Hardening Handset Biz
Ericsson executives optimistic about 3G; less so about near-term results
By Jeanie Stokes
from the June 4, 2001 issue of Broadband Week
NEW YORK -- Ericsson, the world's largest manufacturer of mobile telephones and wireless infrastructure, remains optimistic about its future delivering third generation wireless technology.
But the Swedish giant is just as wary about its near-term financial results, which have been battered because of a world glut of current-generation wireless handsets, slowing economies and the resultant effect on telecommunications spending.
Ericsson executives declined to provide financial guidance for the company's second half of the year during their recent investment conference here. Ericsson, which dominates wireless network sales with about 80 percent of the world market, saw its operating margins in the first quarter 2001 decline "significantly due to investments in 3G technology," says chief financial officer Sten Fornell.
"We cannot count on a quick improvement in the second quarter" either, Fornell says. He blames the market uncertainty for the company's inability to provide analysts and investors guidance about Ericsson's financial expectations for the full year. Ericsson is focused now on improving cash flow and expects to save about $3.59 billion annually by a current cost-cutting program that included widespread layoffs.
"We will be profitable in hard times in order to be stronger when the market picks up," says Kurt Hellstrom, president and chief executive officer.
Ericsson and other telecom manufacturers not only are experiencing the impact of slower sales of network systems due to the general economic downturn and the shift to 3G technology. They're also seeing slower handset sales and a buildup of inventory as the wireless markets in Europe and the United States begin to mature and consumers hold off buying new phones, awaiting the arrival of equipment ready to handle high-speed Internet data transmissions as well as voice communications.
The company's future business lies in a mix of equipment for both fixed and mobile wireless Internet access that will share some applications, but not all, says Hakan Eriksson, vice president for research. With the high cost of equipment and network development has come the realization that the industry won't be able to bring the entire Internet to mobile wireless.
"With today's prices, it's far to costly to watch a movie on 3G," Eriksson says.
Ericsson earlier this year decided to outsource its handset manufacturing as one way to improve its cash flow. The company remains optimistic about its pending joint venture with Sony Corp. that's expected to be launched in October. It will marry the two companies' product research, design and development, marketing, distribution and customer services, and bring together Sony's expertise in consumer electronics and experience with Ericsson's telecom expertise to produce new products for mobile Internet services.
Ericsson currently owns about 40 percent of the global equipment market for the GSM/GPRS platform, the world's dominant wireless technology. About 20 million to 30 million GPRS-capable phones will in use by the end of the year, although "we are not sure that all will use GPRS services" capable of delivering Internet connectivity at speeds ranging from 64 kbps to 144 kbps, says Torbjörn Nilsson, senior vice president.
Ericsson also holds about a 40 percent share of the current market for wideband CDMA gear--the 3G standard to which GSM/GPRS networks will migrate--and is participating in 30 of the 51 contracts issued to holders of W-CDMA licenses.
But Ericsson is being cautious about tying itself too closely to the fortunes of its customers: It's providing vendor financing in only two of the 30 contracts, Fornell says.
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