variety of products and services that use its data, the availability and functionality of such

products and services and the rate at which consumers and businesses purchase these products and services. Nokia Siemens Networks is dependent on the pace of the investments made by mobile network operators and service providers. If we and the mobile network operators and distributors are not successful in our attempts to increase subscriber numbers, stimulate increased usage or drive upgrade and replacement sales of mobile devices and develop and increase demand for value-added services, or if mobile network operators and service providers invest in the related infrastructure less than anticipated, our business and results of operations could be materially adversely affected.

 

The mobile communications industry continues to undergo significant changes in response to the increasing maturity of the industry. Traditional mobile voice communications, the Internet, information technology, media, entertainment, music and consumer electronics industries are converging in some areas into one broader industry. In our devices business, we have made significant investments during the past several years in these market segments, such as smartphones, multimedia computers, enterprise applications, navigation, music, video, TV, imaging, games, as well as certain other services and solutions. In the consumer Internet services market segment, we currently focus our offering on five areas—music, maps, media, messaging and games—which we regard as both having the greatest appeal to consumers and being the most financially viable. We expect to make further investments in these areas, but in an increasingly focused manner. In our network infrastructure business, we expect to continue making investments in enterprise mobility infrastructure as well as managed services, systems integration and consulting businesses. The new market segments may require significant investments to innovate and grow successfully. However, due to our financial targets and need to manage costs and prioritize investments during the current difficult global economic conditions, our further investments in some of the new market segments may be delayed or insufficient to reach or maintain the necessary scale and market position to compete effectively and profitably in the longer term.

 

We have made, and may also make in the future, investments through strategic acquisitions, but in an increasingly focused manner. We may, however, fail to successfully complete or integrate the acquired businesses or retain and motivate their key employees; the acquired businesses may carry higher valuations than Nokia, which may have a dilutive effect on our profits; the future valuations of acquired businesses may decrease from the purchase price we have paid and result in impairment charges related to goodwill or other acquired assets; and as a result of all or a portion of a purchase price being paid in cash, the acquisitions may have a potential adverse effect on our cash position.

 

New market segments in the mobile communications industry are in different stages of development. Accordingly, it may be difficult for us to accurately predict which new market segments are the most advantageous for us to focus on, or we may fail to timely identify new market segments emerging in the mobile communications industry. If the new market segments which we target and invest in grow less or are less profitable than expected, we may not receive a return on our investment as soon as or at such levels we expect, or at all. We may also incur operating losses in certain of these new market segments if we are not able to generate sufficient profits to cover the investments required to pursue these new business opportunities. We may also forego growth opportunities in new market segments of the mobile communications industry which we choose not to focus on or fail to timely identify.

 

Our past performance in our established market segments does not guarantee our success in new market segments, particularly where significant changes to the way we do business are required to enter, operate or effectively compete in these segments. We may have less experience, technological and innovative skills in the new market segments, such as consumer Internet services, compared with our established market segments, or we may fail to reach adequate scale in these new segments, and some of our competitors in these new segments may have more experience, skills and scale and a stronger market presence. Our success in consumer Internet services also depends on the acceptance by the market, including our mobile network operator customers, of our expanding consumer Internet services and on the network operators’ strategies regarding their own offering of consumer Internet

services. Any of these events could materially adversely affect our results of operations, financial condition and share price.

 

Competition in our industry is intense. Our failure to maintain or improve our market position or respond successfully to changes in the competitive landscape may have a material adverse effect on our business and results of operations.

 

We experience intense competition in every aspect of our business and across all markets of our products, services and solutions. Participants in our industry compete with each other mainly on the basis of their product, service and solutions portfolio, user experience, design, price, technical performance, operational and manufacturing efficiency, distribution, quality, customer support, brand and marketing. The overall dynamics of our industry are rapidly changing due to numerous factors, including the current difficult global economic conditions, the increasing maturity of our industry and new market segments that are emerging. Mobile device markets are also becoming more segmented and diversified, and we face competition from different mobile device manufacturers at different user segments, price points and geographical markets using different competitive means in each of them. This may make it more difficult for us to compete successfully across the whole mobile device market against more specialized competitors and to leverage our scale to the fullest extent.

 

The competition continues to be intense from both our traditional competitors in the mobile and fixed communications industry as well as a number of new competitors. Some of our competitors, in particular the new industry entrants, have used, and we expect will continue to use, more aggressive pricing and marketing strategies, different design approaches and alternative technologies. Certain competitors have chosen, and others may choose in the future, to accept significantly lower profit margins than is customary in this industry, which may result in pressures to lower our prices and margins. Further, currency fluctuations may have an adverse impact on our competitive position relative to certain of our competitors who incur a material part of their costs in other currencies than we do. Some of our competitors may also benefit from support from the governments of their home countries and other measures which may have protectionist objectives. In addition, some competitors have chosen to focus on building products and services based on commercially available components and content, which may enable them to introduce those products and services faster and with lower levels of research and development expenditures than Nokia. Additionally, because mobile network operators are increasingly offering mobile devices under their own brand, we face increasing competition from non-branded mobile device manufacturers. In the digital map data and related location-based content business, governmental and various global and local companies as well as quasi-governmental agencies are making more map data information with improving coverage, content and quality available free of charge or at lower prices. Aerial, satellite and other location-based imagery is also becoming increasingly available, all of which may encourage new market entrants and make it less costly and time-consuming for competitors to build a high quality map database. In the network infrastructure business, the strategic decision of Nokia Siemens Networks to focus on deal quality, cost-effectiveness and profitability may, at least in the short-term, have a negative impact on its market share and the related scale benefits. Due to the intensity and diversity of the competition overall, the competitive landscape in our industry or in specific industry segments can change very rapidly.

 

As a result of developments in our industry, including convergence of mobile device technology with the Internet, and also our consumer Internet services offered on a stand-alone basis in respect to our devices, we also face competition from companies in related industries, such as Internet-based product and service providers, consumer electronics manufacturers, network operators and business device and solution providers, some of which have more scale and experience and a stronger market presence in certain segments such as consumer Internet services. In addition, new companies, primarily consumer electronics manufacturers, have entered the mobile device business. The competitive environment, including the competitive means, of these converged market segments differ from the more established segments within our industry. For example, we face competition from open source software initiatives and consumer Internet service providers who may provide

competing software and services for free. Some of the new market segments that we target are still in early stages of development and it may be difficult to predict the main competitors and competitive environment in these market segments. In addition, barriers to entry by new competitors in many of these new segments are low and new products and services, once developed, can be distributed broadly and quickly at relatively low cost. Further, as the industry now includes increasing numbers of participants that provide specific hardware and software layers within products, services and solutions, we also face competition at the level of these layers rather than solely at the level of complete products, services and solutions. In some of these layers, we may have more limited experience and scale than our competitors. If we cannot respond successfully to these competitive developments, our business and results of operations may be materially adversely affected.

 

Consolidation among the industry participants, including further concentration of the market on fewer industry participants, or failing industry participants, could potentially result in stronger competitors that are better able to compete as end-to-end suppliers as well as competitors who are more specialized in particular areas. Moreover, the increased concentration among the mobile network operators, particularly in North America where sales of mobile devices to operators represent the major percentage of our sales, has resulted in fewer customers whose purchase preferences may differ from our current product portfolio and increased reliance on fewer larger customers. In addition to mergers, the consolidation among the industry participants may take place in the form of various types of joint ventures, partnerships and other cooperation targeted to obtain potential economies of scale, such as increased bargaining power and price visibility. These developments could have a material adverse effect on our business and results of operations.

 

See Item 4B. “Business Overview—Devices & Services—Competition”, “—NAVTEQ—Competition” and “—Nokia Siemens Networks—Competition” for a more detailed discussion of competition in our industry.

 

We need to have a competitive portfolio of products, services and solutions that are preferred by our current and potential customers to those of our competitors. If we fail to achieve or maintain a competitive portfolio, our business, market share and results of operations may be materially adversely affected.

 

We serve a diverse range of mobile device and network infrastructure customers across a variety of markets with different characteristics, dynamics and stages of development. In order to meet our customers’ needs, we need to have a competitive portfolio with products, services and solutions that are preferred to those of our competitors. For our devices, a competitive portfolio means a focused, optimally-sized offering of commercially appealing mobile devices with attractive aesthetics, design and a combination of value-adding functionalities that are easy to discover and use for all major consumer segments and price points designed, as appropriate, for the local requirements and preferences of different markets and supported by the Nokia brand, quality and competitive cost structure. Further, we believe a competitive device product portfolio needs to include leading flagship products, be innovative and ahead of the expectations of the customer and positively differentiated from our competition. For our services, including map data and related content, a competitive portfolio means offering value-added services and content that are easy to access and use, and positively differentiate us from our competition. In Nokia Siemens Networks’ business, a competitive portfolio means a high-quality offering of products, services and solutions based on robust technology and designed to meet the requirements of our customers and local markets, supported by a competitive cost structure and cost-effectiveness to our customers. If we fail to achieve or maintain a competitive portfolio and balance successfully our global portfolio with the local requirements of our customers in the different markets we serve in a cost-effective manner, our business, market share and results of operations may be materially adversely affected.

 

In order to have a competitive portfolio of products, services and solutions and to establish and maintain good relationships with our customers, we need to identify and understand the key market trends and user segments and address our customers’ needs in the different markets proactively and

on a timely basis. To achieve that, we must constantly obtain and evaluate a complex array of customer feedback and other data in an efficient manner. In addition, the competitiveness of our portfolio depends on our ability to introduce on a continuous and timely basis ahead of our competitors new innovative and appealing products, services, solutions and related business models and to create new or address yet unidentified needs among our current and potential customers. If we fail to analyze correctly or respond timely and appropriately to key market trends, customer feedback and other data or to introduce new innovative and commercially appealing products, services and solutions and to adapt our business accordingly, our ability to retain our current customers and attract new customers may be impaired and our market share, business and results of operations may be materially adversely affected.

 

Certain mobile network operators require mobile devices to be customized to their specifications with certain preferred features, functionalities or design and co-branding with the mobile network operator’s brand. Currently, this is particularly the case in North America and in certain individual markets in the Asia-Pacific region where sales to mobile network operators represent the major percentage of our sales. As a result, we produce mobile devices for certain operators in smaller lot sizes, which may impact our economies of scale, profitability and after-sales service capabilities. In addition, customization could possibly erode the Nokia brand.

 

The competitiveness of our product, services and solutions portfolio is also influenced by our capability to communicate about our mobile devices, including services, effectively through consistent and focused marketing messages to the target audience, and the value of the Nokia brand. A number of factors, including actual or even alleged quality issues or defects in our products, services and solutions, may have a negative effect on our reputation and erode the value of the Nokia brand. Insufficient investments in marketing and brand building could also erode the value of the Nokia brand. Any impairment of our reputation or erosion of the value of the Nokia brand could have a material adverse effect on our capacity to retain our current customers and attract new customers and on our business, market share and results of operations.

 

Our business and results of operations, particularly our profitability, may be materially adversely affected if we are not able to successfully manage costs related to our products, services, solutions and operations.

 

We need to introduce cost-efficient products with new or enhanced functionalities and services and with higher prices in a timely manner and proactively manage the costs related to our products, services and solutions, manufacturing, logistics and other operations and related licensing, including mitigating the impacts of the exchange rate fluctuations related to such costs. If we fail in any of these efforts, this will have a material adverse effect on our business and results of operations, particularly our profitability. We believe that our market share results in economies of scale and, therefore, in a cost advantage for our devices when compared to our competitors. However, currency fluctuations, such as the recent severe volatility in exchange rates, may have an adverse impact on our ability to manage our costs and on our cost advantage relative to certain of our competitors who incur a material part of their costs in other currencies than we do. If we fail to maintain or increase our market share and scale compared to our competitors as well as leverage our scale to the fullest extent or if our costs increase relative to those of our competitors due to currency fluctuations, our relative cost advantage may be eroded, which could materially adversely affect our competitive position, business and our results of operations, particularly our profitability.

 

We also need to reduce our operating expenses to maintain cost efficiency throughout our operations during the current and currently expected economic conditions. Accordingly, we are targeting a significant reduction in our annualized operating expense run rate through various targeted measures. Any failure by us to determine the appropriate amounts of operating expense savings needed, to identify and implement the appropriate cost reduction measures on a timely basis to meet the targeted operating expense savings, or to otherwise adjust our costs to the current and currently expected difficult economic conditions could have a material adverse effect on our business, results of

operations and financial condition. Further, if our net sales continue to decline in the future, it may have an adverse effect on our scale benefits and increase the relative share of our fixed costs, which may decrease our flexibility to adjust our cost base to reflect changes in the business environment. Any failure by us to appropriately maintain or improve our cost-efficiency or adjust our costs to the current and currently expected difficult economic conditions could have a material adverse effect on our financial condition and results of operations.

 

The products, services and solutions we offer are subject to natural price erosion over their life cycle. In addition, the average selling price of our devices has declined during recent years and it may continue to decline in the future, in particular as some of our customers may trade down to lower-priced devices as a result of the current difficult global economic conditions. Also, some of our competitors may continue to reduce their prices resulting in significantly lower profit margins than is customary in this industry. The factors impacting the average selling price of our devices include the extent to which our product mix is weighted towards lower-priced products and our regional mix is weighted towards emerging markets where lower-priced products predominate. Further, there is continuing demand for mobile devices with new or enhanced functionalities and services while the prices of those products must remain competitive. In order to be profitable, we need to be able to lower our costs at the same rate or faster than the price erosion and declining average selling price of our devices.

 

Our sales, costs and results of operations, as well as the US dollar value of our dividends and market price of our ADSs, are affected by exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Japanese yen, the Chinese yuan and the UK pound sterling, as well as certain other currencies.

 

We operate globally and are therefore exposed to foreign exchange risks in the form of both transaction risks and translation risks. Our policy is to monitor and hedge exchange rate exposure, and we manage our operations to mitigate, but not to eliminate, the impacts of exchange rate fluctuations. Recent extreme volatility in the exchange rates combined with decreased liquidity of the global financial markets have increased our hedging costs, as well as limited our ability to hedge our exchange rate exposure in particular against unfavorable movements in the exchange rates of certain emerging market currencies. Exchange rate fluctuations may have an adverse affect on our sales, costs and results of operations, as well as our competitive position, particularly if the extreme volatility experienced in recent months continues. Exchange rate fluctuations may also make our pricing more difficult as our products may be re-routed by the distribution channels for sale to consumers in other geographic areas where sales can be made at more favorable rates by those channels. Further, exchange rate fluctuations may also materially affect the US dollar value of any dividends or other distributions that are paid in euro as well as the market price of our ADSs. For a more detailed discussion of exchange risks, see Item 5A. “Operating Results—Certain Other Factors—Exchange Rates” and Note 35 of our consolidated financial statements included in Item 18 of this annual report.

 

We depend on a limited number of suppliers for the timely delivery of sufficient amounts of fully functional components, sub-assemblies, software and content and for their compliance with our supplier requirements, such as our own and our customers’ product quality, safety, security and other standards. Their failure to deliver or meet those requirements could materially adversely affect our ability to deliver our products, services and solutions successfully and on time.

 

Our manufacturing operations depend on obtaining sufficient amounts of adequate supplies of fully functional components, sub-assemblies, software and content on a timely basis. In mobile devices, our principal supply requirements are for electronic components, mechanical components, software and content, which all have a wide range of applications in our products. Electronic components include chipsets, integrated circuits, microprocessors, standard components, printed wiring boards, sensors, memory devices, cameras, audio components, displays, batteries and chargers, while

mechanical components include covers, connectors, key mats, antennas and mechanisms. Software and content includes various third-party software and content that enables various features and applications to be added into our products, such as music, maps and games. Nokia Siemens Networks’ components and sub-assemblies sourced and manufactured by third-party suppliers include Nokia Siemens Networks-specific integrated circuits and radio frequency components; servers; sub-assemblies such as printed wire board assemblies, filters, combiners and power units; and cabinets.

 

In some cases, our dependence on third-party suppliers has increased as a result of our strategic decisions to outsource certain activities, for example parts of our own chipset R&D and to expand the use of commercially available chipsets. In addition, a particular component may be available only from a limited number of suppliers. Suppliers may from time to time extend lead times, limit supplies, increase prices or be unable to increase supplies to meet increased demand due to capacity constraints or other factors, which could adversely affect our ability to deliver our products, services and solutions on a timely basis. Moreover, a supplier may fail to meet our supplier requirements, such as, most notably, our and our customers’ product quality, safety, security and other standards, and consequently some of our products or services may be unacceptable to us and our customers, or may fail to meet our quality controls. In case of issues affecting a product’s safety or regulatory compliance, we may be subject to damages due to product liability, or defective products, components or services may need to be replaced or recalled. In addition, a component supplier may experience delays or disruption to its manufacturing processes or financial difficulties or even insolvency or closure of its business, in particular due to the current difficult economic conditions and the related global financial crisis. Due to our high volumes, any of these events, or mere allegation of failures in our products, services and solutions, could delay our successful and timely delivery of products, services and solutions that meet our and our customers’ quality, safety, security and other requirements, or otherwise materially adversely affect our sales and results of operations or our reputation and brand value. See Item 4B. “Business Overview—Devices & Services—Markets—Demand Supply Network Management ” and “Nokia Siemens Networks—Production” for a more detailed discussion of our production activities.

 

Possible consolidation among our suppliers could potentially result in larger suppliers with stronger bargaining power and limit the choice of alternative suppliers, which could lead to an increase in the cost, or limit the availability, of components that may materially adversely affect our sales and results of operations. The intensive competition among our suppliers and their consequently reduced profitability as well as the recently reduced demand for components and sub-assemblies may further the exits of certain suppliers from our industry and decrease the ability of some suppliers to invest in the innovation that is vital for our business. Further, our dependence on a limited number of suppliers that require purchases in the same foreign currency increases our exposure to fluctuations in the exchange rate between the euro, our reporting currency, and such foreign currency and, consequently, may increase our costs which we may not be able to pass on to our customers.

 

Many of the production sites of our suppliers are geographically concentrated. In the event that any of these geographic areas is generally affected by adverse conditions that disrupt production and/or deliveries from any of our suppliers, this could adversely affect our ability to deliver our products, services and solutions on a timely basis, which may materially adversely affect our business and results of operations.

 

We must timely and successfully develop or otherwise acquire the appropriate technologies to use in our business. If we fail to develop or otherwise acquire these technologies as required by the market, or to successfully commercialize such technologies as new advanced products, services and solutions that meet customer demand, or fail to do so on a timely basis, this may have a material adverse effect on our business and results of operations.

 

In order to succeed in our markets, we believe that we must timely and successfully develop or otherwise acquire the appropriate technologies and commercialize such technologies as new advanced products. However, the development and use of complex, evolving technologies,

applications and technology platforms for our mobile devices, services and software and networks infrastructure products involve time, substantial costs and risks, both within and outside of our control. We must also be able to convert these complex technologies into affordable and usable products, services and solutions that our current and potential customers prefer over those of our competitors. This is true regardless of whether we develop these technologies internally, acquire or invest in other companies with these technologies or collaborate with third parties on the development of these technologies.

 

The technologies, applications and technology platforms as well as functionalities, features and services on which we choose to focus may not achieve or retain as broad or timely market acceptance as we expect. This may result from numerous factors, including the availability of more attractive alternatives and a lack of sufficient compatibility with other existing technologies, products, services and solutions or regulators’ decisions. However, we can only focus on a limited number of technologies. By choosing to focus on certain technologies, we may forego alternatives achieving broader acceptance in our overall market or in certain parts of it. Additionally, even if we do select the technologies, functionalities, features and services that customers ultimately want, we or the companies that work with us may not be able to bring them to the market at the right time. We may also face difficulties accessing the technologies preferred by our current and potential customers, or at prices acceptable to them.

 

Furthermore, as a result of ongoing technological developments, our products, services and solutions are increasingly used together with hardware, software or service components that have been developed by third parties, whether or not we have authorized their use with our products, services and solutions. However, such components, such as batteries or software applications, may not be compatible with our products, services and solutions and may not meet our and our customers’ quality, safety, security or other standards. As well, certain components or layers that may be used with our products may enable our products, services and solutions to be used for objectionable purposes, such as to transfer content that might be illegal, hateful or derogatory. The use of our products, services and solutions with incompatible or otherwise substandard hardware, software or software components, or for purposes that are inappropriate, is largely outside of our control and could harm the Nokia brand.

 

Any actual or even alleged defects or other quality issues in our products, services and solutions could materially adversely affect our sales, results of operations, reputation and the value of the Nokia brand.

 

Our products, services and solutions are highly complex, and defects in their design, manufacture and associated software have occurred and may occur in the future. Quality issues are emphasized in our devices and services business due to very high production volumes of many of our devices, as a result of which even a single defect in their design, manufacture or associated software may have a material adverse effect on our business. Further, our device portfolio is subject to continuous renewal which, in particular during the periods of large product renewals, may increase the risk of the quality issues related to our new devices. In the network infrastructure business, the undisturbed functioning of large mobile and fixed telecommunications networks may depend on the proper functioning of our products. We make provisions to cover our estimated warranty costs for our products, services and solutions. We believe that our provisions are appropriate, although the ultimate outcome may differ from the provided level which could have a positive or negative impact on our results of operations and financial condition.

