TELEFONAKTIEBOLAGET LM ERICSSON - Company Profile, Information, Business Description, History, Background Information on TELEFONAKTIEBOLAGET LM ERICSSON



Stockholm
S-126 25
Sweden

History of TELEFONAKTIEBOLAGET LM ERICSSON

Telefonaktiebolaget LM Ericsson (LME) is one of the world's largest telecommunications concerns. The core of its operations has almost always been the manufacture of telephones, cables, and switching equipment. During World War II LME also began manufacturing products for the Swedish military, and it later continued to produce radar equipment.

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; and by the turn of the century it had begun selling telephones in China and the South Pacific.

In 1900 exports accounted for about 90% 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, LME's annual sales went from SKr500,000 in 1890 to SKr4 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 LME 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 SKr20 million worth of assets. Despite these setbacks, the company's sales continued to rise, from about SKr9 million in 1913 to SKrl4 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.

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. LME 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 LME stock in 1926 and 1927. By 1930 Kreuger controlled LME. Kreuger's takeover had little effect on LME'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 LME stock to ITT. He would sell ITT a controlling interest in LME for US$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 US$5 million in cash from LME 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 LME's major foreign competitors. Sweden's three major banks--Skandinaviska Kredit, Stockholms Enskilda Bank, and Svenska Handelsbanken-moved quickly to restore LME's liquidity and restructure the company. They also negotiated with ITT over its share of LME, 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 LME stock, and Behn was given a directorship. The new LME 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 LME's finances. This marked the beginning of Wallenberg's long association with the company--he became chairman in 1953--and effectively added LME to the Wallenberg family business empire.

The so-called Kreuger crash made the Depression doubly hard for LME. 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 LME 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, LME did benefit from Sweden's military buildup and manufacturing of telephones, aircraft instruments, machine-guns, and ammunition for the military.

Only after World War II ended was LME able to put the troubles of the 1930s behind it. Once again, LME 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% of all sales, but this began to decrease steadily in 1946. By 1973 the ratio would be reversed; exports would account for about 75% of LME'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 LME 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 LME sold a 52% interest in the subsidiary to United Utilities, a telephone and utilities concern that had become North Electric's main customer. LME sold its remaining interest to United Utilities in 1968.

In 1960 LME 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 LME itself.

LME pared back its nontelephone 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 LME 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.

LME fell behind competitors like ITT, GTE, and Siemens in technological development in the late 1960s and early 1970s. That changed in 1976, however, when LME 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 and 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 LME purchased a controlling interest in Datasaab, a struggling computer manufacturer that had been jointly owned by Saab-Scania and the Swedish government. LME used this acquisition as the starting point of a major effort to enter the U.S. office automation market. LME 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, LME realized that it needed to play a major role there to ensure its prosperity.

In 1985, however, LME 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. LME 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 LME won its first AXE contract from British Telecom, worth US$140 million. Also in 1987, LME gained 16% 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 LME bested its two largest international competitors, AT & T and Siemens.

Faced with the vitality of its core switching business and the relative torpor in its data-processing business, LME 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 US$217 million. With this sale, LME 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. LME also benefited from a surge in the demand for cellular phone service, and the quality of its products enabled LME to capture 40% of the world's cellular systems market. The company's position solidified in 1989 when an LME-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 LME amassed gross profits of SKrl.2 billion, a 60% 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 LME, 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 LME 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% of Orbitel Mobile Communications, the manufacturing subsidiary of British concern Racal Telecom PLC.

LME has risen a long way from the nadir of the Kreuger crash. As a large corporation with a small domestic market, it has almost always relied heavily on export markets for most of its revenues. Despite its size disadvantage relative to international competitors, LME made it back to the top of the telecommunications industry. With its renewed focus on its core businesses giving it strength, it seems poised to remain at the top.

Principal Subsidiaries: ELLEMTEL Utvecklings AB (50%); Ericsson Business Communications AB; Ericsson Cables AB; Ericsson Components AB; Ericsson Radar Electronics AB; Ericsson Radio Systems AB; Ericsson Network Engineering AB; Ericsson Telecom AB; Radiosystem Sweden AB; Ericsson Treasury Services (Ireland); Ericsson Treasury Ireland Ltd.; LM Ericsson Holdings Ltd. (Ireland); Ericsson SETEMER S.p.A. (Italy, 71 %); Ericsson Holding International B.V. (Netherlands); Swedish Ericsson Company Ltd. (U.K.); Ericsson Eurolab Deutschland GmbH (Germany); Ericsson Communications Inc. (Canada); Ericsson North America Inc. (U.S.A.); Ericsson GE Mobile Communications Holding Inc. (U.S.A., 60%); Cia Argentina de Telefonos S.A. (78%); Cia Ericsson S.A.C.I. (Argentina); Fios e Cabos Plasticos do Brasil S.A. (Brazil, 21%); Ericsson de Colombia S.A. (92%); Teleindustria Ericsson S.A. (Mexico, 72%); Cia Anonima Ericsson (Venezuela).

Additional Details

Further Reference

Shaplen, Robert, Kreuger: Genius & Swindler, New York, Alfred A. Knopf, 1960.Attman, Artur, Jan Kuuse, and Ulf Olsson, LM Ericsson 100 Years, 2 vols., Stockholm, Telefonaktiebolaget LM Ericsson, 1976.

User Contributions:

Comment about this article, ask questions, or add new information about this topic: