1

Ernkvist, Mirko

Larsson, Svante

Modern Scandinavian Economic History

First Quarter, Fall 2005

Department of Economic History

Firms in a shifting global market

Lung	Norbert	801012-P252
Maloens	Jeremy	850325-P152
Penon	Andrès	821223-P271

The beginning

The Ericsson Company was founded by Lars Magnus Ericsson in 1876 thanks to his experience in the field of electric equipment. He learnt the craft of instrument maker at the Swedish manufacturing company Öller & Co. After leaving this company he studied abroad and then worked a few years at Siemens & Halske in Germany. He returned back to Öller & Co in 1875 but only one year later he left the company again to form his own enterprise. Carl Johan Andersson, a former colleague, became part-owner of L. M. Ericsson & Co.

In the year 1877, Ericsson signed his first contract with the Swedish PTT. Ericsson was particularly working in the new telephone technology. In 1983, 6 years after the first telephone came to Sweden, Ericsson and H. T. Cedergren constructed a phone which switched up for 10 numbers. Thus, Ericsson became a front-runner in this industry. The former employer Öller couldn’t compete with Ericsson because the latter produced cheaper and better devices and he has also won over the highly skilled employees of Öller thanks to higher salaries. Öller died in 1889 and the company was shut down.

In this paper, we will go through the evolution of the Ericsson Company focusing on different periods that mark turning points of the firm.[1]

Internationalization up to 1918

Three different directions distinguish the evolution of the Ericsson Company during the first part of the 20^th century. This illustrates particularly well the internationalization process of the Swedish multinational firms at that time.

First, the Ericsson Company was active on both the Russian and British markets. These two markets were characterized by extensive and profitable sales and counted for a great part of the company’s total sales. A characteristic of the Swedish multinational firms is illustrated by the telephone plant in St-Petersburg as the latter had been created after political pressures[2]. However, the Russian Revolution led to a nationalization of the Ericsson assets in 1917 which ended the development of the company in this country. Before the First World War, Ericsson had also subsidiaries in other parts of Europe, mainly Central Europe.[3]

At the same time, the Swedish company expanded in Central America by establishing a telephone operating company in Mexico City in 1909. Different elements created a difficult time during the first years of existence; civil wars, world war and internal difficulties. However, the number of Mexeric subscribers increased up to the 1920s.[4]

In order to take part in the continuous development of technologies, Ericsson tried to conquer the US market in the first decades of the 20^th. Some factors explain however why the plant, set up in Buffalo in 1907, was closed in 1920 among which the underestimation of the Bell companies’ market dominance. This closure had repercussion in the development of Ericsson as it did not stay in contact with the innovating US market (see below).[5]

Since Sweden remained neutral during the WWI, the company did not suffer as much as other foreign companies. However, the foreign markets were less important during the war because of difficult economical relations.[6]

Merger with SAT and its consequences

In 1918, just after the First World War, SAT and Ericsson were merged and became Allmänna Telefonaktiebolaget L M Ericsson. SAT acquired a significant share of Ericsson in 1901, when the operator sold its manufacturing operations to Ericsson in exchange for shares. From 1905 the two companies were involved in developing a telephone operating company in Mexico. The merger, therefore, was a natural step. First discussions for a merger took place in 1917 but these plans were blocked, however, either due to lack of support from the Swedish parliament or difficulties in reaching agreements between these companies. Although the First World War affected the negotiations through a shortage of materials and personnel as both the traffic and the number of subscribers increased, in 1918 the two boards reached an agreement and the companies merged.[7]

At the same time the Swedish telephone network became united and publicly owned. After this merger Ericsson was dominating the Swedish market.[8] The merger was very important because the international competition was increasing a lot. Big competitors were: International Telegraph & Telephone Corporation (ITT) from the US and Siemens & Halske from Germany.[9] Very important consequence was, among others, the combination of assets of both companies and also the fact that the expertise in both equipment manufacturing and telephone operations were also combined. Moreover, this merger enabled Ericsson to compensate its losses in Russia. At that time, the company continued its expansion which created the need to cooperate with Kreuger. This cooperation will later bring about some problems.

