Moody’s noted that Nokia’s cellphone volumes dropped 16 percent in the first quarter due to increasing competition from makers of low-end phones or new phone promotions by Chinese carriers.

“While volatility by quarters is not uncommon, Moody’s believes that the structural challenges facing Nokia’s mobile phones segment may not be easy to address,” the rating agency said.

Reacting to the downgrade, Nokia said its financial position remains strong, with its investment grade rating “backed by Nokia’s strong liquidity position and capital structure.”

Chief Financial Officer Timo Ihamuotila said Nokia is “quickly taking action” to improve its financial position.

“Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position,” Ihamuotila said.

The Finnish company has increasingly been losing out to competitors in the lucrative top-end smartphone sector, against Apple Inc.’s iPhone and brands using Google Inc.’s popular Android software, including Samsung Electronics Co. But it’s also been squeezed in the low-end by Asian manufacturers making cheaper phones, such as China’s ZTE.

Last week, Nokia said multiple factors had hurt sales in the first quarter, particularly in the fast-growing markets of India, the Middle East, and Africa and China, and that it expected no improvement in the second quarter.

It announced that operating margins in the first quarter were “approximately negative 3 percent” when previously it had expected them “around break-even, ranging either above or below by approximately 2 percentage points.”

It also said it sold 71 million mobile phones in the quarter — down from 108 million in 2011 — with net sales of €2.3 billion ($3 billion), while smartphone sales halved to 12 million units from a year earlier.

Its share price plummeted 14 percent after the warning and has continued to fall — to a 15-year low of €2.98 ($3.88) in Monday afternoon trading in Helsinki.

Nokia is due to report first-quarter earnings results on April 19, with some analysts predicting that Samsung has overtaken it in cellphone volumes in the quarter.

Last year, it was overtaken in the second quarter in smartphone volumes by its chief rival, Apple, whose iPhones sold more than all Nokia smartphone models combined.

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Online:

www.nokia.com

Salo — along with other Finnish towns inextricably linked to Nokia — is facing an uncertain future as Finland’s most famous corporation shifts its mobile phone assembly to Asia.

Squeezed by fierce competition from Apple Inc.’s iPhone, Samsung Electronics and cheaper brands running Google Inc.’s popular Android software, Nokia has been forced to slash costs, primarily affecting its operations in Europe.

Nokia has already closed plants in Germany, Hungary and Romania; and now it’s the turn of the Finnish assembly plant. Some 1,000 of the 3,500 jobs in Salo — which until recently was Nokia’s flagship assembly hub — are being cut this year. The once-thriving technological center has already become a town of dusty, empty storefronts.

“The latest layoffs will hit us hard,” said Salo’s mayor, Antti Rantakokko.

He has a shiny office in a glass-plate and metal building that opened four months ago, partly paid for by Nokia’s local taxes, which accounted for 95 percent of the town’s corporate tax income that peaked at €60 million ($78.85 million) in 2010.

“Nokia has been a status symbol for us, but more than that it has been a major source of income,” Rantakokko said.

The company began as a paper-maker in the 1890s, and later made rubber products, cables and televisions before it came to Salo — a center for Finland’s electronics industry since the 1920s — in 1983.

Nokia formed an alliance with a local radio and TV manufacturer, which led to the formation of Nokia Mobile Phones in 1989. Two years later, the company produced its first cell phone.

Steered by chief executive Jorma Ollila, Nokia became the world’s top cell phone maker in 1998 when it overtook Motorola Inc. in terms of sales — a major source of pride for a country that had struggled to rebuild itself after fending off Soviet invasion during two wars against Stalin’s Red Army.

Nokia became Finland’s largest firm, overtaking the paper and wood industry as an export earner and provided work for thousands. In 2007, it paid out a record €1.2 billion ($1.57 billion) in corporate taxes to the government.

Nokia reached 40 percent global market share in 2008. However, sales quickly started to lag as the company suffered under the onslaught of inventive mobile technologies from the U.S., the world’s biggest wireless market.

Profits swung to losses and the struggling company’s tax payment dipped to some €2 million last year.

“There’s no denying it has been a great shock to the government, but there’s not much they can do,” said Jyrki Ali-Yrkko, from the Research Institute of the Finnish Economy.

Nokia’s importance to the vulnerable, export-dependent economy was illustrated by the flood of aid the government swiftly earmarked to regions hit by the company’s cutbacks.

