Ericsson’s board returned to the mobile phone issue repeatedly, the minutes of a board meeting in October 2000 show: “Development of consumer products must be governed by consumer demands and wishes, and nothing else; standby and calling times must be improved; terminals with built-in aerials must be included in the range of models; and it is vital to focus as quickly as possible on their design.”

However, the board could merely report that the first year of operations for the mobile phone business division, 2000, had been a financial disaster. While the number of GSM subscribers continued to rise dramatically, Ericsson’s mobile phone operation sank like a stone. It had been forecast that the division would make a profit; instead it made a loss of SEK 24 billion. Half of this was described as restructuring costs.

And it hurt that in the very same year Nokia was making record profits and overtook its rival in terms of turnover. 

Jan Wäreby was appointed CEO for the business division for mobile telephones, with John-Peter Leesi, later CEO of the Lutava metal corporation, as CFO.

Leesi says: “During the early days of mobile phones as consumer products, there was a perpetual gap between demand and supply. Neither we nor anyone else could produce as many mobile phones as the consumers wanted to buy.”

If a phone failed to sell, the assumption was that there was something wrong with the technology, Leesi says.

MASS-MARKET PRODUCTS

Mobile phones now had to be treated with as mass-market products. The demands stemming from this were shown when a fire hit the Philips circuit-board factory in Albuquerque, New Mexico, in March 2000. The blaze was so minor that the staff were able to extinguish it before the fire brigade arrived. The factory’s two largest customers were Nokia and Ericsson, and the ways in which they dealt with the situation differed remarkably.

The factory’s managers promised that production would be up to speed again in a few days. Even so, Nokia immediately began to redesign its circuit board to reduce dependence on Philips. In addition, Nokia’s management lost no time in going to the Philips head office in Amsterdam to demand the allocation of extra resources to ensure that Nokia received its circuit boards.

Smoke and soot damage from the fire closed down production for months. Despite Ericsson scaling up manufacturing of these advanced chipsets in Sweden “in record time,” according to its own annual report, production was adversely affected by an enduring lack of components. This led to a estimated shortfall of 7 million phones.

For Philips the story ended with the closure of the Albuquerque factory in 2003.

In October 2000, the “Back to Business” program was launched in the consumer products (mobile phone) division. In practice this meant relocating manufacturing from high-cost plants such as Kumla in Sweden and Lynchburg in the US to Eastern Europe. The jobs lost at Kumla were to be replaced by the production of 3G equipment.

Author: Svenolof Karlsson & Anders Lugn

© Telefonaktiebolaget LM Ericsson and Centre for Business History

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