TOKYO - - Swedish telecom equipment maker Ericsson plans to restructure its operations in China, its second-largest market, after its sales in the country plunged for a second consecutive quarter in the wake of its home government's move to exclude Huawei Technologies and ZTE from 5 G mobile networks.
As a result of the loss in sales in China, we have to right-size our sales and delivery organization in China, which will begin in the fourth quarter, said Borge Eckholm, Ericsson's president and chief executive, during the company's results presentation on Tuesday.
Short term, we need to adjust the cost structure to right-size as much as possible, he said without giving details beyond noting the company would take a charge against earnings in October-December quarter.
People's Daily quoted an Ericsson executive who said in November last that the company had more than 10,000 staff in the country as the company had more than 10,000 employees.
Ericsson registered a 74% drop in revenues from China, which fell to 1.3 billion Swedish krona 150.3 million in the July-September quarter compared with last quarter of 2008. This followed a 63% decline in Chinese revenues to 1.5 billion krona in the second quarter when the company wrote off 300 million krona worth of Chinese inventories.
In 2020, China had been Ericsson's fourth-largest source of revenue, while China slipped in the second quarter to second largest source of revenue.
The market share in mainland China was quite different, Eckholm said. This is a consequence or follows the decision Sweden took to exclude Chinese vendors in the build-out of 5 G networks in Sweden. Jefferies analyst Jiang Shui said in a client note last week that ZTE received more than 30% of a telephone tender by State-owned Chinese Mobile in late September, while Ericsson got nothing and Huawei won the balance of contracts.
This compared with Ericsson gaining 20% of a comparable tender last year and only teens before, Lee said, indicating the company appeared to have gaining sales at ZTE at Ericsson's expense in particular.
Ericsson management had been vocal in opposing Helsinki's decision to exclude ZTE and Huawei on security grounds, out of worries about possible retribution by China Mobile and its fellow state-owned network operators.
In its latest annual report in March, Ericsson added exclusion risks collateral damage from a weak Swedish-Chinese relationship and warned in the second quarter about potential Chinese measures targeted at the economic interests of Sweden and Swedish Industry, including those of Ericsson. Ericsson's total revenue for the second quarter fell 2% to 56.3 billion krona, as gains in Chinese markets only partially offset the loss in other sales. Net profits raised 4% from a year earlier to 5.8 billion krona.
It is quite clear that the loss of sales in China hurts our sales volume in total, Eckholm said. In addition to investing, we can regain that volume loss by opening up markets in other countries. However, he remains hopeful about the company's long-term prospects in China.
I like to think when you lose a contract, the day after, you start to fight for win it back, he said. The same thing is happening to China. I do believe we have a chance to win back the trust to deliver products in the future. Separately, Eckholm acknowledged that a shortage of some unspecified independent components due to supply-chain disruptions had cost the company some sales last month after having negligible impact earlier.
I wouldn't exaggerate this as we have reasonably good visibility, Eckholm said, while admitting that disruptions pose some threat.