Ericsson stock slumps after mobile phone losses escalate

Ericsson's shares slumped 28 per cent at one stage yesterday after the company warned of a sharp increase in losses from its mobile phone business because of ferocious competition and falling margins.

Ericsson's shares slumped 28 per cent at one stage yesterday after the company warned of a sharp increase in losses from its mobile phone business because of ferocious competition and falling margins.

Sweden's largest company said it would not meet its sales forecast for the year and that losses from its consumer product division, which makes mobile phones, will surge to 16bn kronor (£1.1bn). The unit had been expected to lose 7.5bn kronor this year but the company said an increase in competition in the fourth quarter, a shortage of parts, and a weak market for replacement phones, would mean the deficit will be larger than expected. By the close of trading, Ericsson's shares had partially recovered to close down 16 per cent at 127 kronor, with a massive 251.4 million shares changing hands.

The company warned of an oversupply of mobile phones for the rest of this year and revised down operating margin expectations to 6-7 per cent, from 10 per cent. Ericsson's foreboding adds to growing evidence that the world's mobile phone market is slowing and comes just a week after Motorola, the world's second-biggest maker of mobile phones, said fourth-quarter and full-year profits would disappoint because of less-than-expected industry sales.

Only Nokia, the dominant maker of handsets, has seemingly bucked the trend. On Wednesday, it predicted record fourth-quarter profits and maintained its forecasts for total handset sales for the next two years. Its shares were up 3 per cent yesterday.

Analyst say the conflicting messages have come because Nokia is outperforming its competitors in a slowing market, which has been affected by a lower-than-expected take-up of WAP phones and delays in the launch of GPRS-based services. Nokia has increased its market share of handsets to about 32 per cent, from 27.5 per cent in the previous quarter, leaving Motorola with 18 per cent and Ericsson on 11 per cent.

"Nokia is thrashing the competition," said Mandeep Singh, analyst at ABN Amro, adding: "There is still evidence of a slowdown."

Ericsson yesterday said it expected 420 million cellular phones to be sold this year and 525-575 million next year, lower than consensus forecasts of 600 million in 2001

Analysts say the industry's rapid growth cannot be maintained. "As penetration goes up the potential for further growth becomes less," said Andrew Beale, an analyst at Deutsche Bank. "This year will be the peak for an increase in penetration."

Overall, Ericsson reported a 50 per cent increase in third-quarter earnings to 5.5bn kronor, from the same period a year earlier, as its sales at its network equipment division surged, but the result still represents a decline from the previous quarter. The company said it would not meet its previous forecast of a greater than 25 per cent increase in sales this year

Ericsson's president, Kurt Hellstrom, said: "We will be focussed on stopping the bleeding of this [handset] business and getting it back to profit."

The company will attempt to slash its mobile phone division's costs by shifting handset production from Sweden and the USA, to Asia, Latin America and Eastern Europe, and may also cut the range of handsets released. Despite the losses, Ericsson said it will not dump its Consumer Product division, and it expects it to turn a profit in the second half of next year.