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How Ericsson Is Responding to Falling Sales

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Sep. 7 2017, Updated 7:37 a.m. ET

Sales fell across segments

Tough competition from rivals Nokia (NOK) and China’s (MCHI) Huawei coupled with weak demand for network equipment is causing serious headaches for Ericsson (ERIC). The company’s revenues (QQQ) continued to fall in the latest quarter.

Ericsson’s largest operating segment, Networks, registered a 14% decline in sales in 2Q17. Sales in the two other segments, IT & Cloud and Other, fell 10% and 11%, respectively. Due to the top-line weakness, Ericsson plunged into a net loss of 1.0 billion Sweedish krona, implying a steep bottom line decline from a net profit of 1.6 billion Swedish krona a year ago.

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Cost-reduction taking center stage

What’s Ericsson’s response to the falling sales and mounting losses? Efficiency. The company has drawn up a cost-reduction strategy as it seeks to increase its efficiency to potentially enable it to weather the tough market conditions.

Ericsson’s target is to double its 2016 operating margin by mid-2018. The company had an underlying operating margin of 6.0% in 2016. Ericsson is also working to reach an annual cost reduction run rate of 10 billion Swedish krona by mid-2018.

R&D department to be spared

In the efficiency drive, Ericsson is aiming to cut service delivery and common costs. According to a recent Reuters report, Ericsson could eliminate as many as 25,000 jobs in its cost-cutting drive. However, Ericsson’s managment has been clear that the R&D (research and development) will not be affected by the cost restructuring measures.

Perhaps keeping R&D out of the cost guillotine is due to Ericsson’s recognition that it needs to remain active on the innovation front to stay competitive. Ericsson is collaborating with Cisco (CSCO) in product development.

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