As a crude indicator, imagine a combination of five big players: smartphone
leaders Apple, HTC and Nokia, along with chipmaker Qualcomm and Ericsson,
the infrastructure leader. The revenues of this hypothetical giant were 60
per cent higher in the most recent quarter than a year earlier, and the
return on equity from operations – excluding the effect of the remarkable
$58bn net cash position – was a hearty 40 per cent.
Such numbers fit with the industry’s characteristics. It has rapid growth:
handset sales increased 32 per cent globally in 2010 and Ericsson projects
40 per cent annual growth in the number of mobile broadband users over the
next four years. It also has compelling innovation: smartphones cost at
least three times as much as the units they replace.
Not all ships
Still, the high tide is not lifting all ships. On the contrary, it has an
undertow that threatens to pull Nokia down. The Finnish company reported a
loss in the second quarter and sold 31 per cent fewer smartphones than in
the previous one. The share price has been cut in half in two years.
Ericsson is far from drowning but its second-quarter results looked like they
had come from a fairly mature industrial in a cyclical upturn: revenues up
14 per cent, a 9 per cent operating profit margin and an annualised
cash-adjusted ROE of 14 per cent. The struggle is not new: the share price,
which dropped 10 per cent on Thursday on the results, is up only 6 per cent
in two years.
Why do corporate fortunes vary so greatly? With technology changing so fast, a
leading position can quickly become a drag. And when price competition is
lively, as it is in Ericsson’s hardware and services businesses, it is
hard to earn a tremendous return on the big investments required in research
and development.
Eventually the mobile industry will settle down. But not for a while yet. The
next few years are likely to be much like the last few, just a little more
so.
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