Ericsson: Look Before You Leap!
Windsor's comments follow the latest outburst from Ericsson CEO and president Kurt Hellstrom, who has stated that further investments in its joint handset venture with Sony Corp., and in its homegrown CDMA2000 equipment business, are under review. The Sony Ericsson Mobile Communications business will need to show growth in sales and market share in the coming quarters if Ericsson is to pump more money into the venture, says Hellstrom.
The joint owners of the mobile phone producer were looking for profit in the company's first year (it was formed in October 2001), but the venture lost 800 million Swedish Krona ($85 million) in the second quarter of this year and is not set to be profitable this year.
Both partners have agreed previously to invest up to (a key clause) €500 million ($492.5 million) in the venture before the company's second anniversary in October 2003, but Ericsson wants to review progress and see if lower priced models to be launched later this year can win market share, especially from soaraway handset market leader Nokia Corp. (NYSE: NOK) (see Nokia Extends Handset Share).
While comments concerning such a high profile joint venture attracted much attention, equally as telling for Ericsson's future was Hellstrom's comment that a greater share of the CDMA equipment market was required if Ericsson was to continue selling such equipment.
As recently as July, Ericsson had reiterated its support for both the handset and CDMA lines of business (see Ericsson Posts $380M 2Q Loss). Six weeks is a long time in telecoms these days, it seems.
To quit the CDMA business (CDMA and CDMA2000 equipment) now could spell disaster for a management team that has hardly proved itself in recent times, according to Nomura's Windsor. "CDMA2000 has done better than anyone expected, and if Ericsson was to pull out just as the market for that equipment was picking up it could set the company back a long way," says Windsor. He believes Ericsson has about 5 percent of the market at present, while its current networking infrastructure strength lies in the market for wideband CDMA (WCDMA) kit, where it holds about 45 percent of the global business.
Windsor says Nomura has two scenarios for how much of the global next generation wireless infrastructure market CDMA2000 will account for – one scenario gives its 20 percent, the other a hefty 40 percent. It is that potential for growth, which would come from operators such as China Unicom Ltd. committing to a national CDMA2000 network, that could make any decision by Ericsson to exit the market questionable. Such rollout decisions still hang in the balance, however (see CDMA Hits Chinese Wall).
Any such decision could be made worse by increasing investments in CDMA by rivals such as Lucent Technologies Inc. (NYSE: LU). In addition, Windsor believes Nokia (currently holding 10 percent of the CDMA handset market) is about to ramp up its efforts in CDMA devices and could be unveiling a marketing offensive very soon. "We believe Nokia is planning a portfolio overhaul with a greater emphasis on CDMA2000." While the Finnish vendor has regarded this sector as relatively insignificant before, Windsor says Nokia now regards it as an "important market."
Windsor adds that only Ericsson's shareholding structure, which gives the holders of the 'A' shares such power (about 9 percent of the equity yields nearly 99 percent of the votes, as each 'A' share has 1,000 votes while a 'B' share has just one vote), is keeping the current management at the helm. That 9 percent consists of board-friendly institutions, believes the Nomura man. "If it was one share one vote at Ericsson this management team would have gone long ago. What the company needs is new blood at the helm, someone who can shake things up and introduce new ideas."
Don't expect a revolution in Stockholm anytime soon.
— Ray Le Maistre, European Editor, Unstrung