The battle of the telecoms titans
The Finland-Sweden battle between Nokia and Ericsson is extremely tight
By Olavi Koistinen
Luckily the Swedes have Ericsson! After a bitter loss in the Eurovision song contest or an ice hockey game, nothing soothes the self-esteem better than the knowledge that the telecoms midget of our former colonial master is only half the size of Nokia.
Who cares that only the Swedes can win an ice hockey game after being 1-5 down. Mobile phones are more important: Nokia sold five handsets to every one of Swedish-Japanese Sony Ericsson's last year.
In the last decade, the battle was more equal. Back then, the duel between Nokia and Ericsson was a standard topic for the tabloids.
This struggle has not been discussed for the past couple of years: Ericsson was permanently sidelined in the mobile phone business in 2001 when it joined forces with Japanese company Sony in the manufacturing of mobile handsets. The Swedish company ventured close to the brink of bankruptcy at the time as well.
But now there is some of the good old battle spirit in the air again. Ericsson continues to be a major player in the telecoms business, and has once again become a profitable company. The company's turn for the better can be compared to the amazing feats of the Swedish national team in ice hockey.
Last year, Ericsson grabbed up plenty of mobile network orders. In addition to the net sales, the rhetoric has also grown in proportion: many heard arrogant gloating towards Nokia when President and CEO Carl-Henric Svanberg praised Ericsson's market share growth during the first quarter of the year.
Is there any foundation for this boasting? This needs to be investigated with a non-scientific analysis. Which company gives more cause for national pride?
Influence. Ericsson's principal product is mobile networks. In that particular field, the company is a market leader, just as Nokia is in the mobile handset business. Both enjoy a market share of roughly 30 percent.
The leading status brings both companies economies of scale: both can manufacture their key products at a substantially lower price than their competitors.
Nokia's superiority in its own core product market is even greater than that of Ericsson.
According to investment bank Evli, Nokia achieves silver in the network business with a market share of 14 percent. Ericsson, on the other hand, does not manufacture any handsets of its own nowadays.
However, the company has a joint venture with Sony that manufactures mobile handsets. Both partners own half of the joint venture, which benefits from Ericsson's technological and Sony's consumer product know-how.
In the mobile phone market, Sony Ericsson is a minor player with a market share of six percent.
Result: One point for Nokia.
Profitability. Ericsson was extremely profitable last year. The company had 22 percent of its net sales left over as operating profit.
This result was the best in Ericsson's history, especially considering the massive losses it posted just the year before.
Ericsson's cash position is now so impressive that CEO Svanberg has been pestered with questions of future acquisitions.
Nokia's operating margin was only 15 percent last year. The Finnish company has earlier been known in the telecoms business for its hefty margins. However, even Nokia's mobile phone arm failed to achieve Ericsson's profitability.
"It will be tough for Ericsson to maintain the strong margins", analyst Karri Rinta from the Nordea Bank predicts. Tightening competition may force the company to lower its prices.
Result: One point for Ericsson. A strict savings regimen is paying off, and although the profitability of the network business may be under threat in the future, the average prices of mobile handsets are also falling.
Crisis management. Ericsson and Nokia have both been on the brink of bankruptcy. Both have displayed an ability to survive and make tough decisions.
The former Nokia conglomerate was in crisis in the early 1990s before the decision to focus on telecommunications was made.
Ericsson's difficulties culminated in the third-generation UMTS auctions that destroyed the financial standing of numerous operators. After operators had paid fortunes for UMTS licences, no one could afford to invest in the networks themselves. Ericsson quickly felt the repercussions, and suffered from poor demand for its mobile handsets at the same time.
The company introduced radical salvage measures, leading to pink slips for half the staff of one hundred thousand and the founding of Sony Ericsson.
Result: Draw.
Growth. In the 1990s, Ericsson was much larger than Nokia. Now the Finnish company is double the size of its Swedish counterpart. In 2000 the companies were equal in size, but over the course of four years, Ericsson's operations shrank to half of their previous size, whereas Nokia got by with zero growth rates.
Now the Swedish company is facing a period of growth once again. The networks of European operators were in such bad shape that the level of investments last year was larger than it has been for a long time.
However, the network market is quite uneven. The technology is developed in leaps, the customers are large, and there are few of them. Karri Rinta forecasts a meagre five-percent growth rate for the market this year. Weaker network suppliers may be pushed from the market in the next few years, but Ericsson is expected to remain a key player.
Result: One point for Nokia. Larger growth rates in key products in sight for the next few years.
Fashionableness. Ericsson has the reputation of a dull engineering company with box-shaped handsets. Nokia has had its own share of trouble with clam-shell phones, but continues to be more trendy than Ericsson.
Result: Draw. The Swedish company does not need to be fashionable. Its clientele includes large corporations that are more interested in reliability and technical know-how.
History. So much for nostalgia surrounding Nokia's rubber boots, because Lars Magnus Ericsson opened his phone-repair shop in Stockholm back in 1876, the same year that Alexander Graham Bell sought a patent for his invention. After two years in the business, Ericsson was making its own telephones, and in 1896 the Swedish company was building switchboards in Shanghai. At present, Ericsson operates in 140 countries.
Result: One point for Ericsson.
Management. Up until last year, Nokia's top management team had remained largely unchanged ever since the early 1990s. Ericsson, on the other hand, has switched executives like shirts from 1998 to 2003, when Svanberg took over.
Result: One point for Nokia.
Ownership. The Swedes continue to hold the reins in Ericsson, whereas Nokia's shares have flowed abroad.
Swedes hold 54 percent of Ericsson shares. The mighty Swedish Wallenberg family has control of the company by virtue of a class of shares with larger voting rights.
Finns own only 13 percent of Nokia. In the U.S., the ownership is widely distributed among numerous shareholders, including pension institutions. This fragmentation of ownership underscores the power of Nokia's management and CEO Jorma Ollila.
Result: One point for Ericsson. We have allowed Nokia to drift abroad. On the other hand, not all investors are excited about the idea of control cemented in the hands of one family in Sweden.
Jobs and taxes. Both companies employ more or less the same number of people in their native countries. Ericsson's head count in Sweden is a good 21,000, and Nokia has over 23,000 employees in Finland.
Last year, Nokia paid 1.11 billion euros in corporate taxes in Finland. Ericsson is also a significant taxpayer in Sweden.
Nokia indirectly provides work for over 10,000 people in Finland through subcontractors, and Ericsson has a similar role in Sweden.
Result: Draw.
Headquarters. The countries on both sides of the Gulf of Bothnia are holding their breaths over the same question: when will the gigantic telecoms company move its headquarters out of such a small country?
Jorma Ollila said in 2003 that the move of headquarters may be inevitable unless Finland makes a good effort.
Ericsson has gone even further: the company considered switching its headquarters to London already in 1998, but the plan was abandoned. Many now see this as a signal that the company will stay in Sweden.
Result: Draw.
Results. The decathlon ended in a 3-3 draw. Four of the rounds also ended in draws.
Good growth prospects, a long head start in mobile handsets, and a tight-knit management group are Nokia's strengths. Ericsson can be pleased with its better profitability, more impressive history, and ownership anchored in Sweden.
A brilliant past does not guarantee future success.
If one observes only the boring financial indicators, Nokia is a mightier company than Ericsson.
So Finland is the moral winner, just like in the Eurovision song contest.
Helsingin Sanomat / First published in print 29.5.2005
OLAVI KOISTINEN / Helsingin Sanomat
olavi.koistinen@hs.fi
