Quotes of the Day

Carl-Henric Svanberg made his name and fortune from locks. As CEO of Sweden's Assa Abloy in the 1990s, he turned a local security company into the world's biggest lockmaker — acquiring over 100 new firms and restructuring them in a way that boosted Assa Abloy's stock twentyfold. When he left earlier this year, he took with him a personal fortune of $60 million.

You might expect Svanberg, now 50, to ease into early retirement. But last month he took over as president and CEO of Ericsson, the sprawling Swedish telecom-equipment maker that's all locked up in a world of trouble. Ericsson hasn't turned a profit in more than two years. It's had four CEOs in five years and has laid off almost half of its once-mighty workforce of 107,000. Why would Svanberg want such a migraine? "The headache is what's so attractive," he told TIME. "I felt prepared to take on a challenge of this magnitude."

The pain intensified last week, when the company reported a loss of $527 million in the first quarter of 2003 — its tenth straight losing quarter. Sales slumped a devastating 30% in the quarter to $3.2 billion, and the company predicted the worldwide market for mobile systems would shrink "more than 10%" in 2003. But Svanberg, looking tanned and fit, managed to simultaneously break the bad news and soothe the markets, in part by announcing a whopping 14,000 new layoffs by 2004. "We remain determined to return to profit during 2003," he said, and Ericsson stock rose 17% that day.

"Svanberg is a big positive," says Bengt Mölleryd of Stockholm's Evli Bank. "He is quite skilled at dealing with both the media and the financial community. He certainly says the right things."

Now he'll have to do the right things, if he's going to catch up with Ericsson's Finnish rival, Nokia, which earned $1.07 billion net profit in the first quarter on sales of $7.4 billion. It managed to do so with fewer employees than Ericsson, by concentrating on the healthiest end of the business. Ericsson gets 80% of its revenue from mobile-telephone networks, which connect one phone to another — and the market for its telecom gear has been dead for two years. But Nokia focuses on mobile handsets, which fly off the shelves at a rate of 500,000 a day.

The Nokia-Ericsson rivalry has an added intensity; it's hard to overstate the national importance of Ericsson. Founded in 1876, it was for many years Sweden's largest business, and a symbol of the nation's remarkable agility in the high-tech arena. But the pride of Swedish industry and the country's leading exporter has become a penny stock. Kurt Hellström, whom Svanberg replaced last month, slashed the workforce from 107,000 in 2001 to 61,000 as the company's turnover went from close to $36 billion to a relatively anemic $12 billion a year. The cause was obvious: mobile-telephone operators spent $200 billion to buy the licenses for third-generation (3G) mobile-phone networks, but ran out of money to pay for the actual technology and dramatically scaled back orders. Like most other telecom suppliers, Ericsson's stock was downsized too: from a high of almost $19 in 2000 to around 96¢ today.

How does Svanberg plan to turn it around? First, by cutting costs. He pledges to reduce capital expenditures — from $10.78 billion in 2000 to around $4.6 billion — by slashing the workforce to 47,000, less than half its size two years ago. Even with declining sales, he promises a return to profitability by late this year. "Barring any further shocks, they should make it back to profit by the fourth quarter," says Per Lindberg, a telecom analyst at Dresdner Kleinwort Wasserstein in London.

Though locks are relatively low tech, Svanberg — the first outsider chosen to lead Ericsson since 1942 — says he'll succeed by using the skills he picked up at Assa Abloy. "I took over a lot of companies in bad shape," he says. "We were constantly restructuring and I am pretty confident in that area." While Ericsson has been a world leader in designing technology, it has managed manufacturing processes poorly, according to Svanberg. A small, very high-tech portion of the business — customized products for a select group of clients — is like a Michelin-starred restaurant, he says, with a skilled chef and planned menu, while the rest is churning out uniform products. "If you make hamburgers in a Michelin-starred restaurant, you'll find they are more expensive and less tasty than McDonald's," he says.

The company retains some strengths. While the market for mobile-phone networks has declined by 60% in the past two years, Ericsson continues to be the leader of what's left of the market. It holds a 40% market share for GSM networks, which are used in most countries today, and has a similar share of the WCDMA market — the 3G phones which are now available in parts of Europe and Asia — ahead of Nokia's 30% (the other major player is Germany's Siemens).

Yet being the leader of a market that's declining is unlikely to make shareholders happy. Where Ericsson predicts a decline of "more than 10%" in mobile systems this year, Nokia is projecting a 15% contraction. (Nokia cut 1,800 employees, about 10% of its network workforce, last month.) Everybody in the network business is hurting.

Competing against Nokia in the handsets business won't be easy for Ericsson, since that business hasn't been kind to the company. Five years ago it had 16% of the market for mobile handsets, close behind Nokia and Motorola, but in recent years it has seen its market share shrink to around 5%. "We didn't have enough handsets in the mass market, and our competitors did," says Per-Arne Sandstrom, Ericsson's first executive vice president. "We were coming with a lot of telecom knowledge but the consumer competency of Ericsson was not part of the legacy."

The company made a stab at borrowing some consumer savvy in October 2001, by creating a joint venture with Sony, master of the PlayStation and the Walkman, to manufacture and market hipper-looking handsets. But the combined Sony Ericsson is also having trouble. Handset sales in the quarter ended March 31 were 5.4 million, down 400,000 from the previous year, causing a net loss of $108 million. Under the terms of the joint venture agreement Ericsson might be forced to inject another $380 million, money it can hardly afford.

Sony Ericsson has come up with some exciting products, such as its P800 phone, a cool combination of a telephone handset and a personal digital assistant — which costs a cool €650. But Ben Wood, a London-based analyst at Gartner Dataquest, says the company is still not making inroads in the lower end of the mass market, where Nokia is king. "It is absolutely failing to live up to expectations," he said. South Korea's LG Electronics sold more handsets than Sony Ericsson in the first quarter, pushing Sony Ericsson down to an embarrassing sixth place in world market share after Nokia, Motorola, Samsung and Siemens. The company has announced four new phones for this year, including one aimed at the low end of the market, while Nokia has introduced 17 new models.

Svanberg admits the next phase of restructuring will be the hardest for the company, because the danger now is of cutting muscle as well as fat. He needs to win over labor unions for the new job cuts he has just announced and convince investors that there is light somewhere ahead. Above all, he needs to keep his promise to return the company to profit for the first time in three years, no matter how steeply sales decline. "One of my fundamental principles: as a manager you must know your job," Svanberg says. "You must know your company, your technology, your numbers and your competitors. You have to do it all and that takes a while." He had better be a quick study.

• CHARLES P. WALLACE | Stockholm
• Ericsson's new CEO is studying the numbers