Slow 3G uptake causes Ericsson profit woes

Take up of 3G has been slow in devloped markets

A profit warning from Ericsson last week saw share prices drop by nearly 30 per cent and about £10bn wiped from the value of the business.

Major competitors were also affected and share prices for Nokia, Nortel and Alcatel-Lucent also fell, reflecting investor concern over the impact of sluggish consumer demand for next-generation mobile phone services.

The problem is that slow take-up of 3G in developed markets such as the UK and US is pushing the network providers to look overseas for new business.

But margins for new infrastructure are lower than for high-specification upgrades. And there is more competition from local firms.

Ericsson is a prime example. It missed out in mature markets because AT& T in the US postponed upgrades to its 3G network to 2008 while five leading UK mobile operators also delayed decisions on investments. So the company’s growth strategy fell back on low-margin contracts with China Mobile and Bharti Airtel in India.

“Sales of higher-margin mobile network expansions were lower than expected,” said Martin Garner, analyst at Ovum.

“The result is that the group’s finances have been exposed to lower-value sales in developing markets,” he said.

But the big network suppliers should be able to wait out the storm.

“The infrastructure sector is a tough, cyclical market,” said Garner. “But Ericsson is still in a very strong competitive position.”

Ericsson’s chief executive Carl-Henric Svanberg blamed bureaucracy for slow invoicing and reduced sales in the firm’s Chinese business.