L.M. Ericsson left an ironic trail last week.
It extolled its third-generation technology while surrendering its phone-making business and posting a fourth-quarter loss that limped behind expectations.
The Swedish company outsourced its phone-making business to Singapore-based Flextronics International Ltd. in an admission of delivery failures from key suppliers and deficiencies of its entry-level phones.
Under the deal, Flextronics will take over Ericsson’s plants in Brazil, Malaysia, Sweden, Britain and parts of the United States. China’s joint-venture arrangements will be excluded from the agreement.
Ericsson will concentrate on research and development at Lunda and Krista in Sweden, at Raleigh, N.C., and Basingstoke in the United Kingdom.
This decision comes against the backdrop of Nokia Corp.’s report two weeks ago that handset sales dropped in the past year.
Ericsson also will transfer 4,200 workers to Flextronics, while an unlucky 600 workers will be separated from the payroll.
This arrangement also bolsters Flextronics profile, which only last May had signed an agreement with Motorola Inc. to make cellular phones, two-way pagers, set-top boxes, wireless communications gear and components.
It has also signed another outsourcing deal with Taiwanese manufacturer GVC to complement Arima of Taiwan to make entry-level phones .
“With this new set-up,” said Ericsson’s Jan Wareby, “we respond to a much tougher business environment, and we create a sound basis for long-term profitability.”
The company said it was shedding that weight to launch into its area of advantage, which is in second- and third-generation technologies, where it claims to be “growing faster than the market.”
“We are now the world leader in both 2G and 3G mobile systems,” said Kurt Hellstrom, Ericsson’s president and chief executive officer. “We have captured well over 50 percent of the GPRS and 3G orders so far.”
He said the company was investing more in 3G to secure its commitments to deliver the systems in large volumes. The GPRS technology, which will enhance data and speed, is the next trench battle for vendors, especially in the second half of 2001.
But the company delivered these restructuring news in the context of a fourth-quarter report that drew little cheer, with a 64-percent decline in net income and a profit of $234 million compared with $658 million in the previous year. Excluding certain items, operating income slumped to $583 million. Adjusted operating loss was $155 million against an operating profit of $906 million a year ago. For the full year, it posted an operating income of $3.25 billion, an improvement on $1.8 billion in the previous year.
The company basked in its network operators unit as orders rose 40 percent and sales leaped 29 percent.
Although the company shipped 11.8 million phones for the fourth quarter and sold 43.3 million phones-an increase of 38 percent-with a share of more than 10 percent of the world market of 405-415 million phone sales in 2000, Hellstrom said he expects “strong growth for systems and lower sales for phones.”
The outlook for the year is cautious as it anticipates to break even in the first quarter of 2001.
The news had a negative effect on the company’s stocks. At press time Friday, Ericsson’s stocks tumbled 14 percent to $11.13. Flextronics benefited with a 6.3 percent jump to $38.50.
Analysts were skeptical about Ericsson’s outsourcing move since it will still research, design, market and sell the phones in its brand name. This, they contend, could create coordination problems.
A series of downgrades greeted the news. CSFB downgraded it from “strong buy” to “buy;” Merrill Lynch from “NT buy” to “NT accumulate;” UBS Warburg from “buy” to “hold” and Salomon Smith Barney from “outperform” to “neutral.”
