Analyst says that Nokia could reduce cost of producing Lumia models by 17%

Earlier on Wednesday we told you that how well the Nokia Lumia 800 sold during its European launch depended on whose viewpoint you are looking at. While analysts called the demand for the phone tepid, the Finnish based manufacturer said it was the best launch it has had recently. Regardless of which side you believe, Barclays Capital analyst Jeff Kvaal says that Nokia could reduce the cost of producing its Windows Phone handsets by 17%.

According to the analyst, the cost of materials for the Nokia Lumia 800 is $238 and is $167 for the Nokia Lumia 710. With the phones priced at 420 EUR ($560) and 270 EUR ($360) respectively, the analyst believes that Nokia could sell a lot more phones by offering a model priced at 220 EUR ($293); to make this a possibility, Kvaal suggests that Nokia substitute some parts and remove others. The majority of the savings would come from a smaller screen size and a lower quality display along with lower priced memory and processor.

For example, instead of the 3.7 inch "ClearBlack" screen on the Lumia 710, the analyst recommends that Nokia put a 3 inch TFT screen on the lower end device. While the "ClearBlack" technology reduces glare and makes for a more pleasing display outdoors, replacing the screen with a smaller one without "ClearBlack" could shave $5 off the cost of material for the phone. Another $5 could be saved by halving the amount of RAM from 512MB to 256MB.

The Nokia Lumia 800 is a quad-band phone and the Nokia Lumia 710 is a tri-band model, both supporting speeds as high as 14.4Mbps. Kvaal states that further savings could be achieved by offering a model with single/dual band connectivity capable of  7.2Mbps. On the Lumia 710, that would take another $3 off the cost of parts. While both Lumia models currently have a single-core 1.4GHz processor under the hood, changing to a 1GHz processor could allow Nokia to get by with a smaller battery. Going from the 1300mAh cell in the Lumia 710 to a 1200mAh battery would save $2 per unit in production costs without a huge difference in the quality of the phone's operation.

A huge $10 in material costs for the Nokia Lumia 710 could be cut by getting rid of the compass and the back-facing camera. Add in a lower cost supplier of Wi-Fi technology and the phone's printed circuit board, and all together the reductions add up to $38 or 17% off the cost of producing the Lumia 710. And that, says the analyst, is how Nokia could offer a new phone for just 220 EUR.

More savings could be rung up if Nokia sped up the timeframe it has in mind of rolling out its Windows Phone models. If it makes more phones in a shorter period of time, the manufacturer might be able to squeeze out some volume based savings in procuring parts and components. And the beauty of this plan is that it keeps Nokia within the parameters set up by Microsoft for running its mobile OS. Redmond asks for only 256MB of RAM on Windows Phone handsets and no minimum sized battery is required.

Would Nokia be cutting its profit margins by offering such a lower priced phone, even with the cut in material costs? Kvaal points out that Nokia has a 25% profit margin on the higher-end Lumia 800 and a 20-21% margin on the Lumia 710. According to the analyst, making the changes he suggests and selling such a phone for 220 EUR would also result in a 20-21% margin. The only question is, would consumers accept some of the changes such as the smaller screen and the lower amount of RAM? You could argue that any difference in perceived quality could be offset by a lower retail price, but it seems to us that Nokia does not want to position itself as a producer of bargain smartphones.

source: Forbes