Nokia 2012 Annual Report Download - page 97

Regional sales also carry varying profitability. Overall profitability for certain regions should only be
seen as indicative, as profitability can vary from country to country within a particular region and even
from customer to customer within a particular country. During 2011 and 2012, Nokia Siemens
Networks has pursued a policy of prioritizing markets such as Japan, Korea and the United States, as
these markets typically offer vendors more value than other markets. In general, developed markets
provide relatively high margins while emerging markets, where end-users and therefore mobile
operators are often more financially constrained, provide lower margins.
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 and the Chinese yuan. See Item 3A. “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 our strong presence in emerging
markets like China, India, Brazil and 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
and US dollar, being the only significant foreign currencies in which we have more purchases than
sales.
In addition to foreign exchange risk of our own sales and costs, our overall risk depends on the
competitive environment in our industry and the foreign exchange exposures of our competitors.
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, unless hedging would be uneconomical due to
market liquidity and/or hedging cost. We hedge 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
income statement volatility. We also hedge 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, we hedge selected net
investment exposures from time to time.
Global currency markets, were less volatile in 2012 than in 2011. Overall, hedging costs remained
relatively low in 2012 due to the low interest rate environment.
During the first half of 2012, the US dollar appreciated against the euro by 7.2%, but subsequently
depreciated. At the end of 2012, the US dollar was 2.9% stronger against the euro than at the end of 2011.
The stronger US dollar in 2012 had a positive impact on our net sales expressed in euro, as
approximately 50% of our net sales are generated in US dollars and currencies closely following the
US dollar. The appreciation of the US dollar also contributed to a higher average product cost, as
approximately 60% of the components we use are sourced in US dollars. In total, the movement of the
US dollar against the euro had a slightly negative effect on our operating profit in 2012.
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