The major world event in 2008 was the economic recession. Beginning with the mortgage bubble in the US housing market, financial markets were paralyzed and in a short time a series of illustrious banks collapsed.

From June 2007 to October 2008, the world’s stock exchanges declined by almost 60 percent, unemployment figures rocketed, and readiness to invest declined dramatically. Mobile phone manufacturers saw this immediately in their sales figures.

For several of Ericsson’s competitors, the year turned into a bloodbath. When Svanberg had become CEO in 2003, there were about 12 competing companies. At the beginning of 2009, most had abandoned the field.

Above all, the downturn was catastrophic for the American companies. Using Swedish currency equivalents, Motorola made a profit of about SEK 40 billion in 2006, a minor loss in 2007 and in 2008 a loss of SEK 45 billion. Franco-American Alcatel-Lucent made a loss of SEK 35 billion in 2007 and SEK 55 billion in 2008. The worst outcome of all was at Nortel, which was barely in the black in 2006, made a loss of just under SEK 10 billion in 2007 and lost SEK 60 billion in 2008.

CONSOLIDATION

Svanberg told Contact magazine in the spring of 2008: “We must not make the crisis in the world around us our crisis as well. Growth was 8 percent during 2007 and we earned SEK 30 billion, while our competitors had considerable problems.” But this crisis had just as little effect as the previous one on how people communicate with each other. 

Svanberg was fundamentally positive about the global consolidation that was under way. “It will make those who are left stronger.” At the same time the transformation to IP technology meant “that a totally new contest on positions with customers has begun. This will be a new battle for the biggest installed base.”

Developing markets still accounted for most of Ericsson’s sales. “What is unique for Ericsson is our spread. No single market accounts for more than ten percent of our turnover. Our competitors can have markets that comprise 20–30 percent of their sales … But there is no law of nature that ensures stability here.

“Basically it is impossible to win market share aggressively. All deals start with the customers – they contact us. And we do not take on contracts that will not have a positive effect on our margins, even though there may be one or two exceptions. In 2007, we did in fact win significant market share. But the process began with our customers.”

WHAT IS THE RIGHT LEVEL OF PROFIT IN SUCH A FLUCTUATING SITUATION?

 “There is a dramatic increase in traffic right now, and the result is demand for expansion and upgrades. But a new generation of technology can always cope with more than its predecessor and therefore generates lower margins … We have a mix of areas, some highly profitable, others less. In this context I really do not know what the ‘right’ profit level is.

“Even so, profitability is our most important competitive weapon. Nobody is making us get rid of people, but in our business, we always have to be on top where efficiency is concerned. If we start getting sloppy, we will soon find ourselves slipping behind.”

Author: Svenolof Karlsson & Anders Lugn

© Telefonaktiebolaget LM Ericsson and Centre for Business History

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