Ericsson in China

Ericsson's relationship with China dated back to the 1890s, when the first batch of
Ericsson handsets was shipped to Shanghai. Since then, China has gradually
developed into one of Ericsson's primary markets. The Chinese market presented
huge opportunities in terms of volume and size. The telecom and IT industry in
China was growing at the fastest rate in the world and Ericsson was determined to
have a share of the pie. The company set up its first office in Beijing in 1985 and in
1994 Ericsson (China) Co. was established. Ericsson adopted a well laid out
localization strategy to optimally exploit the Chinese market. Between the late
1990s to the early 2000s, Ericsson shifted the procurement and supply side of its
wide range of business to China.

It also brought in its traditional partners. This offered huge employment

opportunities for local Chinese and also contributed to the country's economic
growth. Besides, huge investment in R&D by Ericsson and commitment to develop
the country's 3G technology contributed to China's telecom and IT growth.
However, in the early 2000s, the market for Ericsson products in China lost out to
stiff local competition. Analysts observed that Ericsson needed to rethink its
strategy on pricing and quality of its products.

Issues:

» Understand the approach taken by multinationals to tap new markets

» Determine various issues involved in the setting up of a new company in an

international market

» Appreciate localization strategies adopted by an MNC to expand its operations

» Appreciate the complexity of a growing market like China

» Evaluate the growth of a European telecommunications major in China

» Understand the contribution of an MNC in the host country's economic

development.
China is an extremely important market for Ericsson and a global supply hub for
our R&D and production."

- Carl-Henric Svanberg, Ericsson President and CEO, in 2004.1

"China offers one of the largest opportunities for wireless telecommunications in

Asia. As a committed, local partner in China for more than 100 years, Ericsson is
honored to be part of this high-growth market......."

- Jan Malm, president of Ericsson China, in 2004.2

"This MoU combines the strengths of both our organizations, and the synergy
created by this cooperation will result in a better integrated supply chain for our
customers and therefore increase their efficiency. We look forward to a long and
mutually beneficial relationship for many years to come."

- Xingsheng Zhang, president and Chief Executive Officer of AsiaInfo during

the signing of an MoU with Ericsson for future strategic cooperation, in June
2003.

Introduction

Ericsson's relationship with China can be traced back to more than a century - to
the 1890s - when the first batch of Ericsson telephone sets were shipped to
Shanghai. Since then, China has gradually developed into one of Ericsson's top
markets.

As of 2004, over 50% of mobile subscribers in China were connected through

Ericsson supplied networks. Ericsson had 26 offices, 10 joint ventures and four
wholly owned subsidiaries in China in the early 2000s. Kurt Hellstorm,
(Hellstorm) president of Ericsson, forecast in 2000 that China was likely to become
one of the largest markets for mobile phones in the next few years. With continued
investment and a localization strategy that stressed cooperation with local partners,
Ericsson was positioned to strengthen its market in the country. Analysts observed
that though the telecom markets in North America and Europe had slowed down in
the late 1990s and early 2000s, the Asian market had scaled new heights in spite of
setbacks because of SARS
Experts ranked the Chinese market second only to the United States in terms of
volume and growth prospects. According to some industry estimates, in 2004,
there were more than 400 million mobile phone users and 10 million Internet users
in China (Refer Exhibit I for growth in mobile phone usage in China).

Ericsson was determined to tap this huge market. The company adopted several
measures like setting up local production units, intensive R and D activities and
localization of production and supply networks. The increased focus on Chinese
operations led to enhanced job opportunities in the host country. It also boosted
local Chinese business by actively involving domestic suppliers. Local suppliers
who dealt with Ericsson had to manufacture products according to global
standards, which automatically helped improve China's manufacturing and
production facilities. With Ericsson's growth in China, the country's telecom
business and general economic environment was also positively impacted.

In 1985, Ericsson set up its first office in Beijing, China's capital. In 1994, Ericsson
(China) Co. Ltd., was established. In 2002, China developed into one of Ericsson's
three global supply hubs with full-line production capacity located in Beijing,
Nanjing and Chongqing.

Ericsson's largest joint venture in China, the Nanjing Ericsson Panda

Communication Company Ltd. (ENC), assumed the role of Ericsson's Flow
Control Centre5 for the Asia Pacific Region. Ericsson Mobility World China6
provided a development and testing platform and toolkit for local Chinese
developers who wanted to engage in mobile applications. In May 2002, the
company launched the China Development and Research Institute to consolidate
and strengthen R&D activities. Around the same time, Ericsson also started its
technology licensing business in China. The company entered into a license
agreement for 2.5G7 mobile phone technology with TCL, China's largest mobile
phone producer.

