Ericsson needs a radical new leader to regain momentum from Huawei
Ericsson duly succumbed to the seven-year itch over the summer break and ousted its CE, Hans Vestberg, who took the reins back in 2009. The move had been widely expected after a run of poor results. Vestberg had not made many major mistakes, but can be blamed for the sins of omission, clinging to a safe strategy at a time when the world was changing for his company.
When he was promoted to take over from Carl-Henric Svanberg seven years ago, Vestberg was a safe pair of hands, clearly charged with maintaining the steady course set by his predecessor. Svanberg had taken over as CEO in 2003, inheriting an Ericsson in far worse straits than it is now. He engaged in massive restructuring and also in strategic rethinking, notably what he called the “IPification” of Ericsson, and left company transformed when he moved on in 2009 (to chair BP and Volvo).
But now the Svanberg strategy is no longer enough. His company is operating in a very different set of conditions and needs dramatic change once again. This could rest in a full merger with Cisco, following the two giants’ formation of a close alliance – Svanberg has insisted that is not on the table, but he is gone now, and much will depend on his successor (CFO Jan Frykhammer is in charge on an interim basis but many hope Ericsson will look outside its own ranks for some new blood and ideas). Cisco would intensify that ‘IPification’, with converged IP in its blood in a way that it still isn’t at cellular Ericsson, despite all Vestberg’s efforts.
Vestberg’s last couple of years in the job have been a story of the right ideas, insufficiently boldly executed. He has presided over a major cost-cutting program – but now major enough, at a time when the traditional vendors need to cut their cloth for a far more price-sensitive market which is moving from dedicated and expensive hardware to software.
He has identified the right growth opportunities where Ericsson can apply existing strengths to emerging trends such as SDN, virtualization, IoT, converged IP networks and the prospect of 5G – but the actual commercial results have been too limited to offset the pressures on the core mobile network business, and in some of these key areas, Ericsson is outshone by Nokia (virtualization and cloud platforms) and Huawei (convergence and enterprise).
Even the traditional competitive landscape for Ericsson has changed, with the merger of Nokia and Alcatel-Lucent; the rising importance of IT players like HPE, Intel and Cisco even in the heart of the network; and the inexorable rise of Huawei. While Ericsson remained ahead of its Chinese rival in the mobile networks space in 2015, according to IHS, with 28% to Huawei’s 23% and Nokia/ALU’s 26%, new figures from Dell’Oro suggest the Chinese firm has now overtaken the Swedish one, taking 30% of the RAN market by revenue in the first half of 2016, while Ericsson had 28% and Nokia 24%.
And the mobile networks are no longer the growth engine they once were – that is why Nokia abandoned its mobile broadband-only strategy and snapped up IP-focused ALU. Convergence, cloud, software networks, quad plays and IoTs are the hot topics, and Huawei has strong showing in all of them. While Ericsson’s half-year revenues fell 11% year-on-year to $12.3bn, Huawei’s were up 40% to $36.8bn. Even without its handset business, it overtook Ericsson back in 2014 in overall network equipment sales, as the graph compiled by Bloomberg shows – and that’s with virtually no access to the US market.
So it is clearly time for new ideas. Ericsson chairman Leif Johansson praised Vestberg for leading the company “through significant industry and company transformation” but said it now needs someone new for the “next phase of its strategy execution”. Vestberg’s biggest idea, and contribution to the company’s post-Svanberg resilience, was to build up the services business and make Ericsson more than a networks company.
But the growth in services has stalled and, as JP Morgan analyst Sandeep Deshpande told clients: “That strategy seems to have run its course”. In his view, the top priority for the new CEO will be to improve gross margins, which have been dragged down by the services push and are now significantly below those of Nokia, despite market consolidation.
However, Nokia has its own challenges, some related to digesting ALU, but others down to the market conditions as a whole.
In its somewhat disappointing second quarter results, announced just after Vestberg’s departure, the Finnish firm reported a 14% year-on-year fall in mobile networks sales. This helped contribute to a net loss of €862m (on an IFRS basis – on non-IFRS terms it would have made a profit). Total sales were €5.6bn.
The message from CEO Rajeev Suri was that there would be growth ahead from SDN and 5G leadership, but that sounded like ‘jam tomorrow’ to many investors. Suri did point to some remaining areas of the 4G RAN market which are robust despite the general trend for deployments to slow and prices to fall. These included small cells – now a “meaningful and fast-growing business” in areas like public safety, private networks and stadiums, he said – and in LTE-A and LTE-A Pro upgrades, which are gathering pace, according to the GSA (see separate item).
He said: “Our view at a high level is that 5G will be rolled out relatively quickly in a small number of countries, in particular the United States, China, Japan and Korea. In other countries, 4G and evolutions of 4.5G, in particular, will prevail for some time.” He also offered some signs of hope in China, despite its “torrid” 2015, saying the spending slowdown was “not as fast as we thought it might be”.
Suri also cheered investors by intensifying the cost-cutting program, as Ericsson will have to do – but not Huawei, which is still pouring vast profits into its R&D program. Nokia has identified a further $300bn in savings to be made by the end of 2018 from the consolidation with ALU, now that it has “completed all key decisions on product portfolio integration”, including the effective discontinuation of the ALU LTE line – though there will be some cost associated with swapping out existing ALU 4G kit, especially in the US, where it has the top two operators as customers, as well as Sprint.
|
