Ericsson to refocus on its core business in bid to halt slide in fortunes
ERICSSON has ditched its goal of winning more clients beyond the telecoms industry to refocus on selling networks to cellphone companies in a move to cut costs and halt a dramatic fall in its share price.
The Swedish firm’s clients in its core business include Vodafone and Verizon, but profits have plunged because of competition from Nokia and China’s Huawei, and as telecoms companies make savings. Its shares have fallen 30 percent in two years.
Ericsson said in 2014 it would diversify so by 2020 up to 25 percent of revenue would come from industries beyond telecoms, such as media, utilities and transport, from an estimated 10 percent in 2013.
But the plan has not worked and the company will drop the target as new chief executive Börje Ekholm repositions to focus on the core business of mobile networks. “We will focus on telco clients and networks exclusively for now,” Ericsson’s new head of Digital Services Ulf Ewaldsson said in a recent interview.
The U-turn comes at a challenging time for Ekholm, who after only five months in the top job is being pressed by activist investor Cevian Capital, which has a $1 billion (R12.88bn) stake in the company, to make faster changes.
Ekholm unveiled a cost-cutting plan in March and announced up to $1.7bn in provisions, write downs and restructuring costs. He said this would include exploring options for its loss-making media arm and turning its managed services business around.
Investors welcomed the greater focus after years of disappointing investments from Ericsson, but they worry that the new plan will not generate growth. Moody’s cut the company’s credit rating to junk last month, partly due to worries that the cost-cutting could hamper innovation.
Increasing dependence on telecoms operators could be risky as they are struggling to grow revenue because of fierce competition and are unwilling to spend more on networks even as they prepare for 5G (fifth-generation) wireless broadband technology.
Ericsson has to prove it can remain relevant in an industry that has gone from more than 10 major players to three in 20 years. Investors question whether it can do this under Ekholm, who has been on the board for a decade while Ericsson lost ground.
Ericsson sees opportunities to sell products to telecoms clients which will need to upgrade their networks to address a greater flow of data enabled by 5G.
It will also build additional capacity to connect objects around the world when the Internet of Things becomes reality.
But Bengt Nordstrom, head of consultancy firm Northstream, which advises telecoms operators and vendors, said 5G will only help sustain existing revenues. Ericsson is also betting on getting a boost from automation and artificial intelligence. – Reuters
Ericsson chief executive Börje Ekholm has been on the company’s board for the decade in which it lost ground.