A Lot Of Static At Ericsson

Can CEO Nilsson reconnect the telecom giant?

As soon as Sven-Christer Nilsson walks into a room, you can see why the chief executive of Swedish phone giant Ericsson is well liked by his colleagues. Trim and soft-spoken, he looks younger than his 54 years. He talks enthusiastically as he sketches his vision of a fast-evolving, gadget-driven industry. You wouldn't think this was a man under fire.

But he is. In his first year at the top, Nilsson has had to deal with crashing earnings, a slumping stock price, and poor investor relations. Although he inherited most of these problems, his credibility and his job may be at risk if he doesn't show solid progress. Some analysts even speculate the company could be takeover bait.

Nilsson is working overtime to head off such an outcome. He is betting that the increasing use of mobile phones to transmit reams of information is a prime opportunity for Ericsson, the world leader in wireless systems. He also thinks Ericsson can help its customers exchange their switchboxes and copper wiring for fixed and wireless networks based on Internet technology. These would handle both voice transmissions and huge volumes of data. A bold vision, but if Nilsson can't pull it off, Sweden's flagship company could wind up as a giant with great technology but a tragic inability to market it.

NET GAME. The trouble is that while Ericsson has a formidable presence in wireless and fixed-line networks, it has fallen behind in the telecom market's hottest areas. Finland's Nokia has solidified its hold on the mobile-handset business, with a 23% market share vs. Ericsson's third-place 15%. Meanwhile, U.S. powerhouse Cisco Systems has grabbed the lead in the Internet telephony field, where it is followed by fellow North Americans, Northern Telecom and Lucent Technologies. Most recently, Cisco embarrassed Ericsson by winning a data network contract worth up to $60 million from Telia, a Swedish telecom operator and longtime Ericsson customer.

Nilsson certainly isn't sitting still. In the past few months, the former head of Ericsson's U.S. mobile business has reshuffled top management and established regional headquarters in London, Dallas, Miami, and Hong Kong. He is cutting some 12,000 jobs, mostly in the money-losing old-line telecom equipment business. And he argues that Ericsson has a good shot at leading telecom's next wave--the Internet on mobile phones. "The future will be increasingly in mobile and mobile Internet, and we are extremely well prepared for that," says Nilsson.

Few doubt that Ericsson is well stocked with crack engineers, but can they move at Silicon Valley speed to keep pace with Cisco? Nilsson's biggest obstacle may be the culture at 123-year-old Ericsson. Although the company gets 96% of its revenues outside Sweden, its heart and soul still lie in a sprawling complex of buildings near Stockholm. There, an old-style ethos of eight-hour workdays, compensation mostly based on salaries, and risk aversion persists. One example: Although women and young people represent a huge and fast-growing market for mobile phones, Ericsson's board remains all-male and middle-aged.

TOP PRIORITY. The company's ownership structure could impede its progress, too. While half of its shares are held outside of Sweden, mostly in the U.S., its key owners are Swedish. Thanks to special voting shares, the company is controlled by the Wallenberg family and an arm of Sweden's largest bank, Svenska Handelsbanken. This setup once helped Ericsson take long-term risks. But it makes it hard to issue new stock, which would dilute the main Swedish investors' stakes. And without new stock, Ericsson lacks the currency needed for major takeovers of U.S. technology companies.

For now, Nilsson's top priority is to stop the bleeding. In the first quarter of 1999, Ericsson's pretax income fell by 51%, to $155 million, on sales of $5 billion. Earnings for the full year will be down from 1998. The most serious problem is the decline in Ericsson's mobile-phone handset business. Once a big earner, mobile handsets are now barely profitable because of pricing pressure, aging products, and clunky designs.

In this glitzy market, rival Nokia has established a strong brand presence by launching a new phone every month for two years. Ericsson is working hard to keep pace. In the past couple of months, it has shown off six new models, including the ultrathin T28 mobile and the R380 Smart phone, which will offer users wireless Internet access. It has also rolled out the rugged, waterproof R250 Pro. But analysts question whether phones will let Ericsson catch up with Nokia. "I have my doubts that these products are sufficiently compelling to make a tremendous impact," says Peter Richardson, principal analyst at Dataquest Inc. consultants in London.

Nilsson is trying to deemphasize the battle with Nokia, saying his first goal is to pass Motorola Inc. for second place in handsets. He is also placing big bets on developing the wireless networks that account for almost 50% of Ericsson's revenues. Its sales of such equipment, mostly in Europe and Asia, grew by 47% in the first quarter. There may be up to 1 billion mobile subscribers worldwide by 2004, with 30% to 40% using mobile systems for the Internet. That will entail massive equipment upgrades. The world leader with a third of the market, Ericsson is best positioned to vie for the upgrade business, which could amount to tens of billions of dollars, says Sean Faughnan, technology analyst at J.P. Morgan in London.

BUYING BINGE. Meanwhile, Ericsson recently settled a long-running patent dispute by buying the telecom infrastructure business of U.S.-based Qualcomm Inc. for an estimated $120 million. The deal gives Ericsson access to CDMA, or code division multiple access, technology, the one mobile standard it was lacking. CDMA is used in parts of the U.S. and Asia.

Ericsson is also buying up small to medium-size telecom companies in the U.S. to fill in its gaps in Internet telephony. In mid-April, it bought Maryland-based Torrent Networking Technologies, which makes switches to help channel huge volumes of Internet traffic. Combined with other recent acquisitions and joint ventures, Torrent gives Ericsson a more comprehensive product line to compete with the likes of Cisco.

Nilsson insists that Ericsson is not in crisis. The company has been written off before as too small and too Swedish, and some analysts think its stock already reflects past mistakes and future risks. And any acquirer would have to come up with an awfully sweet deal to coax key shareholders into relinquishing control. But Nilsson has huge problems--and Ericsson is far from calling the tune in the new world of telecoms.