 

Defects and other quality issues may result from, among other things, failures in our own product creation and manufacturing processes or failures of our suppliers to comply with our supplier requirements. Prior to the shipment, quality issues may cause failures in ramping up the production of our products and shipping them to the customers in a timely manner as well as related additional costs or even cancellation of orders by customers. After shipment, products may fail to meet marketing expectations set for them, may malfunction or may contain security vulnerabilities, and

thus cause additional repair, product replacement, recall or warranty costs to us and harm our reputation. In case of issues affecting a product’s safety, regulatory compliance or security, we may be subject to damages due to product liability, or defective products or components may need to be replaced or recalled.

 

Although we endeavor to develop products, services and solutions that meet the appropriate security standards, such as data protection, we or our products, services and solutions may be subject to hacking, viruses, worms and other malicious software, unauthorized modifications or illegal activities that may cause potential security risks and other harm to us, our customers or end-users of our products, services and solutions. This may affect us disproportionately due to our leading market position in mobile devices, many of which feature industry leading third-party software solutions and services, as hackers tend to focus their efforts on the most popular products, services and solutions. Loss, improper disclosure or leakage of personal or other consumer data collected by us, made available to us or stored to or through our products and services could result in liability to us and harm our reputation and brand. Even perceptions that our products, services or solutions do not adequately protect personal or other information collected by us, made available to us or stored in or through our products, services and solutions could impair their sales.

 

Any actual or alleged defects or other quality issues in our products, services and solutions, or even in their unlawful copies, could materially adversely affect our sales, results of operations, reputation and the value of the Nokia brand.

 

Our sales derived from, and assets located in, emerging market countries may be materially adversely affected by economic, regulatory and political developments in those countries or by other countries imposing regulations against imports to such countries. As sales from these countries represent a significant portion of our total sales, economic or political turmoil in these countries could materially adversely affect our sales and results of operations. Our investments in emerging market countries may also be subject to other risks and uncertainties.

 

We generate sales from and have manufacturing facilities located in various emerging market countries. Sales from these countries represent a significant portion of our total sales and these countries represent a significant portion of any expected industry growth. Accordingly, economic or political turmoil in these countries could materially adversely affect our sales and results of operations and the supply of devices and network infrastructure equipment manufactured in these countries. Further, the economic conditions in emerging market countries may be more volatile than in developed countries and the purchasing power of our customers in those countries depends to a greater extent on the price development of basic commodities, many of which have recently been subject to significant volatility, and currency fluctuations which may render imported products too expensive to afford. Our business and investments in emerging market countries may also be subject to risks and uncertainties, including unfavorable taxation treatment, exchange controls, challenges in protecting our intellectual property rights, nationalization, inflation, currency fluctuations, or the absence of, or unexpected changes in, regulation as well as other unforeseeable operational risks. See Note 2 to our consolidated financial statements included in Item 18 of this annual report for more detailed information on geographic location of net sales to external customers, segment assets and capital expenditures.

 

Changes in various types of regulation and trade policies in countries around the world could have a material adverse effect on our business and results of operations.

 

Our business is subject to direct and indirect regulation in each of the countries in which we, the companies with which we work and our customers do business. As a result, changes in various types of regulations, their application and trade policies applicable to current or new technologies, products or services may adversely affect our business and results of operations. For example, changes in regulation affecting the construction of base stations and other network infrastructure could adversely affect the timing and costs of new network construction or expansion and the commercial

launch and ultimate commercial success of these networks. Export control, tariffs or other fees or levies imposed on our products, environmental, product safety and security and other regulations that adversely affect the export, import, pricing or costs of our products, services and solutions, as well as new services related to our products, could also adversely affect our sales and results of operations. For example, copyright collecting societies in several member states of the European Union claim that due to their capability to play and store copyrighted content, mobile devices should be subject to similar copyright levies that are charged for products such as compact disc, digital video disc or digital audio players. Also, the European Commission is considering measures that would require the member states of the European Union to levy import duties for high-end mobile devices and their components which, if eventually taken, could potentially result in similar counter-measures by the other countries outside the European Union. Any new or increased levies and duties could result in costs which we may not be able to pass on to our customers or higher prices for our products, services and solutions which may impair their demand.

 

The impact of changes in or uncertainties related to regulation and trade policies could affect our business and results of operations adversely even though the specific regulations do not always directly apply to us or our products, services and solutions. In addition to changes in regulation and trade policies, our business may be adversely affected by local business culture and general practices in some regions that are contrary to our code of conduct. Further, our business and results of operations may be adversely affected by regulation and trade policies favoring the local industry participants as well as other measures with potentially protectionist objectives which the host governments in different countries may take, particularly in response to the current difficult global economic conditions.

 

See Item 4B. “Business Overview—Government Regulation—Devices & Services, NAVTEQ and Nokia Siemens Networks” for a more discussion about the impact of various regulations.

 

We are developing a number of new products, services and solutions together with other companies. If any of these companies were to fail to perform as planned, we may not be able to bring our products, services and solutions to market successfully or in a timely way and this could have a material adverse effect on our sales and results of operations.

 

We invite the providers of technology, components or software to work with us to develop technologies or new products, services and solutions. These arrangements involve the commitment by each company of various resources, including technology, research and development efforts, and personnel. Our ability to collaborate successfully is increasingly important in our new markets segments, such as consumer Internet services and with the open source software communities. Although the objective of the collaborative arrangements is a mutually beneficial outcome for each party, our ability to introduce new products, services and solutions that meet our and our customers’ quality, safety, security and other standards successfully and on schedule could be hampered if, for example, any of the following risks were to materialize: we fail to choose the right companies as our partners or we are unable to collaborate effectively to reach the targets set for the collaboration; the arrangements with the companies that work with us do not develop as expected; the technologies provided by the companies that work with us are not sufficiently protected or infringe third parties’ intellectual property rights in a way that we cannot foresee or prevent; the technologies, products, services or solutions supplied by the companies that work with us do not meet the required quality, safety, security and other standards or customer needs; our own quality controls fail; or the financial condition of our collaborative partners deteriorates which may result in insolvency or closure of the business of such partners. Further, the current difficult global economic conditions and the related financial crisis may decrease the number of collaborative partners and limit the ability of the remaining collaborative partners to invest in their technologies, products, services or solutions. Any of these events could materially adversely affect our sales and results of operations.

Our sales and results of operations could be materially adversely affected if we fail to efficiently manage our manufacturing and logistics without interruption or make timely and appropriate adjustments, or fail to ensure that our products, services and solutions meet our and our customers’ quality, safety, security and other requirements and are delivered on time and in sufficient volumes.

 

Our manufacturing and logistics are complex, require advanced and costly equipment and include outsourcing to third parties. These operations are continuously modified in an effort to improve efficiency and flexibility of our manufacturing and logistics and to produce and distribute continuously increased volumes. We may experience difficulties in adapting our supply to meet the changing demand for our products, including planning our manufacturing and logistics in the current difficult global economic environment, both ramping up and down production at our facilities as needed on a timely basis, maintaining an optimal inventory level, adopting new manufacturing processes, finding the most timely way to develop the best technical solutions for new products, managing the increasingly complex manufacturing process for our high-end products, particularly the software for these high-end products, or achieving manufacturing efficiency and flexibility, whether we manufacture our products and solutions ourselves or outsource to third parties. We may also experience challenges caused by third parties or other external difficulties in connection with our efforts to modify our operations to improve the efficiency and flexibility of our manufacturing and logistics, including, but not limited to, strikes, purchasing boycotts, public harm to the Nokia brand and claims for compensation resulting from our decisions on where to locate our manufacturing facilities and business. Such difficulties may have a material adverse effect on our business and results of operations and may result from, among other things, delays in adjusting or upgrading production at our facilities, delays in expanding production capacity, failure in our manufacturing and logistics processes, failures in the activities we have outsourced, and interruptions in the data communication systems that run our operations. Such failures or interruptions could result in our products, services and solutions not meeting our and our customers’ quality, safety, security and other requirements, or being delivered late or in insufficient or excess volumes compared to our own estimates or customer requirements, which could have a material adverse effect on our sales, our results of operations, reputation and the value of the Nokia brand.

 

Our products, services and solutions include increasingly complex technologies, some of which have been developed by us or licensed to us by certain third parties. As a consequence, evaluating the rights related to the technologies we use or intend to use is more and more challenging, and we expect increasingly to face claims that we have infringed third parties’ intellectual property rights. The use of these technologies may also result in increased licensing costs for us, restrictions on our ability to use certain technologies in our products, services and solution offerings, and/or costly and time-consuming litigation, which could have a material adverse effect on our business, results of operations and financial condition.

 

Our products, services and solutions include increasingly complex technologies, some of which have been developed by us or licensed to us by third parties. As the amount of such proprietary technologies and the number of parties claiming intellectual property rights continues to increase, even within individual products, as the range of our products, services and solutions becomes more diversified and we enter new businesses, and as the complexity of the technology increases, the possibility of alleged infringement and related intellectual property claims against us continues to rise. The holders of patents and other intellectual property rights potentially relevant to our products and solutions may be unknown to us, may have different business models, or may otherwise make it difficult for us to acquire a license on commercially acceptable terms. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by others which could impair our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid risks of intellectual property rights infringement created by suppliers of components and various layers in our products, services and solutions or by companies

with which we work in cooperative research and development activities. Similarly, we and our customers may face claims of infringement in connection with our customers’ use of our products, services and solutions.

 

In many aspects, the business models for mobile services have not yet been established. The lack of availability of licenses for copyrighted content, delayed negotiations, or restrictive copyright licensing terms may have a material adverse effect on the cost or timing of content-related services offered by us, mobile network operators or third-party service providers, and may also indirectly affect the sales of our mobile devices.

 

Since all technology standards, including those used and relied on by us, include some intellectual property rights, we cannot fully avoid risks of a claim for infringement of such rights due to our reliance on such standards. We believe that the number of third parties declaring their intellectual property to be relevant to these standards, for example, the standards related to so-called 3G mobile communication technologies, including 3GPP and 3GPP2, as well as other advanced mobile communications standards, is increasing, which may increase the likelihood that we will be subject to such claims in the future. While we believe that any such intellectual property rights declared and found to be essential to a given standard carry with them an obligation to be licensed on fair, reasonable and non-discriminatory terms, not all intellectual property owners agree on the meaning of that obligation and thus costly and time-consuming litigation over such issues has resulted and may continue to result in the future. While the rules of many standard setting bodies, such as the European Telecommunication Standardization Institute, or ETSI, often apply on a global basis, the enforcement of those rules may involve national courts, which means that there may be a risk of different interpretation of those rules.

 

From time to time, some existing patent licenses may expire or otherwise become subject to renegotiation. The inability to renew or finalize such arrangements with acceptable commercial terms may result in costly and time-consuming litigation, and any adverse result in any such litigation may lead to restrictions on our ability to sell certain products, services or solutions, and could result in payments that potentially could have a material adverse effect on our operating results and financial condition. These legal proceedings may continue to be expensive and time-consuming and divert the efforts of our management and technical personnel from our business, and, if decided against us, could result in restrictions on our ability to sell our products, services and solutions, require us to pay increased licensing fees, substantial judgments, settlements or other penalties and incur expenses that could have a material adverse effect on our business, results of operations and financial condition.

 

We make accruals and provisions to cover our estimated total direct IPR costs for our products, services and solutions. The total direct IPR cost consists of actual payments to licensors, accrued expenses under existing agreements and provisions for potential liabilities. We believe that our accruals and provisions are appropriate for all technologies owned by others. The ultimate outcome, however, may differ from the provided level which could have a positive or negative impact on our results of operations and financial condition.

 

Any restrictions on our ability to sell our products, services and solutions due to expected or alleged infringements of third-party intellectual property rights and any intellectual property rights claims, regardless of merit, could result in material losses of profits, costly litigation, the payment of damages and other compensation, the diversion of the attention of our personnel, product shipment delays or the need for us to develop non-infringing technology or to enter into a licensing agreement. If licensing agreements were not available or available on commercially acceptable terms, we could be precluded from making and selling the affected products, services and solutions or could face increased licensing costs. As new features are added to our products, services and solutions, we may need to acquire further licenses, including from new and sometimes unidentified owners of intellectual property. The cumulative costs of obtaining any necessary licenses are difficult to predict and may over time have a negative effect on our operating results. See Item 4B. “Business

Overview—Devices & Services—Patents and Licenses”, “—NAVTEQ—Patents and Licenses” and “—Nokia Siemens Networks—Patents and Licenses” for a more detailed discussion of our intellectual property activities.

 

Our products, services and solutions include numerous new Nokia, NAVTEQ and Nokia Siemens Networks patented, standardized or proprietary technologies on which we depend. Third parties may use without a license or unlawfully infringe our intellectual property or commence actions seeking to establish the invalidity of the intellectual property rights of these technologies. This may have a material adverse effect on our business and results of operations.

 

Our products, services and solutions include numerous new Nokia, NAVTEQ and Nokia Siemens Networks patented, standardized or proprietary technologies on which we depend. Despite the steps that we have taken to protect our technology investment with intellectual property rights, we cannot be certain that any rights or pending applications will be granted or that the rights granted in connection with any future patents or other intellectual property rights will be sufficiently broad to protect our technology. Third parties may infringe our intellectual property relating to our non-licensable proprietary features or by ignoring their obligation to seek a license.

 

Any patents or other intellectual property rights that are granted to us may be challenged, invalidated or circumvented, and any right granted under our patents may not provide competitive advantages for us. Other companies have commenced and may continue to commence actions seeking to establish the invalidity of our intellectual property, for example, patent rights. In the event that one or more of our patents are challenged, a court may invalidate the patent or determine that the patent is not enforceable, which could harm our competitive position. Also, if any of our key patents are invalidated, or if the scope of the claims in any of these patents is limited by a court decision, we could be prevented from using such patent as a basis for product differentiation or from licensing the invalidated or limited portion of our intellectual property rights, or we could lose part of the leverage we have in terms of our own intellectual property rights portfolio. Even if such a patent challenge is not successful, it could be expensive and time-consuming, divert attention of our management and technical personnel from our business and harm our reputation. Any diminution of the protection that our own intellectual property rights enjoy could cause us to lose some of the benefits of our investments in research and development, which may have a negative effect on our business and results of operations. See Item 4B. “Business Overview—Devices & Services—Patents and Licenses”, “— NAVTEQ—Patents and Licenses” and “— Nokia Siemens Networks—Patents and Licenses” for a more detailed discussion of our intellectual property activities.

 

Our operations rely on the efficient and uninterrupted operation of complex and centralized information technology systems and networks. If a system or network inefficiency, malfunction or disruption occurs, this could have a material adverse effect on our business and results of operations.

 

Our operations rely to a significant degree on the efficient and uninterrupted operation of complex and centralized information technology systems and networks, which are integrated with those of third parties. All information technology systems are potentially vulnerable to damage, malfunction or interruption from a variety of sources. We pursue various measures in order to manage our risks related to system and network malfunction and disruptions, including the use of multiple suppliers and available information technology security. However, despite precautions taken by us, any malfunction or disruption of our current or future systems or networks such as an outage in a telecommunications network utilized by any of our information technology systems, attack by a virus or other event that leads to an unanticipated interruption or malfunction of our information technology systems or networks could have a material adverse effect on our business and results of operations. Furthermore, any data leakages resulting from information technology security breaches could also materially adversely affect us. Also, failures to successfully utilize information technology

systems and networks in our operations may impair our operational efficiency or competitiveness which could have a material adverse effect to our business and results of operations.

 

The networks infrastructure business relies on a limited number of customers and large multi-year contracts. Unfavorable developments under such a contract or in relation to a major customer may adversely and materially affect our sales, results of operations and financial condition.

 

Large multi-year contracts, which are typical in the networks industry, include a risk that the timing of sales and results of operations associated with those contracts will differ from what was expected when the contracts were entered into. Moreover, such contracts usually require the dedication of substantial amounts of working capital and other resources, which affects our cash flow negatively, or may require Nokia Siemens Networks to sell products, services and solutions in the future that would otherwise be discontinued, thereby diverting resources from developing more profitable or strategically important products. Any non-performance by Nokia Siemens Networks under these contracts may have significant adverse consequences for us because network operators have demanded and may continue to demand stringent contract undertakings, such as penalties for contract violations.

 

Providing customer financing or extending payment terms to customers can be a competitive requirement and could have a material adverse effect on our results of operations and financial condition.

 

Customers in some markets sometimes require their suppliers, including us, to arrange or provide financing in order to obtain sales or business. Moreover, they may require extended payment terms. In some cases, the amounts and duration of these financings and trade credits, and the associated impact on our working capital, may be significant. In response to the recent tightening of the credit markets, requests for customer financing are beginning to increase in volume and scope. We do not, however, currently intend to significantly increase financing to our customers, which may have an adverse effect on our ability to compete successfully for their business. Rather, as a strategic market requirement, we plan to continue to arrange and facilitate financing to our customers and provide financing and extended payment terms to a small number of selected customers. Extended payment terms may continue to result in a material aggregate amount of trade credits, but the associated risk is mitigated by the fact that the portfolio relates to a variety of customers. We cannot guarantee that we will be successful in arranging, facilitating and providing needed financing to customers particularly in the current difficult financial markets. Also, our ability to manage our total customer finance and trade credit exposure depends on a number of factors, including our capital structure, market conditions affecting our customers, the level and terms of credit available to us and our ability to mitigate exposure on acceptable terms. We may not be successful in managing the challenges connected with the total customer financing and trade credit exposure that we may have from time to time. Defaults under financings and trade credits to our customers resulting in impairment charges and credit losses have increased recently, and may continue to increase in the future, due to the current difficult global economic conditions. See Item 5B. “Liquidity and Capital Resources—Structured Finance,” and Note 35(b) to our consolidated financial statements included in Item 18 of this annual report for a more detailed discussion of issues relating to customer financing, trade credits and related commercial credit risk.

 

If we are unable to retain, motivate, develop and recruit appropriately skilled employees, our ability to implement our strategies may be hampered and, consequently, that may have a material adverse effect on our business and results of operations.

 

We must continue to retain, motivate, develop through constant competence training, and recruit appropriately skilled employees with a comprehensive understanding of our current businesses and technologies and the new market segments that we target. While we are to a certain extent reducing our personnel through various targeted measures due to the current difficult global economic conditions, we seek to create a corporate culture that is motivating, encourages creativity and

continuous learning as competition for skilled personnel remains keen. We are also continuously developing our compensation and benefits policies and taking other measures to attract and motivate skilled personnel. Nevertheless, we have encountered in the past, and may encounter in the future, shortages of appropriately skilled personnel, which may hamper our ability to implement our strategies and materially harm our business and results of operations.

 

Some of the Siemens carrier-related operations transferred to Nokia Siemens Networks have been and continue to be the subject of various criminal and other governmental investigations related to whether certain transactions and payments arranged by some former employees of Siemens were unlawful. As a result of those investigations, government authorities and others have taken and may take further actions against Siemens and/or its employees that may involve and affect the assets and employees transferred by Siemens to Nokia Siemens Networks, or there may be undetected additional violations that may have occurred prior to the transfer or violations that may have occurred after the transfer of such assets and employees that could have a material adverse effect on Nokia Siemens Networks and our reputation, business, results of operations and financial condition.

 

Public prosecutors and other government authorities in several jurisdictions have been conducting and in some jurisdictions are continuing to conduct criminal and other investigations with respect to whether certain transactions and payments arranged by some current or former employees of Siemens relating to the carrier-related operations for fixed and mobile networks that were transferred to Nokia Siemens Networks were unlawful. These investigations are part of substantial transactions and payments involving Siemens’ former Com business and other Siemens’ business groups which were and are still under investigation.

 

In December 2008, legal proceedings and government investigations against Siemens were concluded in Germany and settled in the United States. To resolve these legal matters, Siemens agreed to pay a fine of EUR 395 million to German authorities, in addition to the EUR 201 million fine previously paid, and to pay a criminal fine of USD 450 million to the US Department of Justice and to disgorge profits of USD 350 million to the US Securities and Exchange Commission for criminal and civil violations of the US Foreign Corrupt Practices Act. The investigations of employees of Siemens and other individuals remain unresolved by these settlements. To date, none of the fines imposed on Siemens has applied to Nokia Siemens Networks or Nokia. It is not possible at this time to predict whether other government authorities will take further actions and if they do what they might be and the extent to which such actions might apply to or affect Nokia Siemens Networks or Nokia.

