Ericsson CEO’s Do-List: Reality Check, Then Hard DecisionsBy
Analyst: New CEO Ekholm must rebuild Ericsson’s credibility
Challenges include declining market, Chinese competition
Borje Ekholm, the veteran executive brought in to turn around Swedish network-equipment maker Ericsson AB, faces tough decisions on staffing, competition and balance-sheet management that will test the former Investor AB chief’s ability to right the ship after a tumultuous 2016.
Ekholm, a long-time board member at Stockholm-based Ericsson, takes over as chief executive officer on Monday at a company that saw its share price plummet 35 percent last year amid steep revenue declines, fierce competition from Chinese rivals, and dwindling carrier spending as large investments in fourth-generation wireless gear largely wound down.
Ericsson’s biggest investors, Sweden’s Industrivarden AB and Investor, ousted former CEO Hans Vestberg after he failed to predict last year’s downturn, missed financial targets and reacted too slowly to a collapsing market. Since then, a caretaker CEO has continued cutting costs but offered little strategic clarity. For that, investors have been waiting for Ekholm, who led Investor, the Wallenberg family’s investment company, during a 10-year period when the stock returned almost 300 percent.
“First and foremost he has to rebuild the credibility of the company,” Neil Campling, head of technology research at Northern Trust Securities, said in a phone interview. “He has to do that by setting out a clear strategy and clear financial targets, and delivering on those targets.”
Ekholm, a trained engineer with Swedish and U.S. citizenship, said in October that the company needs to keep reducing expenses and shift resources into some areas while pulling back from others -- but he hasn’t given much detail. He won’t comment to the press until Ericsson reports fourth-quarter earnings on Jan. 26, according to a spokeswoman.
“We are only at the beginning of the mobility journey as we in coming years will see massive transformation across industries,” Ekholm said in a statement Monday. “Ericsson has shaped an entire industry and led technology developments.”
At Investor, he generated impressive returns by rejiggering the portfolio with wholly-owned, unlisted companies that helped to triple the stock price. While he’s seen as a high-quality executive, Ekholm also sat on the board of Ericsson for years while its fortunes waned, and some investors have said they’d have preferred an outsider.
“Borje has a deep understanding of the business and the challenges Ericsson currently faces,” Chairman Leif Johansson said in a statement. The new CEO “will be able to guide Ericsson on the next steps of the company’s development.”
Ekholm’s first order of business will be evaluating the company’s costs, product offering, and competitive situation.
Any successful strategy will need to address increasing competitive pressure from Chinese rivals ZTE Corp. and Huawei Technologies Co., who may become more aggressive in pursuing contracts in Europe amid a slowdown in investments in China.
According to IHS Markit, Huawei dethroned Ericsson from its position as the worlds biggest supplier of mobile infrastructure in the third quarter for the first time. And last month, CK Hutchison Holdings Ltd. and VimpelCom Ltd. selected ZTE to merge and manage their Italian mobile networks. The deal gives the Chinese supplier a boost as it tries to scale up its European operations, and represents a blow to Ericsson, which has business with both carriers.
“Figuring out how to fight against the Chinese competitors should be a top priority,” Charles Bordes, an analyst at AlphaValue, said in an e-mail. “The latest developments highlight these difficulties.”
Analysts also note that an ongoing effort to cut operating expenses by 10 billion kronor ($1.12 billion) may not be enough in the face of further declines of 2 percent to 6 percent in the market for mobile infrastructure, following a 2016 drop of as much as 15 percent.
“We should finish the year below the level of revenues of 2011, and yet the workforce is about 9 percent higher, including the recently announced job cuts,” Bordes said. “Except an unlikely rebound in the market in 2017, the math is simple.”
On the horizon for Ericsson and Ekholm is the fifth-generation mobile-network technology that is currently under development, and to keep from slipping further, Ericsson will need to prove its capabilities in developing products for the new standard.
However, large-scale commercial deployment of 5G networks isn’t expected until 2020 and even then, it may not provide the boost to network-equipment makers’ revenue that previous upgrade rounds have, according to Bengt Nordstrom, CEO of telecom industry consultancy firm Northstream.
“Their plans cannot be based on the assumption that revenues for some mysterious reason will increase and that operators will start making huge investments,” Nordstrom said.
For the fourth quarter, Ericsson is projected to report an almost 20 percent sales decline from the year-earlier period. Ekholm will need to think hard about what to say to keep his staff motivated despite the bleak prospects and need for further downsizing, Nordstrom said.
“It’s a company in a very pressed situation, and a lot of people have had to leave,” Nordstrom said. “One important aspect is to show management and employees that a turnaround is possible.”
Jan Frykhammar, who ran Ericsson as a caretaker CEO, will stay on the executive team as adviser to Ekholm, focusing on corporate governance and efficiency.
The management will also need to consider how to use the company’s balance sheet -- whether to continue generous dividends, or preserve cash for the turnaround and ahead of an expected market recovery in 2018. Since the profit warning in October, Ericsson’s credit rating has been cut twice by Moody’s and is now one step above junk.
Ekholm said in October that the dividend will depend on how much capital is needed for Ericsson’s new strategy. The potential for further downgrades “may be of subordinate importance" considering the market situation, he said then.