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Ericsson’s new CEO does not look like the rainmaker it needs

Beleaguered company appoints long-time board member Börje Ekholm, whose abilities appear to lie in finance, not in bold business decisions

Ericsson has played it dangerously safe in its choice of its new CEO, Börje Ekholm, a long-standing investor and board member.

Many of the media reports focused on the fact he is based in the US, which hardly seems to be the biggest of his challenges. North America is Ericsson’s largest market and the company has a growing presence there, by contrast with its stringent staff reductions in its native Sweden. And in the world of global communications, which Ericsson has helped to enable over the years, the debate about location is a retro one.

Not so the debate about the actual choice of leader. Since Ericsson ousted its previous CEO, Hans Vestberg, in July, shareholders and the industry have been crying out for a new broom. Vestberg had many strengths, but his fatal error was to continue for too long on the course mapped out by his heavyweight predecessor Carl-Henric Svanberg, after the market had changed beyond what even Svanberg had foreseen. A new CEO who is grounded in traditional Ericsson (and Swedish – despite his US home) norms is not the new broom the company requires.

When IBM was failing in 1993, it appointed the head of a biscuit company, Lou Gerstner, amid a storm of criticism that someone with no experience of technology could not possibly run a computer firm. In fact, he brought an outsider’s eye to a business which was too much in love with the dark arts of its technology to change radically, and the turnaround became business school history,

Ericsson is very much in the same position as IBM was more than two decades ago. The technologies it dominates are being squeezed in terms of the value chain; the profits are shifting to new platforms in which the Swedish firm has powerful competitors; its traditional customers are under pressure and it has not acted sufficiently quickly to gain new ones.

So it was depressing that the new CEO focused his initial remarks mainly on cost-cutting. “Ericsson is clearly challenged now and we have to make adjustments to the cost structure,” Ekholm told analysts and media. “Jan [Frykhammar] has been doing that and it needs to continue. We have to establish profitability first and get the right size of operations to meet the demand out there. Once we’ve reached the right level

Of course Ericsson needs to cut its cloth according to its changed market conditions, and Svanberg was not ruthless enough in doing that.

But interim CEO Jan Frykhammar has stepped up the pace – Ericsson does not need a new chief to tell it to make more cuts. It needs a CEO with a vision of how the newly lean company can generate growth, from its targeted ‘new businesses’, such as cloud and media, which are important but expanding too slowly to offset decline in the networks sales; and also from directions which it has not even thought about yet.

Some argue this business is mature and there is little room left for vision, only efficiency. But the wireless industry is built on change, innovation and the need to push boundaries. There are visionary CEOs and chairs, it’s just they are not in the major networking OEMs. Softbank’s Masayoshi Son, Google’s Larry Page, Amazon’s Jeff Bezos – these cannot be accused of being stuck in conventional wisdom. Not every large company needs a maverick – Nokia’s Rajeev Suri, who is facing similar challenges to Ericsson’s, has a strong mixture of new ideas and persistence; Intel’s Brian Krzanich, though an insider, has not pulled back from radical decisions.

Ekholm may surprise us of course, though his profile and initial remarks do not drive immediate confidence. He may be based in the US, but he is part of the Swedish establishment – closely associated with the country’s venerable Wallenberg family, which is involved in most of its major companies and industries. The Wallenbergs’ investment vehicle, Investor AB, is one of Ericsson’s largest shareholders and Ekholm has worked there for over a decade, and is currently CEO of Patricia Industries, which manages Investor AB’s unlisted holdings.

Although Ekholm has been an Ericsson board director for 10 years, most of his experience is in finance, not in telecoms. That could be seen as an IBM-style move to avoid a CEO too immersed in the technology, but whereas Gerstner had run companies in difficult markets and had experience of many aspects of business, Ekholm’s more narrowly financial focus may tend to focus him on cost cutting and efficiencies, not providing sufficient contrast with Frykhammar in terms of capabilities.

Ericsson has already announced plans to reduce operating expenses to SEK53bn ($5.6bn) a year by the second half of 2017, from about SEK63bn ($7.1bn) in 2014.

Ekholm acknowledged that Ericsson’s workforce was far larger than in 2010 and hinted at even further cuts, saying: “We need to de-emphasize certain technologies”, without suggesting what those might be.

He concluded: “We’ve seen new competitors come up and existing companies go out of business or merge. Ericsson is one of the few that have survived this phase and I think credit should go to the company for the work it has done under these challenges.”

And Ericsson has not entirely turned its back on its engineering culture. Ekholm’s degrees are in engineering and he is a member of the University Board of KTH Royal Institute of Technology in Sweden. “I’m an engineer and will always be an engineer, and I’m proud of Sweden’s engineering tradition,” he said.

“He has a solid understanding of both the technology and business implications of the ongoing convergence of telecoms, IT and media. Having served on Ericsson’s board of directors for the past 10 years, Börje Ekholm has full understanding of the challenges and the opportunities Ericsson currently faces,” said Ericsson chairman Leif Johansson, in a statement.

Ekholm’s appointment becomes effective on January 16 2017. Until then, Jan Frykhammar will remain interim CEO.

Last week, Ericsson reported a 14% year-on-year decline in third quarter revenue, driven by falling sales of network equipment, which fell 19%. It reported a net loss of SEK200m.

The company is not alone in suffering from the pressures on the network equipment business. This week, Nokia reported a net loss for its third quarter, with sales sliding by 7% year-on-year (6% on constant currency). Slow demand for network equipment was the main factor, with revenues from that unit down by 15%. Total third quarter sales were €6bn ($6.5bn) and there was a net loss of €133m ($145m), compared with a profit of €188m ($205m) a year earlier.

CEO Suri said the fourth quarter would also be “soft from a topline perspective” and demand for networks would stabilize in 2017, but would still be in single-digit decline.

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