Ericsson turned 'outside in' to reverse decline

Technology: The Swedish firm's chief tells Stephen Pritchard about a profit turnaround and his vision for 3G

It is little more than an hour's flying time across the Baltic from the Swedish headquarters of Ericsson to the Finnish HQ of Nokia. But the fortunes of Europe's giant mobile phone makers have diverged recently.

It is little more than an hour's flying time across the Baltic from the Swedish headquarters of Ericsson to the Finnish HQ of Nokia. But the fortunes of Europe's giant mobile phone makers have diverged recently.

Sales and profits have fallen at the once-thriving Nokia; the company has lost market share in the handset business, mostly to Asian rivals. Ericsson, though, is back in the black and its mobile handset joint venture with Sony is starting to pay dividends. In its first- quarter numbers, released last month, profits were 3bn Swedish kronor (£222m) on sales of Skr28.1bn, against a loss of Skr4.3bn on sales of Skr25.9bn for the same period last year.

At the Ericsson HQ in Kista, close to Stockholm, the mood is more upbeat than it has been at any time since the late 1990s. The company has embarked on, and come out of, a painful restructuring. And, in Carl-Henric Svanberg, it has an outsider in charge who is not afraid to put the company right where it has previously gone wrong.

Ericsson was founded in 1876 by Lars Ericsson, a mechanic who set up shop to repair telegraph machines. Disappointed with the quality of early telephones, he started to make his own. Today, plates in the corporate dining room are decorated with a picture of a Victorian-era phone. But Svanberg disagrees with suggestions that this long history causes difficulties for someone who is not an old hand in telecommunications. "The challenge [when he joined] was restructuring and downsizing, reassessing the strategy, finding the right structure and ensuring operating excellence," he says. "These were the main challenges and I felt I had the background for them."

Svanberg came from Assa Abloy, the Swedish security and lock-making group where he was chief executive. He found Ericsson to be a "focused company", concentrating on delivering products and services to the telecoms industry. But technical excellence, he admits, can sometimes come at the expense of strategy.

"The risk for anyone in this industry is that they become lost in the details and forget the big picture. We do have people here who are good at providing the big picture, but it has not been negative [for me] to come from outside."

Svanberg likes to describe Ericsson today as an "outside in" company: one that listens to what its customers want. Technology-driven firms, he says, all too often become "inside out", focused on developing equipment and then trying to find a market for it.

When voice services were the main- stay of the mobile industry, the appeal to consumers was clear and selling the idea of being able to call from anywhere was easy. The newer, data-driven services may excite engineers, but they are a harder sell to the public, he says.

One example of a technology developed inside the telecoms industry is WAP. This much-hyped mobile version of the internet was designed to work over relatively slow, second-generation GSM networks, but failed to gain consumer interest. Svanberg admits that he had a WAP phone - before he entered the telecoms sector - but didn't find it easy to use. Like thousands of others, he gave up on the technology.

The recent teething problems suffered by the 3G mobile phone networks - a combination of heavy handsets, poor battery life and dropped calls - suggest a similar fate could await that technology. So far, sales at 3, the Hutchison-backed third-generation network that operates in Sweden as well as the UK, have fallen far short of expectations. But Svanberg is confident that 3G and HSDPA, a planned, much faster version of the technology, are not like WAP.

Advances in network technologies such as 3G will drive forward innovation in mobile phones and persuade us to buy new handsets, he believes. This is critical, as the mobile market is looking saturated in most western EU countries, with between 80 and 90 per cent penetration .

But if a phone can download a CD in a few minutes, Svanberg predicts, manufacturers will add more memory and the phones will challenge portable music players. He supports this by pointing to innovations already under way with camera phones, which are moving towards the mega-pixel resolution found on consumer digital cameras just a few years ago.

And Ericsson, he believes, is in a unique position to exploit these developments, because it can sell to all parts of the mobile value chain. The company maintains its network equipment, fixed-line and services business, as well as its newly re-invigorated handset business in the shape of the Sony Ericsson joint venture. The restructuring also created Ericsson Mobile Platforms, an operation which comes up with handset hardware designs for other mobile phone brands. Ericsson claims to have half of the top names in the handset business.

Only Nokia, Motorola in the US and perhaps Germany's Siemens are as vertically integrated as Ericsson. But Svanberg believes the industry will move towards greater co-operation, along the lines of the Sony Ericsson arrangement. This will eliminate "research and development double spend", he says. But the complex structure of the sector, including the prevalence of long-term deals with network operators, makes mega-mergers between equipment vendors unlikely.

Ericsson's strong presence in the fixed-line phone business gives it a greater cushion against this squeeze than some of its competitors. Svanberg points out that in the fixed-line arena, despite greater competition, it is the former monopoly carriers, many of them longstanding Ericsson customers, which have won the game.

Just as Ericsson has taken care to remember its corporate history, so Svanberg appears to wish that the financial markets had a better understanding of the recent past. "3G may look disappointing now, against the time plans set in the euphoric 1990s," he says, "but 3G roll out actually mirrors that of GSM."

The enthusiasts of the TMT boom were not wrong per se, he says, but were wrong on timing.

Provided that consumers can be persuaded to buy into 3G, Svanberg maintains, the telecoms industry will continue to recover. But this means paying attention to what both customers and shareholders want now, as well as what the labs are developing for 10 years' time. "Without short-term performance, you do not have the luxury of thinking long term."