India, China Yet to Approve Parts of Nokia Sale Amid Strikes, Tax Disputes
March 28, 2014 4:01 PM
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(Source: The Hindu Business Line)
Nokia and Microsoft are struggling to convince Chinese and Indian governments to buy into the purchase
Nokia Devices is soon to be separated from Nokia Oyj. (
). It's headed to becoming Microsoft Corp.'s (
) first-party Windows Phone unit after Microsoft
opted to spend $7.2B USD to buy the rebounding unit
in Sept. 2013. While the unit will retain the branding and much of the staff of Nokia, the unit will likely see many management and direction changes
under new Microsoft CEO Satya Nadella
his Devices & Studios deputy Stephen Andrew Elop
I. Overstaying Its Welcome
However, the unit is lingering around longer than Nokia would like.
Nokia Oyj. and Microsoft are hoping to close the deal in April, roughly eight months from its announcement. The deal has already been (silently) approved by the
U.S. Department of Justice
(DOJ) and by
the European Union's (EU) regulatory body, the European Commission (EC)
The sale is still awaiting full regulatory approval in India, where regulators have accused Nokia of tax dodging. The deal
appeared to be approved in Oct. 2013
after the Competition Commission of India -- the nation's antitrust body -- gave the deal a thumbs up. However, Indian regulators still needed to separately approve of the transfer of Nokia's Indian manufacturing assets to Microsoft and that's where the difficulty has arisen.
At issue is one of Nokia's biggest plants, located in Sriperumbudur near the city of Chennai, India.
The factory houses
roughly 30,000 workers
. Of these, roughly 8,000 are Nokia employed, while the remainin 22,000 are employed by Nokia's manufacturing partners including
and Foxconn's Indian wing (Foxconn is a subsidiary of Taiwan's Hon Hai Precision Industry Comp., Ltd. (
Nokia's Sriperumbudur Plant near Chennai, India [Image Source:boolokam.com]
Approval won't come cheaply; the Indian supreme court ruled weeks ago that Nokia must pay $571M USD (Rs. 3,500 Crore) in unpaid taxes in order to transfer the plant. And this week Indian officials claimed Nokia still owes an addition $414M USD (Rs. 2,400 Crore), taking its total tax burden to $985M USD -- almost a billion dollars. The second charge came after Indian authorities discovered that Nokia had been selling to Indian consumers the phones it was making at the plant, while pretending it was selling them overseas in order to avoid paying most taxes on them.
Nokia's tax woes in India predate the Microsoft purchase. In Jan. 2013, the company's Chennai offices were raided by income tax officials,
The Economic Times
Times of India
. Indian officials claimed last January that Nokia had promised to pay taxes when it was building the factory, but had never paid up. Commented an anonymous official, "They haven't paid tax in India."
At the time the unpaid tax was said to be roughly $500M USD (Rs. 3,000 krore).
II. Nokia India Employees Threaten Hunger Strike After Massive Layoffs
Nokia is also facing pressure from unions in India. The average employee at its megafactory currently makes around INR 4,800 ($106 USD) per month. The plant's union
has been striking on and off
for the past year, trying to push Nokia (or its new owner) to raise the wage to INR 10,000 ($221 USD) per month.
The incident got ugly in October when Foxconn and Nokia leaned on Indian police to try to break up a strike. In total 319 individuals were arrested, although all but 12 of the union's main leaders were released. Nokia and Foxconn also suspended pay of 23 employees who were labeled as union organizers. Most troubling are allegations that Indian police rounded up 200 female protesters and "abused them" (the manner of the abuse was not specified) before releasing them.
In late October, Nokia agreed to pay 696 of the plant's core unionized employees INR 8,999 ($177 USD) per month, giving the workers rough three-fifths of their demanded wage increase. But since then it has faced fresh tensions -- including a planned hunger strike -- after it cut production at the plant from 13 million units per month to about 4 million, and likewise cut shifts from three shifts to two.
Nokia transfered production of its top unit seller Asha feature phone line from the Indian plant after last fall's labor dispute. [Image Source: Nokia]
Nokia is trying to lobby the government for more help, but it isn't exactly in good standing with the government given the tax debacle. Officials are also hesitant of offending their constituents in the face of upcoming local elections. The plant union's Honorary President, A Soundararajan, announced employees will hold a hunger strike on Mar. 31 to protest the conditions that may leave up to 10,000 workers without jobs.
Mr. Soundararajan to
The Financial Express
The Central and the State Governments should come forward and ensure that the due to the transfer of assets of Nokia to Microsoft (as per the USD 7.2billion deal), there should not be any job losses. We have decided to stage a one-day hunger fast on March 31 in this regard.
The union is pressing especially hard because it fears Nokia is transfering much of its production to Chinese and Vietnamese facilities. This would include the production of the Asha phone series, which had previously been produced at the Indian plant, but was shuffled elsewhere after the labor dispute last fall. Over 10,000 workers may be laid off if this situation stands. The union believes that if it can convince the government to force Microsoft to retain all employees as a term of the deal approval, they may be able to force production of the Asha line to return to the plant.
III. China Worried About Nokia's Predatory Intellectual Property Efforts
Meanwhile in China --
home to much of Nokia's other manufacturing facilities
-- the Finnish firm is facing a different kind of pressure. Chinese officials are concerned that without a device unit, Nokia will be free to charge predatory rates on its patents, as its Android competitors (and potentially Apple, Inc. (
) when that licensing pact expires) won't have any product to target with countersuits. Chinese officials want guarantees of cheap licensing for Chinese Android OEMs.