The same year, it also signed a worldwide WCMDA/UMTS 8 patent license

agreement with Huawei Technologies, a leading Chinese telecom vendor. In
August 2002, it was among two companies to be awarded the MMS 9 contract from
China mobile

Ericsson was well positioned to support China's evolution into the third generation
of mobile communications (For details on Ericsson's product offerings, please refer
Exhibit II). The company made efforts to integrate China's excellent production
facilities and human resources into its global production and R&D programme. In
the first quarter of 2004, China accounted for about 9% of Ericsson's global
revenues. The country became the Swedish giant's second largest market
worldwide, trailing only behind the United States. Ericsson's success in China was
a result of well-planned strategy by the company. To optimally utilize the vast
resources in China, the company adopted an extensive localization strategy...

Localization Strategies

To tap the potential Chinese market, the Swedish giant made concerted localization
efforts. The company realized that integration with the local economy was
essential for success. To this end, the company decided to localize procurement
and supply for its wide range of businesses.

Under its 2000 Plan, Ericsson ordered RMB 14.9 billion worth of components
from local suppliers in 2000, which experts felt, was a substantial order. Ericsson's
determination to take root in China was expected to enable Chinese enterprises to
land even more generous orders and have a larger share in the Sweden-based
company's production and R & D activities. Apart from the staggering 4-time
increase in domestic purchase value (from RMB 3.9 billion in 1999 to RMB 14.9
billion in 2000), Ericsson's accumulative investment in China reached $600 million
by year-end 2000. Industry experts commented that the increase in domestic
purchase improved the "homemade" rate of Ericsson (China) products. Two of the
company's mobile phone models -- T18 and A1018 -- got more than 60% of their
components from domestic suppliers

Competition

Though China's telecommunication market was growing faster rate than anywhere
else in the world and Ericsson had a successful localized strategy, not everything
seemed bright for the Swedish conglomerate on the mainland.

The company suffered setbacks in 2001-02. Craig Watts, an analyst with Norson
Telecom Consulting in Beijing, said, "I don't think there has been a worse time for
Ericsson in the China market. We have just seen an erosion. The domestic makers
are on their heels and are a lot cheaper. Ericsson is still winning contracts -- it just
got a $150 million deal from China Unicom, for instance -- but the competition is
much stiffer." The most obvious problem was the collapse of Ericsson's handset
market share. In the mid to late 1990s, Ericsson controlled the mobile handset
market in China along with Motorola and Nokia. But, by the early 2000s, the
company was barely visible. At the end of 2001, Ericsson China controlled only
5% of the market, which further dropped to around 2% by mid-2002...

Entry of Sony Ericsson in the Chinese Market

Sony Ericsson launched Sony Ericsson China in August 2002 to produce and
market handsets for both domestic consumption and exports. Ericsson was widely
acclaimed as the top handset vendor in China in the 1990s, but eventually lost
market to Motorola, Nokia and others.

Sony did not have a history of very strong sales in the Chinese handset market.
Sony Ericsson China was formed with the intention of recovering market share.
Ericsson formally exited the handset market in 2002, and the entire responsibility
of handset design, production, sales and support was transferred to the new
company. Combining strengths from Sony (entertainment and design) and Ericsson
(mobile communications technology and R&D), the company aimed at creating a
new consumer segment, with who laid more stress on enhanced value for money.
Advanced features like imaging, entertainment and interactivity were incorporated
in the new Sony Ericsson handsets. Since its inception in 2002, Sony Ericsson was
launched several handsets with features designed specially for local customers...

The Future

The growing telecom and IT industry in China offered huge opportunities. The
mobile and Internet telephony market in China was growing at one of the fastest
rates in the world.

The obstacles faced by Ericsson included stiff competition from multinational

companies like Nokia and Samsung, domestic competition from companies like
TCL and ZTE, and shifting loyalties of consumers from multinationals to
affordable local companies. Ericsson's share in the mobile handset market dropped
from the leadership position in the late 1990s to less than 2% in 2002. Even the
joint venture with Sony failed to reverse the trend. Analysts felt that in the face of
such intense competition, the company needed to rethink its policies. While
localization had helped, pricing and quality were two aspects, which had to be
looked at afresh. Affordability was a primary reason for Ericsson losing its market
to local competition...