Rattled by tight capital markets and sluggish sales of mobile handsets and infrastructure equipment, LM Ericsson flew its executives to New York last week to reassure analysts and the media of its commitment to developing leading-edge 3G basestations and handsets while cutting corporate costs to the tune of $3.5bn
"We are adjusting our costs and our organization to a slower market," said Ericsson's president and CEO, Kurt Hellstrom, who has been much maligned in his homeland of Sweden for the swift actions he has taken to keep Ericsson afloat. "We will be profitable even in hard times in order to be even stronger when the market starts to pick up again," he said.
The Stockholm-based company began its cost cutting after it reported a 23 percent decrease in year-to-year sales from the United States, its largest market, in the first quarter of 2001. The drop led the company to lower its annual forecasts for both mobile systems and phones.
Ericsson also plans to reduce its head count from 105,000 to 94,000 worldwide, and to outsource production of its mobile phones to contract manufacturer Flextronics (Singapore). In addition, the company in April announced a mobile phone joint venture with Sony Corp. to help bring efficiencies to Ericsson's phone business, decreasing employees there from 18,000 to less than 5,000 by the end of the year.
Hellstrom said the mobile phone business, while difficult at present, only accounts for about 12 percent of Ericsson's business, while wireless infrastructure systems comprise more than 60 percent of sales.
Ericsson owns more than 30 percent of the worldwide wireless infrastructure market, and "we think that is a good point from which to build a base for 3G business," Hellstrom said.
Ericsson remains "very optimistic about the potential for 3G," Hellstrom said, noting that the company has gained 30 out of 51 agreements allocated for 3G wideband-CDMA network build-outs. Pre-commercial launch of W-CDMA networks is slated to begin in the fourth quarter of this year, with commercial service starting at the beginning of the second quarter in 2002.
General Packet Radio Services (GPRS), the so-called stepping stone to 3G services, were called a bright spot in Ericsson's financial picture, and are expected to drive the company's growth over the next few years.
Carriers in North America are holding off on investments in TDMA (time division multiple access) networks this year, as they wait to begin investments in Global System for Mobile Communications (GSM)/GPRS, their chosen path to 3G.
Hellstrom said he remains convinced that "the growing number of subscribers followed by the growing demand for capacity [for GPRS/GSM] will lead to a pick up" in North American business, though he couldn't say when.
Torbjorn Nilsson, senior vice president and head of marketing and strategy, business development at Ericsson, said the company expects 30 types of GPRS services to be deployed by September, mostly in Europe, and remains confident the company will sell 20 to 30 million GPRS phones this year.
Ericsson's executive vice president and chief financial officer, Sten Fornell, explained that increased investments in 3G technology, combined with low sales volumes and excess capacity, lowered Ericsson's operating margins and income in the first quarter of 2001.
Nevertheless, Fornell said, "We intend to keep our leading position in 2G and 3G systems and will do this by focusing our resources even more in core areas."
Ericsson does not project a recovery in the systems business in the second quarter, however, and there is limited visibility about the rest of the year, he said.
As for the phone business, Ericsson has reduced its 2001 mobile handset forecast to 430 to 480 million units, down from the 530 million units predicted earlier. The company continues to work through excess inventory and expects to see an increase in phone sales toward the end of the year. The joint venture with Sony, Sony Ericsson Mobile Communications, is expected to be profitable when it begins operations October 1.
Multimedia handsets for 3G developed by the new entity will handle W-CDMA/GSM and GPRS and feature video streaming, Bluetooth, color displays, 384 kbps packet data, imaging, next-generation Wireless Application Protocol services and mobile multimedia messaging services.
Ericsson executives have high hopes that the Sony joint venture will allow them to be "a main player in the new mobile Internet market," but analysts are not convinced the deal will help Ericsson leapfrog market leader Nokia Oyj (Espoo, Finland) in mobile handsets.
Cahners In-Stat Group (Scottsdale, Ariz) analyst Brenda Sky noted that Nokia Oyj has been successful in emphasising stylish phones that appeal to broader groups of people, while Ericsson, as well as Motorola (Schaumburg, Ill), both of whom continue to lose share to Nokia, pack lots of features onto phones for high-end business users who spend more money.
But that philosophy hasn't been proven yet, according to Sky, and both Ericsson and Motorola struggle with short-term profitability issues in their handset divisions. Adding to the difficulty is the fact that Ericsson and Motorola are focusing on handsets for mobile Internet services, a strategy that Sky suggested could be a shaky one, because US consumers have been slow to embrace mobile Internet functionality.