A Telecom Takes Cover [article on ERICY]
worldlyinvestor.com
Mar 16,
1999
A Telecom Takes Cover
March 16, 1999 6:05 AM EST
By Luis de la Prida
Special to worldlyinvestor.com
In the telecom equipment world, few
companies have the breadth of Ericsson
(quote, chart, profile). This Stockholm-based
behemoth operates in over 140 countries
worldwide and claims to have ownership of
over 40% of the worldwide telecom market.
It is no wonder, then, that the company is
often cited as one of the titans in the brewing
battle for supremacy of the telecom world (See
David H.M. Baker's February 1 article on
Ericsson).
But for all its size and promise, Ericsson has
failed to live up to investor expectations in
recent years, disappointing the Street on three
occasions last year alone. Its ADRs, which
trade on the Nasdaq, have mirrored these
disappointments and have shed close to 2% in
value this year. And most Wall Street analysts
currently rate Ericsson a hold.
In the meantime, Ericsson's Finnish foe, Nokia
(quote, chart, profile), is up roughly 15% in
1999 and is rated a strong buy.
As the telecom industry grows and expands in
many different directions, investors can expect
that the road ahead for Ericsson will be a
rough one.
A Market Leader
Ericsson began operations in Sweden in 1876
as repair shop for telegraph equipment.
Eventually, however, its founder, Lars Magnus
Ericsson, turned his attention to
manufacturing telephones.
Today, Ericsson is one of the world's leading
suppliers of telecom equipment for wired and
mobile systems used for public and private
networks. The company also makes military
electronics such as radar systems.
In telecommunications, Ericsson holds about
40% of the world market for analog systems
and a higher share for digital systems.
Products include mobile telephones, where it
is number three worldwide, behind Nokia and
America's Motorola (quote, chart, profile),
radio base systems, pagers, equipment for
providing wireless access to fixed
telecommunications networks, digital
exchange systems, mobile data
communications, and private radio network
systems.
Despite its Swedish origins, Ericsson derives
a very large percentage of its sales abroad.
China is Ericsson biggest market, accounting
for approximately 12% of total sales. Its next
biggest markets are the United States, the
United Kingdom, Brazil, Italy and Sweden.
Europe collectively accounts for 50% of the
company's sales.
Calling 911
For most of the last five years, Ericsson was a
high-flying company in a high-flying industry.
In 1998, however, two key things hurt
Ericsson.
First, the company was bruised by the crises
in emerging markets. Second, the firm was
hurt by perceptions that it had failed to
articulate a long-term strategy and was not
able to keep up with its competitors - a factor
of utmost importance given the competitive
(not to mention dynamic) nature of the
telecom industry.
Ericsson responded by cutting staff, spinning
off units, and restructuring the firm. Going
forward, the company hopes to better compete
by focusing on three core segments: network
operations, consumer products, and enterprise
solutions. In so doing, Ericsson is trying to
position itself to benefit from the expected
convergence of the telecommunications and
data communications industries.
Further Down the "Line"
But analysts question whether these changes
will be enough. Near term, few expect the
company to prosper. Indeed, most analysts
recently revised their revenue estimates
downward following the bearish indications
Ericsson management gave last December.
Longer term, the outlook is not so bleak.
Analysts say that Ericsson should benefit
from favorable trends in the wireless sector,
including increased competition by carriers,
greater capacity upgrades, and vigorous
subscriber growth.
That is not to say that there are no
company-specific reasons for holding this
ADR. Ericsson is quite adept at offering
end-to-end solutions to its customers.
In addition, Ericsson is well entrenched in
some of hottest cell phone markets on the
planet, like Europe, the Americas (especially
Brazil), and China. And its key business,
cellular, is experiencing phenomenal growth
and should continue to benefit from the
upcoming introduction of a new phone
handset.
The main caveat to this scenario, however, is
the prospect for increased competition. Simply
put, there is a new breed of competitors on the
horizon, besides Nokia and Motorola. These
include not only the Cisco's (quote, chart,
profile) and Sony's (quote, chart, profile) of the
world, but also a growing band of emerging
markets players with very grand digital
dreams.
Further down the line, a key issue will be how
Ericsson responds to the developing
competition for third generation technologies
that are expected to infuse cellular into every
sphere of consumer technology.
Luis de la Prida is a writer based in New York
who has worked for the financial services
industry in New York and Mexico City.
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