Sweden-based Ericsson, considered the largest networking equipment maker in the world, announced last Thursday that it is expecting a significant earnings reduction after writing off its unprofitable ST-Ericsson venture that manufactures cellphone parts.
Ericsson told investors last Thursday that the company is losing 8 billion Swedish kronor, or about $1.2 billion, which would affect the total earnings for the fourth quarter. Ericsson’s shares fell 1.8 percent at the day’s trading closure after the announcement.
Created together with the French semiconductor manufacture STMicrolectronics in February 2009, ST-Ericsson has accumulated a total of $2.7 billion in losses from the moment it began its operation. STMicrolectronics announced in December 10 that it would leave the business after a certain transition period.
Ericsson also said that it would not buy the 50 percent share of its French partner in ST-Ericsson, a move that further put a gloom on the current standing of the said venture which currently pays 5,090 employees in Geneva.
Northstream chief executive Bengt Nordstrom said that Stockholm-based Ericsson may eventually sell ST-Ericsson in parts or in its entirety following the venture’s write off.
When the venture was in its early stage in August 2008, Ericsson and STMicrolectronics announced that the new business, which combines STMicrolectronics’s ST-NXP wireless expertise and Ericsson’s mobile business, would become the world’s biggest supplier of mobile components and chips to hardware makers like Sharp, LG, Sony Ericsson, Nokia, and Samsung.
ST-Ericsson never took off however, despite having the advantage of exploiting combined resources and both partners’ intellectual property and patents on many components for both 2G and 3G mobiles and modems utilizing Long Term Evolution technology. The new company failed to make profit after struggling to attract business from clients in Asia, and the US component maker, Qualcomm.
“We don’t have the kind of silicon industry in Europe that exists in the United States and Asia, so this was always a difficult attempt,” Mr. Nordstrom added.
Nordstrom also noted that ST-Ericsson’s list of prospects shortened after Nokia announced in February 2011 to switch to Microsoft’s Windows system instead of using its own Symbian software for mobiles.
ST-Ericsson’s biggest customer was Nokia so the Finnish company’s switch to Microsoft’s operating system was a big blow to the venture, according to Nordstrom.
Ericsson’s contribution to the GSM and 3G wireless technology standards was significant, but it decided to leave the mobile industry market to focus on making networking equipment. It currently ranked as the number one maker of network gear although China’s Huawei is fast catching up.
Last February, Ericsson completely left the mobile sphere by selling 50 percent of the handset maker Sony Ericsson to its partner, Sony.
Ericsson’s reported third quarter profit dove 42 percent, decreasing to 2.2 billion kronor. It said that the 600 million kronor loss was due to ST-Ericsson’s bad performance.
On Thursday, the company said an estimated 5 billion kronor of the earnings charge shows that recent low valuation of underperforming ST-Ericsson. The remaining 3 billion kronor would be used next year to cover remaining commitments to ST-Ericsson.
“During the process of exploring options, Ericsson will not speculate on the possible outcomes, timelines and future strategic alternatives for ST-Ericsson assets,” the company said.