Ericsson’s Growth Heals the World
Monday, October 1, 2007
“We had this discussion when we looked at what we called the next billion,” he said, “whether we should do another, what we call, a poor man’s network, a poor man’s phone, or something. But nothing is more cost-efficient than to build another billion of what you already [built a billion of]. So, whether it’s Bangladesh, or downtown Tokyo, or in New York, it’s the same equipment. That creates economies of scale right through.” Telefonaktiebolaget LM Ericsson? (Nasdaq: ERIC) held a strategy and technology summit a couple of weeks ago, where CEO Carl-Henric Svanberg waxed poetic about his company’s future. To get the inside scoop on what the analysts there know that individual investors don’t, I listened in to share my thoughts with Fools.Economies of scaleFirst off, Svanberg dismissed the idea of chasing low-margin, high-volume sales in developing countries through low-end products.
“We had this discussion when we looked at what we called the next billion,” he said, “whether we should do another, what we call, a poor man’s network, a poor man’s phone, or something. But nothing is more cost-efficient than to build another billion of what you already [built a billion of]. So, whether it’s Bangladesh, or downtown Tokyo, or in New York, it’s the same equipment. That creates economies of scale right through.”
That’s been part of the downfall of some other major infrastructure builders such as Alcatel-Lucent (NYSE: ALU) and Nortel Networks (NYSE: NT). Chasing revenue growth at the expense of margin discipline has damaged their profits greatly, and as gross margins are frittered away, the sales growth story doesn’t always materialize either.
Save the world, save the cheerleader. No, wait …
That doesn’t mean that the developing world is worthless to Ericsson. “It’s also the mobile phone,” Svanberg believes, “that will close the digital divide. It means an awful lot when you come out to these urban areas, rural areas in the most poorest parts of the world, when they can get access to Internet and knowledge.” It’s just that Svanberg won’t cook up some half-hearted budget solution for these opportunities; he’d rather push the same product lines that power the industrialized world.
Forget about profits for a second, and think about the humanitarian implications of that strategy. If and when Djibouti or Nepal outgrow the communications needs of a nation in the early stages of technical sophistication, they don’t want to be hamstrung by some one-shot communications infrastructure. Svanberg explained how Ericsson’s standard back-end systems have a clear migration path for easy and relatively low-cost upgrades for when the need arises.
So rather than mugging fragile economies on the rise with forced obsolescence and wholesale network upgrades, Ericsson will nudge its less fortunate customers onto a better path for the future.
How very Swedish of it.
Bad apples, good business
It’s not voice traffic that drives the global need for expanded and upgraded networks, of course. Voice traffic is easy and takes up very little bandwidth. The big deal these days is data traffic.
Today’s G3 and EDGE networks were designed for much more downloading than uploading, but Svanberg said that traffic is already flowing as freely upstream as it is downstream. Thank the handsets with built-in cameras for that one — both the still image variety and the video recorders.
If you need an example of why this is awkward, just look at the bad press Apple (Nasdaq: AAPL) and AT&T (NYSE: T) have gotten over the service provider’s slow EDGE network for Apple’s iPhones. Sounds like an upgrade is in order, right there.
This disconnect creates a huge opportunity for Ericsson to sell some of those incremental upgrades, even to relatively sophisticated service providers. The traffic map just turned out different from their original designs. “You can’t talk to any operator without discussing data traffic and that they’re approaching bottlenecks in efforts here and there,” Svanberg said.
Spend money to make money
All of these good things are happening for Ericsson because of strategic decisions it made years ago. As Svanberg explained, “Spending 50% to 100% more than our competitors in R&D, obviously, I think that became a trigger for the consolidation for the others. And now in 2007 and onwards, we have started to expand our portfolio, we have done acquisitions; as you all know, we entered new areas and we’re pushing multimedia.”
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