Ericsson takes drastic measures

(Telephony) Ericsson said it is aggressively addressing its weakness in the mobile-phone market by transferring all its handset manufacturing duties to Singapore-based Flextronics.

The two signed a memorandum of understanding that establishes a strategic alliance Ericsson believes will lead to a rapid improvement of economies of scale, a smaller capital exposure and reduced risk in the market. This move is in addition to its restructuring plan it adopted last year to turn the handset business around.

"We're taking a more fundamental look," said Kurt Hellstrom, Ericsson chief executive. "We have decided to completely outsource production of mobile phones, focusing on R&D, design, marketing, branding and sales of phones. The agreement will give us rapid improvement in economies of scale. This is a sound basis for long-term profitability and confirms our commitment to be a top supplier of mobile phones."

Ericsson said its move will save the company about $1.6 billion a year from 2002. Ericsson took a restructuring charge of $832 million in the fourth quarter, which is added to a previously announced restructuring charge of $488 million. Ericsson said about 4,200 of its employees will join Flextronics, and another 600 will be eliminated.

The company reported fourth-quarter profits of $223 million, down 64% from $655 million a year ago. Ericsson said it will only break even in the first quarter. It reduced its sales growth forecast because of an uncertain economy and heavy investments in third-generation technology. Merrill Lynch, Salomon Smith Barney, Credit Suisse First Boston and UBS Warburg all issued downgrades on the company's stock.