Crisis Call: Is Sony Ericsson heading for divorce‾

13 Jul 2009

Sometimes it\'s easier to stay in a troubled marriage than to undergo a costly and messy separation. Consider Sony Ericsson, the world\'s fifth-largest maker of mobile phones. The eight-year-old joint venture between Japanese consumer electronics giant Sony (SNE) and Swedish telecom equipment maker Ericsson (ERIC), has weathered more than its share of ups and downs. But now, with sales tanking and losses soaring, rumors abound that one"”if not both"”of the companies may be pushing for a breakup.

Both partners insist divorce isn\'t an option. Even after Sony Ericsson warned on Mar. 20 that first-quarter shipments would be down by nearly half from the previous quarter and that losses could be as high as $530 million, the two parents continued to affirm their commitment to the venture. \'Sony and Ericsson are determined to work with Sony Ericsson\'s management team to turn the situation around and return the company to profitability,\' the companies said in a joint statement.

That\'s a huge challenge. To give Sony Ericsson a chance to engineer a turnaround by 2010 will require an infusion of at least $1.4 billion in additional capital, figures brokerage Nomura International. Without it, the company could burn through most of its current $1.6 billion cash pile as soon as August, estimates Richard Windsor, Nomura\'s global technology specialist in London. \'The situation at Sony Ericsson is relatively precarious,\' Windsor says. \'The perception is that it could easily become the next Motorola.\'

Midrange handset sales are plunging

That\'s a far cry from where Sony Ericsson was as recently as two years ago. After a rocky start to the joint venture, the company\'s hip brand image and products such as the Cybershot camera phones and Walkman range of handsets proved popular with consumers, helping to propel it to the No. 3 position among cell-phone makers for a brief period in 2008.

But success was short-lived. Last year, as weakening economies started to take a bite out of sales, the global handset market grew by just 3.6%"”and Sony Ericsson\'s volume fell by nearly 7%. This year, \'the global handset market is expected to shrink between 10% and 15%, and it\'s the midrange segment of the handset market"”the area where Sony Ericsson has traditionally been the strongest"”that will be hit the hardest,\' says Nomura International Executive Director Stuart Jeffrey.

One reason: It isn\'t enough these days just to offer imaging and music. Witness the success of the Apple (AAPL) iPhone, with its slick features and über-cool brand image. \'Touch screens, GPS, Internet browsing, and social networking are the hot areas of the handset business and Sony Ericsson has not made significant inroads into any of them,\' says Carolina Milanesi, research director for mobile devices at telecom consultancy Gartner (IT) in London.

US operations chief just quit

A big part of Sony Ericsson\'s current problem, analysts say, is that it has built the wrong portfolio of handsets. The mobile market has become increasingly polarized around ultra-basic devices such as the $50 Nokia (NOK) 2600 and high-end smartphones like the BlackBerry, iPhone, or Nokia N96. Yet Sony Ericsson has remained firmly mid-market.

The company has tried to move upscale, but with only limited success. Last year it launched a pricey smartphone called the Xperia built around the mobile version of Microsoft (MSFT) Windows. Although the device was mainly aimed at the U.S.

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