Finnish President Sauli Niinisto, who hails from Salo, visited Nokia’s plant here on March 20 in a display of support for the laid-off workers.

“We won’t abandon our friends and we won’t give up,” Niinisto told reporters.

To the dismay of many Finns, Nokia has gradually loosened its ties to its home nation.

It remains headquartered in Espoo, outside Helsinki, but in 2010, it appointed a non-Finn to head the company for the first time when it named Canadian Stephen Elop as chief executive. That led to a major strategy shift last year as it joined up with Microsoft Corp., Elop’s former employer, to replace Nokia’s platforms with Windows software in its cell phones.

Nokia still employs 12,000 people in Finland, one-fifth of its global work force, and the company will maintain research and development, production planning and smartphone customization for corporate clients in Salo and two other plants in Finland, Nokia spokesman James Etheridge said.

“Finland has been and will continue to be critical to our success. The majority of the Windows Phone engineering and development team is in Finland,” Etheridge said.

Nonetheless, Nokia has stuck to its decision to move all assembly jobs to its factories in Asia, where it has two plants in China, and one each in South Korea and India.

Neil Mawston, from Strategy Analytics in London, said Nokia was one of the last big cell phone makers to shift assembly to Asia from Europe, following in the footsteps of Samsung, Motorola, and Sony Ericsson.

“It’s the way things are heading right now, doing production in developing markets where there is the biggest pool of users on the planet, and R&D in developed markets,” Mawston said Thursday. “Nokia has a good history of designing mobile phones in Finland for the past 30 years, so to continue to do that makes sense.”

In 2008 Nokia employed 5,000 people in Salo — nearly 10 percent of the population — and provided work for 2,000 others among those in the IT industry who supplied it with components.

Mayor Rantakokko expects this year’s corporate taxes to drop to €14 million, mostly because of Nokia’s decline.

Still, he is hopeful. The government has provided the municipality with an extra €5 million over two years to deal with the impact of Nokia’s downsizing.

“The layoffs are a bitter blow but we can’t let it get us down,” Rantakokko said. “Nokia will still have 2,500 workers here and will remain important to us.”

“There is a technical pool out there, soon out of work, and the challenge will be to find a use for it,” Rantakokko said.

“They had been negligent when monitoring the loading of the explosives that were not packed according to international maritime regulations,” State Prosecutor Juha-Mikko Hamalainen said.

If found guilty, the two men — both Ukrainians, like the rest of the crew — face a maximum three-month prison sentence, or more likely will be fined, Hamalainen said. He said both had pleaded not guilty.

They are free to leave along with the other 11 crew members because their cases can be held in absentia, Hamalainen said.

The vessel arrived in the southern port of Kotka last month from Germany to pick up a cargo of anchor chains and paper machine parts, destined for China.

It was impounded on Dec. 21 after port authorities discovered the surface-to-air missiles, which officials said lacked the necessary transit documents required for all weapons, and the inadequately packed explosives.

The missiles were eventually determined to be heading to South Korea as an official government shipment from Germany. Officials declined to say where the explosives were destined, saying the documentation was in order and that the picric acid needed no special permits.

“Now they (the crew) are all free to travel. The ship, the missiles and the explosives can leave,” said Petri Lounatmaa, a spokesman for Finnish Customs. “Our joint investigation with the police will, however, continue.” He declined to give details.

“They had been negligent when monitoring the loading of the explosives that were not packed according to international maritime regulations,” State Prosecutor Juha-Mikko Hamalainen said.

If found guilty, the two men — both Ukrainians, like the rest of the crew — face a maximum three-month prison sentence, or more likely will be fined, Hamalainen said. He said both had pleaded not guilty.

They are free to leave along with the other 11 crew members because their cases can be held in absentia, Hamalainen said.

The vessel arrived in the southern port of Kotka last month from Germany to pick up a cargo of anchor chains and paper machine parts, destined for China.

It was impounded on Dec. 21 after port authorities discovered the surface-to-air missiles, which officials said lacked the necessary transit documents required for all weapons, and the inadequately packed explosives.

The missiles were eventually determined to be heading to South Korea as an official government shipment from Germany. Officials declined to say where the explosives were destined, saying the documentation was in order and that the picric acid needed no special permits.

