Telefonaktiebolaget LM Ericsson - Company Profile, Information, Business Description, History, Background Information on Telefonaktiebolaget LM Ericsson

S-126 25 Stockholm

Company Perspectives:

We believe in an "all communicating" world. Voice, data, images, and video are conveniently communicated anywhere and anytime in the world, increasing both quality-of-life, productivity, and enabling a more resource-efficient world. We are one of the major progressive forces, active around the globe, driving for this advanced communication to happen. We are seen as the prime model of a networked organization with top innovators and entrepreneurs working in global teams.

History of Telefonaktiebolaget LM Ericsson

Telefonaktiebolaget LM (Ericsson) is one of the world's largest telecommunications concerns with the largest customer base across the globe. With operations in over 140 countries, Ericsson has three main divisions--Mobile Systems, Multi-Service Networks, and Consumer Products--that focus on providing products and services related to network management tools, data backbone and optical networks, and Internet applications. During 1999 and into the new millennium, Ericsson was involved in major restructuring efforts due to increased competition and falling revenues.

Growth During the Late 1800s and Early 1900s

The company bears the name of Lars Magnus Ericsson, an engineer who founded a workshop to repair telegraph machines in Stockholm in 1876. At first, Ericsson only worked with telegraph equipment, but that changed in 1877 when the newly invented telephone reached Sweden. LM Ericsson began producing telephones the next year, but sales were disappointing because the American Telephone and Telegraph Company (AT&T) had a virtual monopoly on telephone service in Sweden and used its own equipment. AT&T's Bell subsidiaries faced no serious competition in Sweden until 1883, when engineer Henrik Tore Cedergren founded Stockholms Allm&auml-a Telefonaktiebolag (SAT) to provide telephone service and purchased his equipment from LM Ericsson.

Another boost to LM Ericsson's fortunes appeared in the 1880s in the form of an expanding export market. In 1881, the company's international business was very small and limited to other Nordic countries. By the end of the decade, however, its telephones were appearing in western Europe, Great Britain, and Russia. If LM Ericsson's export business expanded in the 1880s, it exploded in the 1890s. The company began selling telephones in Australia and New Zealand. Late in the decade it sold telephone exchanges that switch calls, as well as telephones in South Africa. During the Boer War, LM Ericsson supplied field telephones to the British armed forces. In 1899, LM Ericsson opened its first foreign factory, in St. Petersburg, Russia; by the turn of the century it had begun selling telephones in China and the South Pacific.

In 1900, exports accounted for about 90 percent of LM Ericsson's total sales. Contraction of demand in the domestic market and rapidly expanding foreign markets were partly responsible for this dominance of exports. Telegrafverket, the state-run telephone company, and SAT had been Ericsson's principal customers in Sweden, but both decided to set up their own manufacturing subsidiaries. Telegrafverket did so in 1891 and SAT in 1896. Nonetheless, Ericsson's annual sales went from SKr 500,000 in 1890 to SKr 4 million in 1900.

Ericsson incorporated in 1896 as Aktiebolaget LM Ericsson & Company, with Ericsson serving as chairman, president, and sole shareholder. He retired as president in 1900 and was succeeded by Axel Boström, his former office manager. Ericsson stepped down as chairman the next year and died in 1926.

Even without the guiding hand of its founder, Ericsson continued to conquer international markets in the years leading up to World War I. It began selling equipment in Egypt and set up manufacturing subsidiaries in Great Britain, the United States, France, and Austria-Hungary. It also began installing telephone exchanges, joining with SAT to set up a network in Mexico in 1905. Relations with SAT, all but severed in 1896 when it began manufacturing its own equipment, were repaired in 1901 after SAT acquired telephone concessions in Moscow and Warsaw. Realizing that his production capacity was inadequate to supply these new markets, Henrik Cedergren agreed to merge his manufacturing operations with Ericsson's. SAT sold its subsidiary, AB Telefonfabriken, to Ericsson in exchange for Ericsson stock.

Ericsson suffered during World War I as hostilities cut off most of its foreign markets. Exports were limited to Russia and neutral countries. The Russian market dissolved in 1918 when the new Bolshevik government nationalized Ericsson's Soviet operations, seizing about SKr 20 million worth of assets. Despite these setbacks, the company's sales continued to rise, from about SKr 9 million in 1913 to SKr l4 million in 1920.

