Sweden-based L.M. Ericsson said it will cut roughly 10,000 employees as economic problems in Asia and Latin America squeeze some of the company’s operations.
Ericsson head Sven-Christer Nilsson announced last week the company’s profits for 1998 will be lower than analysts expected-about 15 percent to 20 percent lower.
Ericsson shares fell more than 22 percent following the announcement. Its American Depository Receipts fell $4.75 to $24.13 on Thursday.
“My estimate is based on our view of the continued impact of the global financial crisis, which is affecting demand in some of Ericsson’s operations, including in particular Public Networks,” said Nilsson. “Even though there are certain general signs of recovery in some Asian markets, there are wider repercussions on global demand which are now affecting sales and income.”
Nilsson also pointed to Ericsson’s mobile phone division, which has come under price pressure this year.
“In mobile phones, our operating income during the last months of the year is negatively affected by the shift in demand toward entry-level phones with reduced margins,” said Nilsson.
Nilsson said the entry-level phones are in demand for the rapidly growing prepaid market, which now accounts for about one-third of the wireless market in western Europe.
Ericsson has seen its mobile-phone market share fall to Nokia Corp. this year, and analysts have criticized Ericsson for not responding to market trends.
“Ericsson has been static and has not responded to the trends of the marketplace. I would be surprised if that was the case much longer,” said Jake Saunders, analyst with The Strategis Group in London. “Nokia is the darling of analysts at the moment, but Ericsson will catch up.”
Handset sales for Ericsson showed an 11-percent increase in the third quarter from the previous year, and though volumes in mobile phone sales grew 50 percent, Ericsson said price pressure has continued. The company said in October that pricing pressure is expected to result in a 25-percent to 30-percent price reduction in its product portfolio annually.
Nilsson said strong demand and growth remains in its mobile systems division.
“For next year, we expect … a slow start of the year and a development for the whole year below our long-term growth objectives,” said Nilsson. “My expectation regarding Ericsson’s long-term growth remains unchanged. We shall exceed the market growth.”
“This is a blip on the horizon at the moment,” said Saunders. “The potential recession and the Asian crisis eventually caught up with Ericsson. It happened a lot earlier to other manufacturers.”
Infrastructure and handset provider Motorola Inc. has struggled in 1998, experiencing weakened demand, price pressure and unfavorable currency comparisons as a result of the Asian economic turmoil. Motorola also was slow in introducing digital handsets.
The company today is working to eliminate a total of 15,000 employees for 1998 and is cutting operating costs. Motorola’s third-quarter earnings surpassed analysts’ expectations.
“The company is making progress in getting the ship turned around. Outside of execution risk, we believe the biggest risks to the story remain the things out of Motorola’s control, such as the health of the world’s economy and financial markets,” said Jeffrey Schlesinger, analyst with Warburg Dillon Read L.P. in New York.
