Tech

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

Fixing messed up companies is hard and takes time. Shareholders in Ericsson AB were reminded of that on Tuesday when the Swedish company cautioned that demand for its telecoms gear would remain weak, and that more cost cuts were needed in its turnaround.

The shares tanked by 13 percent, reversing the gains made since Borje Ekholm took over as CEO in January. The selloff didn't look overdone. This is already Ekholm's second profit warning after all. Ericsson says the mobile equipment market will decline by a "high single digit" percentage, rather than the expected 2 to 6 percent decline. 

Down cycle
Ericsson's revenue fell last year and is forecast to fall further because construction of 4G mobile networks is largely complete
Source: Bloomberg
2017, 2018, 2019 figures are estimates based on Bloomberg data

The job of returning Ericsson to sales and profit growth will require ruthless execution and a sense of urgency that has long eluded the once undisputed king of mobile network equipment. Ericsson's board, controlled by two long-term shareholders, Investor AB and Industrivarden AB, is to blame for the sense of drift after letting the company become bloated and unfocused.

The task has been made harder by the fact that Ericsson dithered and is restructuring during an entirely foreseeable downturn, now that 4G networks have largely been built. In contrast, rival Nokia Oyj did a painful overhaul with layoffs and asset sales a few years back when the sector's revenue wasn't shrinking. The market for wireless network equipment and software is forecast to drop to $23.4 billion in 2020 from $48.2 billion in 2015, according to IHS.

Bad, and a Bit Less Bad
Shares in Ericsson and Nokia have both been hit by lower demand for mobile gear
Source: Bloomberg

The recent arrival at Ericsson of activist shareholder Cevian Capital is the only reason for optimism. It has built a 5.9 percent stake since November. But it only controls 3.5 percent of the voting rights, far less than the near 37 percent held collectively by Industrivarden and the Wallenberg-controlled Investor.

Cevian likes to cast itself as a "constructive activist", which works with its targeted companies to improve things. It has a longer three to five-year investment horizon than its flashier American cousins. But managing partner Christer Gardell didn't hesitate to publicly berate the Ericsson board over its complacency soon after disclosing his fund's stake in late May.

Lately, though, Cevian has been working with Ericsson and has signaled its support for Ekholm's planned revamp. Its influence is starting to be felt. Leif Johansson, chairman for the past six years, has said he'll step aside before the 2018 annual shareholder meeting. A search is underway for a replacement, and Gardell has joined the nomination committee for appointments.

Ericsson's decision to deepen cost cuts while trying to protect the R&D budget, announced on Tuesday, is a move the activist would support.

Unfortunately, the realities of the telecoms equipment business mean fixing Ericsson will probably take two or three years at least, with no ultimate guarantee of success. Former rival Alcatel never completed its recovery; it just sold itself to Nokia once most of the dirty work was done. 

Since lots of network gear is sold with long contracts, the supplier often commits to years of support and product development. Ericsson can't just kill products overnight that telecoms operators have built into their infrastructure. It's not as simple as closing a retail outlet with poor sales.

Cevian is supposedly a patient activist that's now invested in a company where the Swedish model of patient capitalism has failed spectacularly. Ericsson has to contend with the reality of low demand and the CEO should be given more time. But sometimes a kick in the pants really is the best option.

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

(A previous version of this story was updated to reflect the date that Cevian started stake-building.)

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

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net