The most important event of the World War I years was Ericsson's merger with SAT in 1918. The two companies had been allied for decades, with a short separation after the establishment of AB Telefonfabriken. The companies decided to pool their assets in the uncertain war years. The new entity was called Allm&auml-a Telefonaktiebolaget L.M. Ericsson. Arvid Lindman of Ericsson was appointed chairman, with Hemming Johansson of Ericsson and Gottlieb Piltz of SAT serving as co-presidents.

The Kreuger Debacle: 1930s

In 1921, an attempt to hammer out a worldwide telephone cartel agreement between Allm&auml-a Telefonaktiebolaget L.M. Ericsson, AT&T's Western Electric subsidiary, and a German engineering firm, Siemens & Halske, fell through, and the three giants of the telephone business spent the rest of the decade battling with each other along with a U.S. firm, International Telephone and Telegraph Corporation (ITT), in the world's markets. In 1926, the company dropped Allm&auml-a (general) from its name and became known by its present name. Ericsson had become one of the most important players in its chosen arena, but by 1930, the company would find its survival in doubt as it was caught in the machinations of Ivar Kreuger, the notorious Swedish financier and confidence man. Kreuger rose to prominence in the 1920s, trying to forge an international monopoly in the production and sale of matches. He acquired the necessary financing, however, through fraud; he lied about the extent of his assets and the profitability of his previous ventures to gain credit. For years his deceits went undetected, and his empire grew. In the late 1920s he began to diversify, and he purchased Ericsson stock in 1926 and 1927. By 1930, Kreuger controlled Ericsson. Kreuger's takeover had little effect on Ericsson's operations, but the company's assets became another token in his pyramid financing scheme.

By 1931, the Great Depression had made it all but impossible to raise capital through the securities markets, so Kreuger was forced to take desperate measures to meet his debt obligations and keep his gossamer empire from disintegrating. In one last effort, he approached ITT chairman Sosthenes Behn and proposed to sell his Ericsson stock to ITT. He would sell ITT a controlling interest in Ericsson for $11 million, which he needed to make interest payments on his own bonds. Early in 1932, however, ITT backed out of the deal as doubts about Kreuger's solvency began to emerge. ITT demanded its money back, but Kreuger had already spent it. Kreuger killed himself in March 1932.

After Kreuger's death, an independent audit revealed that he had also embezzled $5 million in cash from Ericsson by replacing the money with illiquid French telephone bonds. His looting had bankrupted the company, and furthermore, he had delivered it into the hands of ITT, one of Ericsson's major foreign competitors. Sweden's three major banks--Skandinaviska Kredit, Stockholms Enskilda Bank, and Svenska Handelsbanken-moved quickly to restore Ericsson's liquidity and restructure the company. They also negotiated with ITT over its share of Ericsson, a process made delicate by the fact that Swedish law forbade foreign interests from exercising a voting majority in Swedish companies. Under agreements reached later that year, ITT was allowed a large, but not a majority, share of re-issued Ericsson stock, and Behn was given a directorship. The new Ericsson board met for the first time in May 1933, with former National Power Administration official Waldemar Borgquist as chairman. Marcus Wallenberg, Jr., of Stockholms Enskilda Bank was also appointed to head a special committee overseeing Ericsson's finances. This marked the beginning of Wallenberg's long association with the company--he became chairman in 1953--and effectively added Ericsson to the Wallenberg family business empire.

The so-called Kreuger crash made the Depression doubly hard for Ericsson. Abroad, the company secured its market share by entering into cartel agreements with its competitors. At home, it cut back its work force and did not pay a dividend from 1932 until 1936. The outbreak of World War II did not make things any easier. The German invasion of Poland eliminated a foreign market that had been an important source of revenue, and Ericsson once again omitted its dividend in 1939. The company lost about a third of its export sales during the war as well as foreign assets that were destroyed or nationalized. On the other hand, Ericsson did benefit from Sweden's military buildup and manufacturing of telephones, aircraft instruments, machine-guns, and ammunition for the military.