China is pressuring Nokia to give cheaper intellectual property licensing to Chinese OEMs, such as Huawei. [Source: VR-Zone]
That's good news for all Android phonemakers, really, as limiting the licensing rates of the mobile industry's
biggest patent holder and biggest litigator
(Nokia Oyj.) in China will likely make it harder for the European company to seek higher rates from American, South Korean, Japanese, and Taiwanese firms, as well.
While the EU's EC approved the deal, it voiced similar concerns to China, warning Nokia Oyj. that it will be
watching it very carefully for signs of abusive patent behavior
analyst Sami Sarkamies says the delays show that the deal won't be as sweet as Nokia was hoping for, given the concessions it must make. He
(The delay) is a bad sign. They have been discussing with authorities for quite a while already, and they still need more time. The biggest risk is in the upside of their patents. It looks like Nokia will have to make bigger concessions to push the deal through.
Nokia's "Advanced Technologies" unit -- which handles its patent licensing --
530M ($727M USD) last year. That's only about 4.1 percent of Nokia's 2013 net sales for its continuing businesses. However the licensing pulled in an operating profit of €310M ($426M USD), 22.7 percent (or roughly a fifth) of Nokia's total annual operating profit. Nokia had hoped to grow licensing sales to €600M ($825M USD). It will now be much more difficult to achieve that goal.
IV. Nokia, Chinese Workers Come to a Truce, Microsoft Promises April Close of Deal
In China, Nokia also is having some labor headaches. Nokia's main manufacturing facility in China is in the southern city of Dongguan. The plant employs roughly 3,000 workers, which make a minimum wage of
around 1,310 yuan ($211 USD)
a month -- somewhat more than their Indian counterparts. As in India, much of the assembly and production duties in China are contracted to Foxconn.
A Nokia China woker shuffles phone components on an assembly line.
[Image Source: Icarus Films]
In November, between
1,000 to 1,500 Nokia employees (according to various accounts) at the Dongguan facility went on strike
following the sacking of as many as 2,000 employees. Nokia said that 59 employees had been terminated. Riot police were called in and some union leaders were arrested.
The unrest in China has been
put aside for now
after Nokia wrote employees telling them:
Microsoft has promised that the workers' salaries and benefits will remain the same for 12 months after the acquisition.
Nokia China's workers are seen picketing in Nov. 2013. Since then, most have returned to work. [Image Source: Weibo]
It also paid employees who agreed not to strike a bonus of 1,000 yuan ($161 USD) -- nearly an additional month's worth of wages.
Microsoft's general counsel -- Brad Smith
-- remained optimistic that the Indian and Chinese roadblocks to the deal's close could be overcome,
We are nearing the final stages of our global regulatory approval process. Currently we are awaiting approval confirmation in the final markets. This work has been progressing, and we expect to close next month, in April 2014.
Brad Smith, Microsoft EVP and General Counsel
But by the sound of it Microsoft will be getting a global manufacturing base very on edge and on the verge of striking, while Nokia will have to settle tax issues and scale back its patent ambitions.
Microsoft [press release]
This article is over a month old, voting and posting comments is disabled
3/28/2014 9:46:32 PM
Microsoft didn't really want to get into the hardware business anyhow. They just wanted to kill that android phone.
RE: That's OK
3/29/2014 9:41:02 AM
How do you figure that? Xbox and Surface are Microsoft hardware. Then there's the whole Open Compute thing that Microsoft released their own set of specs for last week...
RE: That's OK
3/30/2014 9:59:40 AM
Xbox has yet to break even, and the surface isn't doing that well either.
It isn't what MS does best.
Besides, the xbox really is there to sell software anyhow.
RE: That's OK
3/31/2014 3:04:38 PM
I'd consider it more of MS diversifying their portfolio. They also make computer peripherals, mice, keyboards, etc. But they have their hands in the hardware business.
RE: That's OK
3/30/2014 12:43:36 PM
You should have read about why Ballmer was fired. The argument he had with the board over buying the Nokia phone division was one major reason. The board was reluctant to buy this. Apparently, Ballmer's shouting and insults, while disturbing them, had an unholy influence over their decision.
With him gone, and problems piling up, the smartest thing for them to do would be to back off on this and let it go. We don't know the terms of the agreement, only what was released to the public. So I wonder how another billion in expenses to Nokia, and all the other problems, can affect the deal. When, in my own company, we bought two others over the years, the results of the due diligence decided how much we would pay, and whether we would go through with the deal at all.
As well, special circumstances could kill the deal if they popped up during, or even after the negotiations. Companies always include penalties, or a clause that allows them to scuttle the deal if major negative problems come up.
If Nokia does have to pay an additional $1 billion in taxes to the Indian government, where will that money come from? Nokia is not cash rich, while Microsoft is. But would Microsoft be willing to sink another billion into this deal? And then, I have no doubt at all that the firing large numbers of workers was part if the deal to drastically lower future costs. If that isn't going to happen, what then?
And if Nokia needs to make these binding agreements with major countries around the world over how much they can charge for their patents, that will cause them to reassess as well. If they can't do what they expected to do with those patents after the sale, the sale won't look as good as it did.
I can see a lot of problems here. For example, Win Phone sales were down significantly during the holiday quarter, when sales move up significantly. How does Microsoft view this? They already had a deal in place shortly before that surprise announcement. I can't believe that Microsoft's board, which was unhappy to do this deal in the first place, was satisfied about that. I wonder what Nadella really feels about this now, and I wonder if the deal can still be unwound. If it is, then that's the end of Win Phone.
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