 

The internal review by Nokia Siemens Networks and Nokia is complete. Siemens has informed us that its own investigation is also complete. Although the government investigations of Siemens by German and United States authorities have been concluded and resolved, investigations in other countries continue, as well as investigations of Siemens employees and other individuals. Accordingly, until these investigations are complete and the matter resolved, it is not possible to ensure that Siemens employees who may have been involved in the alleged violations of law were not transferred to Nokia Siemens Networks. Nor is it possible to predict the extent to which there may be undetected additional violations of law that may have occurred prior to the transfer that could result in additional investigations or actions by government authorities. Such actions have, and could include criminal and civil fines, tax liability, as well as other penalties and sanctions. It is also not possible to predict whether there have been any ongoing violations of law after the formation of Nokia Siemens Networks involving the assets and employees of the Siemens carrier-related operations that could result in additional actions by government authorities. The development of any of these situations could have a material adverse effect on Nokia Siemens Networks and our reputation, business, results of operations and financial condition. In addition, detecting, investigating and resolving such situations have been, and might continue to be, expensive and consume significant time, attention and resources of Nokia Siemens Networks and our management, which could harm our business and that of Nokia Siemens Networks.

The government investigations may also harm Nokia Siemens Networks’ relationships with existing customers, impair its ability to obtain new customers, business partners and public procurement contracts, affect its ability to pursue strategic projects and transactions or result in the cancellation or renegotiation of existing contracts on terms less favorable than those currently existing or affect its reputation. Nokia Siemens Networks has terminated relationships, originated in the Siemens carrier-related operations, with certain business consultants and other third-party intermediaries in some countries as their business terms and practices were contrary to Nokia Siemens Networks’ Code of Conduct, thus foregoing business opportunities. It is not possible to predict the extent to which other customer relationships and potential business may be affected by Nokia Siemens Networks legally compliant business terms and practices. Third-party civil litigation may also be instigated against the Siemens carrier-related operations and/or employees transferred to Nokia Siemens Networks.

 

Siemens has agreed to indemnify Nokia and Nokia Siemens Networks for any government fines or penalties and damages from civil law suits incurred by either, as well as in certain instances for loss of business through terminated or renegotiated contracts, based on violations of law in the Siemens carrier-related operations that occurred prior to the transfer to Nokia Siemens Networks.

 

We cannot predict with any certainty the final outcome of the ongoing investigations related to this matter, when and the terms upon which such investigations will be resolved, which could be a number of years, or the consequences of the actual or alleged violations of law on the business of Nokia Siemens Networks, including its relationships with customers.

 

An unfavorable outcome of litigation could have a material adverse effect on our business, results of operations and financial condition.

 

We are a party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, results of operations and financial condition.

 

See Item 8A7. “Litigation” for a more detailed discussion about litigation that we are party to.

 

Allegations of possible health risks from the electromagnetic fields generated by base stations and mobile devices, and the lawsuits and publicity relating to this matter, regardless of merit, could have a material adverse effect on our sales, results of operations, share price, reputation and brand value by leading consumers to reduce their use of mobile devices, by increasing difficulty in obtaining sites for base stations, or by leading regulatory bodies to set arbitrary use restrictions and exposure limits, or by causing us to allocate additional monetary and personnel resources to these issues.

 

There has been public speculation about possible health risks to individuals from exposure to electromagnetic fields from base stations and from the use of mobile devices. A substantial amount of scientific research conducted to date by various independent research bodies has indicated that these radio signals, at levels within the limits prescribed by safety standards set by, and recommendations of, public health authorities, present no adverse effect on human health. We cannot, however, be certain that future studies, irrespective of their scientific basis, will not suggest a link between electromagnetic fields and adverse health effects that would have a material adverse effect on our sales, results of operations and share price. Research into these issues is ongoing by government agencies, international health organizations and other scientific bodies in order to develop a better scientific and public understanding of these issues.

 

Over the past eight years Nokia has been involved in several class action matters alleging that Nokia and other manufacturers and cellular service providers failed to properly warn consumers of alleged potential adverse health effects and failed to include headsets with every handset to reduce the potential for alleged adverse health effects. All but one of these cases have been withdrawn or dismissed, with one dismissal currently on appeal. The remaining pending case is currently the subject of a motion to dismiss. In addition, Nokia and other mobile device manufacturers and cellular

service providers were named in five lawsuits by individual plaintiffs who allege that radio emissions from mobile phones caused or contributed to each plaintiff’s brain tumor. Those cases were dismissed in August 2007. The plaintiffs appealed those dismissals to the District of Columbia Court of Appeals which are currently pending.

 

Although Nokia products, services and solutions are designed to meet all relevant safety standards and recommendations globally, even a perceived risk of adverse health effects of mobile communications devices or base stations could have a material adverse effect on us through a reduction in sales of mobile devices or increased difficulty in obtaining sites for base stations, and could have a material adverse effect on our reputation and brand value, results of operations as well as share price.

 

Nokia is the world’s number one manufacturer of mobile devices by market share and a leader in the converging Internet and communications industries. We make a wide range of devices for all major consumer segments and offer Internet services that enable people to experience music, maps, media, messaging and games. We also provide comprehensive digital map information through NAVTEQ and equipment, solutions and services for communications networks through Nokia Siemens Networks.

 

For 2008, our net sales totaled EUR 50.7 billion (USD 70.6 billion) and net profit was EUR 4.0 billion (USD 5.6 billion). At the end of 2008, we employed 125 829 people; had production facilities for mobile devices and network infrastructure around the world; sales in more than 150 countries; and a global network of sales, customer service and other operational units.

 

History

 

During our 142 year history, Nokia has evolved from its origins in the paper industry to become the world leader in mobile communications. Today, approximately a billion people from virtually every demographic segment of the population use Nokia mobile devices for communications, business, entertainment and as luxury items.

 

The key milestones in our history are as follows:

 

 

 

Organizational Structure

 

We have three reportable segments: Devices & Services; NAVTEQ; and Nokia Siemens Networks.

 

Our Devices & Services group was formed on January 1, 2008, and combined our three former mobile device business groups—Mobile Phones, Multimedia and Enterprise Solutions—and the supporting horizontal groups into one integrated business group. The new organizational structure is designed to align Nokia with the opportunities we see for future growth in devices and services and increase efficient ways of working across the company. Devices & Services has three units: Devices; Services; and Markets. The three units receive operational support from our Corporate Development Office, which is also responsible for exploring corporate strategic and future growth opportunities.

 

We completed our acquisition of NAVTEQ Corporation on July 10, 2008, one of a number of strategic acquisitions to bring us the technology and knowledge we believe we need to compete effectively in consumer Internet services. NAVTEQ is a leading provider of comprehensive digital map information and related location-based content and services for automotive navigation systems, mobile navigation devices, Internet-based mapping applications, and government and business solutions. By acquiring NAVTEQ, we aim to ensure the continued development of our context and geographical services through Nokia Maps as we move from simple navigation to a broader range of location-based services, such as pedestrian navigation and targeted advertising. At the same time, NAVTEQ continues to develop its expertise in the navigation industry, service its strong customer base and invest in the further development of its industry-leading map data and technology platform. NAVTEQ is a wholly-owned subsidiary of Nokia.

 

Nokia Siemens Networks was formed on April 1, 2007, and combined our former Networks business group with Siemens’ carrier-related operations for fixed and mobile networks. Nokia Siemens Networks is jointly owned by Nokia and Siemens and consolidated by Nokia. Nokia Siemens Networks has five business units: Radio Access; Converged Core; Broadband Connectivity Solutions; Operations and Business Software; and Services.

 

Devices & Services and Nokia Siemens Networks are each reportable segments for financial reporting purposes. Commencing with the third quarter 2008, NAVTEQ is also a reportable segment. Prior period results for Nokia and its reportable segments have been regrouped for comparability purposes according to the new reportable segments effective in 2008.

For a breakdown of our net sales and other operating results by category of activity and geographical location, see Note 2 to our consolidated financial statements included in Item 18 of this annual report.

 

Other

 

We primarily invest in research and development, marketing and building the Nokia brand. However, over the past few years we have increased our investment in services and software, including acquiring a number of companies with specific technology assets and expertise. We expect the amount of capital expenditure (excluding acquisitions) during 2009 to be approximately EUR 700 million, and to be funded from our cash flow from operations. During 2008, our capital expenditures (excluding acquisitions) totaled EUR 889 million, compared with EUR 715 million in 2007. For further information regarding capital expenditures see Item 5A. “Operating Results” and for a description of capital expenditures by our reportable segments see Note 2 to our consolidated financial statements included in Item 18 of this annual report.

 

We maintain listings on three major securities exchanges. The principal listing venues for our shares are NASDAQ OMX Helsinki, in the form of shares, and the New York Stock Exchange, in the form of American Depositary Shares. In addition, our shares are listed on the Frankfurt Stock Exchange.

 

Our principal executive office is located at Keilalahdentie 4, P.O. Box 226, FI-00045 Nokia Group, Espoo, Finland and our telephone number is +358 (0) 7 1800-8000.

 

Devices & Services

 

The following discussion should be read in conjunction with Item 3D. “Risk Factors” and “Forward-Looking Statements.”

 

Overview

 

The mobile communications industry has evolved rapidly during the past two decades. While today mobile devices are still used primarily for voice and text message communication, people increasingly also use them to take and send pictures, listen to music, record video, watch TV, play games, surf the Internet, check email, navigate, manage their schedules, browse and create documents, and more. This trend—where mobile devices increasingly support the features of single-purposed product categories such as music players, cameras, pocketable computers and gaming consoles—is often referred to as digital convergence. Multifunctional mobile devices, which are often called converged devices, smartphones, or multimedia computers, typically feature computer-like and consumer electronics-like hardware and software. Today, people want to be truly connected, independent of time and place, in a way that is very personal to them. Nokia’s goal is to create mobile devices in every price band and every category combined with context-enriched services to deliver compelling consumer solutions.

 

A person’s choice of mobile device is influenced by a number of factors, including their purchasing power, brand awareness, technological skills, fashion consciousness and lifestyle. The global market for mobile devices is comprised of many different consumer groups and markets with different characteristics, dynamics and stages of development. We believe that in order to meet our customers’ needs, we need to have a focused, optimally-sized offering of commercially appealing mobile devices with attractive aesthetics, design and a combination of value-adding functionalities that are easy to discover and use for all major consumer segments and price points designed, as appropriate, for the local requirements and preferences of different markets and supported by the Nokia brand, quality and competitive cost structure. Further, we believe a competitive product device portfolio needs to include leading flagship products, be innovative and ahead of the expectations of the customer and differentiated positively from our competition. For our services, including map data and related

content, a competitive portfolio means offering value-added services which are easy to access and use and positively differentiates us from our competition.

 

Nokia mobile devices are developed and produced by our Devices & Services group. We shipped a total of 468 million mobile devices in 2008, representing growth of 7% compared with 2007. Based on an estimated global market volume for mobile devices of 1.21 billion units for 2008, our estimated full-year global market share increased to 39% from an estimated 38% for 2007. This further strengthened our leading position in the global mobile device market—a position Nokia has held since 1998.

 

Nokia mobile devices are primarily based on the GSM/EDGE, 3G/WCDMA and CDMA global cellular standards, and also increasingly feature non-cellular technologies such as Bluetooth, WLAN and GPS. Our higher-end converged devices, such as our Nokia Nseries and Nokia Eseries smartphones, typically offer the functionalities of many portable single-purpose devices—such as megapixel cameras, music players, computers, gaming consoles and navigation devices—in a single, converged device. In 2008, we shipped a total of 61 million converged devices.

 

In 2008, Nokia and industry partners took the first steps to develop Symbian OS, the market-leading operating system for mobile devices, into an open and unified mobile software platform, which will eventually move towards ‘open source’. In December 2008, Nokia acquired full ownership of Symbian Limited, the company that develops and licenses Symbian OS, and, together with industry partners, initiated plans to establish the Symbian Foundation, an independent, non-profit entity to lead this development.

 

Our Devices & Services group is comprised of three units—Devices, Services, and Markets—each of which is outlined in the following sections.

 

Devices

 

Our Devices unit is responsible for developing and managing our mobile device portfolio, including the sourcing of components. The unit consists of the following four operational sub-units:

 

 

Our R&D, design and category management sub-units are each aligned with five product categories, which represent target segments for Nokia’s mobile device portfolio: Connect, Achieve, Explore, Live and Entry.

Connect focuses on mobile devices where the balance between price, functionality and style is key. Devices in this category typically have mainstream features, including megapixel cameras, music players and navigation functionality. Highlights from 2008 included the following:

 

 

Achieve is focused on advanced mobile devices targeted at business users, with the flagship range being the current Nokia Eseries of devices. They are designed specifically, though not exclusively, for business use, and to address companies’ security, manageability, cost and ease-of-use concerns. Nokia Eseries devices feature both cellular connectivity, such as GSM and 3G/WCDMA, and non-cellular connectivity, such as WLAN. They also support network connectivity, personal information management, email and corporate telephony (PBX) system access, device management and security solutions. Achieve focuses on partnering with leading industry players in corporate mobility like Alcatel Lucent, Cisco, IBM, and Microsoft. During 2008, together with Microsoft, we announced the debut of Mail for Exchange for all S60 devices, instantly enabling a user base of over 80 million devices worldwide to connect to Microsoft Outlook with no additional license fees. Other highlights from 2008 included the following:

 

 

Explore focuses on advanced devices optimized for creating, accessing, experiencing and sharing multimedia, with the starting point being the current Nseries range of multimedia computers. Explore aims to take advantage of device convergence by capturing value from traditional single-purpose product categories, including music players, cameras, pocketable computers, gaming consoles and navigation devices, by bringing combinations of their various functionalities into Nokia devices. Highlights from 2008 included the following:

 

Live concentrates on mobile devices with distinct designs and features targeted at specified style and music-driven consumer segments, with devices grouped under the Xpress sub-category. The Xpress sub-category focuses on the mobile music experience and consumer multimedia. The Xpress sub-category also meets the needs of Explore consumers below the N-Series price threshold. Highlights from 2008 included the following:

 

 

Entry addresses markets where there has been and we believe continues to be significant potential for growth. Our aim is to provide affordable mobile phones while cooperating with local mobile operators to offer solutions designed for a low total cost of ownership. In instances where their price point deems it appropriate, some of our Connect and Live mobile devices also target entry-level markets. Entry devices have voice capability, basic messaging and calendar features, and, increasingly, color displays, radios, basic cameras and Bluetooth functionality. Highlights from 2008 included the following:

 

 

Services

 

Functionalities that improve the mobile device user experience are evolving. We are increasing our offering of consumer Internet services, in five areas—music, maps, media, messaging and games—and working to deliver those services in an easily accessible manner to consumers. Our Services unit, which during 2008 operated under the Services & Software name, is responsible for developing this part of our business. The new name reflects organizational changes within the unit resulting from our decision in 2008 to focus on offering consumer Internet services in the five areas that we regard as both having the greatest appeal to consumers and being the most financially viable: music, maps, media, messaging and games. Nokia estimates that the overall market value of these targeted segments will be approximately EUR 40 billion in 2011. Our strategy in competing in this market is for Nokia’s consumer Internet services to support our device average selling price, extend and enhance the Nokia brand, generate incremental net sales and profit streams, and create value and choice for consumers. Currently, we are working to grow our customer base and build customer loyalty in each of the five focus areas. By combining value and choice for consumers with our scale in mobile device deliveries, our goal is to become the global leader in “Internet on mobile.”

 

Over the past few years we have increased our research and development in services and supporting software and have made a number of strategic acquisitions to bring us the knowledge and technology that we believe we need to compete effectively in consumer Internet services. The most recent acquisitions are as follows:

 

 

As part of our efforts to concentrate on consumer Internet services, we completed or announced the following disposals in 2008:

 

 

Services consists of five operational sub-units—Music, Social Location, Media, Messaging and Games—each focused on the development of services in their respective areas. The five sub-units are supported by three horizontal teams: People & Places, whose role is to build and develop links between our five core services, and act as the primary interface between Services and NAVTEQ; Service Experience, whose role is to develop ways to improve the experience people have when using our services, in particular working to ensure that there is a common look and feel across the portfolio; and Service Platforms, tasked with developing the infrastructure upon which we deploy our services; in particular working to ensure that we are able to deploy them speedily and efficiently. Highlights from 2008 in our five targeted segments included the following:

 

Music: In the United Kingdom, we launched our Comes With Music service, an ’all-you-can-eat’ offer where, following the purchase of a Nokia Comes With Music-edition device, users can download freely from a catalogue of millions of tracks for a pre-defined period of time—typically one year or longer—and keep the music once that period is up. Since the year-end, we have also announced the launch of the service in Australia and Singapore. During 2008, we also expanded the presence of Nokia Music Store, our digital music store, to 12 countries across three continents. Both Nokia Music Store and the Comes With Music service include all the major labels and hundreds of independent labels.

 

Maps: Nokia Maps 2.0 was made available with maps for 150 countries and 15 million points of interest and features both ‘drive’ and ‘walk’ navigation. We also completed the acquisition of NAVTEQ, enabling us to start integrating NAVTEQ technology into new services for our customers.

 

Media: We continued to develop our media sharing capabilities, including our application and content sharing service Mosh, Widsets and Download! as well as our pre-load business. In February 2009, we announced the launch of Ovi Store, a one-stop shop that will offer consumers relevant, targeted media through their social connections and their physical location information. Ovi Store will consolidate our existing media sharing capabilities.

 

Messaging: We made a number of announcements in the area of messaging: we announced the acquisition of OZ Communications, a leading supplier of email, instant and social messaging

applications to operators in North America and other markets; we announced the renewal of our business mobility strategy, including the shift of resources from our Intellisync email service to focus on developing consumer messaging solutions including push email—email with an ‘always on’ capability—and we announced Nokia Messaging, a service which gives millions of consumers access to email and instant messaging accounts from Yahoo! Mail and Yahoo! Messenger, Windows Live Hotmail, Gmail and Google Talk, and AOL Mail as well as email solutions from thousands of ISPs around the world on the majority of Nokia devices. Nokia Messaging is expected to launch commercially later in 2009.

 

Games: We launched and expanded the N-Gage games service with several titles of interactive, multiplayer games from publishers including Capcom, EA Mobile, Gameloft, Glu Mobile and Nokia Games Publishing.

 

An important part of our services strategy is Ovi, our Internet services brand we introduced in 2007. By integrating our individual services under the Ovi brand we aim to simplify the user experience of Nokia services and differentiate ourselves from competitors in the consumer Internet services market.

 

With Ovi services and applications—accessible online at Ovi.com, on a PC using Nokia Ovi Suite, and through various Nokia mobile device applications—users can easily manage, synchronize and share their personal files or information, as well as access Nokia services in music, maps, media sharing, messaging and games. Our plan is for people to be able to combine Ovi services as they want to and customize their view and experience of Ovi.

 

We continued to develop Ovi during 2008, rolling out new services or releases of existing services that users can access through www.ovi.com. As is common practice in the Internet services business, we continue to add new elements and services to Ovi as they go through beta testing and develop sufficiently for a wider audience. We are also working to improve the way people discover and use our Internet services through Ovi.com. One of our key goals is to bring all of our services under the Nokia Account—a single user name and password to access the different services.

 

Markets

 

Our Markets unit is responsible for the management of our supply chains, sales channels, brand and marketing activities. The unit consists of three operational sub-units: Sales, Marketing and Demand Supply Network Management.

 

Sales

 

Our Sales sub-unit is responsible for the sales of Nokia mobile devices from the Connect, Achieve, Explore, Live and Entry device categories. Most of Nokia’s mobile device business derives from sales to operators, distributors, independent retailers, corporate customers and consumers. However, the percentage of our total device volume that goes through each channel varies by region. In 2008, distributors accounted for approximately 95% of our device volumes in the Asia-Pacific region, approximately 91% in the Middle East & Africa and approximately 79% in China. In Europe, distributors accounted for approximately 39% and operators approximately 46% of our volumes. In both Latin America and North America, operators accounted for more than 84% of our 2008 volumes.

 

Each of our active operator and distributor customers is supported by a Nokia account team. In addition, customer executive teams led by Nokia Group Executive Board members focus on both Devices & Services and Nokia Siemens Networks for the largest operator groups.

 

Marketing

 

Our Marketing sub-unit is responsible for our outbound marketing activities, with the aim of developing and enhancing the Nokia brand and increasing traffic to both physical and online sales points. The Interbrand annual rating of 2008 Best Global Brands positioned Nokia as the fifth most-

valued brand in the world, for the second consecutive year. Other highlights from 2008 included the following:

 

 

Demand Supply Network Management

 

Our Demand Supply Network Management sub-unit is responsible for production and logistics for Nokia mobile devices. It also handles our customer care service.

 

We operated ten manufacturing facilities in nine countries around the world for the production of mobile devices as of December 31, 2008. Production at our plant in Salo, Finland, our plant in Beijing, China and our plant in Masan, South Korea is geared towards high-value, low-to-medium volume mobile devices. Our Vertu business is served by our manufacturing plant in the United Kingdom.

 

Our six other production facilities—Komárom in Hungary, Cluj in Romania, Dongguan in China, Chennai in India, Manaus in Brazil and Reynosa in Mexico—concentrate on the production of high volume, cost-sensitive mobile devices. Our manufacturing facilities form an integrated global production network, giving us flexibility to adjust our production volumes to fluctuations in market demand in different regions.

 

We continually assess the efficiency and competitiveness of our manufacturing facilities. In February 2008, we started production at our new facility in Cluj, Romania. In June 2008, we discontinued the production of mobile devices in Germany and closed our Bochum site, moving production to our other sites in Europe.

