WSJ -- Ericsson Gets Back in Gear / Selling 3G Equipment ...
September 14, 2004
Ericsson Gets Back in Gear
Selling 3G Equipment Turns Profitable As Demand Takes Off
By DAVID PRINGLE
Staff Reporter of THE WALL STREET JOURNAL
Telefon AB L.M. Ericsson, the world's leading supplier of cellphone networks, is beginning to benefit from the billions of dollars it has spent developing flashy technologies to carry video pictures and other multimedia traffic.
About two years behind schedule, big Ericsson customers, such as Vodafone Group PLC, are set to roll out mass-market third-generation services in Europe this fall using the Stockholm-based company's gear.
Fueled partly by rising spending on third-generation, or 3G, equipment, the global cellphone-networks market is expected to grow 17% to $46 billion (€37.5 billion) this year, according to investment bank Goldman Sachs. Sales have been shrinking for three years, so that growth would be a boon for Ericsson and rivals, such as Nokia Corp. of Espoo, Finland, Siemens AG of Munich, Germany, and Nortel Networks Corp. of Brampton, Ontario.
Analysts say that selling 3G equipment is finally becoming a profitable business for Ericsson and its peers. "As they ramp up manufacturing the margins are going to improve," says Jason Chapman, a London-based analyst with research firm Gartner Inc. "There is also more focus on high-margin software enhancements."
Ericsson's 3G expertise also is earning it royalty payments and licensing fees from handset makers such as LG Electronics Inc., Seoul, South Korea, which uses Ericsson's technology in its best-selling 3G phone.
If Europeans and Americans use 3G technology to download many video clips or make video calls to each other, then the cellphone-networks market could keep growing at more than 10% in 2005. If not, growth is likely to slow to a modest 5%, Goldman Sachs forecasts.
In any case, the growing demand for 3G gear is helping 128-year-old Ericsson emerge from one of the worst crises in its history. When its major customers -- the big cellphone-service providers in Western Europe and the U.S. -- began postponing their 3G launches in 2002, Ericsson appeared to be heading toward a bankruptcy-court filing. It halved its work force, slashed its research-and-development budget and raised $3.2 billion by selling new shares.
But critical for Ericsson, it still maintained sales offices in more than 100 countries, including Kyrgyzstan, Liberia and other remote markets. That global reach has paid off. Unable to afford the expense of building fixed-line networks, service providers in developing countries have been splurging on wireless equipment. In the past 18 months, Ericsson has won more than $300 million of business in Nigeria, for example. Relying on such unexpectedly strong demand for plain old cellphone service in developing countries helped it pull through.
Now, Ericsson's growth is again being supplemented by rising demand in Western Europe. In the second quarter of 2004, Ericsson's sales of cellphone networks leapt 28% to 24.3 billion kronor ($3.3 billion or €2.7 billion) from the year-earlier quarter. For the first time in 14 quarters, Ericsson's sales in Western Europe rose compared with the year-earlier quarter. That helped Ericsson make a net profit of 5.3 billion kronor compared with a net loss of 2.7 billion kronor in the year-earlier period.
An Ericsson spokeswoman says the company expects to see mass-market uptake of 3G services in 2005. Ericsson also is planning to launch a software upgrade next year that will further increase the speed of 3G networks, she adds.
Ericsson no longer makes handsets itself, having spun its cellphone business into a joint venture with Sony Corp. of Tokyo in late 2001. After struggling for two years, that venture company, London-based Sony Ericsson Mobile Communications, has been gaining market share this year as a result of a broad range of phones with built-in cameras. It had a net profit of 500 million kronor in the second quarter, but some analysts still question whether it is big enough to compete effectively with top cellphone makers, such as Nokia.
Ericsson also maintains a presence in the cellphone market by selling handset blueprints to Sony Ericsson and other phone makers. Market researchers say a 3G handset from LG, which is based on Ericsson's technology, is flying off the shelves in Europe. Hutchison Whampoa Ltd. of Hong Kong, which controls 3G service providers in several European countries, has ordered three million of the phones from LG this year.
The growing availability of 3G handsets has helped to persuade Telecom Italia Mobile SpA of Rome, Vodafone and other service providers to funnel more money into filling out their 3G networks. U.S. service providers, such as AT&T Wireless Services Inc. of Redmond, Washington, now also are beginning to roll out 3G services in some cities. All this is very timely for Ericsson, Nokia and other Western equipment makers who are beginning to face serious competition in emerging markets from low-cost, China-based suppliers, such as Huawei Technologies Co.
Though Ericsson first began working on 3G technology in the early 1990s, it is only now beginning to recoup some of that investment, according to Richard Windsor, a London-based analyst with Nomura. He believes that Ericsson and other equipment makers had losses on sales of 3G gear in 2002, broke even in 2003 and are now making reasonable gross margins. However, he cautioned that 3G equipment is still not nearly as profitable as second-generation gear.
An Ericsson spokeswoman declined to comment, saying: "We never break down the margins on different technologies."
Write to David Pringle at david.pringle@wsj.com
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