Following huge losses in its handset division, Ericsson will outsource handset production.
Swedish telecoms giant Ericsson today announced its 2000 results. Pre-tax income was up, at $2.98 billion. However, the handset division lost $1.7 billion for the year. The company has now decided that in an attempt to stem these losses it will stop making mobile phone handsets, setting aside $830 million to restructure its consumer products division.
The move isn’t quite as drastic as it sounds. Consumers will still be able to buy Ericsson handsets, which will be researched, developed and marketed by Ericsson. However, it will outsource all its handset production to external manufacturers. The expected savings of $1.6 billion per year would almost take the handset division into profitability, even at current revenues. Many mobile manufacturers such as Motorola already outsource a large proportion of production.
But is Ericsson wise to remain involved in handsets at all? It derives the vast majority of revenues from its highly profitable network infrastructure operations. The handset business, meanwhile, is in a competitive marketplace dominated by Nokia, which has around a third of the global market compared to Ericsson’s 11%. The Finnish firm has economies of scale other manufacturers simply cannot get. Worse, the market is slowing significantly as penetration rates in developed markets approach saturation.
However, Ericsson is probably right to stick with its current strategy. If the savings materialize, the business will no longer be a cash drain. In any case, the rewards from selling a loss-making handset business in the current market climate would not be great. Even if the business doesn’t fit, holding onto it for now is not a bad move.
In any case, selling handsets direct to consumers gives Ericsson valuable mindshare and up-to-date knowledge of the mobile telecoms business. Losing handsets would diminish the service Ericsson can offer network operators, potentially losing infrastructure contracts to full-service rivals: Nokia, in particular, is extremely keen to build its infrastructure business. The last thing Ericsson needs to do is jeopardize its dominant position in this lucrative market.