 

Each of our plants employs state-of-the-art technology and is highly automated. During 2008, in addition to the significant capital investment we made in our new facility in Romania, we made investments in our plants in India and Brazil.

 

Our mobile device manufacturing and logistics—which we consider to be a core competence and competitive advantage—are complex, require advanced and costly equipment and involve outsourcing to third parties. During 2008, outsourcing covered approximately 17% of our manufacturing volume of mobile device engines, which include the hardware and software that enable the basic operation of a mobile device. Outsourcing has been utilized to adjust our production to seasonal demand fluctuations.

 

Overall, we aim to manage our inventories to ensure that production meets demand for our products, while minimizing inventory-carrying costs. The inventory level we maintain is a function of a number of factors, including estimates of demand for each product category, product price levels, the

availability of raw materials, supply-chain integration with suppliers and the rate of technological change. From time to time, our inventory levels may differ from actual requirements.

 

Design

 

In Devices & Services, we take a human approach to designing mobile devices. Using our understanding of the way people live and their aspirations we create designs that they will want and love to use. This ethos is central to our design work and brand.

 

Our design process is influenced by consumers and their behavior—how they want a mobile device to look, function and fit into their lifestyle. We focus on making devices and services that are beautiful to use—sleek design and ease of use, relevance for specific consumers and local tastes and creating a joy of use.

 

We have a multi-disciplinary design team of approximately 340 designers, psychologists, researchers, anthropologists and technology specialists representing more than 30 different nationalities. Based in China, Europe and the US, the team conducts in-depth research and analysis of consumer trends and behavior, as well as studies new technologies, materials, shapes and styles.

 

Technology, Research and Development

 

Component Sourcing

 

In line with industry practice, Devices & Services sources components for our mobile devices from a global network of suppliers. These components include electronic components, such as chipsets, integrated circuits, microprocessors, standard components, printed wiring boards, sensors, memory devices, cameras, audio components, displays, batteries and chargers, and mechanical components, such as covers, connectors, key mats, antennas and mechanisms. Such hardware components account for the majority of our overall spending on sourcing. We also source software and content, including third-party software and content that enable various features and applications to be added into our products.

 

Chipset Platforms

 

A chipset platform comprises integrated circuits designed to work as a unit and perform specific functions in a mobile device. A key component of the chipset is the modem, responsible for converting the digital language of a chip to the analog language of radio. This allows one device to communicate with another over radio signals.

 

We discontinued our own chipset development in 2007 and have since expanded our use of commercially available chipsets. Today, we operate a multi-sourcing model for our chipsets, working with five chipset suppliers: Broadcom, Infineon Technologies, Qualcomm, ST-Ericsson and Texas Instruments.

 

Our multi-vendor strategy is aimed at increasing the efficiency of our research and development efforts by allowing Nokia to leverage external innovation through working with the best partner in a specific chipset development area, and by freeing our own R&D resources to focus on our core competencies in modem development and other areas central to Nokia’s growth strategy, such as consumer Internet services and enterprise software.

 

We are continuing to develop our leading modem technology, which includes protocol software and related digital design for multi-protocol modems. Modem technology is an area where we believe we have a competitive advantage through our strong experience, execution capability and intellectual property rights position. We license our modem technology to chipset manufacturers who use it in the chipsets they develop and produce for Nokia and, if they so decide, in the chipsets they produce for the open market.

Software

 

Software refers to both the platforms that enable the implementation of radio technologies and applications in mobile devices, and the applications or services that run on a mobile device.

 

We deploy different software operating systems to allow us to balance usability, features and cost in a flexible manner. These include Series 30, Series 40 and Maemo, all software platforms developed in-house; and S60, software built on Symbian OS, an operating system widely used by the industry. We provide mobile devices for a wide range of market segments, price points and user groups, and by having different software operating systems we are able to choose the right one for each Nokia device. S60, which we use in our own devices and which is licensed to other device manufacturers, is the world’s leading smartphone software platform.

 

In 2008, Nokia and industry partners took the first steps to develop Symbian OS, the market-leading operating system for mobile devices, into an open and unified mobile software platform, which will be licensed royalty-free and eventually move towards ‘open source’. In December 2008, Nokia acquired full ownership of Symbian Limited, the company that develops and licenses Symbian OS, and, together with industry partners, initiated plans to establish the Symbian Foundation, an independent, non-profit entity to develop a unified platform with a single user interface framework. The goal is for the Symbian Foundation to build on the appeal of Symbian OS and accelerate the development of compelling web-enabled applications.

 

The Symbian Foundation initially combines software assets contributed by Fujitsu, Motorola, Nokia, NTT DoCoMo, and Sony Ericsson. By mid-February 2009, more than 70 companies had announced their endorsement of the plans to establish the foundation, including Nokia and the other initial board members: AT&T, LG Electronics, NTT DoCoMo, Samsung Electronics, Sony Ericsson, ST-Ericsson, Texas Instruments and Vodafone. The contributed software is to be made available to all foundation members under a royalty-free license from the foundation’s first day of operations, expected before the end of the first half of 2009.

 

Key to our software strategy are cross-platform development environments, or layers of software that run across different device operating systems. These layers enable developers with experience in a variety of software environments to create applications for the mobile market. Our acquisition of Trolltech in 2008 should enable us to accelerate our cross-platform software strategy for mobile devices and desktop applications and develop our consumer Internet services business. Trolltech now operates as Qt Software, taking its new name from its Qt technology that forms the basis for tens of thousands of commercial and open source applications.

 

Research and Development

 

Since January 1, 2008 the bulk of our research and development activity has fallen within Research & Development, a sub-unit of our Devices unit. A smaller portion of our research and development efforts falls within our Services unit, while longer-term technology development comes under the scope of Nokia Research Center, a global network of research centers and laboratories Nokia maintains, in many cases in collaboration with outside partners.

 

Nokia Research Center

 

Looking beyond the development of current products, services, platforms and technologies, our corporate research center creates assets and competencies in technology areas that we believe will be vital to our future success. In recent years, Nokia Research Center has been a contributor to almost half of Nokia’s standard essential patents.

 

The center works closely with Nokia Devices & Services and Nokia Siemens Networks and collaborates with several universities and research institutes around the globe. These include the Massachusetts Institute of Technology and Stanford University in the United States, the University of Cambridge in the United Kingdom, and Tsinghua University in China. Further expanding the scope of our long-term

technology development, in 2008 Nokia Research Center launched joint research programs with the Swiss Federal Institutes of Technology in Lausanne and Zurich (EPFL and ETH Zurich) and with the Helsinki University of Technology in Finland. During the year, we also established a new research laboratory in Los Angeles, California.

 

Research highlights in 2008 included the successful trial and continued development by Nokia Research Center Palo Alto in conjunction with University of California, Berkeley of a system to provide real-time traffic information based on speed and location data from GPS-enabled mobile devices carried by motorists. Building from the Nokia Maps service, this provides a glimpse into the future with the mobile device as a personal travel assistant. Nokia Research Center also launched Morph, a concept that demonstrates the functionality that nano-technology might be capable of delivering: fully flexible materials, a revolutionary self-cleaning shell and transparent electronics. The Morph concept was conceived out of a scientific partnership between Nokia Research Center and the Cambridge Nanoscience Centre.

 

At the beginning of 2009, Nokia Research Center adopted a research agenda focused on four core areas, compared with eight previously. The four areas of research are: rich context modeling; high performance mobile platforms; cognitive radio; and user interface technology. By pursuing a narrower research program, Nokia Research Center is targeting the areas that, besides being the most viable investments financially, we believe offer the best potential for strengthening our position in the converging Internet and communications industries in the long term. In revising its research agenda, Nokia Research Center is also discontinuing research in technology where a certain degree of maturity has already been reached within the business.

 

Patents and Licenses

 

A high level of investment by Devices & Services in research and development and rapid technological development has meant that the role of intellectual property rights, or IPR, in our industry has always been important. Digital convergence, multiradio solutions, alternative radio technologies, and differing business models combined with large volumes are further increasing the complexity and importance of IPR.

 

The detailed designs of our products are based primarily on our own research and development work and design efforts, and generally comply with all relevant and applicable public standards. We seek to safeguard our investments in technology through adequate intellectual property protection, including patents, design registrations, trade secrets, trademark registrations and copyrights. In addition to safeguarding our technology advantage, they protect the unique Nokia features, look and feel, and brand.

 

We have built our IPR portfolio since the early 1990s, investing approximately EUR 40 billion cumulatively in research and development, and we now own approximately 11 000 patent families. As a leading innovator in the wireless space, we have built what we believe to be one of the strongest and broadest patent portfolios in the industry, extending across all major cellular and mobile communications standards, data applications, user interface features and functions and many other areas. We receive royalties from certain handset and other vendors under our patent portfolio.

 

We are a world leader in the development of the wireless technologies of GSM/EDGE, 3G/WCDMA, HSPA, OFDM, WiMAX, LTE and TD-SCDMA, and we have a robust patent portfolio in all of those technology areas, as well as for CDMA2000. We believe our standards-related essential patent portfolio is one of the strongest in the industry. In GSM, we have declared close to 300 GSM essential patents with a particular stronghold in codec technologies and in mobile packet data. Our major contribution to WCDMA development is demonstrated by approximately 370 essential patent declarations to date. Our CDMA2000 portfolio is also robust with approximately 150 patents declared essential. The number of essential patents is expected to increase further due to the rapid development of higher data rate technologies, an area where we are a particularly strong contributor.

We are a holder of numerous essential patents for various mobile communications standards. An essential patent covers a feature or function that is incorporated into an open standard which is deployed by manufacturers in order to comply with the standard. In accordance with the declarations we have made and the legal obligations created under the applicable rules of various standardization bodies, such as the European Telecommunication Standardization Institute (ETSI), we are committed to promoting open standards, and to offering and agreeing upon license terms for our essential patents in compliance with the IPR policies of applicable standardization bodies. We believe that a company should be compensated for its IPR based on the fundamentals of reasonable cumulative royalty terms and proportionality: proportionality in terms of the number of essential patents that a company contributes to a technology, and proportionality in terms of how important the technology is to the overall product. Nokia has agreed upon terms of several license agreements with other companies relating to both essential and other patents. Many of these agreements are cross-license agreements with major telecommunications companies that cover broad product areas and provide Nokia with access to relevant technologies.

 

Our products and solutions include increasingly complex technology involving numerous patented, standardized or proprietary, technologies. A 3G/WCDMA mobile device, for example, may incorporate three times as many components, including substantially more complex software, as our 2G/GSM mobile devices. As the number of entrants in the market grows, as the Nokia product range becomes more diversified, as our products and solutions are increasingly used together with hardware, software or service components that have been developed by third parties, as Nokia enters new businesses, and as the complexity of technology increases, the possibility of alleged infringement and related intellectual property claims against us continues to rise. As new features are added to our products, services and solutions, we are also agreeing upon licensing terms with a number of new companies in the field of new evolving technologies. We believe companies like Nokia with a strong IPR position, cumulative know-how and IPR expertise can have a competitive advantage in the converging industry, and in the increasingly competitive marketplace.

 

Competition

 

The mobile device market continues to undergo significant changes, most notably due to the convergence of mobile device technology with the Internet, which are significantly impacting the competitive landscape in the mobile device market.

 

Mobile device market participants compete with each other on the basis of their product, services and solutions portfolio, user experience, design, price, operational and manufacturing efficiency, technical performance, distribution strategy, quality, customer support, brand and marketing. The critical factors that determine the success of a product or service vary by geographical market and product and services segment. For instance, price, brand and distribution are often the critical factors in entry-level markets. In general, mobile device markets are becoming more segmented and diversified, and we face competition from different mobile device manufacturers in different user segments, price points and geographic markets.

 

The competition in the market for our products, services and solutions continues to be intense from both our traditional competitors in the mobile device industry, as well as from a number of new competitors. Some of our competitors have used, and we expect will continue to use, more aggressive pricing strategies, different design approaches and alternative technologies. In addition, some competitors have chosen to focus on building products based on commercially available components, which may enable them to introduce these products faster and with lower levels of research and development expenditures than Nokia.

 

Historically, our principal competitors in mobile devices have been other mobile device manufacturers such as LG, Motorola, Samsung and Sony Ericsson. However, traditional market participants have in recent years been joined by mobile network operators, which are increasingly offering mobile devices under their own brand, which increases competition from non-branded mobile device manufacturers, and other new market participants, such as manufacturers traditionally active in other segments of

the consumer electronics industry. Our competitors today include, but are not limited to, Apple, Garmin, Google, Hewlett Packard, HTC, Huawei, Palm, Research in Motion, TomTom and ZTE. The mobile device industry may continue to attract new entrants.

 

As a result of developments in our industry, including the convergence of mobile device technology with the Internet, we also face competition from companies historically focused on related industries, such as Internet-based products and services, consumer electronics manufacturers, network operators and business device and solution providers, some of which have more scale and experience and a stronger market presence in certain market segments, such as Internet services. Many mobile device manufacturers—both traditional participants and new entrants—have expanded into Internet services and enterprise software in an effort to differentiate themselves from competitors. Mobile network operators are also seeking to provide services to consumers for their own branded devices, including both Nokia devices and devices from other manufacturers. We also face competition from consumer Internet service providers, which may provide competing software and services for free.

 

Further, as the industry now includes increasing numbers of participants that provide specific hardware and software layers within products and solutions, we face competition at the level of these layers rather than solely at the level of complete products and solutions. An example of such a layer is operating system software, with competitors including, but not limited to, Apple, Google, Microsoft, Palm and Research in Motion. The competition also includes open source software initiatives, such as the Open Handset Alliance, which is developing the Android mobile device software platform and operating system, and LiMo Foundation, which is developing the LiMo mobile device operating system. Mobile devices are, to an increasing extent, based on various technology platforms, which brings the competition to the technology platform layer and changes the barriers of entry for new market entrants.

 

Also, significant changes in exchange rates may also impact our competitive position through their impact on our competitors. In 2008, the most notable of such impacts was the depreciation of the Korean won by 29% against the US dollar and 27% against the euro, which benefitted our Korea-based competitors.

 

Due to the intensity, complexity and diversity of the competition overall, the competitive landscape in our industry or in specific industry segments can change very rapidly. As the parameters of competition are less firmly established than in other industries where the competitive landscape does not change greatly from year to year, it is difficult to predict how the competitive landscape of the mobile device industry will develop in the future.

 

NAVTEQ

 

Overview

 

In July 2008, we acquired NAVTEQ Corporation, a leading provider of comprehensive digital map information and related location-based content and services for automotive navigation systems, mobile navigation devices, Internet-based mapping applications, and government and business solutions. By acquiring NAVTEQ, we aim to ensure the continued development of our context and geographical services through Nokia Maps as we move from simple navigation to a broader range of location-based services, such as pedestrian navigation and targeted advertising. At the same time, NAVTEQ also continues to develop its expertise in the navigation industry, service its strong customer base and invest in the further development of its industry-leading map data, location-based services and technology platform. As of December 31, 2008, NAVTEQ had 4 028 employees in 35 countries. Highlights in 2008 after the completion of our acquisition of NAVTEQ included the following:

 

 

 

NAVTEQ’s map database enables its customers to offer dynamic navigation, route planning, location-based services and other geographic information-based products and services to consumer and commercial users. NAVTEQ provides its database to mobile device and handset manufacturers, automobile manufacturers and dealers, navigation systems manufacturers, software developers, Internet portals, parcel and overnight delivery services companies and governmental and quasi-governmental entities, among others. The products and services incorporating NAVTEQ map data include the following:

 

 

In addition, NAVTEQ has a traffic and logistics data collection network in which it processes traffic incident and event information, along with comprehensive traffic flow data collected through its network of roadside sensors, in order to provide detailed traffic information to radio and television stations, in-vehicle and mobile navigation systems, Internet sites and mobile device users. In January 2009, NAVTEQ expanded its traffic offering in Europe with the completion of its acquisition of T-Traffic, a leading provider of traffic services in Germany.

 

NAVTEQ’s map database is a highly accurate and detailed digital representation of road transportation networks in Europe, North America and other regions around the world. This database offers extensive geographic coverage, including data at various levels of detail for 74 countries on six continents, covering more than 15 million miles of roadway worldwide. Unlike basic road maps, NAVTEQ’s map database currently can have over 260 unique attributes for a particular road segment. The most detailed coverage includes extensive road, route and related travel information, including attributes collected by road segment that are essential for routing and navigation, such as road classifications, details regarding ramps, road barriers, sign information, street names and addresses and traffic rules and regulations. In addition, the database currently includes over 30 million points of interest, such as airports, hotels, restaurants, retailers, civic offices and cultural sites. We believe NAVTEQ’s digital map has the most extensive navigable geographic coverage of any commercially available today.

Sales and Marketing

 

Sales

 

NAVTEQ provides its data to end-users through multiple distribution methods including retail establishments, the Internet, automobile, handset and mobile device manufacturers and their dealers, and other re-distributors. NAVTEQ also offers distribution services to its customers, including the manufacturing and shipping of digital storage media to automobile manufacturers and dealers or directly to end-users, as well as a complete range of services, including inventory management, order processing, on-line credit card processing, multi-currency processing, localized VAT handling and consumer call center support.

 

NAVTEQ licenses and distributes its database in several ways, including licensing and delivering the database directly and indirectly to its business customers and consumer end-users. In addition to the basic license terms that typically provide for non-exclusive licenses, the license agreements generally include additional terms and conditions relating to the specific use of the data.

 

The license fees for NAVTEQ’s data vary depending on several factors, including the content of the data to be used by the product or service, the use for which the data has been licensed and the geographical scope of the data. The fees paid for the licenses are usually on a per-copy basis or a per-transaction basis. NAVTEQ also produces and delivers database copies to automobile manufacturers pursuant to purchase orders or other agreements.

 

Marketing

 

NAVTEQ’s marketing efforts include a direct sales force, attendance and exhibition at trade shows and conferences, advertisements in relevant industry periodicals, direct sales mailings and advertisements, electronic mailings, Internet-based marketing and co-marketing with customers.

 

Technology, Research and Development

 

NAVTEQ’s global technology team focuses on developments and innovations in data gathering, processing, delivery and deployment of its map database and related content. NAVTEQ employs an integrated approach to its database, software support and operations environments and devotes significant resources and expertise to the development of a customized data management software system. NAVTEQ has also built workstation software to enable sophisticated database creation and the performance of updating tasks in a well-controlled and efficient environment with the ability to access the common database from any of its more than 190 satellite offices and edit portions of the data concurrently among several users. NAVTEQ’s proprietary software enables its field force to gather data on a real-time basis on portable computers in field vehicles. Once the data has been gathered and stored on portable computers, NAVTEQ’s field force performs further data processing at its field offices before integrating the changes into the common database.

 

Patents and Licenses

 

NAVTEQ relies primarily on a combination of copyright laws, including, in Europe, database protection laws, trade secrets and patents to establish and protect its intellectual property rights in its database, software and related technology. NAVTEQ holds a total of more than 200 United States patents, which cover a variety of technologies, including technologies relating to the collection and distribution of geographical and other data, data organization and format, and database evaluation and analysis tools. NAVTEQ also protects its database, software and related technology, in part, through the terms of its license agreements and by confidentiality agreements with its employees, consultants, customers and others.

Competition

 

The market for map and related location-based information is highly competitive. NAVTEQ currently has several major competitors, including Tele Atlas, which was acquired by TomTom, and numerous governmental and quasi-governmental mapping agencies that license map data for commercial use, as well as many local competitors in geographic areas outside of North America and Europe. Several global and local companies as well as governmental and quasi-governmental agencies are making more map data information with greater coverage and content, and higher quality, available free of charge or at lower prices, which may encourage new market entrants or reduce the demand for fee-based products and services which incorporate our map database. In addition, in recent years, several companies have engaged in map data collection or have announced plans to map various countries around the world. Aerial, satellite and other location-based imagery is also becoming increasingly available. This content may provide NAVTEQ’s customers with an alternative to its map data and make it less costly and time-consuming for competitors to build a high quality map database.

 

Nokia Siemens Networks

 

Overview

 

This section describes the business of Nokia Siemens Networks, a company jointly owned by Nokia and Siemens and consolidated by Nokia, which started operations on April 1, 2007. Nokia Siemens Networks combined Nokia’s former Networks business with Siemens’ carrier-related operations for fixed and mobile networks. Its operational headquarters are in Espoo, Finland, along with two of its five business units. Nokia Siemens Networks has a strong regional presence in Munich, Germany, where two of its business units are based. The Services business unit is based in New Delhi, India. The Board of Directors of Nokia Siemens Networks is comprised of seven directors, four appointed by Nokia and three by Siemens, and Nokia appoints the CEO.

 

Nokia Siemens Networks provides wireless and fixed network infrastructure, communications and networks service platforms, as well as professional services to operators and service providers. Nokia Siemens Networks has a broad product and services portfolio designed to address the converging mobile and fixed infrastructure markets and a global base of customers with a presence in both developed and emerging markets and one of the largest service organizations in the industry. Nokia Siemens Networks focuses primarily on the GSM family of radio technologies and aims at leadership in: GSM, EDGE and WCDMA/HSPA networks; core networks with increasing IP and multi-access capabilities; fixed broadband access, transport, operations and billing support systems; and professional services such as managed services and consulting. Nokia Siemens Networks is also a vendor of mobile WiMAX solutions.

