Ericsson's Blazing CircuitsJulia Flynn
Lars Ramqvist has been logging plenty of air miles between Sweden and China lately. As chief executive of L.M. Ericsson, the Swedish telecommunications equipment maker, Ramqvist's courtship of top Chinese officials helped Ericsson secure its No.1 spot as a supplier of mobile-telephone systems to the booming Chinese market, against such rivals as Motorola Inc. and Siemens. It also helps explain why the 55-year-old Swedish executive is spouting Asian philosophy to Ericsson employees and shareholders. "We should keep in mind the old Chinese proverb," Ramqvist cautions. "No tree grows to the heavens."
That may be. But tempering expectations hasn't been easy. Fueled by surging sales of mobile-phone equipment (chart), Ericsson has emerged as one of the hottest players in the global telecom game. On Aug. 18, the company reported a 78% rise in pretax profit, to $303 million, for the first half of 1994 as revenues grew 33%, to $4.8 billion. Since April, Ericsson's stock has soared 19%, to around $54 a share, far outpacing the Swedish stock market.
The key question: How long can the hot growth continue? With heavy investments in research and development and a network of powerful partners, Ericsson looks well positioned to supply sizzling emerging markets with its traditional business of wire-based public phone systems in coming years. It's also riding the digital wireless wave that's rolling through Europe, the U.S., and Japan. Still, "virtually no company could keep up that pace for very long," says Evan Miller, a telecommunications analyst with Lehman Brothers in London.
GOOD TIMING. Judged by its recent coups, though, the slowdown won't be immediate. On Aug. 1, China's Guangdong Province agreed to buy $400 million worth of telecom equipment from Ericsson. That deal followed a $217 million contract to expand Mercury Communications Ltd.'s One-2-One network in Britain, which was launched last fall as the world's first personal-communications system (PCS) offering mobile phoning for the masses. The Mercury experience could help Ericsson win sales in the U.S., where PCS is just getting started. "Big contracts are what we've come to expect from Ericsson," says Andrew Haskins, an analyst at James Capel & Co. in London. "Things are going its way."
That wasn't the case a few years back. Soon after he took over in 1990, Ramqvist persuaded the company's directors to hike R&D spending by 50% over two years, to $1 billion annually. He was betting on a mobile future, since strong growth of both public-network switches and analog-cellular systems had begun to fizzle out. It was a risky move, coming just as the recession hit. Ericsson's 1991 profits plunged 67%, and its stock price collapsed 70%, to 11. Even so, Ramqvist, a PhD in physics and chemistry, ignored advice to slash R&D spending to prop up profits--and instead closed factories. "If we hadn't increased R&D, we'd be roughly half the size we are now," he says.
TRIPLE PLAY. Last year, Ericsson spent 21% of its sales on R&D, about twice the industry average. That has helped it protect its estimated 41% share of the world market for mobile-phone infrastructure--and gain a 60% share in the fast-growing digital segment. "Ericsson has succeeded in taking a big chunk of the market from Motorola," says Ira Brodsky, president of Datacom Research in Wilmette, Ill. By using its global network of 40 research centers to develop new digital mobile systems for three different markets--Europe, the U.S., and Japan--essentially at the same time, Ericsson was able to grab a commanding lead in the market. That's impressive, considering that each digital system took more than 1 million person-hours to develop.
Ericsson's powerful partners have also helped it stay nimble. In 1987, as head of its components unit, Ramqvist struck a deal with Texas Instruments Inc. that gives Ericsson access to the U.S. company's most advanced microelectronics in return for a long-term supply agreement. In mid-August, the partners opened a $100 million custom-chip factory on the outskirts of Stockholm. Ericsson has a similar arrangement with Hewlett-Packard Co. to develop operating systems. To help it market in the U.S., Ericsson has teamed up with General Electric Co. And in Japan, Ericsson has turned to Toshiba Corp. to help it service its customers there.
Still, Ramqvist faces some challenges. Price wars are squeezing profit margins in Ericsson's important wired public-transmission and phone-switch businesses. "There's tremendous pricing pressure, and demand is not making up for it, so the markets are actually contracting," says researcher Yankee Group's Keith Mallinson, who estimates that prices plunged 40%, to $9,000 per transmission unit, while switching prices have at least halved over the past five years. Meanwhile, the tantalizing growth prospects of digital mobile have attracted far more big suppliers than analog systems have.
Ramqvist also worries that politics may play an increasing role in deciding which company gets big contracts. He's still fuming over loss of a Saudi Arabian contract to supply half a million telephone lines that was worth some $1.7 billion, despite submitting what he believes was the lowest bid. In May, AT&T was awarded the contract after the Clinton Administration intervened. But then, after scoring so many successes, Ramqvist knows that Ericsson may be due for some humbling. After all, that's the point of his often-repeated Chinese proverb.