The telecom industry faced a revolution in technology in the early 1970s. For leading manufacturers, it was evident that new digital technology would replace the older electromechanical switches in telephone stations. Developing these products was expensive, however. For Ericsson, the establishment of the development company Ellemtel together with Televerket, the Swedish PTT, in 1970 was important for both leveraging technical expertise and reducing costs.
Development of the AXE system at Ellemtel began in earnest in 1972. When AXE was introduced in the market in 1975, Ericsson had a product of the highest technical quality that could replace conventional switching technology. However, AXE also became a platform for a broader communications system that encompassed not only fixed but also mobile telephony. The development of AXE was thus of very significant strategic importance for Ericsson and contributed substantially to establishing the company as a technology leader.
AXE was also a tremendous success. In several bidding contests, Ericsson ranked among the foremost suppliers. A strategically important order was won when Australia selected Ericsson’s system against the toughest possible competition. To meet increased demand, Ericsson was forced to quickly reconfigure production, above all in Swedish plants, and to develop and adapt employee skills to the new technology. In 1980, five years after the introduction of AXE, 14 of Ericsson’s 22 Swedish production plants had been converted to electronic systems, including production of AXE and peripheral equipment.
Technical developments in the early 1980s proceeded rapidly and increased use of digital technology opened new doors for the company. The need for fast and reliable solutions for voice and data communications would be even greater in the future and demand significant resources for research and development. Considering Ericsson’s limited resources, it was at that time hardly feasible to divide resources among too many areas of development. The focus on core business was one factor leading to an increase in costs for research and development (see chart).
The increasing complexity of telecommunications technology meant that customers to an increasing extent wanted total solutions for voice and data communications. Starting in the 1980s, Ericsson therefore invested in the development of communications systems for both public and private-sector customers. An important component in the system concept was the introduction of more efficient and reliable transmission systems. Conventional telephone cables were replaced by fiber-optic cables.
The rapid development of electronics and specialized components meant that Ericsson’s production was increasingly focused on assembly and system design.
Ericsson’s investments in new technology, however, were most evident in the development of mobile telephony. When work started in the early 1980s, it was hardly possible to foresee the rapid growth that would occur in this sector. Because Ericsson at an early stage began development of digital technology, including AXE, the company had a solid platform on which to base wireless technology.
Ericsson had already achieved a strong position in mobile telephony with the analog NMT (Nordic Mobile Telephony) standard. However, it was with the development and launch in 1992 of the digital GSM standard that mobile telephones became a consumer product. Ericsson led this work and was able to achieve a very strong position in the rapidly expanding mobile telephone market, in part because it was the only company able to supply mobile systems according to all prevailing standards.
Development work in mobile telephony, and later for broadband and other Internet-based technology, contributed to a significant increase in R&D costs. By the late 1990s, these costs, which amounted to 8 percent of net sales in the early 1980s, had increased to about 15 percent.
Author: Mats Larsson