 

During 2008, the Nokia Siemens Network integration was largely completed and Nokia Siemens Networks delivered on its commitment to achieve substantially all of the EUR 2 billion of targeted annual cost synergies. In the current challenging economic conditions and intensely competitive market Nokia Siemens Networks’ focus continues to be on profitability and cash flow, which the management believes will allow the company to build a long-term sustainable business.

 

At December 31, 2008, Nokia Siemens Networks had 60 281 employees, more than 600 operator customers in over 150 countries, and systems serving in excess of 1.5 billion subscribers. Highlights from 2008 included the following:

 

 

 

Nokia Siemens Networks Business Units

 

Nokia Siemens Networks has five business units: Radio Access; Converged Core; Broadband Connectivity Solutions; Operations and Business Software; and Services. These are supported by Operations; Research, Technology & Platforms; and Customer and Market Operations.

 

Radio Access develops GSM, EDGE and 3G/WCDMA/HSPA radio access networks and cellular transmission for operators and network providers. It also develops new technologies such as I-HSPA, LTE and mobile WiMAX to support the uptake of mobile data services and introduce flat architecture for wireless and mobile broadband applications. The main products offered by Radio Access are base stations, base station controllers and cellular transmission equipment.

 

Converged Core develops core network solutions for mobile and fixed network operators. The main products are switches, different kinds of network servers, subscriber databases and media gateways. Nokia Siemens Networks circuit-switched network solutions are aimed at helping operators provide high quality voice solutions and reduce the cost of providing voice minutes to subscribers. Nokia Siemens Networks has expanded its portfolio in subscriber data management solutions with the acquisition of Apertio, completed in 2008. Apertio is an innovator of real-time subscriber data platforms and applications. Many of Nokia Siemens Networks core network products are used in both fixed and mobile networks as part of so-called fixed-mobile convergence.

 

Broadband Connectivity Solutions focuses on transport networks, which are the underlying infrastructure for all fixed and mobile networks. To better meet customer requirements in the converging transport and broadband sectors, the Broadband Access and IP Transport business units were merged from January 1, 2009 into this new business unit. Consumer applications, the needs of large enterprise, the growth of the Internet and new services have increased the demand for bandwidth. Broadband Connectivity Solutions provides the fundamental elements for high-speed transmission via optical and microwave networks, including packet-oriented technologies such as Ethernet and traditional protocols such as TDM. The business unit also provides a comprehensive portfolio for the wire line connectivity area such as digital subscriber line access multiplexers, and narrowband/multi-service equipment. The business unit aims to provide cost-efficient high bandwidth for access networks, enabling high quality “triple play” services such as high-speed Internet, VoIP and IPTV.

Operations and Business Software provides network and service management software and charging and billing software. Operations support systems seek to improve the operational efficiency of operators and reduce network complexity, while service management allows operators to speed up the service launch and manage customer experience. Business support systems let operators differentiate themselves from the competition by enabling flexible pricing and charging of services and calling plans.

 

Services offers operators a broad range of professional services, from consultancy to outsourced operations; systems integration to hosting; and from network design to network care, including a full range of network implementation and turnkey solutions. Services has the capability to integrate software from virtually all vendors, helping operators and service providers to achieve a higher quality of service with lower operating and capital expenditure. The Services portfolio is delivered through a global organization that covers 150 countries, with more than 20 000 experts serving more than 1 500 customers.

 

Compliance Program

 

In addition to a strong finance and control organization with internal financial controls designed to ensure high standards of reporting and compliance with all applicable laws, Nokia Siemens Networks is implementing an expanded compliance program. This program includes training programs and defined, specialized approval processes for entering into business transactions with the potential for corruption risks and for engaging third-party consultants in the sales process. Nokia Siemens Networks has zero tolerance for financial or other business misconduct.

 

Nokia Siemens Networks’ Code of Conduct, which is identical with the Nokia Code of Conduct, defines boundaries between appropriate and inappropriate business behavior. According to the Code of Conduct, Nokia Siemens Networks employees must not engage in activities that may lead to conflicts of interest, such as any agreement or understanding regarding gifts, hospitality, favors, benefits or bribes, in exchange for gaining or maintaining business. The Code of Conduct is supported by the company’s anti-corruption compliance program, which includes, among other things, a detailed handbook, training, and several reporting and helplines available for employees and external workers. The training program has been in place since April 1, 2007 and by the end of 2008, the training was available in 18 languages and more than half of all employees had successfully completed the online Code of Conduct test. It will be replaced by a new mandatory training scheme in 2009.

 

Sales and Marketing

 

Sales

 

The Customer and Market Operations organization oversees and executes sales and marketing at Nokia Siemens Networks. Customer teams and customer business teams, which handle larger, multinational customers, act as the company’s main customer interfaces to create and capture sales opportunities by developing solutions together with their customers. Sales of infrastructure equipment, software and services to customers are done predominantly directly or in some cases through approved Nokia Siemens Networks reseller companies.

 

Nokia Siemens Networks has organized its customer business teams on a regional basis. For the biggest global customers, dedicated account units beyond this regional structure are in place. Each of Nokia Siemens Networks’ customers is supported by a dedicated account team. In addition, customer executive teams led by Nokia Group Executive Board members focus on both Nokia’s Devices & Services and Nokia Siemens Networks for the largest operator groups.

 

Solution Sales Management supports the sales process by managing bids and pricing for products and services.

Marketing

 

Nokia Siemens Networks introduced its own brand in 2007, and by leveraging the strong presence of its parent companies, has positioned its global strengths in business and connectivity solutions with customers, media, governments and analysts through opening events, brand engagement activities and customer-focused initiatives throughout 2008.

 

Marketing has a broad remit to support Nokia Siemens Networks’ wide portfolio of products, software and solutions across all regions and customer business teams with a wide range of activities including marketing communications, branding, advertising, media campaigns, exhibitions and events, customer marketing activities, testimonials, industry seminar, forums and thought leadership programs, many of which are executed in close collaboration with the company’s sales force, solution sales managers, business units as well as strategy, human resources and corporate communication teams.

 

Nokia Siemens Networks has also strengthened its solutions-driven approach that seeks a deeper partnership with its customers by focusing on the specific business needs of an operator and the day-to-day running of its networks, rather than on solely providing network equipment to meet technology-specific needs.

 

Production

 

Operations is responsible for the supply chain management of all Nokia Siemens Networks’ hardware, software and original equipment manufacturer, or OEM, products. This includes supply planning, manufacturing, distribution, procurement, logistics, demand/supply network design and delivery capability creation in product programs.

 

At December 31, 2008, Nokia Siemens Networks had production facilities in nine major plants globally: three in China (Beijing, Shanghai and Suzhou), two in Finland (Espoo and Oulu), two in Germany (Berlin and Bruchsal), and two in India (Calcutta and Chennai). The facility in Chennai, where mobile communications infrastructure is manufactured and distributed, was opened in November 2008 to support India’s rapid growth in mobile subscribers.

 

In December 2008, as part of its merger-related cost synergy process, Nokia Siemens Networks completed the sale of its manufacturing site in Durach, Germany in a management buy-out, led by the existing leadership of the facility. The deal included a multi-year agreement for the site to continue production for Nokia Siemens Networks. In November 2008, Nokia Siemens Networks announced that it planned to close its Espoo production facility, and began negotiations with employee representatives to that end.

 

Nokia Siemens Networks works with best-in-class manufacturing service suppliers to increase its flexibility and optimize costs. Approximately 20% of Nokia Siemens Networks production is outsourced.

 

Certain components and sub-assemblies for Nokia Siemens Networks products, including company-specific integrated circuits and radio frequency components, servers, sub-assemblies such as printed wire-board assemblies, filters, combiners and power units, and cabinets, are sourced and manufactured by third-party suppliers. Nokia Siemens Networks then assembles components and sub-assemblies into final products and solutions. For selected products and solutions, third-party suppliers deliver final goods directly to our customers. Consistent with industry practice, Nokia Siemens Networks manufactures telecommunications systems on a contract-by-contract basis.

 

Nokia Siemens Networks generally prefers to have multiple sources for its components, but it sources some components from a single or a small number of selected suppliers. As is the case with suppliers to Nokia Devices & Services, management believes that these business relationships are stable and typically involve a high degree of cooperation in research and development, product design and manufacturing. This is necessary in order to ensure optimal product interoperability.

Technology, Research and Development

 

Research, Technology & Platforms of Nokia Siemens Networks focuses on research, standardization, intellectual property rights, innovation, R&D services and platform development. It cooperates with universities, the IT industry, standardization and other industry cooperation bodies worldwide.

 

Nokia Siemens Networks research and development work focuses on wireless and wireline communication solutions that enable communication services for people and businesses. These include wireless connectivity solutions like GSM/EDGE, 3G/WCDMA, TD-SCDMA, HSPA, WiMAX and LTE and wireline connectivity solutions based on copper (ADSL, VDSL with Fiber to the curb, or FTTC, Fiber to the building, or FTTB, and fiber-based next generation optical access, or NGOA).

 

In the transport and aggregation domain, Carrier Ethernet, IP Routing, IP traffic analysis and multi-access mobility are among the key focus areas. Within the applications domain, research and development focuses on the service delivery framework (SDF), messaging, browsing, downloading and streaming, common service, subscriber and device profile data storage. It also focuses on peer-to-peer, or person-to-person, IP connectivity session control (IMS) & VoIP, network/service/subscriber/device management, online and offline charging for post- and pre-paid subscribers.

 

Where appropriate, Nokia Siemens Networks seeks to provide support for technologies that it does not produce itself.

 

Patents and Licenses

 

Nokia Siemens Networks seeks to safeguard its investments in technology through adequate intellectual property rights, including patents, patent applications, design patents, trade secrets, trademark registrations and copyrights.

 

Nokia Siemens Networks owns a significant portfolio comprising IPR that was transferred from its parent companies at time of merger and IPR filed since its start of operations on April 1, 2007 resulting from strong investment in research and development. Nokia Siemens Networks is a world leader in the research and development of wireless technologies, as well as of transport and broadband technologies, and it has robust patent portfolios in a broad range of technology areas. The IPR portfolio includes standards-related essential patents and patent applications that have been declared by Nokia and Siemens. Nokia Siemens Networks will declare its own essential patents and patent applications based on evaluation of pending cases with respect to standards. Nokia Siemens Networks receives and pays certain patent license royalties based on existing agreements with telecommunication vendors.

 

Competition

 

In 2007, the competitive environment changed significantly in the market for mobile and fixed networks infrastructure and related services with the emergence of the merged Alcatel-Lucent and the formation of Nokia Siemens Networks. As a result, together with Ericsson and Huawei, there are now four major global players leading the network infrastructure market that offer a portfolio covering both equipment and services. This competitive environment remained broadly unchanged throughout 2008.

 

Our principal competitors in network infrastructure include Alcatel-Lucent, Cisco, Ericsson, Huawei, Motorola, NEC, Nortel and ZTE. In services, competition is from both traditional as well as non-traditional telecommunications players such as Accenture, HP and IBM. HP is active in the service delivery platform market and IBM is active, for example, in the billing and data center businesses. In addition to these companies, there are many other competitors, such as Fujitsu, Juniper, Samsung and Tellabs, which have a narrower scope in terms of served regions and business areas.

 

Conditions in the market for mobile and fixed networks infrastructure and related services remained challenging in 2008, as the difficult conditions that emerged in 2007 continued. The market continued to be characterized by equipment price erosion, a maturing of industry technology and

intense price competition and the market was flat in euro terms in 2008 compared to 2007. In addition the financial and economic turmoil that emerged during the latter part of 2008 further intensified the difficulties in the market leading to forecasts of a retraction of the market in 2009.

 

In addition, consolidation among network operators has increased the need for scale, which is continuing on a regional basis, and placed pressure on vendors in 2008. The increasing demand for data communication has heightened the need for a broader business scope, with companies trying to differentiate themselves through innovations such as reduced energy consumption.

 

In the fastest-growing part of our business, services, which include managed services (outsourcing), consulting, systems integration and hosting, vendors are judged upon their ability to identify and solve customer problems rather than their ability to supply equipment at a competitive price. Competition comes from both established and non-traditional companies, including Ericsson and IBM.

 

In businesses such as radio networks, the 2G (GSM) segment is facing intense price competition in emerging countries, where operators need to make large investments in networks but generally receive low revenues per customer. In mature markets, there has been a slowdown in operator investments. Within the 3G segment, leading vendors are competing based on factors including technology innovation, such as lower energy consumption equipment, and less complex network architectures.

 

The fixed line market continues to be characterized by intense price pressure, both in terms of equipment price erosion due to heavy competition, especially from Asian vendors, and from declining tariffs, which are expected to continue to fall. Decreasing fixed line revenues combined with rising voice and data network traffic are expected to force network operators to invest in new business opportunities and continue their network evolution to converged IP/Ethernet- and wavelength-division multiplexing-based transport architectures. The global trend of subscribers moving to mobile communications from fixed communications is expected to continue, especially with the growth in the number of mobile subscribers in markets where it is not economically feasible to build a fixed network.

 

Seasonality—Devices & Services, NAVTEQ and Nokia Siemens Networks

 

For information on the seasonality of Devices & Services, NAVTEQ and Nokia Siemens Networks, see Item 5A. “Operating Results—Overview—Certain Other Factors—Seasonality.”

 

Sales in sanctioned countries—Devices & Services, NAVTEQ and Nokia Siemens Networks

 

We are a global company and have sales in most countries of the world. We sold mobile devices and services through Devices & Services and network equipment through Nokia Siemens Networks to customers in Iran, Sudan and Syria in 2008. NAVTEQ did not have any sales to customers in these countries from the completion of our acquisition of NAVTEQ on July 10, 2008 to December 31, 2008. Our aggregate sales to customers in these countries in 2008 accounted for approximately 1.6% of Nokia’s total net sales, or EUR 791 million. Iran, Sudan and Syria are subject to US economic sanctions that are primarily designed to implement US foreign policy and the US government has designated these countries as “state sponsors of terrorism.”

 

Government Regulation—Devices & Services, NAVTEQ and Nokia Siemens Networks

 

Our business is subject to direct and indirect regulation in each of the countries in which we, the companies with which we work or our customers do business. As a result, changes in or uncertainties related to various types of regulations applicable to current or new technologies, products, services or solutions could affect our business adversely. Moreover, the implementation of technological or legal requirements could impact our products, services and solutions, manufacturing or distribution processes, and could affect the timing of product, services and solution introductions, the cost of our production, products, services or solutions, as well as their commercial success. Also, our business is subject to the impacts of changes in trade policies or regulation favoring the local industry

participants, as well as other measures with potentially protectionist objectives that the host governments in different countries may take. Export control, tariffs or other fees or levies imposed on our products; environmental, product safety and security and other regulations that adversely affect the export, import, pricing or costs of our products, services and solutions; as well as new services related to our products, could adversely affect our net sales and results of operations.

 

For example, in the United States, our products and solutions are subject to a wide range of government regulations that might have a direct impact on our business, including, but not limited to, regulation related to product certification, standards, spectrum management, access networks, competition and environment. We are in continuous dialogue with relevant United States agencies, regulators and the Congress through our experts, industry associations and our office in Washington, D.C. Also, the European Union (EU) regulation has in many areas a direct effect on our business and customers within the single market of the EU. For example, the European Commission is considering measures that would require the member states of the European Union to levy import duties for high-end mobile devices and their components which, if eventually taken, could potentially result in similar counter-measures by the other countries outside the European Union. These legal requirements influence, for example, the conditions for innovation and investment in fixed and wireless broadband communication infrastructure. We interact continuously with the EU institutions through our experts, industry associations and our office in Brussels.

 

Corporate Responsibility—Nokia Devices & Services and Nokia Siemens Networks

 

The following discussion includes description of the corporate responsibility activities of our Devices & Services and Nokia Siemens Networks segments only, unless otherwise indicated. In the following discussion, “Nokia” refers to Nokia excluding NAVTEQ and Nokia Siemens Network.

 

Customers—Corporate Responsibility

 

Accessibility of Nokia Devices

 

Accessibility is about making Nokia devices and services usable and accessible to the greatest possible number of people, including customers with disabilities. We have been working on accessibility concerns for more than ten years, and by the end of 2008 we continued to offer more than 60 device features or applications aimed at providing greater accessibility for people with limitations in hearing, speech, vision, mobility and cognition. We work together with representatives from disability organizations, regulators and academia to discuss accessibility priorities and development. During 2008, we offered new functionality for accessibility, including:

 

 

Nokia Forum third-party developers have also introduced voice feedback, optical scanning and supportive services to the mobile devices that complement the Nokia offering addressing sensorial and physical challenges in mobile communications.

 

Employees—Corporate Responsibility

 

Values

 

We have a set of values developed by our employees around the world that reflects and supports our business and changing environment. The values act as a foundation for our evolving business culture and form the basis of how we operate: achieving together, to reflect how we reach out to others, encouraging them to work together with us and share risks, responsibilities and successes; very

human, to reflect how we do business and work with each other; engaging you, to reflect how we engage our customers, our suppliers, and our own employees in what Nokia stands for; and passion for innovation, to reflect our curiosity about the world around us and our desire to improve people’s lives through innovation in technology.

 

We also encourage open discussion and debate within the business. An annual global employee survey is conducted as a way of getting feedback from our employees on a range of important issues, and we act on this feedback when designing our people policies and practices. It is also possible for employees to ask questions about our business, even anonymously, through the company Intranet—our internal Internet pages—and receive a prompt and openly published response.

 

Nokia Siemens Networks also has a set of values that reflects and supports its business and the changing environment. The values form the basis of how Nokia Siemens Networks operates: focus on our customer, to reflect the importance of helping customers succeed in their business; communicate openly, to reflect the importance of speedy, fact-based and transparent communications; inspire, to reflect the importance of building excitement within the business, especially about the needs of customers; innovate, to reflect the focus on innovation to succeed; and win together, to reflect how trust, respect, honesty and openness form the workplace.

 

Code of Conduct

 

Efforts at expanding the knowledge among employees of Nokia’s Code of Conduct continued in 2008. By the end of the year, approximately 86% of Nokia employees had completed the Nokia Code of Conduct training provided by the company. Upon the completion of our acquisition of NAVTEQ, we have also communicated our Code of Conduct to all NAVTEQ employees to make them aware of our values, ethics and responsibilities both as a business and as individual employees. Information on the Nokia Code of Conduct is available in 34 languages, and a web training tool and online test for employees are used to ensure they understand the issues covered in the Nokia Code of Conduct. Since the beginning of 2009, Nokia has had an Ethics Office, whose role is to support all employees in matters relating to the Code of Conduct.

 

On January 1, 2009, Nokia Siemens Networks published a revised Code of Conduct which is identical with that of Nokia. See Item 4B. “Business Overview—Nokia Siemens Networks—Compliance Program.”

 

Labor Conditions at Manufacturing Facilities

 

At December 31, 2008, we had 25 576 employees working directly in production, including manufacturing, packaging and shipping, at our ten mobile device manufacturing facilities. During 2008, the injury and illness rate amongst all our employees at our production facilities was 0.6.

 

In 2008, all nine of our main device manufacturing facilities were assessed against our assessment framework which is based on International Labour Organization conventions and the human rights declarations of the United Nations. The assessments were conducted by a professional external assessment company, STR-CSCC. Results showed these factories have successfully implemented the framework into employment processes, although some areas for improvement related to overtime control and occupational safety, mainly related to fire safety, were detected. All findings have an action plan in place and those facilities with an action plan will receive a reassessment during first half 2009 to ensure full compliance with the framework.

 

To support the implementation of the framework all manufacturing facility employees undertake training on the principles of the framework as part of their induction.

 

At December 31, 2008, Nokia Siemens Networks had 2 012 employees working directly in production—including manufacturing, packaging and shipping—at its production facilities. During 2008, Nokia Siemens Networks started to develop a framework for managing labor conditions. The first step was to define a standard, which is based on International Labour Organization conventions

and standardized Industry Code of Conduct, benchmarked against international labor laws and standards. This standard will be integrated into Nokia Siemens Networks global employment policies and guidelines, providing information and guidance. Using the standard as performance indicators, Nokia Siemens Networks is also building an effective management system to monitor and assess labor conditions, starting first with manufacturing operations.

 

Promoting Diversity in the Workplace

 

Nokia and Nokia Siemens Networks are committed to both promoting diversity and inclusion in the workplace and providing rewarding career development opportunities for all employees. In 2008, on average, 13.7% of senior management positions within Nokia were held by women, while 47.4% of senior management positions were held by people of non-Finnish nationality. At December 31, 2008, 22.7% of senior management positions within Nokia Siemens Networks were held by women. Senior management positions are defined differently in Nokia and Nokia Siemens Networks, and accordingly their related data is not directly comparable.

 

Voluntary Attrition at Nokia

 

During 2008, the rate of voluntary attrition was 9.3% at Nokia and 6.2% at Nokia Siemens Networks.