Interwar period

During the 1920s, Ericsson Company continued to expand internationally. Previous losses, especially in Russia encouraged the need for new opportunities. In 1925, Karl Fredrik Wincrantz made Ericsson involved in telephone operations which created a need for capital. Ivan Kreuger started here showing interest in the company. This financial man used the depression of the early 1920s to invest and sometimes acquiring majority holdings to control some Swedish industries. When Kreuger became an owner of Ericsson Company, things started to be wrong as Kreuger did not have the same vision and goals than Ericsson. Indeed, he wanted cooperation with the main competitor, ITT, whereas Ericsson had always been keen to compete. In the year 1930, Ericsson was completely dominated by Kreuger’s international empire. This was followed by the sale of the Swedish company to the American competitor, ITT. However, disagreement arose because of a wrong end-year report of the Ericsson Company. Kreuger committed suicide in 1932 after realizing the mess he created within the Swedish firm. On the one hand, Ericsson ownership was held by ITT but on the other hand, Swedish law did not permit ITT to use its ownership rights. Moreover, Ericsson was in a deep financial crisis and a rapid solution was needed.[10] When Marcus Wallenberg Jr became Vice Chairman of LM Ericsson and Hans Theobald Holm Managing Director, reorganization characterized the business of Ericsson and the company restarted its expansion. Actually, the links between the Wallenberg family and the Swedish banks helped the company to recover from the previous problems.[11]

After WWII

The WWII affected the Swedish economy like most of the other economies. However, as the country remained neutral, Swedish firms experienced better conditions than foreign ones engaged in the war. An important feature of this period is the increasing importance of the domestic market, especially for the Ericsson Company.

Three tendencies characterized Ericsson after WWII. The first trend is a rapid growth. Actually, two generations of new technology made Ericsson have technical advantages and be able to go on its own on the world markets.

Secondly, Ericsson’s business specialized. By contrast to the previous period characterized by diversification, Ericsson concentrated on the market for public telecommunication and decreased its operations in the telephone operating business. In 1990 one telephone operating company remained in Argentina.

Third, re-internationalization took place. By contrast to the war years, Ericsson was dependent upon foreign markets after the WWII. The export share of its sales increased to two-third up to 1970. Moreover, an important share of production took place outside Sweden and the biggest part of the foreign companies was situated outside Europe. As most large, established Swedish multinational firms, Ericsson made an acquisition in the US instead of greenfield investments. However, Europe was still a significant market for Ericsson in the 1980s. This period of geographical expansion was nevertheless characterized by difficulties to enter in the US market which was a source of development ideas of the telecommunications of the future. After a first tentative in the 1910s, Ericsson tried to establish once again on this market in the 1950s but without success. What can be mentioned is the fact that the company was now linked with the innovative American market. The objective was reached in the 1980s when Ericsson created a joint venture with an American cable producer.[12]

Today’s situation

Nowadays, Ericsson is one of the biggest companies in the telecommunication industry. Ericsson sells it’s cell phones everywhere in the world. From Asia (Thailand, India, China, etc.), Africa, Oceania (Australia), Latin America (Mexico, Brazil Argentina), North America (USA) to Europe where Ericsson sells in all countries.[13] On the 28^th of August 2001 the Division Consumer Products (DCP) of Ericsson and the Digital Telecommunication Network Company of Sony (DTNC) created a joint venture which is based in London, UK. This joint venture is called Sony Ericsson Mobile Communications AB and offers mobile phones and further multimedia equipment.[14] During the next five years Ericsson will invest 1 billion Dollars in the very important Asian market. This money will be used to improve manufacturing, service in China and Research & Development.[15]

Furthermore, the expansion or better the takeover of its competitors is also very characteristic for Ericsson and the British “Sunday Telegraph” reported that Ericsson wants to take over its British competitor Marconi. This purchase is valued around 1,89 billion Euro. Ericsson is reported to make an offer within the next weeks.[16]

Conclusion

The history of Ericsson was characterized by expansion, both internationally and nationally, for instance, the merger with SAT was a national expansion.

Even though it was non-economically efficient, the company built production facilities abroad after WWII. The reasons are strategic and political: staying in contact with the technological evolution was necessary and sometimes, political pressures made Ericsson expand in foreign countries.

Today Ericsson is one of the biggest telecommunication companies and continues to follow its expansion culture.

References

Articles:

§ Olsson, U., “Securing the markets. Swedish multinationals in a historical perspective”, pp 99-127.

Internet:

Ericsson Official website http://www.naringslivshistoria.se and http://www.ericsson.com

Wikipedia Online. http://de.wikipedia.org/wiki/Sony_Ericsson

Asian Times Online, China Business. http://www.atimes.com/atimes/China_Business/GJ06Cb02.html

Der Standard http://derstandard.at/

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[2] Olsson, U., “Securing the markets. Swedish multinationals in a historical perspective”, pp 99-127.

[8] Compare Olsson, Ulf. Securing the markets. Swedish multinationals in a historical perspective. Page 106

[12] Compare Olsson, U., “Securing the markets. Swedish multinationals in a historical perspective”, pp 99-127.

[16] Compare „Der Standard“ (APA/dpa) Article: Presse: Ericsson angeblich vor Übernahme von Marconi. http://derstandard.at/ (09.10.2005)