Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Ericsson CEO Hans Vestberg, already under pressure from restive shareholders, really didn't need another problem on his desk.

Underperforming Peers
Ericsson has trailed Nokia and its benchmark since the April announcement
Source: Bloomberg

Yet that's just what's happened: the Justice Department and SEC are investigating the company for alleged corruption by its executives in China, according to Swedish newspaper Svenska Dagbladet. Ericsson, the biggest maker of equipment used in wireless networks, said it's cooperating with the authorities.

Vestberg will have to hope that the episode won't prove to be his undoing. The experience of telecom carrier Vimpelcom when it was investigated and fined a near-record $795 million under the U.S. Foreign Corrupt Practices Act will be of little comfort.

That episode, over alleged bribes paid to win business in Uzbekistan, also embroiled Telenor and Teliasonera, and led to the departures of top executives at the Nordic carriers.

Even before the inquiry came to light, Vestberg had been facing criticism from investors. Ericsson's second-biggest shareholder, Industrivaerden, had publicly rebuked the company in May for its stock performance inability to grow revenue or profit. These two charts show the scale of that problem:

Long Slog
Ericsson's sales growth is showing signs of petering out
Source: Bloomberg
Treading Water
Ericsson has struggled to increase net income
Source: Bloomberg

Sweden's powerful Wallenberg family, which controls about 22 percent of Ericsson's voting rights, has remained mum to date. The U.S. inquiry will sorely test the two institutions' patience.

Ericsson's woes run deep. With sales of mobile gear and services accounting for 94 percent of revenue last year, the company has been hurt as telecom companies cut spending after completing their 4G networks. The wireless market will shrink by an average 3.5 percent a year to $65.7 billion in 2019, according to market research firm IHS.

Missing a Trick
Ericsson is stong in mobile gear but lags its main listed rival in fixed and broadband equipment
Source: Gartner 2015 figures

Ericsson hasn't diversified enough, unlike competitors such as Nokia, which bought Alcatel-Lucent last year. The $18 billion deal boosted Nokia's presence in fixed network and broadband products like IP routers, which help companies like Verizon to carry heavy video traffic and Facebook to run its websites from distant servers. The industry's other behemoth, China's Huawei, has also benefited from selling similar products -- and still offers mobile phones too.

Under Vestberg, Ericsson has been reluctant to make large acquisitions to bolster its portfolio, and has missing out on the growth his competitors have enjoyed. Instead, he signed a joint venture with Cisco last year to develop and sell fixed network products together. But such partnerships often fall flat because they slow down the research and development process and don't bring cost savings. Nokia bought Alcatel in part because its partnership with fixed-network specialist Juniper wasn't working out.

Vestberg has been trying to cut his way out of trouble, aiming for cost savings of 9 billion kroner ($1 billion) by the end of 2017. Operating expenses have climbed in five of the past ten years and, as this chart shows, gross margins have been declining for years

Under a Microscope
Ericsson's gross margins are closely watched by investors
Source: Bloomberg

Investors already want more on the cost-cutting front, and were unimpressed by a reorganization announced in late April. Since then the shares are down 23 percent, far worse than Nokia's 4 percent decline and the European technology index's 6 percent slide.

Vestberg looks increasingly like a CEO on borrowed time -- whatever the outcome of the U.S. investigations.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net