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Can Ekholm chart a new course for Ericsson through troubled waters?

icebreaker ship

© Flickr/cc-licence/Ville Miettinen

  • Promise of a “focused business strategy and improved internal efficiency”
  • Core portfolio areas: networks, digital services and IoT
  • Potential offload of Media and Cloud Infrastructure businesses
  • Restructuring costs will at least double as a result

Ericsson’s new CEO this morning unveiled his eagerly anticipated strategy for the company. The question is – will Börje Ekholm prove to be the modern day equivalent of  the Norwegian Roald Amundsen or England’s Edward Smith? The former managed to navigate the Gjøa through the North West Passage to successfully chart a course from Greenland to Alaska, whereas the latter was the unfortunate captain of the Titanic who sailed into the iceberg.

The good ship Ericsson has, to be fair, seen better and more prosperous days. Although it still remains a major infrastructure vendor and technology innovator, the emergence of virtualisation and the resulting shake up of vendor-telco relationships has left it at a crossroads. It cannot afford to continue as it once did, yet repeated attempts to diversify and realign have not produced the necessary results.

Consequently, Börje Ekholm, the recently-appointed president and CEO, is faced with yet another attempt at restructuring the company, this time promising a “focused business strategy” (please, nobody mention rearranging deckchairs…).

"For some time Ericsson has been challenged on both technology and market leadership and the group strategy has not yielded expected returns,” explained Ekholm. “In our strategy review we have listened carefully to customers around the world and made an in-depth analysis of our portfolio and performance. To enable us to immediately take action and move with speed in execution we are today outlining our path to restoring profitability and to lead with innovation and best in class solutions in areas we have decided to focus on."

Key to the strategy will be the pursuit of a more focused business strategy to “revitalise technology and market leadership”, improve group profitability and enable customer success. It intends to “drive the development of market-leading solutions, fully leveraging the potential of 5G, IoT and cloud”. Restoring profitability is paramount, so that means slimming the portfolio to fewer areas and securing effectiveness and efficiency in operations.

Changes to product portfolio

Networks remains the heart of Ericsson’s business, and it intends to accelerate and increase investments in key areas to support the continued global rollout of 4G and establishing a leading position in 5G. It also wants to optimise the end-to-end network offering to address its customers' requirements.

Next comes the intriguing part – a newly created division called Digital Services Business Area. This actually encompasses cloud-based virtualised network infrastructure and applications, OSS and BSS solutions, and related services capabilities. Ericsson notes this area is “strategically important to our customers” and wants to be “the partner of choice for our customers on their journey to become digital service providers” (although cynics could argue that CSPs have already started their journeys to become DSPs and Ericsson risks being late to the party).

The third core area is around IoT. Ericsson intends to shift its IoT strategy away from a systems-integration-led approach to a platform- and solutions-led strategy to better leverage its global scale and expertise, which is a sensible strategy given how this sector is evolving. Ericsson also wants to refocus its Managed Services strategy with emphasis on automation, to leverage its global scale and OSS capabilities to provide high-tech services and cost efficient operations.

Finally, Ericsson appears to have woken up to the dubious value of its Media business. This has always been an odd addition and one that you cannot help but think was driven by personalities rather than financial strategy. It now intends to “explore strategic opportunities” for the business – i.e. look to offload it – while continuing to develop its media solutions. Somewhat confusingly given the relatively low contribution to the company’s finances, the unit is to be split in two – to create Ericsson Broadcast & Media Services and Ericsson Media Solutions. For some reason that has yet to be fully articulated by management, Ericsson continues to invest time and energy in its TV and broadcast business.

“With these changes I am confident that we will create the most intelligent and efficient networks, deliver the most competitive solutions and constantly innovate to enable our customers to succeed in a fully connected world,” said Ekholm.

New company structure

The company has also announced a new organisational structure to support its long-term strategy. Despite the three “core portfolio areas” of Networks, Digital Services and IoT, the new “Business Areas” are not the same. Instead, they are: Networks, Digital Services and Managed Services (as well as two separate aforementioned units for the Media business). We are still somewhat puzzled as to how IoT fits into this picture. In addition, its ten current regions are reduced to five “Market Areas”, all represented in the new Executive Team, effective April 1 (no jokes please).

Assuming stable market conditions, Ericsson foresees “significant improvements” in 2018. Beyond that, Ekholm says he is “convinced that Ericsson, on a sustainable basis, can at least double the 2016 Group operating margin, excluding restructuring charges. But even more importantly, I think that we can deliver a return on capital employed that will create value for our shareholders.”

However, the short-term news for shareholders is not good, as there will be a “planned higher pace in cost reductions”, with restructuring charges for 2017 now amounting to approximately SEK 6-8 billion (€630-840 million), compared to the company’s previous estimate of just SEK 3 billion (€315 million). The good news for employees is that Ekholm does not anticipate any major job losses.

Ericsson is also setting aside provision for SEK 7-9 billion (€740-940 million) in the first quarter due to “recent negative developments related to certain large customer projects”.

No, we have no idea what happened in Q1 that proved so disastrous that it has to make this massive financial provision, and the mystery has left analysts puzzled for now, and not to mention more than a little nervous. Ericsson declined to provide specific details during an analysts’ conference call this morning, merely saying they were “few and isolated”.

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