Ericsson to Outsource Phones After Profit Pummeling
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In the wake of a 64-percent fourth-quarter profit plunge, Telefon AB LM Ericsson said Friday said it would take precautionary measures by outsourcing its mobile phone business through Singapore-based Flextronics International.
Taking a back seat to market leader Nokia Corp. and Motorola, the Swedish firm said profits declined to $2.25 billion kronor, or $233 million, down a whopping 6.32 billion kronor from the year earlier.
Ericsson, which took a fourth-quarter restructuring charge worth 8 billion kronor for the outsourcing deal, said about 4,200 Ericsson employees will join Flextronics, while 600 will be laid off.
The firm expects the outsourcing will save it $1.55 billion by 2003.
In discussing the outsourcing, Chief Executive Officer Kurt Hellstrom said in a teleconference Friday that Ericsson will not completely relinquish its handset business, noting that to do that would result in weakening its systems side.
But Ericsson is not the only handset maker to suffer in the market. A little more than a week ago, rival Motorola brought cellular phone manufacturing to a halt at its plant in Harvard, Ill., laying off about 2,500 employees in the process. That move came just a week after it announced sagging profits for the fourth quarter.
While Ericsson and Motorola are no doubt distressed by their recent handset downturns, one manufacturer has the opportunity to smile. Flextronics will be the proud outsourcing firm of the phones Ericsson decided to stop focusing on beginning April 1. This includes all Ericsson facilities in Brazil, Malaysia, Sweden, the U.K. and parts of a U.S. plant in Lynchburg, Va.
Citing expectations of "substantial" revenues, Flextronics CEO Michael E. Marks said his firm will take charge of more than just the manufacturing.
"We are being asked to manage our customers' operations, including new product introduction, supply chain management and logistics," Marks said.
Marks also said Flextronics has been awarded new infrastructure programs form Ericsson, including some telecommunications systems.
State of the Handset Address
Dan Downey, an analyst in the Wireless and Mobile Services department at Yankee Group, said that there has been a "sky is falling" attitude surrounding the handset sector for the last few weeks since the Big Three, Nokia, Motorola and Ericsson announced lower-than-expected earnings. But Downey said these firms shouldn't worry despite layoffs and restructuring.
"The handset market is still maturing and people would like at the numbers and see that where one of these companies had expected to ship, say, 550 million units, the results were that they'd ship maybe $500 to $540 million phones," Downey said. "The market is just not growing as fast as people expected."
Downey said the problems and shortfalls can be attributed in part to low margins on the phones because service providers such as Sprint or Verizon are offering scores of discounted phones as part of their service packages.
As for Friday's deal between Ericsson and Flextronics, Downey believed it could be for the best. He said Ericsson seems to be hedging its bet on its strength, which is the wireless and wireline infrastructure space where it expects to make networks the core of their business.
For Flextronics, Downey said they could be dependent on the market when it comes time to roll out General Packet Radio Service (GPRS), a much-hyped standard for wireless communications which runs at speeds up to 150 kilobits per second, compared with current Global System for Mobile Communications (GSM) systems' 9.6 kilobits.
Downey said equipment manufacturers like Flextronics could make a killing if GPRS catches on with the world and people begin to ditch their less capable phones for new handsets with the promise of added benefits.