Focus on Core Operations and International Expansion: 1950s-60s

Only after World War II ended was Ericsson able to put the troubles of the 1930s behind it. Once again, Ericsson concentrated on its core telephone manufacturing business, and export markets played their traditional leading roles. During the war, domestic orders had accounted for a peak 80 percent of all sales, but this began to decrease steadily in 1946. By 1973, the ratio would be reversed; exports would account for about 75 percent of Ericsson's sales, just as they had during the early 1920s. Despite the nationalization of its Mexican subsidiary in 1958, sales in Latin America and Australia boomed in the 1950s. Profits grew, and the company expanded steadily throughout the postwar years.

In 1951, Ericsson expanded its manufacturing capacity in the United States by acquiring a majority interest in North Electric Company of Ohio for $1.7 million. In the early 1960s, however, North Electric's orders from General Telephone Corporation and the U.S. Air Force fell off sharply and the company began to lose money. In 1966, Ericsson sold a 52 percent interest in the subsidiary to United Utilities, a telephone and utilities concern that had become North Electric's main customer. Ericsson sold its remaining interest to United Utilities in 1968.

In 1960, Ericsson finally rid itself of Ivar Kreuger's legacy. After several years of negotiation, Marcus Wallenberg, Jr., purchased an option on ITT's entire stake in the company, which consisted of almost 1.1 million shares of preferred and common stock worth a total of $22.7 million. All of the common shares were subsequently sold through underwriting syndicates, and 200,000 of the preferred shares were sold on the open market, with the remaining 438,000 divided between Providentia, a Swedish trust company, Svenska Handelsbanken, Skandinaviska Enskilda Banken, and Ericsson itself.

Ericsson pared back its non-telephone business in the 1960s. In 1963, it sold off ERMEX AB, a subsidiary that produced electric cattle fences and locks. In 1968, it divested its electricity-meter operations when it sold another subsidiary, Ericsson Mätinstrument, to the Swiss engineering concern Landis & Gyr. At the same time, it savored its reputation as the world's premier non-U.S. telecommunications company. The crossbar switching system, which it had pioneered in the early 1950s, formed the basis of telephone networks in many countries. In 1973, Ericsson attempted to expand its share of the British market by entering into a joint venture with electrical manufacturer Thorn Electrical Industries to produce telephone exchanges.

Development of the AXE System: Mid-1970s

Ericsson fell behind competitors like ITT, GTE, and Siemens in technological development in the late 1960s and early 1970s. That changed in 1976, however, when Ericsson introduced its AXE switching system. The AXE was the first fully digital switching system, converting speech into the binary language used by computers. Its competitors still used the slower and less-reliable analog system, in which electric currents conveyed the vibrations of the human voice. The AXE's modular software and hardware gave it another edge over its rivals, making it easier to manufacture and test as well as easier for customers to repair and modernize. The system was an immediate success, winning virtually every major international telecommunications contract for two years after its introduction. Björn Svedberg, the young engineer who led the AXE development team, was appointed president of the company in 1978.

In 1980, Ericsson purchased a controlling interest in Datasaab, a struggling computer manufacturer that had been jointly owned by Saab-Scania and the Swedish government. Ericsson used this acquisition as the starting point of a major effort to enter the U.S. office automation market. Ericsson also modified its powerful MD-110 PBX switch, a central-office switch, to suit the needs of U.S. customers, and in 1983, it entered into a joint venture with Honeywell to market the MD-110 in the United States and to develop other telecommunications products. Previously a bit player in the United States, Ericsson realized that it needed to play a major role there to ensure its prosperity.

In 1985, however, Ericsson discontinued the sale of personal computers in the United States after selling only 3,000 units, or one-fifth of its goal for the year, and technical problems with the MD-110 suggested that it had been brought to market too quickly. Ericsson laid off 500 employees--one-quarter of its work force--from its money-losing U.S. operations.

At the same time, however, the AXE system continued to prove a tremendous success; in 1985 Ericsson won its first AXE contract from British Telecom, worth $140 million. Also in 1987, Ericsson gained 16 percent of the French telephone-switching market when the French government accepted its bid for Compagnie Générale Constructions Téléphoniques, an ailing switch-maker. This coup was especially prestigious because Ericsson bested its two largest international competitors, AT&T and Siemens.

