Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle

Ericsson's new CEO is trimming fat and focusing on core business activities, but does the new strategic plan pack any punch?

Iain Morris, International Editor

March 28, 2017

7 Min Read
Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle

After former CEO Hans Vestberg was sunk by the proverbial iceberg of a major earnings setback last summer, Ericsson finally settled on Börje Ekholm as his successor. Ever since, market watchers have been speculating about the role the acolyte of the Wallenberg family, one of Ericsson's main shareholders, would come to play after taking charge at the start of this year. A finance expert but self-confessed "rookie" in the telecom world, he seemed just as likely to flog the ailing Ericsson business, or parts of it, as steer the company toward a brighter future. (See Is Ekholm Ericsson's Savior or Seller?)

A new strategic vision was promised, however, in which emerging business opportunities in Ericsson's wheelhouse seemed bound to be a focus. The much-hyped 5G mobile standard was the most obvious. (See Ericsson's Ekholm Trumpets 5G Role But Still Lacks Plan.)

The update that finally emerged today, after weeks of eager anticipation, confirmed a number of suspicions but lacked the wow factor analysts had craved and was woefully short on detail. Dodging hard-edged questions about the future outlook, Ekholm promised to "at least" double Ericsson AB (Nasdaq: ERIC)'s operating margin, to about 12%, without really indicating how he plans to achieve this -- other than through further cost cutting -- or when. "I would like to be convinced by the plan," said one analyst during a call earlier today, sounding wholly unconvinced, while others questioned some of the latest decisions. (See Ericsson Tightens Focus, Warns of $1.7B Q1 Hit.)

Those will cover -- in all probability -- a sale of Ericsson's unprofitable media business, which the vendor has spent years assembling through a considerable amount of takeover activity. Despite those efforts, media was responsible for just 4% of Ericsson's sales in 2016 and an operating loss of SEK1.8 billion ($210 million). Besides exploring "options" for those particular assets, Ericsson also looks set to jettison its cloud hardware business, a small part of its similarly loss-making IT and cloud division.

That will leave the company with its vast networks business, which accounted for nearly three quarters of sales last year, a digital services outfit that includes the OSS/BSS product portfolio and a slimmed-down managed services unit, whose chief focus will be on "automation."

For all the latest news from the wireless networking and services sector, check out our dedicated Mobile content channel here on Light Reading.

If the decision to retain the OSS/BSS division hardly came as a surprise, it is one that some analysts find troubling. How much Ericsson generates in revenues from OSS/BSS business is unclear, but its entire IT and cloud division contributed about 47.9 Swedish krona billion ($5.5 billion) in sales last year, 8% less than in 2015 and only about a fifth of Ericsson's total revenues. More worryingly, the unit's operating loss -- even excluding restructuring charges -- doubled to SEK4 billion ($460 million) in 2016.

Ekholm insists that OSS/BSS is "strategically important" both to Ericsson and to its customers. That makes perfect sense, given the importance so many service providers now attach to their digital transformation. And Ekholm believes he can restore profitability here by ditching legacy activities and channeling resources into exciting new areas. The sale of the media and cloud hardware businesses could support that move, assuming Ericsson can raise a decent amount from the divestment of what remain relatively small (and currently loss-making) assets.

Yet this gambit could expose Ericsson to an assault by China's Huawei Technologies Co. Ltd. After all, many service providers feel the need to continue maintaining their legacy systems even as they invest in new ones, and Huawei has the wherewithal to satisfy their various demands. The Chinese vendor already appears to have chewed into Ericsson's share of the networks market. The fear now is that -- with its determination to dominate any new opportunity -- Huawei could have a similar impact in the OSS/BSS arena. (See Is There No Stopping Huawei?)

Next page: Core complaints

Core complaints
What was really missing from Ekholm's strategy, though, was any indication of how Ericsson will counter its challenges in the networks sector. Last year, it predicted that overall sales in this market would fall by 2% to 6% this year and stabilize thereafter -- a forecast it is sticking to now. With the lion's share of revenues coming from this business, Ericsson would have to outperform the overall market to grow its top line. But its real priority is to improve its profitability: While network sales fell by 11% last year, to SEK165 billion ($18.8 billion), operating income excluding restructuring charges dropped 34%, to just SEK19.7 billion ($2.3 billion).

On neither the sales nor the profitability front, however, has Ericsson offered much reassurance. In an update that ran to more than 1,000 words, fewer than 60 were devoted to the networks business, featuring cursory mentions of 4G, 5G and a statement about optimizing the "end-to-end offering to address… customers' needs." In a more general sense, Ericsson also said that combining products and services, and driving efficiency, would help it to better meet requirements.

Really? Industry chatter at the recent Mobile World Congress suggests that Ericsson's real problem is execution, not efficiency. Contrasting Ericsson and Huawei, a source at one major service provider told Light Reading that when something goes wrong with Huawei products, a team of engineers arrives by plane almost immediately. With Ericsson, they turn up days later. The Swedish vendor might want to equate efficiency with execution, and argue that improvements will lead to better customer service, but that cannot be taken for granted. In Huawei's case, it is arguably the company's bloat, and perhaps even a devil-may-care attitude toward costs, that puts it at customers' beck and call.

Cutbacks, then, could entail business risk. But even if pruning is to proceed regardless of that risk, Ekholm had few concrete details he was prepared to divulge. Restructuring costs this year could soar, it seems, to as much as SEK8 billion ($810 million) against a previous estimate of just SEK3 billion ($340 million). That suggests another round of job losses, and yet Ekholm denied there would be any big announcements about redundancies. He also pointed out that Ericsson would continue to recruit employees while laying off others -- a phenomenon that has seen the company's staff numbers remain at a stubbornly high level in recent years. In the meantime, some "negative developments related to certain large customer projects," combined with impairment charges and first-quarter restructuring expenses, are to cost Ericsson up to SEK15 billion ($1.7 billion) in the current quarter. Oops.

And what of 5G and future growth opportunities? If Ericsson can restore its reputation as the go-to vendor for wireless broadband products, it could benefit handsomely as telcos start to invest in the next-generation mobile technology. But this is unlikely to happen for at least a couple of years, when the first standards are due to appear. And a high-speed rollout of 5G looks increasingly improbable as operators wrestle with their own business challenges. (See The Growing Pains of 5G.)

Want to know more about 5G? Check out our dedicated 5G content channel here on
Light Reading.

On a less negative note, the markets appear to have taken the strategy update in their stride, with Ericsson's share price down only about 2% in Stockholm at the time of publication, despite the warning on first-quarter costs. That drop looks modest compared with the double-digit declines that Ericsson suffered after earnings disappointments last year. Importantly, the share price is trading about 8% higher than at the beginning of this year, when Ekholm took over, even if it is about 27% lower than the end of March 2016.

Ekholm certainly appears to have benefited from some goodwill in the industry, with analysts reserving judgment while he learns the ropes. Getting to grips with such a vast and complex machine as Ericsson, with its multinational operations and more than 111,000 employees, is not something he could possibly do in only a few short weeks. And perhaps Ericsson needs a competent, no-nonsense manager as opposed to a visionary leader. It will be what he does, not what he says, that really makes the difference.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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