Ericsson’s crisis became a fact with the profit warning published on March 12, 2001. Business is often patchy in the telecommunications sector, and January and February had been very poor months in financial terms, which was normal. On the other hand orders normally pile up in March (the last month of the financial year for many American companies), but in 2001 they completely failed to do so.
This change came very suddenly, says Ramqvist: “It was like a bolt out of the blue when in February 2001 a major customer like AT&T wanted to cancel written orders for mobile systems. We had never experienced anything like this before. […] Ericsson’s board and management had no premonition of what was going to happen: the worst downturn the industry had experienced in modern times, where more than 700,000 people all over the world were quickly going to lose their jobs.”
The trade unions say they had seen the crisis coming before management did.
“We could see well before the executives that business was going to the dogs,” says Jan Hedlund, who became the Metalworkers Union representative on Ericsson’s board in 1994. “I remember how the CFO, Sten Fornell, caused a lot of irritation when he said at a meeting with the trade unions in the autumn of 2000: ‘Well, it’s not so worrying after all. The decline we are seeing at the moment is certainly a temporary one’.”
Hedlund’s fellow trade unionist on the Ericsson board, Arne Löfving, responded irately: “For God’s sake man, tell the truth. Everybody needs to realize we are facing major problems.”
Hellström was one of those who had seen the writing on the wall. “One of the people I spoke to was Vodafone’s CEO, Chris Gent, and I said they had paid too much for a license. How could they afford that? It corresponded to 10 years’ infrastructure investment. But he referred to the enormously high price of their stock and said that it was not particularly expensive in relation to that.”
In an interview in Dagens Industri in mid-2000, Hellström warned that the mobile operators were paying too much for 3G licenses.
He said later: “I was nearly lynched. Both customers and employees were mad at me. Was I trying to knock the bottom out of the market? Or spreading panic? Was I trying to undermine the stock exchange? I got malicious phone calls and letters from angry investors and, as usual, the mass media said I was an idiot. On the other hand, there was no criticism from the board.”
Politician Henrik Westman wrote in Svenska Dagbladet: “Yesterday [June 29, 2000] Ericsson CEO Kurt Hellström managed to scupper stock exchanges across Europe. His statement about the risk of declining growth in the mobile market led to a drop for telecommunications stock.”
The newspaper quotes an anonymous analyst: “The problem with Hellström is that a negative angle is applied to everything he says. At least that is how he is perceived by the market. He is just not easy to interpret. And before you know for sure, you sell Ericsson.”
Hellström’s retrospective comment: “It was obvious that nobody wanted to see what the situation was. It was a crazy period but the worst thing was that nobody dared to stand up and go against the flow.”
But when the bottom dropped out of the market, share prices dropped as well, and then one could see that the licenses had cost too much. Far too much. Hellström recounts: “I wonder what Europe’s politicians were thinking. Mobile telephony was the only area where Europe had taken the lead. No other industry had created as many highly qualified jobs and generated so much tax revenue. They just thought it would go on like that.”
From mid-2001 to mid-2002, telecom operators’ investments swung from an annual increase of 25 percent to cutbacks of 25 percent.
To put it differently, they almost halved their purchases from vendors, including Ericsson.
This meant the introduction of 3G was an uphill struggle. The IT crisis in 2000 had not affected the mobile industry, but the European 3G auctions were catastrophic.
Uddenfeldt recalls: “This affected all the system suppliers. What is interesting in this context is that even though this was a major telecom crisis, it did not really have any effect on the numbers of new subscribers nor on sales of telephones. These were, after all, products that consumers wanted. That is why the crisis did not affect Nokia particularly severely.”
And even if networks were not extended when the crisis was at its worst, the need to do so grew as the numbers of new subscribers rose sharply.
Author: Svenolof Karlsson & Anders Lugn
The red line shows operators’ ongoing operational expenditure, the blue line their capital expenditure. From internal Ericsson material.