 

Suppliers—Corporate Responsibility

 

Nokia

 

During 2008, we continued to promote environmental and social responsibility in the supply chain. From the environmental perspective, we increased the visibility of suppliers’ environmental performance and target setting, focusing on four key areas: energy consumption, carbon dioxide (CO₂) emissions, water consumption and waste generation. Of our suppliers that together account for 69% of our overall hardware expenditure, 82% have reduction targets for energy, CO₂, water and waste in place and monitored. This monitoring is continuing in 2009 as part of our ongoing cooperation with suppliers.

 

We also monitored our suppliers’ site certification to Environmental Management System ISO14001. At December 31, 2008, 91% of our direct suppliers’ sites serving Nokia were ISO14001 certified. These certified suppliers account for at least 98% of our hardware purchasing expenditure.

 

Regarding EU REACH, or the European Union Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals, we have been actively surveying and co-operating with all our direct suppliers to generate awareness and ensure that necessary actions are in place.

 

From a social and environmental perspective we have continued to promote compliance against our requirements. We conducted 62 Nokia Supplier Requirements assessments and eight in-depth labor, health and safety and environmental assessments in 2008. Five of the in-depth assessments were conducted by internal Nokia assessors and three by external third-party assessors, as part of the Global eSustainability Initiative (GeSI) and Electronic Industry Citizenship Coalition (EICC) industry joint audit pilot.

 

Nokia conducts an annual Supplier Satisfaction Survey. In 2008, the overall satisfaction survey result was 78%, on a scale where 0% represents an unacceptable level and 100% represents an excellent level. Overall satisfaction reflects how Nokia performs on areas such as planning, relationship management and whether other business expectations force suppliers to compromise on their environmental and ethical level of compliance. The overall satisfaction level of suppliers to Nokia’s Corporate Responsibility was 90%.

 

In addition to our own work we have continued to participate at an industry level through the GeSI and World Resources Institute’s Greenhouse Gas (GHG) Protocol, and we actively participate in workgroups focusing on learning and capability building, extractives and joint industry audits.

Nokia Siemens Networks

 

All Nokia Siemens Networks suppliers must meet Nokia Siemens Networks’ global supplier requirements, which set standards for the management of ethical, environmental and social issues. This commitment is part of the contractual agreements with the suppliers.

 

To monitor our suppliers, Nokia Siemens Networks conducts regular audits to identify risks, monitor compliance and raise awareness of its requirements, and shares best practice on CR management. In 2008, Nokia Siemens Networks carried out 103 system audits to assess compliance with its supplier requirements. Nokia Siemens Networks also conducted in-depth labor conditions audits of seven suppliers in China, India and the UK.

 

The annual Nokia Siemens Networks supplier satisfaction survey was conducted with 290 key suppliers. This survey showed ‘business ethics and environment’ as the area on which Nokia Siemens Networks scored best, obtaining an overall score of 8.3 (scale 1-10). Based on the feedback of this survey, Nokia Siemens Networks considers that the basic requirements are understood well by the majority of its suppliers, and that suppliers find the requirements to be strict.

 

In early 2008, Nokia Siemens Networks also conducted a survey on the compliance to its requirement on Environmental Management System (EMS) among its direct suppliers. The survey showed that 91% of suppliers’ sites had a documented EMS in place, and the majority of these were also certified.

 

Nokia Siemens Networks also continues to work in collaboration with others in our industry to improve standards in the ICT supply chain through groups such as the GeSI.

 

Society—Corporate Responsibility

 

Nokia

 

In 2008, Nokia continued to develop mobile data-gathering technology, aimed at helping organizations to collect field data without the use of paper forms. Intended primarily to assist non-profit organizations and government departments, this approach increases the speed of response time, increases efficiency and can reduce costs. In September 2008, the Nokia Data Gathering solution was launched in conjunction with its adoption by the Amazonas State Health Department in Brazil. In that case, the software is being used to monitor outbreaks of disease and the effectiveness of prevention programs in the city of Manaus.

 

During 2008, we continued to support a variety of youth development initiatives around the world, with activities underway in 57 countries. These projects are tailored to the needs of local communities and address issues such as education, employability and health, and encourage young people to contribute to their local communities. Nokia employees continued to give their time to community projects through the Nokia Helping Hands employee volunteering program. In 2008, more than 5 400 employees in 25 countries volunteered more than 34 000 hours of service.

 

In March 2008, the success of the Bridgeit youth education project in the Philippines was reflected in its renewal and expansion. Originally launched in 2003, Bridgeit uses mobile networks to bring interactive multimedia learning materials to schools that lack fixed internet connections or ready access to the latest educational materials. Through this partnership with International Youth Foundation, Pearson and the United Nations Development Programme, Nokia estimates that approximately one million elementary school children have benefited from the program to date.

 

During the year, Nokia continued to provide assistance to people affected by natural disasters. This assistance included the donation of funds and mobile phones to assist relief efforts following an earthquake in the Sichuan province of China and the donation of funds to assist relief efforts in the wake of Cyclone Nargis in Myanmar. Our support for cyclone victims in Myanmar has included a substantial sum raised through a UNICEF greetings card campaign. We have also committed to support the long-term reconstruction of the affected areas in both Myanmar and Sichuan province.

Additionally, in 2008 we donated funds to assist relief efforts following floods in Ghana and drought in Ethiopia; we donated funds and mobile phones to assist relief efforts following floods in Itajai Valley in Brazil; and we donated funds to support earthquake recovery programs in Chile and Pakistan.

 

Nokia Siemens Networks

 

During 2008, Nokia Siemens Networks provided assistance to people affected by natural disasters, actively participating in the relief efforts and restoration of communications systems in the wake of the earthquake in the province of Sichuan in China, and donating funds to international relief organizations.

 

In 2008, Nokia Siemens Networks launched several educational initiatives for underprivileged children in Ethiopia, Afghanistan, South Africa, China and India as well as initiatives to promote telecommunications skills and the role of women in technology in Indonesia and India. In Germany, Nokia Siemens Networks worked with a special needs center to build a communications network to help promote communication amongst its residents.

 

Nokia Siemens Network continues developing solutions supporting sustainable development in emerging markets. For example, during 2008 the Nokia Siemens Networks Village Connection was rolled out in India, with trials in Africa, the Asia-Pacific region and Latin America. By the end of the year, some 50 villages were covered by this innovative, cost-efficient solution that enables operators to extend their reach to remote villages and bypass the technology that typically would be required. In 2008, Nokia Siemens Networks also launched Internet Kiosk, an extension to the Village Connection program that lowers Internet costs by sharing access.

 

In 2008, Nokia Siemens Networks continued its collaboration with London Business School and University of Calgary. The ‘Connectivity Scorecard’ assesses performance against approximately 30 indicators of connectivity—including broadband, fixed-line, mobile and computing technologies—that contribute to a country’s social and economic prosperity. The study carried out across 25 countries analyzes not only a nation’s ICT infrastructure but how well it is being used, and ranks each country’s performance on a Connectivity Scorecard.

 

Environment—Corporate Responsibility

 

Nokia

 

In 2008, we continued to look for possibilities to reduce the environmental impact of our devices and operations at each stage of the product life cycle. Focus areas include materials used, energy efficiency, the manufacturing process and recycling. We also introduced several new mobile services advocating sustainable lifestyles.

 

Recycling Nokia Devices

 

Between 65% and 80% of a Nokia mobile device can be recycled. We participate in collective recycling schemes with other equipment manufacturers in Europe and Australia; have our own collection points for recycling used mobile devices and accessories in approximately 85 countries; and engage in local recycling awareness drives with retailers, operators, other manufacturers and authorities around the world. These drives aim at increasing consumer awareness of recycling and their responsibility for bringing back their used devices for responsible recycling. Additionally, we work with qualified recyclers around the world to ensure proper end-of-life treatment for obsolete devices.

 

During 2008, Nokia executed voluntary local recycling drivers to raise awareness in 30 countries. One of our most successful voluntary co-operative recycling initiatives is the Green Box campaign in China, which was initiated with China Mobile and Motorola in 2006. During 2008, collection volumes from the Green Box campaign exceeded 42 tons of waste, which equals to approximately 470 000 devices.

In 2008, Nokia continued to participate in financing the collection and treatment of electronic waste in different EU countries in accordance with requirements as set by National Implementation of the European Union WEEE directive, or directive on Waste Electrical and Electronic Equipment. There are now national collection networks in operation to collect and treat all electronic waste from households. During 2008, the EU Directive 2006/66/EC on Batteries initiated national set-up of similar collection networks for portable batteries. In addition, Nokia has during 2008 increased communication on recycling on local country level with the introduction of localized recycling information on Nokia Internet pages.

 

Energy Saving in Nokia Devices

 

Over the last decade, we have reduced the average no-load energy consumption of our chargers by over 80%, and our best-in-class chargers by over 95%. We are making good progress in reaching the target of reducing no-load power used by our chargers by 50% from the 2006 level by the end of 2010.

 

Nokia was the first mobile manufacturer to put alerts into devices encouraging people to unplug their chargers, and we are rolling these alerts out across our device range. Based on a voluntary agreement, namely EU IPP, or the EU pilot project on Integrated Product Policy, Nokia together with other manufacturers created and took into use a Mobile Device Charger Energy rating. The 0-5 star rating is based on the charger’s no-load power consumption and is shown as a specific label that raises awareness and encourages the use of more energy-efficient chargers. All new Nokia chargers are specified to meet the criteria of voluntary agreements such as the EU Code of Conduct and US Environmental Protection Agency’s Energy Star and the highest four and five star criteria of EU IPP.

 

Materials in Nokia Devices and Packaging

 

All Nokia mobile devices worldwide are fully compliant with EU RoHS, or the EU directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment. We have also phased out PVC from all Nokia’s mobile devices and enhancements. We are currently phasing out the use of brominated and chlorinated flame retardants and Antimony Trioxide. The first device leading this phase-out, the Nokia 7100 Supernova, was launched in November 2008.

 

In early 2008, we started shipping Nokia 3110 Evolve, the first mobile device whose bio-covers use 50% renewable materials, thus reducing the amount of fossil fuels used to manufacture it. Nokia’s high efficiency charger AC-8 was launched with the Nokia 3110 Evolve, and is now shipping in volumes with many of our devices. The packaging for the Nokia 3110 Evolve contained 60% recycled materials, doubling the amount of recycled content typically used. Furthermore, due to the smaller size of the overall sales package, substantially less cardboard is used.

 

We continue to improve our packaging solutions. The use of renewable, paper-based materials has been increased to over 95% of total packaging materials. From August 2008, the sales packages of all new devices have been smaller than their earlier equivalents. From February 2006 to the end of 2008 we reduced the weight of packaging materials and user guides of our most affordable devices by over 60%, which amounts to some 100 000 tons of saved paper. Smaller and lighter packaging has also reduced the need for transportation. The improvements in our packaging solutions have also translated into significant monetary savings.

 

Promoting Sustainability through Nokia Services and Software

 

Eco services have been developed to help people to make sustainable choices and to consider environment in everyday life. A variety of eco services are freely downloadable in Nokia devices.

 

In December 2008, we introduced the beta-version of Green Explorer, a free service designed to promote sustainable travel. The service is a combination of travel guide information and tips about sustainable travel shared by the users themselves.

We also launched Eco Catalogue, later known as Eco zone as part of the Nokia Download! offering. This service can already be used with 200 million Nokia devices. The Nokia Eco zone is a mobile destination that enables owners of Nokia devices to view and download a range of eco content varying from wallpapers and applications to links. During 2008, we also introduced we:offset, the world’s first CO₂ emission offsetting tool for mobile devices.

 

Nokia Facilities: Energy, Emissions and Environmental Certifications

 

Nokia facilities consumed in 2008 69 GWh of direct and 592 GWh of indirect energy. This energy consumption caused 14 700 tons of direct and 218 000 tons of indirect greenhouse gas (CO₂e) emissions. Direct energy means usage of gas and oil and indirect energy usage of electricity, district heating and district cooling in Nokia facilities. In addition to CO₂e emissions caused by energy usage, direct greenhouse gas emissions include greenhouse gas warming potential caused by HFC-refrigerants. Without Nokia’s purchase of certified green energy, the above mentioned indirect emissions would have been greater by 46 700 tons.

 

Nokia has the corporate level ISO 14001 certificate in place for all manufacturing sites. Nokia Devices & Services supply chain-related environmental issues are discussed in the ’Suppliers’ section above.

 

Nokia Siemens Networks

 

Nokia Siemens Networks environmental strategy is to achieve a net positive impact on environment. It intends to achieve this through:

 

 

Nokia Siemens Networks has set concrete and ambitious targets for improving the environmental performance of its products and its facilities. In June 2008, Nokia Siemens Networks joined the WWF Climate Savers program and committed to improve the energy efficiency of its base station products so that as a result their total annual CO₂ footprint is targeted to be decreased by 28% by 2012, compared to 2007 best product performance, and to reduce energy consumption of its buildings by 6% by 2012. The emissions avoided by these actions would amount to approximately 2 million tons of CO₂ annually.

 

Nokia Siemens Networks supports the move by the World Health Organization to harmonize global regulations on electromagnetic fields based on the widely recognized guidelines issued by the International Commission on Non-Ionizing Radiation Protection (ICNIRP). Nokia Siemens Networks engages with its customers, including mobile network operators, to make them aware of electromagnetic field issues and provides detailed instructions to ensure they operate equipment appropriately to keep local exposure within safe limits. This includes offering support and training where necessary for customers who need support in this area, particularly in emerging markets. Furthermore, an important part of Nokia Siemens Networks’ responsibility in this area is to engage openly in the global public debate and monitor the latest scientific studies on radio waves and health. Nokia Siemens Networks’ electromagnetic field specialists are members of scientific organizations including the Bioelectromagnetics Society and the European Bioelectromagnetics Association, and participate in relevant scientific events.

 

Nokia Siemens Networks announced in 2008 that renewable energy will be the first choice for installed remote base station sites by 2011. In 2008, Nokia Siemens Networks participated in SMART 2020, the world’s first comprehensive global study of the ICT sector’s growing potential to reduce the CO₂ emissions of many other industries.

All of Nokia Siemens Networks production sites are included in the scope of the ISO 14001 certification.

 

The following is a list of Nokia’s significant subsidiaries as of December 31, 2008. See, also, Item 4A.“History and Development of the Company—Organizational Structure.”

 

 

 

 

At December 31, 2008, Nokia operated ten manufacturing facilities in nine countries for the production of mobile devices, and Nokia Siemens Networks had nine major production facilities in four countries. We continually assess the efficiency and competitiveness of our manufacturing facilities. Nokia’s new mobile device manufacturing facility in Romania started production in February 2008. We closed our manufacturing facility in Bochum, Germany in June 2008 and moved its production to our other sites in Europe. In December 2008, as part of its merger-related cost synergy process, Nokia Siemens Networks completed the sale of its manufacturing facility in Durach, Germany in a management buy-out, led by the existing leadership of the facility. The deal included a multi-year agreement for the site to continue production for Nokia Siemens Networks. In November 2008, Nokia Siemens Networks announced that it planned to close its Espoo manufacturing facility, and following negotiations with employee representatives the plan is to close the facility during 2009 and ramp-up production in other Nokia Siemens Networks manufacturing facilities.

 

We consider the production capacity of our manufacturing facilities to be sufficient to meet the requirements of our devices and networks infrastructure business. The extent of utilization of our manufacturing facilities varies from plant to plant and from time to time during the year. None of these facilities is subject to a material encumbrance. See, also, Item 4B. “Business Overview—

Devices & Services—Markets—Demand Supply Network Management” and “—Nokia Siemens Networks—Production.”

 

The following is a list of the location, use and capacity of manufacturing facilities for Nokia devices and Nokia Siemens Networks infrastructure equipment.

 

 

 

 

Not applicable.

 

This section begins with an overview of the principal factors and trends affecting our results of operations. The overview is followed by a discussion of our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments reflected in our reported financial results. We then present a detailed analysis of our results of operations for the last three fiscal years.

 

As of January 1, 2008, our three mobile device business groups, Mobile Phones, Multimedia and Enterprise Solutions, and the supporting horizontal groups were replaced by an integrated business segment, Devices & Services. Results for Nokia and its reportable segments for the years ended December 31, 2007 and 2006 have been regrouped for comparability purposes to the results for the year ended December 31, 2008 according to the current reportable segments. For a description of our organizational structure see Item 4A.—“History and Development of the Company—Organizational

Structure.” Business segment data in the following discussion is prior to inter-segment eliminations. See Note 2 to our consolidated financial statements included in Item 18 of this annual report.

 

On July 10, 2008, Nokia completed the acquisition of NAVTEQ Corporation. NAVTEQ is a separate reportable segment of Nokia starting from the third quarter 2008. Accordingly, the results of NAVTEQ are available only for the period from July 10, 2008 to December 31, 2008.

 

As of April 1, 2007, Nokia results include those of Nokia Siemens Networks on a fully consolidated basis. Nokia Siemens Networks, a company jointly owned by Nokia and Siemens, is comprised of the former Nokia Networks and Siemens’ carrier-related operations for fixed and mobile networks. Accordingly, the results of Nokia Group and Nokia Siemens Networks for the years ended December 31, 2007 and 2008 are not directly comparable between each other or to our results for the prior years. Our results from January 1 to March 31, 2007 and for preceding years include our former Networks business group only.

 

The following discussion should be read in conjunction with our consolidated financial statements included in Item 18 of this annual report Item 3D. “Risk Factors” and “Forward-Looking Statements.” Our financial statements have been prepared in accordance with IFRS.

 

Principal Factors Affecting our Results of Operations

 

Devices & Services

 

The principal source of net sales in our Devices & Services business is the sale of mobile devices. Our customers include mobile network operators, distributors, independent retailers, corporate customers and consumers. Our product and services portfolio covers all major consumer segments and price points from entry-level to mid-range and high-end devices as well as services. Our strategy is to have a focused, optimally-sized offering of commercially appealing mobile devices and services that differentiates us from our competition. Device hardware specifications, attractive design and materials, value-adding functionalities and region-specific local requirements and preferences are important competitive factors in achieving that objective.

 

Functionalities that improve the mobile device user experience are evolving. We are increasing our offering of consumer Internet services, specifically in music, maps (including navigation and points of interest), media (including the Ovi Store for applications), messaging and games, and working to deliver those services in an easily accessible manner to consumers. Net sales from such services are derived from consumer subscriptions paid in advance, consumer transactions paid when the service is delivered, and advertising or sponsoring fees collected from our business partners. At this early stage of development, we are currently focused on getting those services to consumers quickly through “combos” where certain mobile devices are offered in combination with one or more services. In the future, we believe that subscription renewals, transaction levels, and advertising or sponsoring revenues will increase as a proportion of overall services net sales.

 

Our competitive advantages include scale, brand, manufacturing and logistics, distribution and intellectual property.

 

 

 

Devices & Services net sales and profitability are driven by factors such as the global mobile device market volumes, our market share, the average selling price (ASP) of our devices and our cost level, supported by our competitive advantages.

 

The global mobile device market volume is driven by (i) the degree to which existing mobile subscribers replace and upgrade their mobile devices with new devices, or the extent to which they own more than one mobile device; and (ii) the number of new subscribers (net additions). The replacement market is driven by the introduction of devices that are attractive to end-users in terms of design, features, aesthetics, and new value-added functionality. We expect the replacement market will be driven by purchases of devices with color screens, cameras, music players, and general design and aesthetic improvements. In addition, we believe the combination of consumer Internet services, including maps, music, media, messaging and games, and the user interface, in terms of ease of discovery and use of such services and other functions, in mobile devices will increase in importance and drive volumes. Therefore, we are investing to create a leadership position in those five consumer Internet service areas and to make the user-experience more personal and instinctive. New subscriber volumes, particularly in emerging markets, are impacted primarily by lower cost of ownership, driven by lower priced tariffs and lower cost mobile devices. The four billion mobile subscriptions mark was reached in the beginning of 2009. However, in 2009, due to the difficult global economic conditions, we believe that compared with 2008 net subscriber additions may decline, the replacement cycle may lengthen and more consumers may replace their handsets with less expensive mobile devices.

 

Industry volume is also influenced by, among other factors, global and local economic factors, regional political environment, consumer spending patterns, competitive pressures, regulatory environments, the timing and success of product and service introductions by various market participants, including mobile network operators, the commercial acceptance of new mobile devices, technologies and services, the convergence of technologies in mobile devices and operators’ and distributors’ financial situations. Industry volumes are also affected by the level of mobile device subsidies that mobile network operators are willing to offer to end-users in the markets where subsidies are prevalent. While the mobile network operators have started to reduce their subsidies as a result of the current difficult economic conditions, we believe we may be less exposed to decreases in such subsidies than many of our competitors due to our lower market share in many of the highly-subsidized geographical markets, such as the US, compared to the less subsidized markets, such as the emerging markets. Recently, we have seen network operators shifting the focus of their subsidy programs to emphasize higher-end products that are sold in conjunction with contracts that include both voice and data usage. We believe that executing on our Internet services strategy is important in order for us to have a broad portfolio of devices that the operators will find financially attractive to subsidize.

