Ericsson encouraged to quit handset venture

Michael Carroll
11 Oct 2011

Credit ratings firm Fitch is backing Ericsson to exit its handset joint venture with Sony to alleviate concerns over future funding of the business.

The agency notes that Ericsson has already increased debt guarantees from 1.1 billion Swedish krona ($165.1 million) to 2.1 billion krona this year, and faces the prospect of further rises if the handset business continues to lose market share.

Sony Ericsson’s share of global device sales in 2Q11 was 1.7% - almost half the level it enjoyed in 2Q10, Gartner figures show. Fitch estimates the vendor’s revenue share experienced a similar drop, hitting 3.7% in 2Q11 compared to 7.6% a year previously.

While Fitch notes that Ericsson’s accounting methods mean it isn’t directly exposed to the joint venture’s “cash burn,” the parent will still have to cover increased debt funding to account for that spending. It notes the future isn’t rosy for Sony Ericsson, which “is an Android phone maker in an increasingly crowded environment. Differentiating itself has become more difficult.”

That difficulty is evident in an estimated 31% drop in device shipments during 2Q, which resulted in Sony Ericsson slipping into negative operating margins during the period. “These negative trends have caused the JV's cash to fall to €510 million, from €1,039 million in Q211,” the agency states.

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