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They are the last of Europe s makers of mobile devices and network equipment,
which once ruled the world
SUCCESS is toxic, says Risto Siilasmaa, Nokia s chairman, as snowflakes swirl
in the wind outside. Asked what lesson to draw from his firm s collapse, which
started a decade ago, he underlines the dangers of doing too well. In its
heyday, Nokia was a monster; its market capitalisation surpassed $290bn in
mid-2000 and by 2007 it accounted for 40% of global handset sales. Yet its
dominance in hardware, which encouraged a relaxed attitude towards software,
bred failure. It is now worth $33bn.
No executive at Ericsson, Nokia s big European rival based some 400km to the
west near Stockholm, would put it quite that way. But the experience of the
Swedish firm has been strikingly similar. Early this decade Ericsson provided
40% of the world s mobile infrastructure and its market capitalisation hovered
above $40bn. Now both numbers are about half that.
The two firms are also direct competitors once again, which invites assessment
of who is ahead. Another question is whether European governments will do
anything to give them a boost. They are among the last of the continent s
makers of mobile devices and network equipment, which once ruled the world but
are now lagging behind American and Chinese firms. If Ericsson and Nokia
continue to shrink, only one European firm, Schneider Electric, would be left
among the world s 35 biggest tech companies by revenue.
Nokia has long been a master of reinvention. It started as an operator of a
pulp mill in 1865. A pair of rubber boots in its small company museum
highlights the firm s varied history. But Nokia needed some luck to fall on its
feet. That came in the form of a mind-bogglingly generous deal from Microsoft,
which in 2013 paid $7.2bn for Nokia s flailing handset business. That big dose
of cash, plus another $2.8bn from the sale of HERE, a mapping business,
basically saved Nokia , reckons Mr Siilasmaa. The money let the firm rebuild
itself. Using its smallish network-equipment business as a base, Nokia has
quickly expanded, mostly by acquisition. It bought Siemens out of a joint
holding, Nokia Siemens Networks (NSN) in 2013, paying $2.2bn. Two years later
Nokia took over Alcatel Lucent, a French-American vendor, for $17bn in shares.
Most previous marriages in telecoms gear had failed, because dropping products
to get the efficiency gains while keeping hold of customers had been
exceedingly difficult. But at the time of Nokia s big deal the technology was
changing. Networks were no longer mainly about physical connections, but more
defined by software, which made merging product lines easier. As important,
Rajeev Suri, Nokia s boss, had free rein from his board to rethink strategy. He
had proved himself a capable boss of NSN since 2009, a job nobody wanted.
If rubber boots symbolise Nokia s history, Stockholm s telephone tower
(pictured) is emblematic for Ericsson. It operated in Sweden s capital until
1913, serving over 5,000 lines. Founded in 1876 as a maker of telecoms gear, it
was natural that Ericsson should stick to defending its share of that market
when in the mid-2000s Chinese vendors, mostly Huawei, but also ZTE, became
serious competitors. It also expanded its business of running customers
networks. In the short term the strategy worked. While other Western firms lost
business to the Chinese and were forced to merge, Ericsson expanded its market
share.
Waiting for 5G
Yet neither effort did much to improve margins. When profits plunged in late
2007, the firm s share price dropped by nearly a third. Ericsson was left more
vulnerable when investment in mobile networks started to shrink in 2014. A
hurried diversification strategy, including into services and software for
television broadcasters, and cloud computing, did not help. Revenues fell from
250bn SEK in 2015 (then $29.5bn) to about 200bn SEK in 2017. Early that year
Ericsson s main shareholder, the Wallenberg family, brought in a new chief
executive, B rje Ekholm. He has vowed to reduce costs, kill off unprofitable
service contracts and sell non-core businesses. He wants to refocus on 5G,
the next generation of wireless technology.
As a result, Ericsson and Nokia now look much alike. They have the same number
of employees (about 100,000), make similar-sized profits in their networks
business (gross margins of 30-40%) and have similar market capitalisations. But
differences remain, which seem to favour Nokia. It is with some justification
that Mr Suri calls his firm the Western alternative to Huawei its product
portfolio is broader than Ericsson s, and includes gear for fixed networks.
Some also consider Nokia more innovative: it inherited Bell Labs, a respected
laboratory where the transistor was invented, from Alcatel Lucent. Mr Suri has
big plans to use artificial intelligence to make Nokia more efficient, for
instance in drafting offers to build smaller networks.
Yet the next few years could give Ericsson the edge. Some operators consider
its 5G gear better than Nokia s. More important, while Nokia has overhauled
itself, Ericsson has just started to restructure in earnest. Its plans look
serious. Not all analysts trust that the affable Mr Ekholm, who says such
things as I m a big believer in evolution, is tough enough to transform
Ericsson. But the firm also has a new big activist shareholder, Cevian, whose
co-founder, Christer Gardell, is nicknamed the butcher for his way of shaking
up companies. It owns 9% of Ericsson s class B shares.
For both firms, much will depend on the uptake of 5G. Both bosses are realistic
about the outlook. They do not expect a sudden spike in 5G investment; instead,
new networks will be rolled out gradually in the coming years. And then there
is Huawei. It is a formidable, but not unbeatable competitor, says Mr Ekholm:
Let s focus on what we can control: being innovative. Mr Suri, for his part,
expects that Nokia s products will appeal to clients wary of trusting a Chinese
supplier: Security and privacy are embedded in our brand.
Such arguments will go down well in America and other countries worried about
Chinese eavesdropping devices in telecoms equipment. Yet if this is not enough
to revive growth, talk about more mergers will be inescapable. Neither of the
current bosses will discuss grand ambitions. Mr Suri wants to buy lots of small
tech firms to strengthen his business in software to manage networks; Mr Ekholm
says a large-scale merger has no place in his strategy. There is also talk of
Samsung, the South Korean tech giant, buying at least part of Ericsson. A
marriage of Ericsson and Nokia, sometimes raised as a possibility, is the least
probable of all. A combined firm would have a monopoly in America, forcing
operators there to look for a second supplier, such as Samsung.
Pressure will also grow on the European Union, which is in charge of
telecommunications law, to lighten the regulatory burden for network operators.
Politicians may even start calling for protectionist measures. If Ericsson and
Nokia in Europe benefited from the same support as Huawei and ZTE in China,
they d be fine, says Pierre Ferragu of Bernstein Research, while acknowledging
that such protectionism would make European telecoms less competitive in the
long run.
A better approach would be to remember what made the European mobile industry
strong in the first place, says Bengt Nordstrom of Northstream, a telecoms
consultancy. When 2G (or GSM, as it was called back then) was introduced in the
late 1980s, many European countries and operators signed up to a memorandum of
understanding, agreeing on such things as the radio spectrum used, the services
to be offered and when to launch them a co-operation which is lacking today. A
similar effort could now boost Nokia and Ericsson. No one these days worries
about toxic success rather of managing recovery.
This article appeared in the Business section of the print edition under the
headline "Telephone tower v rubber boots"