What’s next for Ericsson?

Whoever takes over as CEO of Ericsson will have their work cut out for them as the telecom infrastructure vendor faces multiple challenges

The board of directors of Ericsson announced yesterday that the company’s CEO Hans Vestberg was to leave his position effective immediately. The decision to oust Vestberg was widely anticipated – and positively received by financial markets. One of the major questions raised after the announcement was why the board waited so long to take that step.
“The board was forced to act under mounting pressure from financial analysts and the media instead of understanding earlier on that they ought to look for a new CEO,” Bengt Nordström, co-founder and CEO of telecom consultancy firm Northstream, told RCR Wireless News. Nordström is critical of the board being reactive instead of proactive.
“The board has asked too few critical questions: How are operators planning to invest? When will ‘internet of things’ revenue start to kick in? How can Ericsson benefit from growth in the cloud services space? They have avoided these questions or simply not understood their importance,” he added.

Adjusting to changing market conditions

Neither Vestberg nor the board of Ericsson seem to have anticipated changes in market conditions and thereby failed to act accordingly, according to Nordström. It will be a painful exercise for Ericsson, but the vendor must adjust the size of its telecom infrastructure division to the reality of the market: telecom infrastructure is a declining business. At the same time, the Swedish vendor will have to take a closer look at its product and service portfolio and decide what to keep, what to ditch and what to expand. Both divestment and acquisitions are in the cards.
“Looking back at what Ericsson management said in the past years, one can only note that there lacks a clear strategy. For instance, the company has talked a lot about IoT without actually saying what role Ericsson should play,” said Nordström. “There are three things that Ericsson must do now. Firstly, they must make sure that the cost efficiency of the core telecoms infrastructure business reflects how the market is developing, instead of adjusting the cost base reactively every third year. They also need to make sure products hit the market in time. Secondly, the company needs to review its product portfolio with great care. Ericsson completed in the past years a number of acquisitions and has got a somehow incoherent portfolio as a result. Thirdly, Ericsson must decide what to bet on and act on it by investing or acquiring,” he concluded.

Unclear path toward IoT and the cloud

Leif Johansson, president of the board of directors at Ericsson, said in a comment on the resignation of Vestberg that the company ought to be looking at new revenue streams, in particular within the cloud, IoT and “5G.” While 5G fits right into Ericsson’s core infrastructure business, betting on IoT and cloud services might prove a more delicate equation to solve.
“At Northstream, we are convinced that IoT will have a far-reaching, transformative effect on all vertical industries, but just how big an infrastructure business it can become is a lot more uncertain,” said Nordström. “We estimate that about 1-3% of operators’ future revenue will come from IoT; this makes it hard to justify very large infrastructure investments that could benefit telecoms vendors. Those who will benefit from IoT are consulting companies. If Ericsson is serious about IoT, then they will have to invest in acquiring competencies in that field,” he said.
The market for cloud services is no less challenging as companies such as Amazon, Microsoft and Google already have strong positions. ”We do not believe that the cloud can become a large business for operators or telecoms vendors. Operators offering cloud services are most likely to do so in collaboration with the likes of Amazon, Microsoft and Google,” said Nordström.

Time is of the essence

Besides making the right choices, Ericsson had better find a new CEO rather quickly as the market is evolving fast and competition is tough. Only days after Ericsson reported its total sales decreased by 11% and operating income fell 22% year-over-year during the second quarter, China-based competitor Huawei reported a 40% increase in sales in the first half of 2016, compared to the same period in 2015. Ericsson competitor Nokia is also in a better position than Ericsson to compete thanks to the IP portfolio it gained with the acquisition of Alcatel, according to Nordström.
“Ericsson’s Achilles’ heel is the weakness of its IP portfolio; they have a number of products but not a complete portfolio,” said Nordström.
Huawei in the meantime continues to benefit from its unique position in China, where the infrastructure business is still a growing market segment. But Huawei has also succeeded where both Ericsson and Nokia have failed.
“In addition to the special position it enjoys in China, Huawei has also succeeded within both the enterprise and consumer segments, contrary to Ericsson and Nokia,” Nordström said. “Ericsson’s portfolio is the least complete of all three and what is missing is IP. In that respect, Ericsson is dependent on a successful collaboration with Cisco. Nokia also faces challenges here but it is ahead of Ericsson and has got a smaller cost structure compared to Ericsson’s.”

Experience in telecom required

What type of CEO does Ericsson need? According to Nordström, the board should look for someone with both information and communications technology and telecoms experience, someone who can shoulder Ericsson’s many challenges from Day One.
“Ericsson needs an experienced leader well acquainted with both ICT and telecoms. They should avoid recruiting someone who will need a year to be up and running. You do not want to end up with a Nokia-Elop scenario, which saw tens of thousands of jobs disappear,” he said.