Profits Rise: Late 1980s to Mid-1990s

Faced with the vitality of its core switching business and the relative torpor in its data-processing business, Ericsson decided to divest the latter and refocus on the former in 1988, abandoning its vision of producing its own automated office system. It sold its computer and terminal operations to Nokia Corporation, a Finnish concern, for $217 million. With this sale, Ericsson prospered. It laid the groundwork for future profits by winning contracts for switching equipment from the U.S. regional Bell companies that were formed when AT&T was broken up. Ericsson also benefited from a surge in the demand for cellular phone service, and the quality of its products enabled Ericsson to capture 40 percent of the world's cellular systems market. The company's position solidified in 1989 when an Ericsson-backed design for digital mobile radio transmission was selected over entries from AT&T and Motorola as the U.S. standard by the Cellular Telecommunications Industry Association.

In 1988, Ericsson amassed gross profits of Skr l.2 billion, a 60 percent increase over the previous year. Profits continued to grow throughout the end of the decade, and the company continued to expand its position in overseas markets. In 1990, telecommunications giant Nippon Telephone and Telegraph chose Ericsson, Motorola, and AT&T to be its partners in a plan to jointly develop a digital mobile telephone system. The move was expected to give Ericsson valuable access to Japan's burgeoning mobile phone market. In 1991, the company strengthened its position in Europe's cellular phone market when it acquired 50 percent of Orbitel Mobile Communications, the manufacturing subsidiary of British concern Racal Telecom PLC. The following year it purchased a majority interest in Fuba Telekom, a German telecommunications concern.

By now, Ericsson had risen a long way from the nadir of the Kreuger crash. As a large corporation with a small domestic market, it relied heavily on export markets for most of its revenues and despite its size disadvantage relative to international competitors, Ericsson worked its way to the top of the telecommunications industry by the early 1990s. In fact, it stood as one of the world's largest manufacturers of telephone apparatus, radio communication instruments, cellular mobile phone switching systems, and cables by 1994. Income for 1995 rose by 36 percent over the previous year to SKr 7,610 million--$1.1 billion--while orders rose by 25 percent.

Ericsson spent the next few years determined to remain a market leader. During 1996, the firm launched two new cellular phones that utilized digital control channel technology and were supported by Time Division Multiple Access (TDMA), an operating standard used by nearly all U.S. markets. Ericsson also purchased the remaining interest in Oribitel and the remaining stake in its joint venture with Raychem Corp. that had been formed two years earlier. The venture, entitled Ericsson Raynet, was created to develop and market fiber networks for phone access networks.

That year, Ericsson logged record results. Orders, sales, and earnings increased--as they had for the past five years--and the firm had grown to serve the world's largest customer base. The company attributed much of its success during this time span to its focus on research and development. During 1996, the company increased research and development spending by 50 percent over 1995 spending and employed 18,000 R&D engineers in factories across the globe. The following year, Ericsson announced that it would restructure operations into three business segments--Mobile Phones and Terminals, Mobile Systems, and Infocom Systems--a move that signaled the firm's commitment to its mobile phone business.

Success continued in 1997 as the company focused efforts on expanding its research in third-generation mobile telephone systems and Wideband Code Division Multiple Access (WCDMA). WCDMA was defined by Ericsson in its 2000 annual report as "a technology for wideband digital radio communications of Internet, multimedia, video, and other capacity-demanding applications." This technology, developed by Ericsson and other telecommunication firms, was selected for the third generation of mobile phone systems in Europe, Japan, Korea, and the United States. The company also continued to work with Intel Corp., IBM Corp., Toshiba Corp., and Nokia Ltd. on the Bluetooth system, a new technology based on radio signals that eliminate the need for wires when transmitting signals between phones, computers, and other devices.

Restructuring in the Late 1990s and Beyond

Sven-Christer Nilsson was elected president and CEO in 1998 while Lars Ramqvist succeeded Svedberg as chairman. Under the direction of Nilsson, Ericsson reorganized business operations again, forming three new business segments. Network Operators included the firm's wireless and fixed solution for data and telecommunications and those operations that had fallen under the previous Mobile Systems division as well as the Infocom Systems; the Consumer Products segment included the firm's mobile phone operations; and Enterprise Solutions offered solutions for business communications. As part of the restructuring, Nilsson also planned to cut 11,000 jobs over the next two years.