“Now they (the crew) are all free to travel. The ship, the missiles and the explosives can leave,” said Petri Lounatmaa, a spokesman for Finnish Customs. “Our joint investigation with the police will, however, continue.” He declined to give details.

The move marks a major strategy shift for Nokia, which has previously equipped devices with its own software. Analysts said the deal was a bigger win for Microsoft than Nokia, whose CEO Stephen Elop in a leaked memo this week compared his company to a burning oil platform with “more than one explosion … fueling a blazing fire around us.”

Nokia said the partnership would “deliver an ecosystem with unrivaled global reach and scale.” However, it warned that the new strategy would also bring “significant uncertainties,” and said it expects profit margins to be hit by strong competition from rivals.

Nokia’s share price plunged 9 percent to euro7.43 ($10.11) in afternoon trading in Helsinki.

Elop, a Canadian national, joined Nokia from a senior executive position at Microsoft last year. The first non-Finn to lead Nokia, he is under intense pressure to reverse the company’s market share losses to North American and Asian competitors.

“Nokia is at a critical juncture, where significant change is necessary and inevitable in our journey forward,” Elop said. He added the company was aiming at “regaining our smart phone leadership, reinforcing our mobile device platform and realizing our investments in the future.”

Speaking later to analysts in London, he declined to say when Nokia would introduce a new device running on Windows Phone. But he said Nokia won’t bury its own Symbian operating system or the new Meego platform that it is currently developing.

The Symbian technology is being used in 200 million phones with 150 million more expected on the market, Elop said.

Android surpassed Symbian to become the world’s No. 1 smart phone software in the fourth quarter of last year, according to the Canalys research firm.

Microsoft CEO Steven Ballmer said the partnership would give the team “more innovation, greater global reach and scale.”

“We need to, and we will, collaborate closely on development … so we can really align and drive the future revolution of the mobile phone,” he said.

The key challenge will be to come up with devices of a quality level and hip factor that helps position Windows Phone as an attractive alternative to iPhone or Android.

Windows Phone 7, which was launched last year, still has a lot of catching up to do in terms of both the number of users and the number of “apps” available for the phones.

Nokia said its expertise in developing new software with Microsoft will be “on top of the platform in areas such as imaging, where Nokia is a market leader.” Its map services will be a core part of the new device as will Microsoft’s Bing search engine, Nokia said.

Neil Mawston of London-based Strategy Analytics said Microsoft was the big winner in the partnership, by teaming up with the biggest mobile hardware vendor in the world.

“In terms of expanding their distribution reach, this is a huge win for Microsoft,” he said.

For Nokia the deal leaves uncertainty about what will happen to its current Symbian operating platform. Mawston said he expects it to be phased out within two years and “completely, or at least mostly, replaced by Windows Phone.”

Although Nokia still is the mobile industry’s biggest handset maker, its market share has plummeted from a high of 41 percent in 2008 to 31 percent in the last quarter of 2010.

It has also lost its innovative edge in the fiercely competitive top-end sector and is virtually invisible — with a 3 percent share — in the world’s largest smart phone market, North America.

Apples’ iPhone has set the standard for today’s smart phones and Research In Motion Ltd.’s BlackBerrys have become the favorite of the corporate set. More recently, Google Inc.’s Android software has emerged as the choice for phone makers that want to challenge the iPhone.

“Today, developers, operators and consumers want compelling mobile products, which include not only the device, but the software, services, applications and customer support that make a great experience,” Elop said.

He warned of further layoffs and restructuring, saying Nokia must “improve the speed and nimbleness and agility of the organization … by taking significant steps in how we operate.” He gave no details.

The company said it will announce a new leadership team and organizational structure “with a clear focus on speed, results and accountability.”

Nokia, which claims 1.3 billion daily users of its devices, said it hopes the “broad, strategic partnership” with Microsoft will lead to capturing the next billion users to join the Internet in developing growth markets.

Jyrki Ali-Yrkko, from the Research Institute of the Finnish Economy, described Nokia’s cooperation with Microsoft as “surprising.”

“The strengths will be in Microsoft’s strong position in various corporate solutions and server solutions, but its weakness is that Microsoft perhaps doesn’t have a broad, user-oriented group of developers like those around Android or Apple,” Ali-Yrkko said.

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Online:

Nokia: http://www.nokia.com