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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. (HEX:NOK1V).  It's headed to becoming Microsoft Corp.'s (MSFT) 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 and 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 Salcomp and Foxconn's Indian wing (Foxconn is a subsidiary of Taiwan's Hon Hai Precision Industry Comp., Ltd. (TPE:2317)).

Nokia Chennai
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, according to The Economic Times and 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.

Nokia Chennai workers

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 Asha
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.

Comments 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. (AAPL) 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.

Huawei Girl
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.

Nordea Markets 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 tells Reuters:

(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 -- made 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.

Nokia China
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
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, writing:

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
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.

Sources: Microsoft [press release], Reuters, Financial Express, China.org



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Manufacturing sites
By Penti on 3/29/2014 7:19:08 PM , Rating: 2
India isn't really important here, China mildly is because most of their new design and engineering talent works there, and they virtually fired everybody elsewhere. India will close as soon as they wind down asha and Nokia X devices. There is no gauging there, everybody making sub 200 dollars and month will be living in shallows or at least a very illegal housing situation. There really is no problem to pay them a salary that is still not livable while they wind down those operations.




RE: Manufacturing sites
By melgross on 3/30/2014 12:50:26 PM , Rating: 2
You don't understand the way it works. In the EU, it's already illegal to just shut major plants down. You NEED to get approval from various governments as well as the EU itself. The same thing is true for India and China. If the Indian government says they can't close the plant down without some major concession, then they can't. A company can't just walk away in these places. They can't even do major firing without government approval. So the may threaten and bribe, but in the end, public outcry will win, even in China.

The USA is one of the rare major countries where the government has no say about hiring and firing, as well as plant closings. People who look at the way things work here, and project that elsewhere, are in for a shock.


RE: Manufacturing sites
By ven1ger on 3/31/2014 3:12:06 PM , Rating: 2
Thanks for the explanation. I was kind of wondering when reading the article why does India and China have a say in what a Finnish and US company does with regards to each other. Your explanation helped clear it up.


RE: Manufacturing sites
By Penti on 4/11/2014 4:24:13 PM , Rating: 2
I live in EU, it's fine to shut down plants when you decide, it's fine to move them outside EU all without EU approval. It's fine to shut down some of your plants inside EU for whatever reason you can find basically, just claim it's savings and consolidation. You might need approval when buying firms, but here Microsoft got approval both in from the government in Finland and by the Commission. It's nothing about labour at all but an anti-competition measure just as you need permission/clearance by the FTC in the states. Nokia (Finland) has already fired 30 000 people, many of those were in manufacturing plants at Salo, Finland, Komárom, Hungary and Cluj, Romania in the EU and some in Reynosa, Mexico too all part of the shift to Microsoft. Before the shift they had no problems closing a plant in Germany. Plus you can always place a subsidiary in bankruptcy. Retail chains often do in the EU for example while the owners still make money.

The plant in India is doomed, Foxconn and Flextronics in other parts of the world will do most of the manufacturing and assembly work for both high-end and low-end, and low-end devices such as those India does now for Nokia will disappear and then the justification for the plant will too. But half of the plant will go before they shut down completely. Their goal is to go from making hundreds of millions of phones to maybe 30-40 million a year. You don't need 20 000 factory/plants workers for that. Some facilities in China might be kept, or sold to a contract manufacturer just so the engineers will be close to production and engineering/testing/prototyping. Most of the design talent and engineering as well as facilities is already gone from Finland which any way means they need to rely on their suppliers much more, and new talent in China. Most of their managers will be at Redmond and pretty soon the main Nokia building will stand empty as soon as it's too large for Microsoft. Nokia or Microsoft couldn't care less if they had to walk away from the India plant with the government seizing it. Most of the employees are from temp agencies any way. They can do a lot, even without firing a single Nokia/Microsoft employee. They are really bad employers in emerging markets too. Even in Hungary workers had about 300-400 EUR, which is not really enough to pay for a flat and food. In Romania they had sub 300 EUR. To rent an apartment in Cluj you need about 300-400 EUR/month, for one bedroom. They are basically glad to get rid of Nokia. They can get 10 times or more at other firms in wages. Microsoft don't need 10 000 employees in manufacturing and tens of thousands of contract workers at their own manufacturing facilities. They need maybe 2000 assembly workers. At most. Nobody will interfere there.


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