Along with reorganizing, Ericsson made several key acquisitions. In 1998, the firm purchased U.S.-based Advanced Computer Communications Inc., a leading routing and remote access technology firm. The following year, Torrent Network Technologies Inc. and Touch Wave Inc.--both U.S. firms--were purchased. During 1999, Ericsson also settled a two-year patent dispute concerning Wireless Code Division Multiple Access (CDMA) technology with Qualcomm Inc. As part of the settlement, Ericsson acquired Qualcomm's wireless infrastructure business.

At the same time, however, Ericsson's financial success of the past was dwindling. Despite its efforts, its share of the mobile handset market was faltering, due in part to fierce competition by market leader Nokia. From 1998 to 1999, Ericsson's share fell from 15.1 percent of the market to just 10.5 percent. Its share of the mobile infrastructure market however, remained strong with more than a 30 percent share. By the end of the decade, 70 percent of Ericsson's revenues stemmed from infrastructure sales, while 21 percent came from the sale of handsets.

Nilsson's stint as Ericsson's president and CEO was short-lived. In July 1999, he was forced to resign when his restructuring efforts were deemed ineffective. Ramqvist eventually took over as chairman and Kurt Hellström, the executive vice-president of the firm's Asia operations, was named president and CEO.

During 2000, Ericsson continued its $1 billion restructuring effort. Several strategic moves were put in place to return the company to profitability across all of its business segments. It entered the Internet Protocol (IP) telephony market with the launch of its WebSwitch 2000 product line targeted at the U.S. businesses. It also divested several non-core businesses including its interest in Jupiter Networks. While Ericsson faced many obstacles in 2000--including increased competition, slowing economies, and the weakening of the Swedish Krona against the U.S. dollar--it was able to increase sales and net income. Ericsson shares, however, lost value for the first time in 10 years.

The firm's faltering Consumer Products division reported a loss in 2000 of SKr 24 billion due in part to a factory fire and quality issues. The company claimed that during 2000, only one out of ten handsets bore the Ericsson name, while four out of ten mobile telephone calls traveled over an Ericsson network. As such, Ericsson announced in 2001 that it would outsource production of its mobile phones to Flextronics International Ltd., cutting its Consumer Products division workforce from 18,000 in 2000 to just 7,000 in 2001. It also announced plans to form a joint venture with Sony. The deal created Sony Ericsson Mobile Communications, a company that would include both firm's mobile phone businesses. As the firm continued to shift its major focus from mobile handsets to wireless infrastructure, Ericsson also began a new advertising campaign slogan--"Ericsson can grow your business"--in hopes of gaining recognition in the increasingly competitive telecommunications industry.

While Ericsson's financial results remained lackluster, management concluded that it would overcome its obstacles. In its October 2001 third quarter report, Hellström boasted that "in these challenging times, our customers rely more that ever on our ability to deliver better solutions faster. With our dedicated people, strong cash position, premier customer base, and technological lead, I am confident that we will deliver on our customers' expectations better than any competitor." Whether or not the company would quickly return to profitable during the years to come however, remained to be seen.

Principal Subsidiaries: Ericsson Utvecklings AB; Ericsson Enterprise AB; Ericsson Microwave Systems AB; Ericsson Radio Systems AB; Ericsson Telecom AB; Ericsson Gamsta AB; Ericsson Mobile Communications AB; Ericsson Radio Access AB; Ericsson Software Technology AB; SRA Communication AB; LM Ericsson Holding AB; Ericsson Austria AG; Ericsson France S.A.; Ericsson GmbH (Germany); Ericsson S.p.A. (Italy; 72%); Ericsson AG (Switzerland); Teleindustria Ericsson S.A. (Mexico); Ericsson Company Ltd. (China); Ericsson Communication Private Ltd. (India); Ericsson Taiwan Ltd.; Ericsson Cables AB; Ericsson Inc. (United States); Nippon Ericsson K.K. (Japan; 90%); Ericsson Australia Pty. Ltd.

Principal Divisions: Network Operators; Consumer Products; Enterprise Solutions.

Principal Competitors: Nokia Corporation; Motorola, Inc.; Siemens AG.


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