Ericsson: Problems with JVs, Challenges in Core Market

Earlier this week, Ericsson announced quarterly financial results that were significantly wide of the mark.

Some observers blamed the disappointment on difficulties experienced by its handset and semiconductor joint ventures, with Sony and ST Micro, respectively.

There is no question that Ericsson must fix those joint ventures or bail on them. In conjunction with Sony, it seems to be working on a plan that might rescue Sony Ericsson from handset oblivion. The prospects for its joint venture with ST Micro seem less sanguine.

Still, irrespective of those issues, Ericsson has a looming problem in its core wireless-networking business that the company might have difficulty surmounting. The problem isn’t just the global economic downturn, which has had a severe impact on Ericsson’s business in many developing countries, where credit remains exceptionally tight.

Eventually, upgrade cycles will visit wireless operators in North America and Europe, and buildouts of 3G networks will continue in developing markets such as China, India.

What is at issue, though, is whether Ericsson can hold its margins and market share against strengthening competition from Chinese vendors, principally Huawei, but also ZTE. Both companies stand to take sizable business in their home country, as one might expect, but they are becoming formidable competitors in Europe and North America, too.

Numbers from market researchers Technology Business Research (TBR) and from Dell’Oro Group demonstrate that Huawei, in particular, is gaining share in wireless-network infrastructure.

According to Dell’Oro, Ericsson remains the pole sitter, holding 32-percent market share in the second quarter, unchanged from its performance in the same quarter a year earlier. Nokia Siemens remained the second-largest vendor with a 20 percent share — representing a loss of ground from the prior year — while third-place Huawei gained to 17 percent.

For its part, TBR says Ericsson is holding its own, walking a fine line between growth and profitability, continuing its gradual migration to a services-led approach in its customer engagements with wireless operators. Ericsson will need that services-led margin, because Huawei is charging hard.

Said John Byrne, a research director at TBR:

“With clear momentum in EMEA and an increasing focus on North America, both Huawei and ZTE are well-positioned to continue to take market share away from Western vendors, especially Alcatel-Lucent and Nokia Siemens.”

Ericsson isn’t immune from the competitive threat posed by Huawei and ZTE. Said Fredrik Thoresen, an analyst at DnB NOR in Oslo, Norway:

“There’s fierce price competition from companies like Huawei and we may see some of that coming through in Ericsson’s numbers.”

That services-led effort, then, becomes key for Ericsson. Its product margins will be under pressure from Chinese vendors that are renowned for offering capable, competitive priced gear.

Carl-Henric Svanberg, the departing Ericsson CEO who will be setting up shop in the big chair at BP (yes, that BP), was chagrined at having to meet what he considered unreasonable market expectations.

“We have said all along that it would be unrealistic that we wouldn’t be affected by the downturn. Some of the expectations out there were a bit high.”

“What we are seeing right now is the new projects that were planned nine months or a year ago when the financial crisis was much tougher. Now everyone understands we are moving to safer territory but it takes time for operators to plan.”

So, even though the company acquired insolvent Nortel’s wireless-network assets for $1.13 billion, beating a bid from Nokia Siemens, it isn’t counting on a quick turnaround. Despite better prospects beginning to emerge from wireless operators in North America, Europe, China, and India, Ericsson’s other developing-world markets remain constrained by a paucity of credit.

Notoriously reticent, Ericsson won’t provide clear visibility or strong guidance regarding its own expectations. Excluding the problems it is having with its joint ventures, the company has tough challenges ahead. Those come not only from inclement markets, but from stiffening competition.

If Cisco were to jump into the wireless-networks fray, as some suspect it might after its purchase of Starent, the game could get even tougher.

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