Business Feature: Ericsson’s annus horribilis

The year 2007 looks set to be Ericsson's own annus horribilis: the world leader in mobile networks has long been the star of the Swedish economy but is now battling through a crisis with no end in sight.

After two profit warnings and a turbulent week on the financial markets, the group’s market capitalisation has been almost halved to 239.08 billion kronor ($38.14 billion) from 450 billion at the start of the year.

Chief executive Carl-Henric Svanberg, the golden boy in Swedish business circles when he took over the company in 2003, is now under heavy fire for his management of the crisis.

Making matters worse are bribery allegations that arose against the company last week.

“To restore confidence will be a very, very long process of about three or four quarters, or a year, because we have had two profits warnings” in one month, analyst Greger Johansson at the Redeye analysis group told AFP.

Now, Ericsson “has to think about how to communicate with the market, what they can do,” he said, predicting that the company would announce job cuts.

“The solution or action plan can be found in one or two months but the implementation and regaining confidence will take much more than one or two months,” he said.

While Ericsson remains a solid industrial company and a world leader in its field, shareholders have been fleeing the group en masse and the stock has been in freefall since the first profit warning on October 16.

The Ericsson share was valued at 28.2 kronor on the Stockholm stock exchange at the start of the year. On Friday, it closed at 14.72 kronor, a fall of 47.4 percent.

In mid-October, Ericsson dropped a bombshell when it announced that its earnings would be sharply weaker than expected in the third quarter due to a slowing market that was seen continuing through 2008.

It said investments in mobile network expansions and upgrades, which bring in more money than new rollouts, were slowing down and there was also rising competition from Asia.

Third quarter net profit came in at 4.0 billion kronor, a 36-percent fall from the same quarter a year earlier, while operating profit was down by the same amount to 5.6 billion.

And last Tuesday, during a conference with investors and analysts in the United States – where Ericsson is facing several class action suits from shareholders who feel they have been misled – Svanberg reiterated that the problems were set to continue.

He said sales in the fourth quarter would “probably” be in the lower range of the previously announced forecast of 53 to 60 billion kronor.

Criticism has been fierce against Ericsson’s leadership in recent weeks, with analysts commenting that either management doesn’t have a good grasp of developments on the market or it is unable to properly communicate about developments.

But Johansson said he did not expect Svanberg to be sacked.

“I don’t really believe they are going to fire Svanberg, it wouldn’t be good signal,” he said.

On Friday, the chairman of the board, Michael Treschow, reiterated confidence in Svanberg.

“Carl-Henric has headed the company for five years and he has attained positions on the market we have today,” he told Swedish Radio.

“Ericsson is a world leader, has the best profitability and the growth,” he added, noting that “for 18 straight quarters, the company met market’s expectations.”

Treschow said it was not easy to communicate negative news to the but that the company had tried its best.

“Yes it’s still number one in the world. They have the highest share. There is no problem with its products…. (But) the confidence management is down, that’s the point,” Johansson said.

Confidence further undermined by damaging media reports. Last week, Radio alleged that Ericsson had paid bribes to politicians in Oman and to secure contracts.

By AFP’s Delphine Toitou