With customers merging and capital expenditure budgets shrinking in North America and Europe, Ericsson AB is shifting more marketing resources to Asia where the mobile and networking equipment OEM is hoping to benefit from a surge in infrastructure spending by governments and private communication services enterprises.
The company aims to keep up a vibrant presence in its Western markets and plans to continue rolling out new products and services in North America, the world’s biggest market for telecommunication equipment. Service providers in the region are slowing down capex growth, however, and refocusing investment resources on gaining scale through consolidation and by adding spectrums to broaden offerings to customers. This development has resulted in slower capex growth in North America, accelerating OEM consolidation and intensifying competition amongst survivors, according to Ericsson executives.
“Our sales trend shows there’s less spending on mobile broadband in North America from the customers for the reasons that we have talked about so many times before – mergers [and] spectrum auctions, which makes the market a little bit slower.” said Hans Vestberg, president and CEO of Ericsson during a conference call to discuss the company’s first quarter results. “We see even more competition and new, innovative models coming up in order to meet the growing demand of mobile broadband and new Internet services.”
The changes Vestberg referenced are deep and persistent, impacting not just the telecom services providers and their willingness to raise spending on infrastructure and other network services but also the equipment vendors. OEMs are jostling for market share and struggling to reduce costs, boost margins and improve their competitive positions, according to industry observers. This has resulted in a wave of mergers and acquisitions in the Western mobile and networking equipment market. The latest of such deals – the planned acquisition of Alcatel-Lucent SA by fellow European Nokia Corp. – announced recently could result in additional pressure on Ericsson, according to Vestberg. (See: Nokia Renews Makeover Efforts with Alcatel-Lucent Deal).
“Not only are our customers consolidating but everybody is seeking how to be the best and how to address this changed world with the data consumption and the utilization,” Vestberg said. “Two of the larger equipment manufacturers in our industry [are merging]. That, of course, also indicates that they are changing strategies to gain both scale and leadership. That is a reflection of an industry that's gone from 15 vendors in mobile infrastructure now almost coming down to three in 10 years. It’s dramatic change.”
Ericsson’s growth strategy calls for the company to maintain a steely focus on its core industry segments to protect its market share but the company is also moving to preserve profitability by developing new services in Europe and North America where telecom companies want to broaden offerings. The accelerating adoption of Internet of Things (IoT) technology and its expansion into broad segments of the economy offer companies like Ericsson new growth opportunities, the company said.
“We have our core businesses,” Vestberg added. “We believe they are super important for us, but we're also developing new, adjacent businesses that are supporting us and our customers when they are moving into these areas.”
These efforts may not be enough to keep the company’s sales on a strong growth pace, however. Reductions in capex budgets at service providers, equipment vendor consolidation and aggressive competition will inevitably crimp Ericsson’s growth in the West, observers noted. In response, the company is seeking to expand operations in Asia, especially in India and China where governments and service providers are accelerating infrastructure development to bring connectivity to millions of people across the countries.
The strategy appears to be working, based on the company’s performance in the first quarter. Sales exploded in India, soaring 108 percent and helping to push companywide sales to 53.5 billion Swedish Krona ($6.3 billion), up 13 percent, from 43.5 billion SEK in the year-ago comparable quarter. Profit growth suffered during the period, however, hurt by lagging performance in a key market and a patent dispute with Apple Inc. While many of the company’s regional markets performed strongly, growth slowed in North America depressing gross profit margins, which fell more than one percentage point from the year-ago quarter to 35.4 percent, according to Ericsson chief financial officer Jan Frykhammar.
“The main reason for the reduction [in gross profit] compared to the year ago of a little bit more than one percentage point is the lower business volume on mobile broadband, driven by lower capacity business in North America,” Frykhammar said during the company’s conference call. “That's been offset by continued fast pace of 4G deployments in mainland China.”
Ericsson isn’t depending alone on continued penetration of its products into China to boost sales growth in the country. It is also trying to localize Chinese offerings with acquisitions, including one announced in the recently ended quarter, “to broaden our portfolio in China, that historically has been very much about our core business -- meaning mobile infrastructure and services,” said CEO Vestberg. “Here, we take the first step in to be a supplier, also, on the OSS/BSS in China, acquiring a company that is having expertise in system integration for billing systems.”