The world's largest wireless infrastructure maker announced a restructuring that will resonate throughout the company, not just in manufacturing. Management insists it is holding on to the handset division, where results have been strained by a failure to meet demand for low-price phones. Its networking equipment division, meanwhile, is also suffering.
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Ericsson (Nasdaq: ERICY), the world's largest maker of wireless networking equipment, announced a plan to restructure on Tuesday. The "Comprehensive Efficiency Program" is expected to save the company around $2 billion (20 billion SEK) this year. "We have started a comprehensive review of our operations with the target to reduce costs," said Kurt Hellstroem, Ericsson's president and CEO. The announcement is just a primer for the full-fledged plan to be released when it reports earnings on April 20. The plan is a response to "today's uncertain state of the economy" and includes 1,500 cutbacks at its Kulma, Sweden facility, the closing of two handset factories in the UK, and additional layoffs related to its outsourcing to electronic manufacturing services company Flextronics (Nasdaq: FLEX). That said, the company stated that the cost savings will come mostly from non-manufacturing areas such as administration, marketing and sales, supply management, and research and development. A hiring freeze has been instituted across the entire company and it will significantly reduce the number of consultants it uses. Ericsson's handset division has struggled over the last few years partly due to production delays and a failure to anticipate demand for cheaper mobile phones. Its handset division posted an operating loss of more than $1.5 billion last year. Just last week at the Wireless 2001 Convention, management had to deny rumors that the handset division was on the chopping block. Ericsson gets more brand recognition from the handsets that bear its name, but only 20% of revenues come from handsets. Seventy-five percent of revenues and most of its growth and net income come from network operations. Ericsson currently garners only 10% of the global handset market in comparison to its Finnish rival, Nokia (NYSE: NOK), with a third of the market. While demand for handsets is expected to rise 10% to 15% or so from last year, networking gear revenue is tied to third generation (3G) upgrades. Ericsson is feeling the economic slowdown and delayed 3G rollout where it hurts most -- in network infrastructure. (Hellstroem said in a Bloomberg interview that demand for network gear has fallen.) The pain is not limited to Ericsson. It is hurting every telecom company in the wireless game. Motorola (NYSE: MOT) and Nortel Networks (NYSE: NT) are also cutting jobs and watching the expenses. Many of the infrastructure and service providers were counting on a faster rollout of 3G to boost revenues, but it just isn't happening. Costly wireless spectrum bids, hefty debt loads, a lack of killer applications and numerous other issues are delaying 3G. Recently, a few major U.S. service providers have been touting the arrival of "3G" by the end of the year. Sprint PCS (NYSE: PCS), the wireless telephone arm of No. 3 long-distance company Sprint Corp (NYSE: FON), recently announced that 3G will be available in the U.S. by the end of the year. Shortly after, Verizon (NYSE: VZ), the No. 1 U.S. wireless service provider, stepped up to the plate with its own promise of 3G in the U.S. by the end of the year. But this version of "3G" is well shy of what many think of as 3G. Sprint and Verizon are promising speeds up to 144 kbps versus the 14.4 kbps today, but the "real 3G" is about data speeds north of 384 kbps and as high as 2,000 kbps for fixed wireless connections. Ericsson also announced a $538 million dollar gain from the sale of its remaining stake in Juniper Networks (Nasdaq: JNPR). In Q4 last year, Ericsson recorded a $1.5 billion gain from selling Juniper shares.
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