Tags: Warning | History | Wallenbergs | Plan

A Warning From History for Wallenbergs's Man With a Plan

By    |   Saturday, 01 April 2017 12:45 PM

Telecoms equipment-makers suffer from a paradox. Their products underpin the smartphone revolution, yet they've not really prospered as the internet spreads. The sector is a textbook case of how U.S. and European industry giants can be gored by cheap Asian rivals, prompting consolidation and bankruptcies.

Look at Sweden's Ericsson AB. Sales and profit have fallen as phone carriers spend less on networks after rolling out 4G technology. On Tuesday, new CEO Borje Ekholm announced an overhaul of the one-time king of mobile gear designed to improve profit.

Ekholm -- put in the top job by Ericsson's biggest shareholder, the Wallenberg-backed Investor AB -- has promised to cut costs, prune the product range and slash management layers. A few small, loss-making businesses will be sold. Ericsson says it can "at least double" its 2016 operating margin, excluding restructuring charges, to reach 12 percent at some unspecified date.

If this all sounds familiar, it's because former competitor Alcatel-Lucent did something very similar before selling out to Nokia Oyj in late 2015. Nokia went through its own radical overhaul before that deal, selling its mobile phone business and slashing costs. Both turnarounds took two to three years. Revenue dropped sharply as unprofitable contracts and products were abandoned, while billions were spent on restructuring charges. Only the eventual tie-up left the combined company with the chance of a more profitable future -- at least once operators start investing in networks again.

So while Ericsson is following a familiar path, one has to ask where it will end. Would someone want to buy the company if Ekholm's repair job works? Cisco Systems Inc. is an oft-named candidate, but a takeover would dilute its profit so would be hard to justify.

It seems more probable that Ericsson will have to adjust to being a smaller company that has to hustle to compete with Nokia and China's Huawei Technologies Co Ltd.

Unfortunately, what Ekholm has unveiled so far is short on detail and long on promises. For example, Ericsson plans to "re-focus" the loss-making managed services division, which runs projects for telecoms clients, but has said little about how. The unit brought in nearly half of Ericsson's revenue last year, and similar ones at Alcatel and Nokia proved difficult to fix. Saying you'll exit unprofitable contracts is easy. It takes time and money to do so without annoying customers.

The fog extends to charges. Ericsson says this year's restructuring costs will be 6-8 billion Swedish kronor ($680 million-$910 million), more than double an earlier target. Yet the company has unhelpfully stopped giving guidance on how much operating expense this will strip from the business, nor has it said how many jobs will be cut. Alcatel was once locked in a similar unhealthy cycle of spending all of its cash on restructuring charges.

If that weren't enough, Ericsson warned it would take 7-9 billion kronor in extra provisions in the first quarter for "negative developments related to certain large customer projects". That's almost comically vague. Investors deserve better. 

Ekholm was chosen as a loyal Wallenberg lieutenant. If he wants to earn the trust of the rest of Ericsson's shareholders, he'll need to do better. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

© Copyright 2019 Bloomberg L.P. All Rights Reserved.

   
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Telecoms equipment-makers suffer from a paradox. Their products underpin the smartphone revolution, yet they've not really prospered as the internet spreads. The sector is a textbook case of how U.S. and European industry giants can be gored by cheap Asian rivals, prompting...
Warning, History, Wallenbergs, Plan
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2017-45-01
Saturday, 01 April 2017 12:45 PM
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