 

The global mobile device market deteriorated significantly in the second half of 2008, with a pronounced weakening in the fourth quarter. We expect that the mobile device market will continue to be negatively impacted in 2009 by the slowdown in consumer spending. While noting the

extremely limited visibility, we expect industry mobile device volumes in 2009 to decline by approximately 10% from the approximately 1.2 billion units we estimate for 2008.

 

Our mobile device market share is driven by our ability to have a competitive product portfolio with attractive aesthetics, design and combination of value-adding functionalities and services for all major consumer segments and price points. Market share is also impacted by our brand, manufacturing and logistics, distribution, competitive cost structure, pricing and how we differentiate our products from those of our competitors. We believe that product differentiation will be based increasingly on service innovations and how these services are integrated with devices to improve the user experience. Consequently, we are investing to extend our leadership position in mobile devices and integrated services. Our market share is also impacted by our regional and product mix. In 2008, for example, our global device market share benefited from our strong market share in India, Middle & East Africa, South East Asia-Pacific and the entry-level market. Our global device market share increased in 2008, and we are targeting again to increase our market share in 2009. We believe that our global share may benefit in 2009 from our continuously improving product portfolio and our competitive advantages, which may enable us to navigate through the current difficult global economic conditions in a relatively more stable manner than some of our competitors.

 

Our device ASPs are impacted by overall industry dynamics, in particular the increasing relative share of emerging markets where lower-priced products predominate, and competitive factors such as pricing activities. Our ASPs are also impacted by our own product mix, as well as the overall competitiveness of our product portfolio. We also respond in a tactical manner in certain product segments and regions to pricing activities by our competitors in order to maximize our earnings in a sustainable way. Also, global or local economic conditions may impact our device ASPs, in particular as some of our customers may trade down to lower-priced devices as a result of the current difficult global economic conditions.

 

Operational efficiency and cost control have been and are expected to continue to be important factors affecting our profitability and competitiveness. We continuously assess our cost structure and, in the current difficult global economic conditions, we are taking action to reduce our overall costs and prioritize our investments. Our objective in the current environment is to maintain our strong capital structure, focus on profitability and cash flow and invest appropriately to innovate and grow in key strategic areas.

 

Costs of sales of Devices & Services are comprised of the cost of components, manufacturing labor and overhead, royalties and license fees, the depreciation of product machinery, logistics costs, cost of excess and obsolete inventory, as well as warranty and other quality costs. The unprecedented currency volatility we have recently experienced is impacting our costs, since at the end of 2008 we sourced approximately 25% of our device components based in the Japanese yen, which has appreciated significantly relative to the US dollar and the euro during the fourth quarter of 2008. The positive financial impact of our Japanese yen hedges effective at the end of 2008 will end from mid-2009 onwards. We are taking action to reduce our devices sourcing costs in the Japanese yen, including price negotiations with our suppliers and shifting the sourcing of certain components to non-Japanese suppliers.

 

In addition, we are taking action to reduce operating expenses. At the beginning of 2009, our annual operating expense run rate in our Devices & Services business was approximately EUR 6.7 billion on a non-IFRS basis which excludes special items and purchase price accounting related items. We will continue to adjust our cost structure through 2009 and 2010, and we are targeting an annualized Devices & Services operating expense run rate of lower than EUR 6 billion, on a non-IFRS basis which excludes special items and purchase price accounting related items, by the end of 2010, with a majority of the targeted reduction in 2009. As a part of the measures needed to reach this target, in the research and development we plan to continue to sharpen our focus on portfolio pruning and prioritization of investment. We plan to invest in consumer Internet services in an increasingly focused way. In sales and marketing, we plan to reduce spending related to specific products, and we will endeavor to leverage theme-based marketing to a much greater extent. In general and

administrative, every shared supporting services unit has already identified and is acting on targeted expense reductions of at least 10% in the first half of 2009.

 

NAVTEQ

 

NAVTEQ’s objective is to be the leading provider of comprehensive digital map data and related location-based content and services, including traffic information, to corporate customers. NAVTEQ’s strategy is to enhance and expand its geographic database and related dynamic content and services, thereby enabling NAVTEQ to grow its presence in applications and services created by automotive manufacturers, navigation system and application vendors, Internet application providers and mobile device manufacturers. By acquiring NAVTEQ, Nokia aims to ensure the continued development of our context and geographical services through Nokia Maps as we move from simple navigation to a broader range of location-based services, such as pedestrian navigation and targeted advertising. At the same time, NAVTEQ continues to develop its expertise in the navigation industry, service its customer base and invest in the further development of its industry-leading map data, location-based content and technology platform.

 

A substantial majority of NAVTEQ’s net sales comes from the licensing of NAVTEQ’s digital map data and related location-based content and services for use in mobile devices, in-vehicle navigation systems, Internet applications, geographical information system applications and other location-based products and services. NAVTEQ’s success depends upon the development of a wide variety of products and services that use its data, the availability and functionality of such products and services and the rate at which consumers and businesses purchase these products and services. Unfavorable conditions in the automotive and consumer electronics industries have negatively impacted NAVTEQ’s net sales and profitability during the six months ended December 31, 2008. We expect this to be mitigated to some extent by the increasing adoption of location based services in the mobile handset industry. NAVTEQ net sales are also impacted by the highly competitive pricing environment. In response to the pricing pressure, NAVTEQ focuses on offering a digital map database with superior quality, detail and coverage; providing value-added services to its customers such as distribution services; and enhancing and extending its product offering by adding additional content to its map database.

 

In addition to the factors driving net sales discussed above, NAVTEQ’s profitability is also driven by NAVTEQ’s investments related to the development of its database and expansion of its sales and marketing efforts. Many of these costs are discretionary. NAVTEQ’s development costs are comprised primarily of the purchase and licensing of source maps, employee compensation and third-party fees related to the construction, maintenance and delivery of its database. NAVTEQ has responded to the current difficult economic conditions by focusing on controlling costs, including exiting certain non-core business activities related to printed maps, restrictions on recruitments and travelling, and prioritizing database development and maintenance costs based on customer requirements and return on investment.

 

Nokia Siemens Networks

 

Nokia Siemens Networks provides mobile and fixed network solutions and services to operators and service providers. Our strategy is focused on two key areas. First, Nokia Siemens Networks seeks to be the industry’s most competitive and efficient infrastructure and services vendor. Nokia Siemens Networks intends to do this by building efficient tools and processes and by maintaining a focus on profitability and cash flow. Secondly, by utilizing its scale, competences and global installed customer base Nokia Siemens Networks seeks to offer a portfolio of products and services to address two important areas for its customers: enriched customer experience and network efficiency. The first is focused on helping operators manage their customers’ experience by improving customer life-time value and helping to reduce customer turnover to competitors. The second area is focused on improving network efficiency for operators as traffic grows by helping them to reduce network investment and operating cost and thereby improve their profitability.

 

Nokia Siemens Networks’ performance in the infrastructure business is determined by its ability to

satisfy the competitive and complex requirements of the market and its current and potential customers. Nokia Siemens Networks will need to continue to leverage and, in some cases, improve its scale, technology and product portfolio to maintain or improve its position in the market.

 

Nokia Siemens Networks’ net sales depend on various developments in the mobile and fixed infrastructure market, such as network operator investments, the pricing environment, and product mix. In developed markets, operator investments are primarily driven by capacity upgrades—which are driven by greater usage of the networks—both for voice calls and increasingly for data usage. Also, in developed markets, the investments of the network operators are driven by evolution of network technologies and an increasing need for efficiency. In the emerging markets, the principal factors influencing the operator investments are the growth in network coverage and the growth in the number of subscribers. Nokia Siemens Networks’ net sales are also impacted by pricing developments. The products and solutions offered by Nokia Siemens Networks business are subject to price erosion over time, largely as a result of technology maturation and competitive forces in the market. Further, Nokia Siemens Networks’ net sales are affected by the product mix—the mix of hardware sales, software sales and services sales. Net sales are also impacted by regional mix—the balance between sales in developed and emerging markets.

 

We estimate that the mobile infrastructure, fixed infrastructure and related services market will decline 5% or more in euro terms in 2009, from 2008 levels. The decline is expected to result primarily from the overall slowdown in the investments of network operators and service providers in the current difficult global economic conditions. We target for Nokia Siemens Networks market share to remain constant in 2009, compared to 2008. Nokia Siemens Networks market share may be adversely impacted by its focus on profitability and cash flow and deal discipline. However, we believe this impact may be offset as its market share should benefit from a favorable technology mix in its products and services portfolio.

 

There are several factors that drive the profitability at Nokia Siemens Networks. First, there are the drivers of net sales discussed above. In addition, the scale, operational efficiency and cost control have been and will continue to be important factors affecting Nokia Siemens Networks’ profitability and competitiveness. Nokia Siemens Networks’ product costs are comprised of the cost of components, manufacturing, labor and overhead, royalties and license fees, the depreciation of product machinery, logistics costs as well as warranty and other quality costs. Nokia Siemens Networks’ profitability is also impacted by the pricing environment, product mix and regional mix.

 

The pricing environment in the markets where Nokia Siemens Networks operates continued to be intense in 2008, and we expect that these general market conditions will continue in 2009. Nokia Siemens Networks delivered on its commitment to achieve substantially all of the EUR 2 billion of targeted annual cost synergies by the end of 2008. In November 2008, Nokia Siemens Networks announced that it had completed the preliminary planning process to identify the proposed remaining headcount reductions necessary to reach its previously announced synergy-related headcount adjustment goal of 9 000 employees and began the process of sharing those plans with employees and their representatives. In order to maintain a competitive cost structure and to achieve further cost reductions, Nokia Siemens Networks will continue to focus on leveraging its cost advantages, which will include strict deal discipline, real estate and factory consolidation, supply chain optimization, global resource balancing and continued IT and process development.

 

Certain Other Factors

 

Exchange Rates

 

Our business and results of operations are from time to time affected by changes in exchange rates, particularly between the euro, our reporting currency, and other currencies such as the US dollar, the Japanese yen, the Chinese yuan and the UK pound sterling. See Item 3.A “Selected Financial Data—Exchange Rate Data.” Foreign currency denominated assets and liabilities, together with highly probable purchase and sale commitments, give rise to foreign exchange exposure.

The magnitude of foreign exchange exposures changes over time as a function of our presence in different markets and the prevalent currencies used for transactions in those markets. The majority of our non-euro based sales are denominated in the US dollar, but Nokia’s strong presence in emerging markets like China, India, Brazil and in Russia also gives rise to substantial foreign exchange exposure in the Chinese yuan, Indian rupee, Brazilian real and Russian ruble. The majority of our non-euro based purchases are denominated in US dollars and Japanese yen. In general, depreciation of another currency relative to the euro has an adverse effect on our sales and operating profit, while appreciation of another currency relative to the euro has a positive effect, with the exception of the Japanese yen, being the only significant foreign currency in which we have more purchases than sales.

 

To mitigate the impact of changes in exchange rates on net sales as well as average product cost, we hedge material transaction exposures on a gross basis. Nokia hedges significant forecasted cash flows typically with a 6 to 12 month hedging horizon. For the majority of these hedges hedge accounting is applied to reduce profit and loss volatility. Nokia also hedges significant balance sheet exposures. Our balance sheet is also affected by the translation into euro for financial reporting purposes of the shareholders’ equity of our foreign subsidiaries that are denominated in currencies other than the euro. In general, this translation increases our shareholders’ equity when the euro depreciates, and affects shareholders’ equity adversely when the euro appreciates against the relevant other currencies (year-end rate to previous year-end rate). To mitigate the impact to shareholders’ equity, Nokia hedges selected net investment exposures from time to time.

 

During 2008, the volatility of the currency market was significantly higher than in 2007. At the same time, the currency market liquidity was significantly lower in 2008, especially towards the end of the year. This significantly increased our hedging cost and restricted our flexibility in hedging, particularly with respect to certain emerging market currencies, in 2008.

 

In 2008, until the end of July the US dollar depreciated against the euro by 6%. Since then, the US dollar appreciated strongly and ended 4% higher at the end of 2008 than at the end of 2007. The stronger US dollar towards the end of 2008 had a positive impact on our net sales expressed in euros because approximately 50% of our net sales are generated in US dollars and currencies closely following the US dollar. However, the appreciation of the US dollar also contributed to a higher average product cost as approximately 50% of the components we use are sourced in the US dollar. In total, the movements of the US dollar against the euro had a slightly positive impact on our operating profit in 2008.

 

During 2008, the Japanese yen appreciated by 30% against the euro. As at the end of 2008 approximately 25% of the devices components we use were sourced in the Japanese yen, the appreciation of the Japanese yen had a negative impact on our operating profit in 2008, which was primarily offset by our currency hedges. The positive financial impact of our Japanese yen hedges effective at the end of 2008 will end from the mid-2009 onwards. We are taking action to reduce our devices sourcing costs in the Japanese yen, including price negotiations with our suppliers and shifting the sourcing of certain components to non-Japanese suppliers.

 

During 2008, the volatility of emerging market currencies was high especially towards the end of the year when the Chinese yuan, Brazilian real, Indian rupee and Russian ruble depreciated 12%, 20%, 15% and 14%, respectively, against the euro. In general, the depreciation of an emerging market currency has a negative impact on our operating profit due to reduced revenue in euro terms and/or the reduced purchasing power of customers in the emerging market. The appreciation of an emerging market currency generally has a positive impact on our operating profit.

 

Significant changes in exchange rates may also impact our competitive position and related price pressures through their impact on our competitors. In 2008, the most notable of such impacts was the depreciation of the Korean won by 29% against the US dollar and 27% against the euro which benefitted our Korea-based competitors.

 

For a discussion on the instruments used by Nokia in connection with our hedging activities, see

Note 35 to our consolidated financial statements included in Item 18 of this annual report. See also Item 11. “Quantitative and Qualitative Disclosures About Market Risk” and Item 3D. “Risk Factors.”

 

Seasonality

 

Our mobile device sales are somewhat affected by seasonality. Historically, the first quarter of the year was the lowest quarter of the year. The second quarter was up from the first quarter and the third was also up from the second quarter. The fourth quarter was the strongest quarter, mainly due to the effect of fourth quarter holiday sales. Despite the pronounced weakening of the global mobile device market in the fourth quarter of 2008, we still continue to see the fourth quarter as our strongest quarter in volumes. However, over time we have seen a trend towards less seasonality. The difference between the sequential holiday seasonal increase in the Western hemisphere in fourth quarter and subsequent decrease in first quarter sequential volumes has moderated. The moderation in seasonality has been caused by shifts in the regional make-up of the overall market. Specifically, there has been a larger mix of industry volumes coming from markets where the fourth quarter holiday seasonality is much less prevalent.

 

Currently, services net sales are primarily derived from “combos” where certain devices are offered in combination with one or more services. Accordingly, our services net sales are affected by the same seasonality as mobile device sales.

 

NAVTEQ’s sales to the automotive industry are not significantly impacted by seasonality. However, NAVTEQ’s sales to navigation device and mobile handset manufacturers typically see strong fourth quarter seasonality due to holiday sales. As the relative share of licensing of NAVTEQ’s digital map data and related location-based content and services for use in mobile devices compared to in-vehicle navigation systems has increased during the last few years, NAVTEQ’s sales have been increasingly affected by the same seasonality as mobile device sales.

 

Our network infrastructure business has also experienced some seasonality during the last few years. Its sales have been higher in the last quarter of the year compared with the first quarter of the following year due to network operators’ planning, budgeting and spending cycle.

 

Accounting Developments

 

The International Accounting Standards Board, or IASB, has and will continue to critically examine current International Financial Reporting Standards, or IFRS, with a view towards increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules continued in 2008 resulting in amendments to the existing rules effective from January 1, 2009 and additional amendments effective the following year. These are discussed in more detail under “New accounting pronouncements under IFRS” in Note 1 to our consolidated financial statements included in Item 18 of this annual report. There were no IFRS accounting developments adopted in 2008 that have a material impact on our results of operations or financial position.

 

Subsequent Events

 

In February 2009, we issued EUR 1 750 million of Eurobonds with maturities of five and ten years under our EUR 3 000 million Euro Medium Term Note, or EMTN program, to repay part of our existing short-term borrowings. We voluntarily cancelled our USD 2 000 million committed credit facility maturing in 2009 due to this repayment. In February, we also signed and fully drew down a EUR 500 million loan from the European Investment Bank. The proceeds of the loan will be used to finance part of our smartphone research and development expenses.

 

Critical Accounting Policies

 

Our accounting policies affecting our financial condition and results of operations are more fully described in Note 1 to our consolidated financial statements included in Item 18 of this annual

report. Certain of our accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following are the critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements. We have discussed the application of these critical accounting estimates with our Board of Directors and Audit Committee.

 

Revenue Recognition

 

Sales from the majority of the Group are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group, and the costs incurred or to be incurred in respect of the transaction can be measured reliably. The remainder of revenue is recorded under the percentage of completion method.

 

Devices & Services and certain NAVTEQ and Nokia Siemens Networks revenues are generally recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. This requires us to assess at the point of delivery whether these criteria have been met. When management determines that such criteria have been met, revenue is recognized. We record estimated reductions to revenue for special pricing agreements, price protection and other volume based discounts at the time of sale, mainly in the mobile device business. Sales adjustments for volume based discount programs are estimated based largely on historical activity under similar programs. Price protection adjustments are based on estimates of future price reductions and certain agreed customer inventories at the date of the price adjustment. An immaterial part of the revenue from products sold through distribution channels is recognized when the reseller or distributor sells the product to the end-user. Devices & Services and certain Nokia Siemens Networks service revenue is generally recognized on a straight line basis over the service period unless there is evidence that some other method better represents the stage of completion. Devices & Services and NAVTEQ license fees from usage are recognized in the period in which the customer reports them to the Group.

 

Devices & Services, NAVTEQ and Nokia Siemens Networks may enter into multiple component transactions consisting of any combination of hardware, services and software. The commercial effect of each separately identifiable element of the transaction is evaluated in order to reflect the substance of the transaction. The consideration from these transactions is allocated to each separately identifiable component based on the relative fair value of each component. The consideration allocated to each component is recognized as revenue when the revenue recognition criteria for that element have been met. If the Group is unable to reliably determine the fair value attributable to the separately identifiable components, the Group defers revenue until all components are delivered and services have been performed. The Group determines the fair value of each component by taking into consideration factors such as the price when the component is sold separately by the Group, the price when a similar component is sold separately by the Group or a third party and cost plus a reasonable margin.

 

Nokia Siemens Networks revenue and cost of sales from contracts involving solutions achieved through modification of complex telecommunications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. This occurs when total

contract revenue and the cost to complete the contract can be estimated reliably, it is probable that economic benefits associated with the contract will flow to the Group, and the stage of contract completion can be measured. When we are not able to meet those conditions, the policy is to recognize revenues only equal to costs incurred to date, to the extent that such costs are expected to be recovered. Completion is measured by reference to costs incurred to date as a percentage of estimated total project costs using the cost-to-cost method.

 

The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as the dependable measurement of the progress made towards completing the particular project. Recognized revenues and profit are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. The cumulative impact of a revision in estimates is recorded in the period such revisions become likely and estimable. Losses on projects in progress are recognized in the period they become likely and estimable.

 

Nokia Siemens Networks’ current sales and profit estimates for projects may change due to the early stage of a long-term project, new technology, changes in the project scope, changes in costs, changes in timing, changes in customers’ plans, realization of penalties, and other corresponding factors.

 

Customer Financing

 

We have provided a limited amount of customer financing and agreed extended payment terms with selected customers. In establishing credit arrangements, management must assess the creditworthiness of the customer and the timing of cash flows expected to be received under the arrangement. However, should the actual financial position of our customers or general economic conditions differ from our assumptions, we may be required to re-assess the ultimate collectability of such financings and trade credits, which could result in a write-off of these balances in future periods and thus negatively impact our profits in future periods. Our assessment of the net recoverable value considers the collateral and security arrangements of the receivable as well as the likelihood and timing of estimated collections. The Group endeavors to mitigate this risk through the transfer of its rights to the cash collected from these arrangements to third-party financial institutions on a non-recourse basis in exchange for an upfront cash payment. See also Note 35(b) to our consolidated financial statements included in Item 18 of this annual report for a further discussion of long-term loans to customers and other parties.

 

Allowances for Doubtful Accounts

 

We maintain allowances for doubtful accounts for estimated losses resulting from the subsequent inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required in future periods. Management specifically analyzes accounts receivables and historical bad debt, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

 

Inventory-related Allowances

 

We periodically review our inventory for excess, obsolescence and declines in market value below cost and record an allowance against the inventory balance for any such declines. These reviews require management to estimate future demand for our products. Possible changes in these estimates could result in revisions to the valuation of inventory in future periods.

 

Warranty Provisions

 

We provide for the estimated cost of product warranties at the time revenue is recognized. Our products are covered by product warranty plans of varying periods, depending on local practices and regulations. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are

affected by actual product failure rates (field failure rates) and by material usage and service delivery costs incurred in correcting a product failure. Our warranty provision is established based upon our best estimates of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. As we continuously introduce new products which incorporate complex technology, and as local laws, regulations and practices may change, it will be increasingly difficult to anticipate our failure rates, the length of warranty periods and repair costs. While we believe that our warranty provisions are adequate and that the judgments applied are appropriate, the ultimate cost of product warranty could differ materially from our estimates. When the actual cost of quality of our products is lower than we originally anticipated, we release an appropriate proportion of the provision, and if the cost of quality is higher than anticipated, we increase the provision.

