Money as a weapon
When ERA’s American competitors saw that they were beginning to lose orders, they adopted a new weapon: financing customer’s investments. This was seen for the first time in Cleveland, where Northern Telecom adopted a new strategy in offering to lend the customer the funds needed for the deal. The target was obviously the interloper, ERA, which, sure enough, could not offer such generous terms.
A financing scheme was now launched that could give the mobile operators 100 percent funding for their networks. The operators were often small or newly established companies that found it difficult to get loans, so this was a powerful sales argument.
Åke Lundqvist was the one who had to deal with this new situation. He told his staff in the US that they could also offer customer finance, plus, if needed, “working capital” of 20–30 percent to enable customers to develop their organizations.
Neither Lundqvist’s boss, Björn Svedberg, nor Ericsson’s board welcomed this situation. The parent company was investing large amounts at this time in setting up Ericsson Information System in the US. This was one reason for Ericsson’s major rights issue for USD 240 million in the spring of 1983, aimed at the American capital market. This attracted a great deal of attention and created interest in the company’s operations. But in 1984 the third-quarter report indicated serious problems, which had an impact on the stock price.
Ericsson had to introduce an ambitious program of cuts, plus changes at group executive level – while at the same time ERA was looking for more venture capital. Lundqvist’s successes inspired some respect but the fact remained that the company did not have enough money for the deals concerned.
CONTRACT WITH CITIBANK
“It was war, and in the end we managed to find some weapons to fight with,” says Johansson. “We signed a contract with Citibank which meant it would take over most of the loans to customers, so in good faith we signed more new contracts in the US. Then it turned out that Citibank’s interpretation of the contract did not agree with ours. For example we were taking licenses as guarantees for the loans we made to the operators. But we could not agree on how to place a value on a license.”
At the time, McCaw was a relatively unknown operator with its head office in Seattle. It was involved in the applications for San Francisco, San Jose, Portland and Seattle and became one of the partners in the operating company that gained the licenses. Thanks to the creative financing plans described here, ERA managed to get an order for a combined system for the Bay Area, San Francisco and San Jose.
This gave ERA its first commercial contact with McCaw, which now began the license acquisitions that at the end of the 1980s were to make McCaw Cellular the largest mobile operator in the US. Ericsson later sold systems to McCaw for Pittsburgh, Madison (Wisconsin) and most of California as well as elsewhere. Ericsson was also asked to replace existing systems in Florida, New York and other places.
ERA’s team spirit is described by all involved as an important factor behind its success. As product manager in Sweden, Jöran Hoff played a central role as the one who told Ljunggren and his team of salespeople what ERA could and could not deliver and at what price. Hoff’s name was also used as a unit by those in the know within ERA: a “Hoff” meant SEK 5 million.
Author: Svenolof Karlsson & Anders Lugn