Tech

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

(Updated )

In Sweden, cooperation and consensus are prized. Even in the fiercest debates in business or politics, arguing openly tends to be frowned upon.

So it's surprising that a spat has broken out between two powerful shareholders in telecommunications network equipment maker Ericsson.

Investor AB, a fund backed by the Wallenbergs, Sweden's pre-eminent business family, and a rival fund Industrivarden, are trying to correct deep problems at Ericsson and find a new CEO. But it appears that they can't agree over what should be done.

Industrivarden has lost faith in Ericsson chairman Leif Johansson and wants to replace him, according to report in Friday's Svenska Dagbladet newspaper. Johansson was chosen as a compromise candidate between the two sides since he has worked at companies both funds had invested in such as Volvo and AstraZeneca. Investor has publicly backed Johansson.

Ericsson's long-standing under-performance is clearly testing the funds' co-operative spirit. Revenue has fallen for seven consecutive quarters on a constant currency basis, according to Bloomberg Intelligence data. Operating profit has shrunk 22 percent since 2011 to reach $2.59 billion last year. Its stock has trailed competitor Nokia. 

Switched Places
Ericsson shares used to outperform rival Nokia's but then fell behind
Source: Bloomberg

Investor AB and Industrivarden have shared power at Ericsson since the 1950s, controlling collectively almost 42 percent of the voting rights. Investor AB has two board seats, while Industrivarden has one, out of a total of usually 10.

It's a prominent example of the Nordic idea of "patient capital," where investors are willing to stick with a company for decades and not be beholden to quarterly earnings pressure. That model is laudable, but it hasn't done Ericsson any favors.

In a sector where technology changes quickly and R&D is costly, Ericsson arguably needed impatient and tech-savvy owners willing to make tough decisions on strategy and questioning management's assumptions. The whole industry is under pressure as Chinese competitors Huawei and ZTE have grown up. And as the major phone companies have largely completed their 4G mobile networks revenue is expected to dwindle this year and next.

But Ericsson's issues are deeper. It's hard to escape the impression that the board should have done more, earlier. 

Stalled Engine
Ericsson's cash generation is stuck in neutral despite carriers spending heavily in rcent years on 4G
Source: Bloomberg

Ericsson resisted starting deep cost-cutting programs that Nokia and Alcatel undertook several years ago. Only now is one underway finally.

On the product side, the company rested on its laurels as the long-time leader in mobile equipment. It was slow and ineffective in responding to the way smartphones blurred the distinction between mobile and fixed networks. With data volumes exploding, operators need to offload mobile traffic to fixed lines and upgrade their networks to fuel our collective addiction to Netflix and YouTube.

Ericsson did not have the right products in fixed networks to respond to the shift. It bought some smaller companies and tried to build its own to fill the gap, but got almost nowhere in terms of market share. And it let Nokia buy France's Alcatel-Lucent last year, which for all its problems did have a good set of broadband, optical, and IP routers that would have plugged that hole in Ericsson's product line. 

Hole in the Portfolio
Ericsson is strong in mobile gear but lags its main listed rival in fixed and broadband equipment
Source: Gartner 2015 figures

Ironically, it appears the presence of two long-term minded funds at Ericsson actually has worked against the company. In fact, Ericsson is the only major company where the two influential Nordic players are both present. Investor AB and Industrivarden claim that they have always worked well together because of shared philosophies in how to create value. With only one in the driver's seat decision-making would have been more nimble.

Ericsson's recently departed CEO Hans Vestberg was fond of talking about the growth to come from so-called 5G technology that won't be commercialized by 2019 at the earliest. Perhaps that message went over well with the patient capitalists in the boardroom -- but other shareholders are right to demand improvements much sooner.

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

(Corrects operating profit figure in fifth paragraph.)

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