COUNTRY BOY

Ericsson has emerged from the worst crisis in the company's storied history under the guidance of an unlikely leader and with a plan to move up the vendor food chain

Seven stories tall, Carl-Henric Svanberg stands at a podium and presses the button that starts live trading on the Nasdaq stock exchange. The throngs of people pounding the pavement along Broadway with heads down and ears plugged with music or chatter from a cell phone are indifferent to the grinning Swede and his colleagues who are projected onto the giant screen covering the building at the southeast corner of Times Square.

On a chilly November day in New York City, most of the people passing by probably don't know that Svanberg is the CEO of a 130-year-old company called Ericsson, though it might not make a difference if they did. But much of the telecom industry, at least on the west side of the Atlantic, also may not know much of the Ericsson story.

“We haven't come here so often,” Svanberg said during an interview prior to his Broadway debut. “Traditionally, we had not entered the U.S. because it was a monopoly [before 1984]. We are certainly still less known in the U.S. than the rest of the world. Activities like this one [visiting Nasdaq] will help us in that respect.”

Being the outsider has always been as much a defense as it has been a criticism of Ericsson. Even after the monopoly broke apart, it was always easy for the company to note the difficulty of breaking through the established carrier/vendor relationships in the U.S. that marked the 1980s and 1990s.

There was a time in very recent history when it looked like the company, founded by Lars Magnus Ericsson in 1876 as a telegraph-maker, would not survive to celebrate its 130th birthday this year.

“Three or four years ago, we were close to not making it,” said Svanberg, who besides being tall (though not seven stories tall), is relaxed, confident and friendly in person. “We were in a tremendous crisis, and we cut 60% of the company.”

For Ericsson, the dark period started while most of the rest of the industry was still riding atop the high-tech bubble. Between 1998 and 2003, the company went through numerous restructurings, had four different CEOs — Svanberg being the last, hired three years ago this month — and saw many other executives cycle through the system.

Svanberg was an unlikely savior. The self-described “country boy from northern Sweden” was the CEO of a lock manufacturer when the Ericsson executive search process turned to him in late 2002 as a potential successor to outgoing Kurt Hellstrom. “I knew they had problems, but I felt that communications would still be this major growth area and that Ericsson had all the assets to take advantage,” Svanberg said.

Now, three years after his hiring, you would never know that Svanberg was a recent telecom virgin. For example, he questions WiMAX with the authority of someone who has seen broadband technologies come and go. “We're doubtful right now about investing a lot of money in it,” he said. “WiMAX, with limited mobility, is a great application for a fixed line service provider, but we're not worried about whether or not it is competitive with mobile 3G. I think there are also some questions of the IPR [intellectual property rights],” he said, referring to Qualcomm's acquisition of Flarion, which some people think gave Qualcomm key IPR related to technologies used in WiMAX.

He's also been quick to have Ericsson exit losing business propositions. One significant decision was last year's shutdown of Ericsson's CDMA networks business in San Diego, which was acquired from Qualcomm in 1999 by one of Svanberg's predecessors. Svanberg doesn't blame the misfire on Ericsson's inability to win CDMA business, but points to a technology swing away from CDMA in some emerging markets such as Latin America. “In Latin America, we have seen CDMA lose out in 90% of the cases,” he said.

In addition, while Nokia and Qualcomm have committed to buildouts of large auxiliary networks designed to carry mobile video traffic in the 3G era, Svanberg is keeping Ericsson out of such projects for now. “We have to focus on what our service providers ask of us,” he said.

Meanwhile, Svanberg has beefed up Ericsson in other areas by acquiring companies such as Marconi, Axxessit, NetSpira, Teleca OSS and TUSC.

But by far, the most important change — and the biggest new commitment that Ericsson has made under Svanberg's tenure — is its move into managed networks and hosted services. In the past three years, the vendor has taken over management of networks for nearly 30 mobile carriers.

“We are providing support services and integration services, but we are also, in some cases, taking over networks for our customers,” he said. “If we take over a network, the advantage is that we can collapse a number of overlapping functions into a support structure that is better overall and reduces costs for the carrier. We can reduce costs by up to 15% or so.” The company also has created mobile content hosting and m-commerce transaction platforms that allow carriers to outsource management of single or multiple content applications to the vendor.

“For a carrier, there is great benefit from our content hosting,” said Hans Vestberg, the lean, fast-talking vice president of the global services unit at Ericsson. “You can share the risk of outing a new application, and you can get the application out faster.”

At the same time Ericsson is betting more on services, it is putting less new investment into research and development than it did a few years ago. Svanberg said the company now has 20 R&D centers around the world, compared with about 50 a few years back. Also, with each managed network contract, Ericsson often devotes hundreds of its own employees to work on-site with a customer. That's a remarkable change in how equipment vendors traditionally have operated, said Lance Wilson, director of wireless research at ABI Research and author of the recent report, “Managed Services in Mobile Wireless Networks.”

“Managed network relationships are very complex,” Wilson said. “It requires a different sales approach, as well as a different management approach on the part of the vendor.”

Despite Ericsson's wins in the managed network and hosted services markets, financial analysts also are proceeding with cautious optimism. Maynard Um, analyst at UBS Investment Research, was one of several dozen who attended Ericsson's Global Services Briefing in November on the same morning Svanberg started trading at Nasdaq. In a research note, Um said managed services could put short-term pressure on margins, a view that bore out in Ericsson's fourth-quarter earnings report last week. Despite 24% overall growth in services revenue during the last year, Svanberg acknowledged the margin pressure.

Svanberg also noted that Ericsson still faces lower revenue in the European market, while its biggest market for sales continues to be in emerging markets like Latin America, as well as in long-neglected markets like North America. In fact, things are looking up in the U.S., where Ericsson has used it services mindset to score a deal with Sprint that makes it a “prime integrator” for network projects. That's exactly the status Ericsson has been seeking by pushing managed services, helping it break the lock on longtime carrier/vendor relationships by rising above it.

Still, last month's massive layoffs at Ford Motor Co. were a reminder that though the economy seems stronger and more robust, large companies worldwide still face the challenge of operating in a new kind of environment. It's as clear in the wireless industry as it is anywhere else that corporate guardians can never afford to relax.

Svanberg said, “The crisis that we went through can be our biggest asset.”