Ericsson sets sights on better times ahead:
INTERVIEW CARL-HENRIC SVANBERG: With cost cuts behind it, the phone group's chief is optimistic. But he's making no predictions, says Christopher Brown-Humes:
Financial Times (London,England)
October 7, 2003
By CHRISTOPHER BROWN-HUMES
Carl-Henric Svanberg certainly knows a thing or two about timing. Six months ago, when he took over as chief executive of Ericsson, the world's leading maker of mobile phone infrastructure, the company was struggling with heavy losses, announcing job cuts and wallowing in the worst recession the telecommunications industry has seen.
But it now appears that he joined just as the company's savage cost-cutting was beginning to bear fruit and the devastating three-year slump that has ravaged Ericsson and other telecoms infrastructure makers around the world was bottoming out. In July he was able to declare Ericsson's financial crisis over and give the first cautiously optimistic assessment that the market for telecoms networks was stabilising.
Ericsson's shares have almost doubled to SKr12.5, from SKr6.5 when he joined the company on April 8. A further sign of the recovery could come later this month, when Ericsson may report a third-quarter profit - after 11 consecutive quarters in the red - despite revenues that are flat or even down on the second quarter.
Mr Svanberg, Ericsson's fourth chief executive in five years, is making no predictions. But he says: "We were at a minus SKr200m (Pounds 15.5m) in the second quarter before restructuring costs. I think it's very low odds on guessing that we will soon be in the black."
In an interview at Ericsson's new corporate headquarters in Kista, just north of Stockholm, Mr Svanberg clearly wants to give the sense that Ericsson is now no longer firefighting but looking at ways to grow again. For the first time since he joined the company from Assa Abloy, the Swedish lock-maker, in April, he spells out exactly how he expects Ericsson to grow over the next five years. Within the group's traditional business of supplying the networks and base stations that allow mobile phone calls to be made, the big areas of growth will be third-generation and a quasi-3G technology called Edge, as well as the emerging markets of China and India.
Defying the continuing scepticism surrounding 3G, Mr Svanberg insists the technology is a "no-brainer" because, if nothing else, it allows more voice calls to be made at lower cost. "Everybody buys the beauty of broadband in their homes. Everybody appreciates the value of mobility. 3G is basically broadband made mobile," he says. 3G already accounts for about 13 per cent of Ericsson's sales today, he notes.
There is also a huge opportunity for Ericsson in China and India, he says, because they will be at the forefront of the industry's drive to add another 1bn mobile phone subscribers over the next few years. He dismisses suggestions that local competitors are starting to erode Ericsson's position in these markets, saying they lack the volumes that underpin cost efficiency and the range of expertise that operators prize. "There is competition from local manufacturers, but we also have local manufacturing and local (research and development)."
The second area for growth is "the services layer" that will arise as multimedia, video-streaming and other 3G services take off. This will involve Ericsson getting closer to telecoms operators and developing a greater understanding of the needs of ordinary consumers, he believes.
Third, services for operators will be increasingly important to the group. That is both managing the networks that operators seem increasingly willing to outsource, and helping them integrate their systems. The business is more stable than infrastructure, has the potential for higher margins and already accounts for SKr18bn-SKr20bn of Ericsson's sales. "We have been so preoccupied with fast growth in infrastructure roll-outs that we haven't paid enough attention to this area," Mr Svanberg says.
Fourth, the company is going to place more emphasis on business customers, not just operators, its traditional clients. "Is the enterprise customer an important area where we will see telecoms growth? We definitely think it is and we definitely think we should play a role in that."
The new focus on enterprises and multimedia is mirrored at Nokia, which has just announced a restructuring that will highlight both business areas.
Ericsson may be talking about growth again but few observers expect it to grow as fast as it did in the late 1990s. Mr Svanberg does not think the peak of the boom is the relevant comparison: he notes instead that the industry's long-term expansion has been in the range of 6-8 per cent a year. He will not say whether he thinks the industry can get back to that rate of growth; only that things have started to look up now that telecoms operators have a stronger financial position after their crippling outlays on 3G licences at the start of the decade.
"It's getting increasingly obvious for us that the market is stabilising. Our planning scenario for next year is a flattish scenario. But there's probably a bigger likelihood that the market will gradually increase."
With this background - an improving market in sight and financial stability achieved - investors will be looking for some clearer targets from the group. Will Mr Svanberg repeat the target of a 10 per cent operating margin articulated by Kurt Hellstrom, his predecessor, for example? Not yet, at least. "We have not felt it's the right time to set goals for the future," he says.
The scars of the long downturn will be visible at Ericsson for a long time - the company is now half the size it was at the beginning of 2001 when it had 107,000 employees and will be down to 47,000 by the time its cost-cutting programme is complete at the end of next year. It lost SKr53bn in 2001 and 2002. There is still no evidence of growth in revenues - indeed, this year they will be almost half the peak level of SKr221bn seen in 2000. Moreover, its debt is still rated as junk by the credit rating agencies and some credit analysts believe it may need to strengthen its balance sheet again.
Mr Svanberg insists the company has a much stronger financial position, after last year's record breaking SKr30bn rights issue and positive cash flow of SKr11bn (including the sale of a France Telecom bond for SKr5bn) in the first half of this year. Annual operating expenses are set to fall to about SKr33bn from SKr88bn owing to the cost-cutting. There is even a touch of impatience that the credit rating agencies have not recognised the company's progress. "They (credit rating agencies) are sometimes slow to recognise an upturn," he says, "They want to be on safe ground."
In one sense, at least, the company has come through the trauma in good shape - it has managed to maintain its market share of 35 to 40 per cent for global system for mobile communications (GSM) and wide-band code division multiple access (WCDMA), its 3G successor. Mr Svanberg seems happy with the shape of the company. Will Ericsson be making acquisitions - Motorola's wireless infrastructure division being one obvious target? "We have nothing in particular we are focusing on right now," he says. What about disposals? "I can't see anything that we should leave behind. The portfolio is pretty tight."
The one disposal that analysts have often expected Ericsson to make is its 50 per cent stake in Sony Ericsson, its handsets joint venture with Sony of Japan. But Mr Svanberg insists this will be kept. The venture has been in the red since it was set up in October 2001 but is now in sight of black figures, just like Ericsson itself.
"They have a number of interesting products coming out," he says, brandishing one of the company's new Z600 clam-shell, colour screen, camera phones.
The venture has brought an excellent blend of skills from the two partners, he says. "It's obvious that the marriage is great. Our commitment to Sony Ericsson is as strong as it has ever been."
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