East Meets West - Sony Ericsson JV
By Steve Wallage, Mon Nov 19 00:00:00 GMT 2001

Both will gain something from the JV, even with the goals of the venture changing over time.

Sony Ericsson is a 50/50 joint venture between Sony and Ericsson combining their mobile handset expertise with the lofty aim of being number one in mobile multimedia devices within five years.

In theory, it should be an Ericsson-dominated company given that their global market share in mobile handsets is around four times that of Sony (it has, of course, been a far higher multiple) and Ericsson is contributing 2,500 employees to the 1,000 of Sony.

In practice, however, Sony is likely to become more dominant of the two. The initial signs are there; a Japanese president (Katsumi Ihara) and the first JV product based on a Sony design and launched in Japan.

Leading up to launch

The two companies appear to have done a pretty good job in setting up the new business. In April, 12 integration teams were formed and it is claimed that the new company was actually able to do business on its official launch date of October 1.

Behind the scenes, the two companies were doing their best to ensure that the JV got off to the 'easiest start'. According to ING Barings, Ericsson set up its technology licensing business to enable the JV to quickly reach profitability.

The same broker estimates that Sony wrote off inventory with a value of around $40m incurring further losses of $120m, just prior to the establishment of the JV.

A much needed collaboration

Taking the positive approach, there are some synergies between the two companies. The most obvious one is the combination of the Ericsson name, experience and installed base in mobile handsets with the consumer electronics and marketing skills of Sony. Geographically, Sony had withdrawn from the US mobile handset market in 1999, while Ericsson gains entry into the Japanese market.

Taking the realistic approach, both companies desperately needed the deal. In the third quarter of 2001, Ericsson mobile phones had an operating margin of -51.0%, year-on-year revenues down 43% and a market share estimated by the investment community at around 7.5%. If the deal had not been struck, Ericsson would probably have simply closed down its mobile handset business.

Sony itself was hardly in a position of strength. Nikko Salomon Smith Barney had predicted Sony would continue to lose money on its PDA and mobile handset business in 2001. Even in the Japanese market, Sony is only the eighth or ninth largest mobile handset vendor.

Cynicism from investment community

The investment community saw the move as one of the 'least worst' options for the two companies - something that had to be done rather than something that could really change the market.

A widely held view was that Ericsson was wise to pick Sony as a partner - for example, JP Morgan stated, "Sony is the best choice for Ericsson for three reasons: marketing and product design, deep pockets for handsets, and the best of a not-so-strong bunch". However, in many ways it would have made sense for Ericsson to partner with a Far Eastern company with a much higher installed base in mobile handsets such as Samsung.

Going forward, the view from investment analysts was mixed. JP Morgan suggested that, "neither Ericsson or Sony have shown an ability to gain share [in mobile devices] in heavily contested markets."

Robertson Stephens believes that the most optimistic case for the JV is a 15% market share in global handsets by 2005. Dresdner Kleinwort Wasserstein were more positive, citing the JV as "a serious threat" to Nokia.

The green vitamin pill

Unusually, the new logo for the JV was actually designed by Ericsson's own design department. The marketing department, perhaps after a good night out, describe it as playful, liquid and alive. Others see it as a continuation of the food theme - from the three sausages of Ericsson to the green vitamin pill of Sony Ericsson.

While it is an innovative logo and has the advantage that it can be used almost like a cursor on the screen of a mobile device, perhaps an opportunity was missed not to develop another brand name - or even drop the Ericsson name to make use of the stronger Sony brand. Political pressures, no doubt, ensured that both names were kept.

The JV will use 'category names' for certain products but remains committed to using Sony Ericsson as the main branding.

Arguably the single biggest challenge to the JV is the cultural and management differences between the two partners. The vast majority of mergers with partners from different countries fail, including those between neighboring countries such as Telia and Telenor. Mergers involving US and European companies, and Far Eastern companies, have been fairly unusual.

JV insiders claim that meetings have been 'interesting' with the companies sharing an 'export-led' culture. However, in reality, the two companies are very different, making a successful JV extremely difficult to achieve.

Cracks appearing already?

However, when one looks behind the press releases, there have been indications that not all is smooth in the JV.

In the initial announcement about the JV in April, Sony said it would invest $500m in the new company - the actual figure has been EUR 280m.

The April announcements also suggested that the JV would represent a complete merger of the mobile handset activities of the two companies. In fact, Ericsson is keeping its mobile technology platform (though Ericsson argue that this is to allow the JV to concentrate on sales and marketing issues), and relationships including a 3G handset agreement with Matsushita. Sony is retaining control of four factories, and relationships including mobile chip-design agreements with Phillips and Nokia.

More worryingly for the JV, the two partners are already acting unilaterally. At Comdex, Sony signed agreements with Nokia (mobile middleware) and AOL (wide-ranging agreement including consumer electronics devices) with no mention of Ericsson.

Ericsson has not ruled out further deals with other vendors, and the official line from the JV is that both parents may do 'focussed' and smaller deals separately but will not undertake any major agreements unilaterally.

The speed of integration is also unclear. Sony's CEO recently told Reuters that "both companies will keep their products and introduce [their] own, new products for a while. Integration will come with time."

The JV also seems to be suffering from changing expectations. For example, it was initially claimed to be profitable from its first quarter, then the first quarter of 2002 while the official line is now to be 'profitable over the full-year 2002'.

Although the JV claims to be integrated, many locations are dominated by either Sony or Ericsson people.

The distant future

It seems unlikely that the relationship will fall apart as the investment community is giving the JV at least six months to prove itself and it will become more difficult to disentangle the partners at this point.

At Comdex, the JV was able to announce a number of new deals including partnerships with MobileAria and Cingular Wireless. They have also announced the first product to be branded under the Sony Ericsson name. Hiding the marketing strength of the new company, this is currently named the CI002S.

The first product to be wholly developed by the JV will be available in the first half of 2002.

The JV will become increasingly dominated by Sony because of the difficulty of true integration. Sony also has a dual agenda in that it will promote the mobile handset as part of its own consumer electronics range, as has been illustrated with its memory stick product.

This is not all bad for Ericsson who will increasingly see the JV as a licensee for their mobile technology, and the JV as a means of reducing their risk and costs in the handset space.

However, the lofty initial aims of the merger will not be achieved - the commitment of the two companies is not strong enough, the market is too competitive and the integration challenges are too difficult. Within two years, it is likely that both partners will have a number of additional agreements with other vendors for 3G handsets.

Steve Wallage works and writes for the451. Steve has more than 13 years of experience as a technology analyst specializing in telecommunications.