Ericsson Connects Again

Savage cost-cutting has put the giant back on track

The glow over Stockholm these days isn't just the midnight sun hanging above the arctic circle. There's also an aurora coming from wireless giant Ericsson, which emerged from three years of crisis on July 18, when it reported positive cash flow and a small second-quarter operating profit. The world's largest seller of mobile-phone networks now confidently predicts it will post a net profit in the fourth quarter. In an interview at Ericsson's sprawling Stockholm headquarters, newly installed chief executive Carl-Henric Svanberg seems downright jubilant. "The financial crisis is behind us," says Svanberg, who stepped into the top job on Apr. 8 after nine years running Swedish lockmaker Assa Abloy.

For investors who have seen the value of Ericsson's shares plunge a stomach-churning 94% from their March, 2000, high, the turnaround couldn't come soon enough. Whacked by the telecom meltdown, the former highflier has racked up $8 billion in losses since 2001. But savage cost reductions carried out mostly by former CEO Kurt Hellström -- including slashing 53,000 jobs, or half Ericsson's peak employment -- have finally returned the company to financial stability. "Ericsson is clearly out of the woods," says analyst Richard Windsor of Nomura Securities in London.

True, sales are still declining as the world's mobile-phone operators keep a tight lid on spending. But Ericsson has now chopped away enough that it can make money in a market only half as large as it was during the boom. "We're not betting on any improvement in the market," says Svanberg. "Today's environment is good enough to be profitable." Nomura's Windsor forecasts Ericsson will earn $190 million on $13.8 billion in sales next year, and by 2005, profits could approach $1 billion.

But can the onetime Swedish star become a growth company again? The signals aren't promising. Ericsson and other wireless-equipment makers such as Nokia and Lucent Technologies say the industry will shrink as much as 15% this year before stabilizing in 2004. Any recovery after that will be weak. Sales of radio base stations, which make up about half of Ericsson's revenues, could rise only 1% in 2005, figures Allied Business Intelligence Inc. of Oyster Bay, N.Y. "There isn't going to be a quick pop," says Allied's research director, Ed Rerisi.

Blame an unhappy convergence of forces mostly out of Ericsson's control. In the developed world, mobile penetration is already so high that wide-scale network construction isn't in the cards. On top of that, the switch to third-generation broadband networks is happening more slowly than hoped. And prices for 3G gear -- where Ericsson boasts an estimated 50% market share -- are already tumbling by 20% per year due to competition.

There's more growth in developing markets such as China and India. But carriers there tend to buy less expensive second-generation systems. Also, the rise of Asian rivals is driving down prices in this segment. "I'm pretty pessimistic for the sector as a whole," says analyst Gilad Alper of Commerzbank in London.

Svanberg shrugs off the bleak forecasts. The 51-year-old exec is convinced wireless is still a good business. Some brave souls such as Hong Kong-based Hutchison Telecommunications are already offering 3G in Asia and Europe. Rivals will have to respond to hang on to their customers and reap 3G's operating efficiencies, Svanberg argues. At the same time, he is continuing Hellström's push into professional services, which now make up 15% of revenues. The company has already won more than 35 bids to operate networks for carriers around the world, including a multimillion-dollar deal announced on July 22 with Swedish-Finnish telco TeliaSonera.

Besides, Svanberg swears he can wring out more cost savings. More efficient manufacturing will kick gross margins up to 36.2% this year, saving $580 million in production costs. And 2003 capital spending is slated to be just half of last year's level. "This is just the beginning of the rebuilding of a highly profitable Ericsson," says Per Lindberg, an analyst at Dresdner Kleinwort Wasserstein in London. That may not be the same thing as gonzo growth, but for hopeful shareholders, who have driven Ericsson stock up by 69% since Svanberg took over, it's a hell of a start.

By Andy Reinhardt, with Stanley Reed, in Stockholm

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