Sony Ericsson has a lot of work to do

Jennifer L. Schenker
30 Oct 2008

When Sony Ericsson recently invited journalists and analysts to Lund, Sweden, to showcase its gleaming new office building there, talk turned quickly to the company's painful situation. After its rocky birth as a joint venture between Japan's Sony Electronics (SNE) and Swedish telecom equipment giant Ericsson (ERIC), the world's No. 5 handset maker soared through years of sizzling growth on the back of sexy phones and hip marketing"”only to stumble badly this year.

Now, under the leadership of a new chief executive, Sony Ericsson is trying to get its mojo back. 'We are moving forward,' promises CEO Hideki 'Dick' Komiyama, a 64-year-old Sony veteran who stepped into the top job last November (, 11/9/07). Trouble is, it's going to take some time before those efforts pay off.

Sony Ericsson's third-quarter results, announced Oct. 17, weren't as bad as many analysts feared. The company sold 1.3 million more phones than in the previous quarter and managed to avoid a widely expected quarterly loss through tough cost controls. But there's little reason to cheer. The average selling price of Sony Ericsson's phones fell 6% vs. the previous quarter, in part due to aggressive discounting. That helped knock down its gross margins from 31% a year ago to just 22%, resulting in zero profits. Results are likely to get worse before they get better. 'We are yet to see a bottom in the company's performance,' predicts a research note from UBS (UBS) Equity Research.

In a tougher spot than competitors

To be sure, it's a tough time for everyone in the mobile industry. A day earlier, Nokia (NOK) reported a 5% decline in revenues and 30% fall in net earnings (, 10/16/08). But price cutting, the global financial crisis, and increased competition from the likes of new entrants Apple (AAPL) and Google's (GOOG) Android are taking a steeper toll on Sony Ericsson than on stronger competitors.

The joint venture is more vulnerable today due to a series of missteps in the past year, including troubling lags in its product pipeline. Its sales are still too heavily concentrated in Western Europe, where a saturated market and widening economic problems are choking off demand. And it's weak at the low end of the market, where the strongest growth is happening in emerging markets.

Fixing these and other issues will take time and require significant changes in the company's structure and management, says Komiyama. 'It will take until the later part of 2009 to get better,' he said in an interview with BusinessWeek. Komiyama says parent companies Sony and Ericsson have consented to his turnaround timetable and action plan.

Trying to change the company culture

Getting there won't be easy. Sony Ericsson already is in the midst of a cost-cutting program that will see it eliminate 2,000 jobs globally in order to save €300 million ($400 million) a year by the second half of 2009. Komiyama says he also has to shake up the company's culture because even after seven years employees from the two parent companies still don't act in unison. At Sony, Komiyama says, 'people all pull together in the same direction.' He sees one of his biggest challenges at the joint venture to establish 'one brand and one team.'

Komiyama already has merged the sales and marketing divisions, fused three product groups into one, and altered priorities at Sony Ericsson's global research and development facilities to better fit the company's overall strategy.

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