 

Provision for Intellectual Property Rights, or IPR, Infringements

 

We provide for the estimated future settlements related to asserted and unasserted past alleged IPR infringements based on the probable outcome of each potential infringement.

 

Our products and solutions include increasingly complex technologies involving numerous patented and other proprietary technologies. Although we proactively try to ensure that we are aware of any patents and other intellectual property rights related to our products and solutions under development and thereby avoid inadvertent infringement of proprietary technologies, the nature of our business is such that patent and other intellectual property right infringements may and do occur. Through contact with parties claiming infringement of their patented or otherwise exclusive technology, or through our own monitoring of developments in patent and other intellectual property right cases involving our competitors, we identify potential IPR infringements.

 

We estimate the outcome of all potential IPR infringements made known to us through assertion by third parties, or through our own monitoring of patent- and other IPR-related cases in the relevant legal systems. To the extent that we determine that an identified potential infringement will result in a probable outflow of resources, we record a liability based on our best estimate of the expenditure required to settle infringement proceedings.

 

Our experience with claims of IPR infringement is that there is typically a discussion period with the accusing party, which can last from several months to years. In cases where a settlement is not reached, the discovery and ensuing legal process typically lasts a minimum of one year. For this reason, IPR infringement claims can last for varying periods of time, resulting in irregular movements in the IPR infringement provision. In addition, the ultimate outcome or actual cost of settling an individual infringement may materially vary from our estimates.

 

Legal Contingencies

 

As discussed in Item 8A7. “Litigation” and in Note 29 to the consolidated financial statements included in Item 18 of this annual report, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against the Group. We record provisions for pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates.

 

Capitalized Development Costs

 

We capitalize certain development costs when it is probable that a development project will be a success and certain criteria, including commercial and technical feasibility, have been met. These costs are then amortized on a systematic basis over their expected useful lives, which due to the constant development of new technologies is between two to five years. During the development stage, management must estimate the commercial and technical feasibility of these projects as well as their expected useful lives. Should a product fail to substantiate its estimated feasibility or life cycle, we may be required to write off excess development costs in future periods.

Whenever there is an indicator that development costs capitalized for a specific project may be impaired, the recoverable amount of the asset is estimated. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is defined as the higher of an asset’s net selling price and value in use. Value in use is the present value of discounted estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. For projects still in development, these estimates include the future cash outflows that are expected to occur before the asset is ready for use. See Note 8 to our consolidated financial statements included in Item 18 of this annual report.

 

Impairment reviews are based upon our projections of anticipated discounted future cash flows. The most significant variables in determining cash flows are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. While we believe that our assumptions are appropriate, such amounts estimated could differ materially from what will actually occur in the future.

 

Business Combinations

 

We apply the purchase method of accounting to account for acquisitions of businesses. The cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, equity instruments issued, and costs directly attributable to the acquisition. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date. The excess of the cost of the acquisition over our interest in the fair value of the identifiable net assets acquired is recorded as goodwill.

 

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

 

Valuation of Long-lived and Intangible Assets and Goodwill

 

We assess the carrying value of identifiable intangible assets, long-lived assets and goodwill annually, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following:

 

 

When we determine that the carrying value of intangible assets, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on discounted projected cash flows.

 

This review is based upon our projections of anticipated discounted future cash flows. The most significant variables in determining cash flows are discount rates, terminal values, the number of

years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. While we believe that our assumptions are appropriate, such amounts estimated could differ materially from what will actually occur in the future. In assessing goodwill, these discounted cash flows are prepared at a cash generating unit level. Amounts estimated could differ materially from what will actually occur in the future.

 

Fair Value of Derivatives and Other Financial Instruments

 

The fair value of financial instruments that are not traded in an active market (for example, unlisted equities, currency options and embedded derivatives) are determined using valuation techniques. We use judgment to select an appropriate valuation methodology and underlying assumptions based principally on existing market conditions. If quoted market prices are not available for unlisted shares, fair value is estimated by using various factors, including, but not limited to: (1) the current market value of similar instruments, (2) prices established from a recent arm’s length financing transaction of the target companies, (3) analysis of market prospects and operating performance of the target companies taking into consideration of public market comparable companies in similar industry sectors. Changes in these assumptions may cause the Group to recognize impairments or losses in the future periods.

 

Income Taxes

 

The Group is subject to income taxes both in Finland and in numerous other jurisdictions. Significant judgment is required in determining the provision for income taxes and deferred tax assets and liabilities recognized in the consolidated financial statements. We recognize deferred tax assets to the extent that it is probable that sufficient taxable income will be available in the future against which the temporary differences and unused tax losses can be utilized. We have considered future taxable income and tax planning strategies in making this assessment. We recognize tax provisions based on estimates and assumptions when, despite our belief that tax return positions are supportable, it is more likely than not that certain positions will be challenged and may not be fully sustained upon review by tax authorities.

 

If the final outcome of these matters differs from the amounts initially recorded, differences may positively or negatively impact the income tax and deferred tax provisions in the period in which such determination is made.

 

Pensions

 

The determination of our pension benefit obligation and expense for defined benefit pension plans is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 5 to our consolidated financial statements included in Item 18 of this annual report and include, among others, the discount rate, expected long-term rate of return on plan assets and annual rate of increase in future compensation levels. A portion of our plan assets is invested in equity securities. The equity markets have experienced volatility, which has affected the value of our pension plan assets. This volatility may make it difficult to estimate the long-term rate of return on plan assets. Actual results that differ from our assumptions are accumulated and amortized over future periods and therefore generally affect our recognized expense and recorded obligation in such future periods. Our assumptions are based on actual historical experience and external data regarding compensation and discount rate trends. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligation and our future expense.

Share-based Compensation

 

We have various types of equity settled share-based compensation schemes for employees. Employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments as at the date of grant, excluding the impact of any non-market vesting conditions. Fair value of stock options is estimated by using the Black Scholes model on the date of grant based on certain assumptions. Those assumptions are described in Note 22 to our consolidated financial statements included in Item 18 of this annual report and include, among others, the dividend yield, expected volatility and expected life of stock options. The expected life of stock options is estimated by observing general option holder behavior and actual historical terms of Nokia stock option programs, whereas the assumption of the expected volatility has been set by reference to the implied volatility of stock options available on Nokia shares in the open market and in light of historical patterns of volatility. These variables make estimation of fair value of stock options difficult.

 

Non-market vesting conditions attached to the performance shares are included in assumptions about the number of shares that the employee will ultimately receive relating to projections of sales and earnings per share. On a regular basis, we review the assumptions made and revise the estimates of the number of performance shares that are expected to be settled, where necessary. At the date of grant, the number of performance shares granted that are expected to be settled is assumed to be two times the amount at threshold. Any subsequent revisions to the estimates of the number of performance shares expected to be settled may increase or decrease total compensation expense. Such increase or decrease adjusts the prior period compensation expense in the period of the review on a cumulative basis for unvested performance shares for which compensation expense has already been recognized in the profit and loss account, and in subsequent periods for unvested performance shares for which the expense has not yet been recognized in the profit and loss account. Significant differences in employee option activity, equity market performance, and our projected and actual net sales and earnings per share performance may materially affect future expense. In addition, the value, if any, an employee ultimately receives from share-based payment awards may not correspond to the expense amounts recorded by the Group.

 

Results of Operations

 

2008 compared with 2007

 

As of January 1, 2008, our three mobile device business groups, Mobile Phones, Multimedia and Enterprise Solutions, and the supporting horizontal groups were replaced by an integrated business segment, Devices & Services. Results for Nokia and its reportable segments for the year ended December 31, 2007 have been regrouped for comparability purposes according to the new reportable segments.

 

On July 10, 2008, Nokia completed the acquisition of NAVTEQ Corporation. NAVTEQ is a separate reportable segment of Nokia starting from the third quarter 2008. Accordingly, the results of NAVTEQ are available only for the period from July 10, 2008 to December 31, 2008.

 

As of April 1, 2007, Nokia results include those of Nokia Siemens Networks on a fully consolidated basis. Nokia Siemens Networks, a company jointly owned by Nokia and Siemens, is comprised of the former Nokia Networks and Siemens’ carrier-related operations for fixed and mobile networks. Accordingly, the results of Nokia Group and Nokia Siemens Networks for the full year 2008 are not directly comparable to the results for the year ended December 31, 2007. The results from January 1, 2007 to March 31, 2007 included our former Networks business group only.

Nokia Group

 

The following table sets forth selective line items and the percentage of net sales that they represent for the fiscal years 2008 and 2007.

 

 

For 2008, our net sales decreased 1% to EUR 50 710 million compared with EUR 51 058 million in 2007. At constant currency, group net sales would have grown 4% in 2008. The decrease in net sales was driven by the decreased net sales in Devices & Services. The following table sets forth the distribution by geographical area of our net sales for the fiscal years 2008 and 2007.

 

 

The 10 markets in which we generated the greatest net sales in 2008 were, in descending order of magnitude, China, India, the UK, Germany, Russia, Indonesia, the US, Brazil, Italy and Spain, together representing approximately 50% of our total net sales in 2008. In comparison, the 10 markets in which we generated the greatest net sales in 2007 were China, India, Germany, the UK, the US, Russia, Spain, Italy, Indonesia and Brazil, together representing approximately 50% of our total net sales in 2007.

 

Our gross margin in 2008 was 34.3% compared with 33.8% in 2007. This improvement in our gross margin reflected an increase in gross margin of Nokia Siemens Networks.

 

Research and development, or R&D, expenses were EUR 5 968 million, up 6% from EUR 5 636 million in 2007. R&D expenses represented 11.8% of net sales in 2008, up from 11.0% in 2007. The increase in R&D as a percentage of net sales reflected increased R&D expenses in Devices & Services which were partially offset by decreased R&D expenses in Nokia Siemens Networks. In 2008, Nokia R&D expenses included EUR 153 million representing the contribution of the assets to the Symbian Foundation, restructuring charges of EUR 46 million and purchase price accounting related items of

EUR 351 million. In 2007, Nokia R&D expenses included restructuring charges of EUR 439 million and purchase price accounting related items of EUR 136 million.

 

In 2008, selling and marketing expenses were EUR 4 380 million compared with EUR 4 379 million in 2007. Selling and marketing expenses represented 8.6% of our net sales both in 2008 and 2007. Selling and marketing expenses decreased in Devices & Services and increased in Nokia Siemens Networks. In 2008, selling and marketing expenses included a EUR 14 million reversal of restructuring charges and EUR 343 million of purchase price accounting related items. Selling and marketing expenses for 2007 included restructuring charges of EUR 149 million and purchase price accounting related items of EUR 214 million.

 

Administrative and general expenses were EUR 1 284 million in 2008 and EUR 1 165 million in 2007. Administrative and general expenses were equal to 2.5% of net sales in 2008 compared to 2.3% in 2007. Administrative and general expenses in 2008 included restructuring charges of EUR 163 million. Administrative and general expenses for 2007 also included restructuring charges of EUR 146 million.

 

In 2008, other operating income and expenses included a EUR 152 million loss due to transfer of the Finnish pension liabilities to pension insurance companies. In 2007, other operating income and expenses included a EUR 1 879 million non-taxable gain on formation of Nokia Siemens Networks. Other operating income and expenses in 2007 also included gains on sales of real estate of EUR 128 million and a EUR 53 million gain on a business transfer partially offset by restructuring charges of EUR 58 million related to Nokia Siemens Networks, EUR 23 million of Nokia Siemens Networks related other costs, a EUR 12 million charge for Nokia Siemens Networks’ incremental costs, EUR 32 million of restructuring charges and a EUR 25 million charge related to restructuring of a subsidiary company.

 

Our operating profit for 2008 decreased 38% to EUR 4 966 million compared with EUR 7 985 million in 2007. The decreased Devices & Services’ operating profit, driven by lower net sales and higher operating expense, was partially offset by the decreased loss of Nokia Siemens Networks, resulting from higher net sales and lower operating expenses and restructuring costs. Operating profit in 2007 was also impacted by the EUR 1 879 million non-taxable gain on formation of Nokia Siemens Networks. Our operating margin was 9.8% in 2008 compared with 15.6% in 2007.

 

Results by Segments

 

Devices & Services

 

The following table sets forth our estimates for the global mobile device market volumes and year-on-year growth rate by geographic area for the fiscal years 2008 and 2007.

 

 

According to our estimates, in 2008 the global device market volume grew by 7% to 1 213 million units, compared with an estimated 1 137 million units in 2007. This growth was driven primarily by the strong growth in both replacement sales and sales from new subscribers in emerging markets,

particularly Middle East & Africa and Asia-Pacific. Developed market device volumes were driven primarily by replacement sales. We estimate that Europe market volumes were down in 2008.

 

We estimate that emerging markets accounted for approximately 63% of industry device volumes in 2008, compared with approximately 59% in 2007. The entry-level device market (devices priced at 50 euros or under) continued to be one of the fastest growing segments for the market. This was particularly the case in 2008 where we estimate this part of the market represented approximately 44% of the total industry volumes and grew almost 30% in volumes compared to 2007. We estimate the converged device (smartphones) market was approximately 161 million units globally in 2008, growing strongly from approximately 117 million units in 2007.

 

Despite this overall year-on-year growth, the mobile device market deteriorated significantly in the second half of 2008, with a pronounced weakening in the fourth quarter of 2008. The negative impact of the rapidly deteriorating global economic conditions, including weaker consumer and corporate spending, severely constrained credit availability and unprecedented currency market volatility, was apparent in varying degrees across all geographic markets and product ranges.

 

At the end of 2008, we estimate that there were approximately 3.9 billion mobile subscriptions globally, representing approximately 58% global penetration. This is compared to approximately 3.3 billion mobile subscribers in 2007 and approximately 43% penetration.

 

The following table sets forth our mobile device volumes and year-on-year growth rate by geographic area for the fiscal years 2008 and 2007.

 

 

Our mobile device volumes were up 7% in 2008 compared with 2007, reaching 468 million units. Of those volumes, our converged mobile device (smartphone) volumes were 60.6 million units in 2008, compared with 60.5 million units in 2007. Strong year-on-year volume growth in the first half of 2008 was significantly offset by slowing growth in the third quarter and declining volumes in the fourth quarter of 2008. Based on our market estimate, our volume market share grew to 39% in 2008, compared with 38% in 2007. In 2008, we estimate that Nokia was the market leader in Europe, Asia-Pacific, China and Latin America. We further estimate that we were also the market leader in the fastest growing markets of the world, including Middle East & Africa, South East Asia-Pacific and India, as well as in WCDMA technology. We continued to be the market share leader in the entry-level market with a market share of approximately 50%. Our estimated smartphone market share declined to 38% in 2008 compared to 52% in 2007.

 

During 2008, according to our estimates we gained device market share in Latin America and Asia-Pacific. Our device market share decreased in Middle East & Africa, North America, Greater China and Europe.

 

In Latin America, our 2008 market share was up significantly driven by strong share gains in markets such as Colombia, Mexico and Brazil as Nokia continued to benefit from its brand and broad product portfolio. Significant market share gains in Asia-Pacific were primarily driven by our strong position in the fastest growing markets, such as India and Indonesia.

In Middle East & Africa, our market share declined in 2008 as a result of market share declines in several markets, including South Africa, Nigeria and Iran. Our market share declined in North America in 2008 primarily due to a market share decline in the US.

 

In Greater China, we continued to benefit from our brand, broad product portfolio and extensive distribution system during 2008, but our market share fell partly due to price competition. In Europe, our market share was slightly down. Nokia’s share increased in, for example, Italy, Russia and Poland, but was more than offset by market share declines in Germany, Spain, France, Turkey and some other countries.

 

Our device ASP in 2008 was EUR 74, a decline of 14% from EUR 86 in 2007. Industry ASPs also declined in 2008. Nokia’s lower ASP in 2008 compared to 2007 was primarily the result of a higher proportion of lower-priced entry level device sales where industry growth was strong.

 

The following table sets forth selective line items and the percentage of net sales that they represent for the Devices & Services group for the fiscal years 2008 and 2007.

 

 

Devices & Services net sales in 2008 decreased 7% to EUR 35 099 million compared with EUR 37 705 million in 2007. At constant currency, Devices & Services net sales would have decreased by 2%. The net sales decrease was primarily due to strong volume growth in the first half of 2008 being significantly offset by slowing growth in the third quarter and declining volumes in the fourth quarter of 2008. Further, the overall volume growth in 2008 was more than offset by a decline in ASP. Net sales grew in Latin America. Net sales decreased in North America, Europe, Middle East & Africa, Asia-Pacific and Greater China. In 2008, services and software net sales contributed EUR 476 million of our total Device & Services net sales.

 

Devices & Services gross profit in 2008 was EUR 12 739 million compared with EUR 13 746 million in 2007. This represented a gross margin of 36.3% in 2008 compared with a gross margin of 36.5% in 2007.

 

Devices & Services R&D expenses in 2008 increased by 9% to EUR 3 127 million compared with EUR 2 879 million in 2007. In 2008, R&D expenses represented 8.9% of Devices & Services net sales compared with 7.6% in 2007. The increase was mainly driven by further investments in software and services. In 2008, Devices & Services R&D expenses included EUR 153 million representing the contribution of the assets to the Symbian Foundation.

 

In 2008, Devices & Services selling and marketing expenses decreased by 4% to EUR 2 847 million primarily as a result of increased focus on cost-efficiency of its selling and marketing efforts, compared with EUR 2 981 million in 2007. In 2008, selling and marketing expenses represented 8.1% of Devices & Services net sales compared with 7.9% of its net sales in 2007.

Other operating income and expenses were EUR 520 million in 2008 and included EUR 392 million of restructuring charges primarily related to the closure of the Bochum site in Germany. In 2007, other operating income and expenses included EUR 57 million of restructuring charges and a EUR 53 million gain on business transfer.

 

In 2008, Devices & Services operating profit decreased 23% to EUR 5 816 million compared with EUR 7 584 million in 2007, with a 16.6% operating margin, down from 20.1% in 2007. The decrease in operating profit in 2008 was primarily driven by lower net sales and higher operating expenses compared to 2007.

 

NAVTEQ

 

The following table sets forth selective line items and the percentage of net sales that they represent for NAVTEQ for the period from July 10, 2008 to December 31, 2008.

 

 

NAVTEQ net sales for the period from July 10, 2008 to December 31, 2008 were EUR 361 million. Net sales were driven by the licensing of NAVTEQ’s geographic database and related location-based content. The following table sets forth NAVTEQ net sales by geographic area for the period from July 10, 2008 to December 31, 2008.

 

 

For the period from July 10, 2008 to December 31, 2008, NAVTEQ gross profit was EUR 318 million. Gross profit reflects net sales, partially offset by costs related to the delivery of NAVTEQ’s database information to its customers.

 

NAVTEQ R&D expenses for the period from July 10, 2008 to December 31, 2008 were EUR 332 million. NAVTEQ R&D expenses included amortization of intangible assets recorded as part of Nokia’s acquisition of NAVTEQ totaling EUR 171 million. R&D expenses were also driven by increased investment in NAVTEQ’s map database related to geographic expansion and quality improvements. R&D expenses represented 92.0% of NAVTEQ net sales for this period.

 

For the period from July 10, 2008 to December 31, 2008, NAVTEQ’s selling and marketing expenses

were EUR 109 million. NAVTEQ’s selling and marketing expenses primarily consisted of amortization of intangible assets recorded as part of Nokia’s acquisition of NAVTEQ totaling EUR 57 million. Selling and marketing expenses were also driven by investments to grow NAVTEQ’s worldwide sales force and expand the breadth of its product offerings. Selling and marketing expenses represented 30.2% of NAVTEQ net sales for this period.

 

NAVTEQ operating loss was EUR 153 million for the period from July 10, 2008 to December 31, 2008, with an operating margin of negative 42.4%. The operating loss was primarily the result of the amortization of intangible assets recorded as part of Nokia’s acquisition of NAVTEQ, which was partially offset by profits from NAVTEQ’s ongoing business.

 

Nokia Siemens Networks

 

According to our estimates, the mobile infrastructure market was flat in euro terms in 2008 compared to 2007 with the trend varying, depending on region. Slowed growth in developed markets was due to decreasing investments in mature 2G networks which were not fully offset by the capacity expansions of 3G networks. The mobile infrastructure market still grew in emerging markets such as Middle East & Africa, Latin America and China due to the continued subscriber growth, resulting in traffic and correlating capacity increases as well as new network build-outs. Globally, the volume growth in the networks infrastructure equipment was significantly offset by the price erosion of the equipment, largely as a result of maturing technologies and intense price competition. The fixed infrastructure market continued to be characterized by intense price competition in 2008, both in terms of the equipment price erosion due to heavy competition, especially from Asian vendors, and declining tariffs.

 

The following table sets forth selective line items and the percentage of net sales that they represent for Nokia Siemens Networks for the fiscal years 2008 and 2007.