FT on Ericsson's Carl-Henric Svanberg
>> 'In 126 Years, Ericsson Has Never Experienced Anything Like This'
Christopher Brown-Humes
Financial times (UK)
April 3 2003
When Carl-Henric Svanberg heard last month that he was going to be Ericsson's new chief executive, the first thing he did was spend SKr100m ($12m) buying shares in the telecommunications equipment group. As he prepares to start this assignment on Tuesday, Mr Svanberg will be hoping his confidence in the group is justified. The shares cost him about SKr6.35 each. So far he has recorded a loss, with the company's shares closing yesterday at SKr5.75.
The company Mr Svanberg is taking over is almost unrecognisable from the one his predecessor, Kurt Hellström, inherited in 1999.
Once the high-flying champion of the Swedish information technology sector and a credible contender to be a leader in the global handset market, Ericsson is now struggling to win back investor confidence. Shares in the world's biggest maker of mobile infrastructure have plunged 96 per cent since March 2000. It lost SKr53bn in 2001 and 2002.
Ericsson's balance sheet was weakened so badly that only a SKr30bn rights issue last year saved it from collapse. A painful restructuring programme, still to be completed, has cost 50,000 jobs, halving the group's workforce.
The woes have been caused by one disaster of the group's own making - its handset operations - and one outside its control - an unprecedented slump in the telecoms equipment market. Ericsson's orders and revenues have shrivelled as mobile phone operators have cut spending because of their cash flow constraints, delaying the roll-out of third-generation services and postponing upgrades to their existing networks. 3G, which allows mobile phone users to send and receive data and images, was expected to drive revenue growth at Ericsson and other equipment suppliers.
Said Mr Hellström in arecent interview with the Financial Times: "Ericsson has been going for 126 years and it has never experienced anything like this."
Few countries depend so much on a single company as Sweden on Ericsson. The equipment maker accounted for 15 per cent of the country's exports in 2000. Last year the figure was just 9 per cent; but Ericsson remains Sweden's largest exporter.
Individuals have suffered, too - and not just those hit by the massive jobs cull that has removed thousands of jobs from cities across the country. Most of the population holds a stake in Ericsson through pension investments, mutual funds or directly held shares. Nearly 1m Swedes - nearly 20 per cent of the working population - hold Ericsson shares.
Above all, national pride has been hurt. Ericsson did more than any other company to give Sweden a lead in mobile telephony and IT, not only because of its own successes in the late 1990s but also because it helped to spawn hundreds of start-ups. The company's swagger in those days was symbolised by Lars Ramqvist, its ebullient former chairman, who threatened to move Ericsson's headquarters to London unless the government took measures to improve the Swedish business climate. "To many Swedes Ericsson and Volvo are the two companies that symbolise Sweden and Swedish manufacturing," says Klas Eklund, chief economist at SEB, one of Sweden's leading banks. With Volvo Cars now part of Ford, Ericsson's importance to the Swedish psyche is even greater.
Swedish disappointment has been inflamed by the success of Nokia, the world's leading maker of mobile phones, in neighbouring Finland. "Many Swedes cannot understand why Nokia is doing so well while Ericsson has had such a difficult time," says Peter Thelin, a partner at Brummer & Partners, a Swedish hedge fund group.
Nokia has shown it understands ordinary consumers in a way that Ericsson failed to do. As an equipment manufacturer, the Swedish group is used to dealing with companies, not consumers. Its phones were over-engineered and ugly and launches were often late; Nokia, by contrast, emphasised design and bringing products to market quickly. After a devastating $2bn loss on the business in 2000, Ericsson combined its handset operations with those of Sony of Japan. One of the reasons was that Sony understood consumers better. But Sony Ericsson is battling to build market share and has yet to make a profit.
It is a measure of Ericsson's difficulties that Mr Svanberg is the fourth CEO in five years. He is the first outsider to take the top job for 60 years and is independent of the two power spheres - Investor, the holding company for the powerful Wallenbergs, and Industrivärden, which is linked to Svenska Handelsbanken - that control Ericsson.
His first task will be to rebuild morale. "By far the most important thing is to encourage what must be a rather demoralised crew," says Sten Westerberg, a senior adviser to Nordea Securities.
