Online Extra: Q&A with Ericsson CEO Hellström
Many CEOs of technology companies are feeling the heat these days, but Kurt Hellström, the president and CEO of Ericsson, the big Swedish telecom-equipment maker, is in a unique position. He not only has the normal problems of a CEO in a struggling industry but he also has the particular burdens leading a small country's flagship company.
As he cuts back on employees and struggles to stop the red ink, Hellström and, to an even greater extent, Lars Ramqvist, the company chairman, are seen in Sweden as letting the whole country down. That has obviously made the last few months tough for the gruff but straight-talking engineer, who would much prefer to be riding his Harley or discoursing on the history of radio technology than answering questions from angry shareholders and journalists. On Apr. 24, he sat down at the company's headquarters for a wide-ranging discussion of Ericsson and Sweden with BusinessWeek London Bureau Chief Stanley Reed. Edited excerpts from his remarks follow:
On the the joint venture announced on Apr. 24 to pool Ericsson's mobile-phone business with Sony's:
In parallel with our work to resolve problems, we realized we needed to strengthen [the phone business] further. We listed a number of potential candidates. We found in talks that Sony was very compatible. They are very international. They have everything we don't have. We don't know video games. We have no competence in audio or streaming [media]. In addition, we thought it would be good to have a collaboration with a company [that was stronger in] consumer-type marketing than Ericsson. Two years from now, we will probably be a serious contender to be No. 1 in the market.
On whether that will fix the money-losing phone and handset business:
It's not fixing our problems in handsets. We have announced our program for downsizing and getting it under control. We have streamlined the program and closed a number of models. It should be profitable in the fourth quarter, even if we are alone.
On why margins are down in the mobile-systems business:
I have explained this so many times: Fifty percent of the systems side is GSM [global system for mobile communications]. It is very profitable. There has been a slowdown in TDMA [time division multiple access] in North America because TDMA operators are not investing or taking decisions about expanding any further.
On the negative $2 billion cash flow in the first quarter:
Most of that was due to accounts receivable. It was more on the systems side. The situation in the market made customers try to draw on our balance sheet. If they had paid as normal, we would have had positive cash flow.
On Ericsson's core business:
Ericsson's core business is sales and marketing, R&D, and services -- both applications as well as a lot of integration services. It is not to manufacture things. [On the systems side, Ericsson is even outsourcing manufacture of bay stations.] What we are keeping is testing and integration.
On why it has taken so long to tackle the problems in mobile phones:
When I took over, I realized that costs were way too high and expectations of growth far too optimistic. I started to realize that management didn't know what they were talking about. I put new guys in charge of that. I saw the product program was not that strong.
Unfortunately, the world changed in another way. Everybody was very optimistic, and we were very optimistic [about demand. Then, the market] started to shift to entry-level phones. That made our product not fit demand. We had to compete by lowering prices on high-end products. [New factories came on line, so] capacity grew while demand dropped. So there was very, very heavy under-absorption which hit us. Then we had a fire that lost 7 million phones.
On the idea of closing down the phone business:
Closing it down would cost a lot of money and have a lot of negative consequences for the systems business. Very few buyers would be willing to take on our problems. If I had known what I know now seven quarters ago....
It is important to have end-to-end capability. [It is a problem, especially at the beginning of a new technology such as Third Generation, or 3G,] if you can't back up your systems with nice handsets. Then, someone will come along who can do that. [Being able to provide handsets] is still an advantage in capturing systems business. We can guarantee availability of handsets for 3G.
On whether he's worried about Nokia taking share in mobile systems -- Ericsson's key business -- through vendor financing:
Nobody can go out and finance deals. That will kill anybody. Even [Nokia]. They are taking very strong and heavy risks. We still have a very strong market share of contracts without very much financing. We have been very cautious and conservative.
On the so-called crisis team of three board members Ericsson has formed:
They are a few guys that I have to talk to instead of summoning the whole board. Because of the problems, I will need to talk to the board a little bit more often. When I talk to them, they will take responsibility.
On reports that Chairman Lars Ramqvist has not been doing enough to help:
[There is no truth in them] whatsoever. There are lots of rumors and myths about how Ericsson is run. It is mostly speculation that is absolutely unfounded and generated in Sweden.
On the criticism that Ericsson has attracted of late in Sweden:
I have become a little bit philosophical. I have never been the messenger of bad news before. We haven't fared worse than any of our peers than perhaps one. We have more or less followed each other. We are somewhere in the middle. It started in the U.S. with the slowdown. The U.S. is our biggest market. Look at Cisco, Motorola, Nortel -- we are all more or less the same. That is not noticed much in Sweden.
This has made it very difficult -- a lot of noise. We are very exposed in Sweden. Everyone in Sweden has a right to know how to run Ericsson. In that sense, it has been a little bit hard.
On whether Ericsson will be a strong company in two or three years:
That I am very confident about. It has taken a long time to come to terms with the mobile phones. The alliance we are about to form with Sony is going to be strong and very good for what is coming. Others are trying to do the same thing, and this will [give them a push].
I still see the same growth numbers for systems all over the world. I am less sure about the replacement market for mobile phones.
Our systems business is very solid. In 3G, we have 50% of all contracts. We are also strong in CDMA 2000 [code division multiple access]. Then we have our fixed side, which is very strong. It grew 37% in the first quarter. That is due to our engine concept to migrate fixed telecom networks to IP-based networks. That solution is going to give us a lot of orders.