Ekholm has stabilized Ericsson, but he is placing too many hopes on 5G

Ericsson’s CEO Borje Ekholm has hardly set the world on fire with his policies since taking the helm 15 months ago. He has mainly focused on retrenching to the troubled company’s core markets, dialling back on the expansionist policies of his predecessor Hans Vestberg.

While Vestberg saw the pursuit of new markets, such as media and cloud, as the answer to the intense pressures and competition in the traditional network equipment space, Ekholm has placed his hopes on an uptick from 5G and associated services, and on slashing Ericsson’s costs. These have been reduced by SEK6bn ($718m) in the past year, and the firm plans SEK10bn of annual savings by mid-2018, compared with its costs at the start of 2017.

Ekholm insisted, at the company’s annual general meeting last week, that his actions have stabilized Ericsson and will create a “strong and successful” firm again in time. However, he said he was still dissatisfied with financial performance, especially a net loss of SEK35.1bn, suffered in 2017, reversing 2016’s profit of SEK1.9bn. “2017 was a tough year with a continued declining market. We are far from satisfied with our performance and have taken a number of actions to turn around the development and improve profitability, to build a strong Ericsson for the long term.”

He told investors: “In 2017 we stabilized and simplified the company. We took out significant costs, and invested in the future. We have a clear strategy and clear targets for turning Ericsson to profitability and a strong long term development.”

On the bright side, Ekholm thinks 5G has been progressing “faster than expected” and insisting Ericsson is well positioned to take advantage, having won about half of the world’s 5G deals so far, helping it to regain some market share during the second half of last year. Some analysts questioned the 5G claims, saying Nokia has announced 50 5G trials, compared to Ericsson’s 38 (as Raymond James of Wall Street calculated).

This highlights a risk Ekholm has been taking since becoming CEO – overplaying the potential impact of 5G, even though it is likely to be deployed in a very different way from 4G (see separate item), and with less capex intensity for most operators. Even in the early years of 4G, Ericsson and its investors were disappointed that LTE did not drive a huge wave of big bang build-outs, as operators were more keen to modernize their existing networks in a service-led approach which spread investments over a longer time and squeezed margins.

So Ekholm cannot put all his eggs in the 5G basket. “We have been working hard to turn around the development,” he said in a statement. “It is therefore satisfying that we, after several years of decreasing market share, have started to increase our share, and doing so with improved gross margin.”

For the rest of this year, Ekholm has three priorities – building technology leadership, especially in 5G; developing product-led solutions; and expanding global scale and skill. This will help it address the three main challenges for operator customers – to decrease cost per gigabit, become fully digital, and find new revenue streams.