There is also a cultural challenge. Ericsson is a technical company, driven and dominated by engineers, who for many years dealt almost exclusively with monopoly state telephone operators. There are those who feel that the group still has not fully adapted to the developments of the last decade - deregulation, privatisation, and the mobile phone revolution - which have created hundreds of new operators.
Mr Svanberg, a former chief executive of Assa Abloy, the world's leading maker of locks, has yet to outline his strategy. Profit is the most important thing, he has said. Ericsson has made a loss for nine consecutive quarters.
Although the company denies that there are any plans for further restructuring, Mr Svanberg is widely expected to implement deeper cuts. The company has already said it aims to cut its annual operating expenses from SKr51bn at the end of 2002 to SKr38bn and be able to break even on revenues of SKr120bn (last year, revenues fell 31 per cent to SKr145.8bn).
Under existing restructuring programmes, employee numbers are forecast to fall below 60,000, compared with 107,000 in early 2001. That would still leave Ericsson with more employees than Nokia, despite having little more than half of the Finnish company's revenues. Nokia has 54,000 employees. In any case, analysts believe the SKr38bn target for operating expenses is demanding and could easily require a further 10,000 jobs to be cut. Ericsson has ruled out fresh fundraising but bankers say it should not be excluded as a possibility.
Mr Svanberg will also have to face larger questions about Ericsson's positioning in the telecoms industry. Among the first issues he will need to handle is whether Ericsson should sell its 50 per cent stake in Sony Ericsson. The joint venture has shown signs that it is increasing its market share (now about 6 per cent) but has yet to make money. Keeping it alive may require further investment: under the terms of the agreement with Sony, Ericsson may be forced to inject another €350m ($380m) into the business by October. Mr Hellström denies that this will be necessary.
Another item on the agenda is whether Ericsson should focus purely on mobile systems - the supply and servicing of base stations, routers and other equipment to mobile operators. That would mean selling its defence and cable activities, which have already been designated as non-core, as well as reviewing the future of its lossmaking fixed line business.
Mr Svanberg will also need to decide whether to deepen or abandon Ericsson's involvement in CDMA, a rival technology to GSM and WCDMA, its third-generation successor. The group now has a market share of 5 per cent in CDMA. Its operations in this area are lossmaking.
Whatever Mr Svanberg decides on these tactical matters, shareholders agree there is one overarching strategic aim. As Anders Nyren, chief executive of Industrivärden, one of Ericsson's two main owners, puts it: "The first challenge is to continue the work which Kurt Hellström started, which is to return Ericsson to profitability."
If Mr Svanberg is lucky, he will have got his timing right. Ericsson insiders insist the equipment market cannot get any weaker. And even in the downturn, the group's market share has held up well. If, as analysts expect, WCDMA eventually becomes the dominant third-generation technology, Ericsson could increase its share further, as it is particularly strong in this segment. The group may also emerge stronger from the downturn than some of its rivals, such as Nortel and Lucent, which have had to dismiss even more people. Even Nokia, which has kept its dominance in handsets, has been badly hit by the downturn in the infrastructure market; this division has plunged into the red.
But will Ericsson ever again be perceived as a growth company? In the late 1990s, profits and sales grew at more than 20 per cent a year. Now Mr Hellström says the goal is to grow faster than the industry average and achieve an operating margin of 10 per cent. But he gives no time-frame.
However, industry trends are not on Mr Svanberg's side. Angela Dean, analyst with Morgan Stanley in London, says there has been a close correlation between Ericsson's growth and the growth in net new mobile phone subscribers around the globe. From 2001, there has been a decline in new subscribers globally; and there is no sign of the trend's being reversed.
The mobile infrastructure market shrank 20 per cent last year and the fall this year could easily be 10 per cent. Ms Dean says: "Of course things would start to look up for Ericsson if data services took off, if operators started to roll out 3G aggressively, if competition forced operators to invest more and people used their phones more. But do I see any signs of this happening any time soon? No."
The continued grim market outlook is undoubtedly the biggest shadow over Mr Svanberg's arrival. Roger Appleyard, credit analyst at ABN Amro in London, says: "Whatever Mr Svanberg's abilities, what he can't do is persuade operators to spend any more money." With analysts predicting another year of losses in 2003, the long-awaited turnaround at Ericsson is still far from certain. <<
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