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http://dailynews.yahoo.com/h/nm/20010126/tc/ericsson_dc_4.html Friday January 26 7:23 AM ET Ericsson Gives Up on Making Mobile Phones

By Jan Strupczewski

STOCKHOLM (Reuters) - Swedish telecoms equipment group Ericsson said on Friday it was pulling out of making its own mobile phones and shedding thousands of jobs in the handset business after reporting a worse than expected fourth-quarter operating loss of $155 million.

Ericsson, the world's third largest maker of mobile phones, also said it would only break even in the first quarter, cut its forecast for global mobile phone demand in 2001 and warned that its core mobile systems business faced increased spending on new third-generation (3G) network technology.

It expects group sales to rise by around 15 percent in the first quarter with strong growth in its profitable mobile networks business, where it is a world leader, but lower sales for handsets.

And while its overall operating margin this year is set to improve to 6.8 percent from 6.1 percent in 2000 it warned that margins in the key mobile networks business would be hit by heavy spending on 3G technology.

``This year will be a year of investment,'' Chief Finance Officer Sten Fornell told a news conference. ``And next year will also be a year of investment.''

Over the year mobile phone sales would be flat, with demand picking up in the second half as customers buy new models for potentially faster mobile Internet GPRS (general packet radio switching) services, Fornell said.

Fornell said vendor financing, where suppliers in the network business lend money to their cash-strapped customers -- the telecom service operators trying to build costly new generation networks, had amounted to $2.06 billion crowns last year and Ericsson was properly provisioned for this.

The gloomy report hit tech stocks around Europe, coming on top of months of worries about slowing demand for mobile phones and concerns about how telecoms operators will finance costly 3G mobile telephony licenses and roll-outs.

Ericsson, the first big mobile phone maker to abandon handset making, said it was fully outsourcing mobile production to the world's third largest electronics manufacturer Flextronics International Ltd in a deal which will also see it transferring plants and staff in several countries to Flextronics.

By the end of this year the company said it will have reduced the workforce at its Consumer Products Division -- its mobile handsets business -- to 7,000 from 16,800 at the end of 2000, with 4,200 employees due to join Flextronics.

The move showed Ericsson had finally thrown in the towel to Finnish rival Nokia, the market leader in the segment, whose own mobile phone business remains highly profitable thanks to better design and lower prices.

Loss ``Bigger Than Appears''

But investors said the eight billion crowns of additional restructuring charges should be included in the operating result, boosting the mobile division's loss to above $2.48 billion, far above market expectations of $1.7 billion.

Ericsson fell 13 percent at the Stockholm bourse opening, wiping out overnight gains in New York of 10 percent, because the market had expected a more radical solution than outsourcing of mobile phone production.

``This is not the best solution. They are still responsible for research and development and the business is still effectively in Ericsson's hands,'' said Inge Andersson, fund manager at Handelsbanken in Stockholm.

``The market was expecting a 50-50 ownership of a company together with Sony or Matsushita, or someone else on the Asian market,'' he said.

Outsourcing Of Handsets Produciton

``The results in our mobile phones business, while in line with expectations, remain unsatisfactory,'' Ericsson Chief Executive Kurt Hellstrom said. ``We have decided to completely outsource supply and production of mobile phones.''

Ericsson has been losing money on mobiles since the second quarter of 2000, citing component shortages and an uncompetitive product mix. As the losses mounted, pressure grew to sell or merge the division with another mobile phone manufacturer.

Ericsson cut its forecast for global handset demand this year to 500-540 million units, below that of Nokia and the second biggest manufacturer Motorola Inc of the United States.

Ericsson said it is selling its mobile plants in Brazil, Malaysia, Sweden, Britain, and parts of the United States to Flextronics, which will take over production and supply, leaving Ericsson with responsibility for research, design, sales and marketing.

Singapore-based Flextronics, which already has an outsourcing agreement with Motorola and makes phones for Germany's Siemens, builds electronics for computer, cell phone and consumer electronics makers.

``We are selling the manufacturing plants to Flextronics. Money is involved, but for now we have a memorandum of understanding and we have not finalized the price,'' said Nina Eldh, spokeswoman for the consumer products division.

Ericsson also signed another agreement with Taiwan's GVC to develop and produce phones.

-- K. (infosurf@yahoo.com), January 26, 2001