The alliance between Sony Corp. of Japan and L.M. Ericsson of Sweden is giving the two companies hope they have a chance to trump Nokia Corp. as the supreme player in the mobile- phone market. But similar alliances in the past have been failures.
After a week of talks, Sony and Ericsson agreed to combine their mobile- phone businesses in a memorandum of understanding that promises not only to leverage their geographic advantages, but also a leap into a future of multimedia offerings.
According to the contract, both companies will produce a common phone with the brand name of Sony Ericsson, and the new company will begin operating Oct. 1. The company will be named Sony Ericsson Mobile Communications.
The combined market share of Sony and Ericsson will be 13 percent, given Ericsson’s 9 percent and Sony’s 2 percent worldwide. The companies shipped 50 million phones last year, bringing in about $7.2 billion.
Sony has about 10 percent market share in Japan, which is by no means a dominant position, with Panasonic, Fujitsu, Mitsubishi Electric and NEC ahead of it.
This has restrained analysts from ranking the Sony-Ericsson combination as a viable threat to Finnish company Nokia, which still controls the mobile-phone market.
“With respect to the market leader, Nokia, we do not see any meaningful competitive threat in 2001 and even 2002 as the joint venture will likely take time to ramp,” wrote Jeffrey A. Schlessinger of UBS Warburg. But he contended that the joint venture has the potential to put up a battle with Nokia in the longer term as the industry gravitates toward a multimedia environment.
While this joint venture is often applauded for its vision of the electronic future of the mobile-phone world, Schlessinger also noted that Nokia has teamed up with other companies as well, which include EMI, Eidos, Rage, IO Productions, Kuju Entertainment and Quiz Supplies.
The joint venture will be responsible for product research, design and development as well as marketing, distribution and customer sales.
Jan Wareby, president of Ericsson’s consumer division, who will become the executive vice president of the new company, said the new company would avoid the pratfalls of past joint ventures, which left the new companies as islands without the benefits of the sales, marketing and distribution facilities of the combining companies.
“There are new rules in this business and we need new competencies,” he said in a teleconference call, noting that the company will combine consumer products like Walkmans, video cameras and Gameboys.
Similar joint ventures that bit the dust include Sony’s alliance with Qualcomm Inc., Sharp’s effort with Alcatel of France, and Lucent Technologies Inc.’s tie-up with Phillips N.V. of the Netherlands. Sony vacated the U.S. market and its alliance with Qualcomm in 1999 after its PCS offerings failed to pull much weight in the market. Sharp’s alliance with Alcatel ran into a brick wall of losses and tardy sales. Ditto the Lucent and Phillips joint venture.
But the Sony Ericsson deal could look to the joint venture between another Japanese company, Toshiba Inc., and German phone maker Siemens AG. Analysts think this is becoming a trend, especially as a way for losers to rebound in a softening market. Siemens is now believed to hold the No. 3 position in the worldwide handset market, pushing down Ericsson.
Also, Japan’s NEC is believed to be in secret talks with a U.S. chipmaker on producing 2.5-generation phones.
Sony Ericsson hopes to roll out its first phones in 2002, which it believes will hum with the radio and wireless know-how of Ericsson and the electronics and aesthetic high points advantages of Sony.
“By combining the complementary strengths of Ericsson and Sony, the new company is uniquely positioned to become a world leader in telecommunications as the industry moves rapidly toward mobile Internet,” said Kurt Hellstrom, Ericsson’s president and chief executive officer, who will be the chairman of the joint venture. “I am quite convinced that we have found the perfect match.”
Sony said it will invest $500 million in the business. Ericsson has not released any funding figures. Wareby had said the individual companies would disclose their figures when they chose to.
“Our collaboration with Ericsson … holds significance for us in creating an ubiquitous value network that is always connected, on demand and interactive,” said Kunitake Ando, Sony’s president and chief operating officer.
Wareby said details of the technology route Sony Ericsson will take has not been decided. Sony produces GSM handsets worldwide and had produced CDMA phones in the United States. Ericsson manufactures GSM and TDMA phones.
The company will be based in London and will employ 3,500 staff-2,500 from Ericsson and 1,000 from Sony. Katsumi Ihara, Sony’s executive vice president, will be president. The board of directors of both companies will be split equally, so will profit sharing.
Wareby said Ericsson’s agreement to outsource its phone-manufacturing division to Flextronics Inc. earlier in the year would not be affected by Sony Ericsson, although the new company will manufacture for the joint venture as will Sony’s manufacturing sector.
Ericsson, which lost $560 million in its first quarter, denied a Wall Street Journal report last week that it had set up a crisis panel, saying that it was the paper’s interpretation of what the company calls its Efficiency Program panel headed up by the company’s chairman, Lars Ramqvist.
Ericsson spokeswoman Kathy Egan said the executive panel was set up to pool the diverse experience and knowledge of high-ranking officers in the company and they are responsible for the recently announced outsourcing, staff reductions and the deal with Sony.
