Ericsson to stop making mobiles

The company will supply but not make mobiles

In a seemingly bizarre turn of events, Sweden's Ericsson is to stop making its own mobile phones.

It has been a trend in electronics to move to outsourcing

Martti Larjo
Evli Securities

The company said it would focus instead on technology and other aspects of its business.

The world's third biggest supplier of mobile phones will cease handset production in an effort to slow its consumer division's slide into the red.

Consumers will still be able to buy mobile phones under the Ericsson brand, but they will be produced by another company.

"In light of a significant change in the world market for mobile phones we have decided to fundamentally change the setup of our business," executive vice-president for consumer products Jan Wäreby said.

Markets ignore profit rise

The markets ignored both the company's 75% rise in pre-tax profits to 28.7bn Swedish kronor (£2.1bn, $2.95bn, 3.22bn euros) in 2000 and its 27% rise in net sales to 273.6bn kronor, announced on Friday.

Instead, they focused on the handset division where losses reached 16.2bn kronor.

At 1200 GMT, Ericsson shares were 13% down on the day at 103.5 Swedish kronor in Stockholm trade.

"Consumer division sales (at Ericsson) have fallen more rapidly than the market expected," said FIM Securities analyst Jussi Hyoty.

Contracting out

But Ericsson's pull-out of handset manufacturing is not as dramatic as it may seem.

I am not sure whether it is enough as the market expected more

Michael Schroder
Opstock

The firm will continue its mobile phone R&D and marketing activities, and handset production will be outsourced.

Consumers will still be able to buy Ericsson-branded phones.

"We are committed to remaining a top player in mobile phones," Mr Wäreby said.

"With this new set-up, we respond to a much tougher business environment, and we create a sound basis for long-term profitability."

Said Mr Hyoty: "The (handset) outsourcing deal hardly surprised anyone, this is good news for Ericsson's suppliers."

Economies of scale

Much of the manufacturing business will be transferred to the Swedish company Flextronics in April.

As part of the deal, 4,200 Ericsson staff will join Flextronics and 600 staff in Sweden will be made redundant.

Flextronics has divisions in Brazil, Malaysia, the US and the UK.

"The alliance... will enable us to achieve economies of scale and volume flexibility," Mr Wäreby said.

Two Taiwan firms, Arima and GVC, will also take on some of the production.

Staff slashed

In total, Ericsson will slash the number of staff at its handset unit to 7,000 in 2001 from 18,000 people.

"It has been a trend in electronics to move to outsourcing," said Evli Securities analyst Martti Larjo.

Other major handset manufacturers, including the biggest US producer Motorola, have contracted out some of their handset production.

"But I do not think Nokia will, on the handset side, be moving in this direction. Their production is in such a good shape and they are not having the problems the others are having," said Mr Larjo.

Other business areas

Ericsson's telecoms infrastructure business accounts for the bulk of its total activities.

Yet, the firm aims to keep its finger on the pulse in the handset market because the two business areas are integral parts of its operations, the FT reported.

Some analysts believed this strategy was flawed because simply halting mobile production would not alone eliminate the Ericsson consumer division's losses.

"Ericsson's decision to outsource its mobile phone production and supply is a further step in their strategy but I am not sure whether it is enough as the market expected more," said Opstock analyst Michael Shroder.

Some analysts predicted that over time Ericsson will pull out of mobiles altogether, but others disagreed.

"I'd say things are getting bad if they have to outsource even the high-end phones. You can reduce costs all you want but it doesn't matter if you don't make good phones," said Daiwa SBCM Europe analyst Matthew Lewis.

Ericsson said it expected there to be 500 million-540 million mobile phones worldwide this year, up from 405 million-415 million units in 2000.