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Who Lost Lucent?: The Decline of America’s Telecom Equipment Industry

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As America transitions to 5G wireless networks, the U.S. intelligence community sees the Chinese telecom giant Huawei as a systemic security risk. In response, President Trump has banned the use of Chinese 5G equipment in U.S. networks. But despite these measures, there is still deep concern that eventually Huawei will dominate global markets, displacing the other major 5G providers, Europe’s Ericsson and Nokia. To address this challenge, a number of proposals have been floated, including that the U.S. government buy shares in Ericsson or Nokia or provide incentives for U.S. companies to produce 5G gear.

Few, however, are asking why there is no American telecom equipment company. After all, in the 1970s the two largest telecom equipment manufacturers were U.S. companies: Western Electric and ITT. Even in the late 1990s, the two largest were still based in North America: Lucent and Nortel (headquartered in Canada but employing tens of thousands of workers in the United States). In 1999, Lucent was almost three times larger than its next two rivals and was the sixth largest company in America in terms of capitalization. Nortel ac­counted for over one-third of the capitalization of the Toronto Stock Exchange. By 2008, however, Nortel was bankrupt, and Lucent was a sliver of its former self, having been sold off to Alcatel, a French company, which was later bought by Finland’s Nokia.

What happened? How did America go from the world’s leader to not even an also-ran in the span of just two decades? Equally troub­ling, why did no one sound the alarm bell when there was still time for action?

Economists say America lost its telecom equipment industry (firms that make the hardware and software that enable wireline and wireless telecommunications) because it naturally lost comparative advantage as the economy shifted to industries like internet services. Business administration scholars blame bad management. Neither view explains what really happened.

The answer lies in the fact that other nations saw the industry as strate­gic and they fought to protect and promote their own companies within this sector. Nowhere is this more true than in China, where, without “innovation mercantilist” policies, Huawei and ZTE (the other major Chinese competitor) would not exist today. Indeed, as Huawei’s founder Ren Zhengfei himself admitted in 2002, without Beijing’s policy of protecting Chinese companies from aggressive foreign competition at home, “Huawei would no longer exist.”1 And if Huawei did not exist, Nortel and possibly Lucent would still be with us today.

While other nations were promoting and defending their industry, U.S. policymakers put their abiding faith in free markets. As the U.S. International Trade Commission (ITC) wrote in 1991, “The United States has never had a Federal policy to promote the communications sector and is unlikely to, given its tradition of and support for free-market policies.”2 It was this view that enabled sixty years of injuri­ous antitrust enforcement that systematically weakened both Western Electric (the predecessor of Lucent) and Bell Labs (the world-class laboratory supported by AT&T and Western Electric). If no industry is more important than any other industry, and if international com­petition is not real, why not aggressively work to break up the leading telecommunications company in the world? For over sixty years, the Justice Department did everything it could to weaken Western Elec­tric, completely discounting national security, competitiveness, and innovation concerns, even as other U.S. government agencies were sounding warning bells. As such, it is not an overstatement to say that, without the aggressive antitrust policies of the U.S. government, America would still be the world leader in telecom equipment.

In addition, after the rise of neoclassical economics and the con­sumer movement in the 1970s, policymakers believed they knew the optimal market structure: competition. The 1996 Telecommunications Act was the culmination of this hubris. As a result of this legis­lation, not only were tens of billions of dollars in capital spending poured down the drain, but Lucent and Nortel were driven off a cliff, stupidly financing the equipment investment of hundreds of telco entrants that soon went bankrupt.

Finally, finance-driven anglosphere capitalism led Lucent and Nortel to make decisions that ultimately led to their downfall: they cut R&D budgets to meet share price targets, and they were unwilling to suffer the pain of keeping core business assets in place during the 2001–2 downturn so that they could rebound when the market recovered. European firms—particularly Ericsson, which was con­trolled by banks, not short-term equity investors—could and did take the longer-term view and thrived in the 2000s.

Today, without massive infusions of government subsidies, or transformative technological changes like the rise of software-defined networks, America will not be able regain competitiveness in this industry. Once these assets—including talent—are gone, they are virtually impossible to recover. But it is not too late to learn important lessons from this epic industrial failure and apply them to the advanced industries the United States still has left, including aerospace, biopharmaceuticals, and semiconductors. This will require an overthrow, however, of the prevailing Washington economic ortho­doxy, which holds that the United States does not compete economically on a national level, and that no industry is more important than any other. It is time for a new national consensus, one that holds that some industries are too critical to fail and that government needs a robust national industrial strategy. Let us hope that it is not too late to learn these lessons, for it would be beyond tragic if in a decade or two someone has to write an article asking, “Who Lost Boeing, GM, Intel, and Pfizer?”

The Rise and Fall of the American Telecom Empire

It was in telephony that a century-old America would first assert what would eventually become global technological leadership. On February 14, 1876, just hours ahead of Elisha Gray (who went on to found Western Electric), Alexander Graham Bell filed a patent appli­cation describing his method of transmitting sounds. Bell received his patent twenty-one days later—back then the Patent and Trademark Office processed patents quickly; today, there is backlog of 540,000 applications.3 And with that, the telephone age was born.

The new Bell Telephone Company needed telephones and equip­ment. It turned to a number of vendors, but it soon became evident that one firm, Western Electric Manufacturing Company, was the best. Western Electric originated in Cleveland, Ohio, in 1869, when Elisha Gray and Enos Barton launched a company to manufacture telegraph equipment for Western Union. In 1872 they moved the company to Chicago. After Bell Telephone became American Tele­phone & Telegraph (AT&T), it acquired a controlling interest in Western Electric. For the next 120 years, Western Electric was AT&T’s wholly owned subsidiary, making telephones, telephone switches, and other equipment.

As telephony grew—faster in America than anywhere else—AT&T grew. By the turn of the century, AT&T and Western Electric dom­inated the U.S. market. By 1900, Western was manufacturing in Aus­tria, Belgium, Canada, China, Germany, France, Italy, Japan, the Netherlands, Russia, and the United Kingdom. And by 1913, it dom­inated the global market, holding 59 percent of the global market for equipment.

It soon became clear that growth depended on technological ad­vancement. So in 1907 AT&T and Western combined their engineering departments and in 1925 established Bell Laboratories. Much has been written about Bell Labs as the world’s most successful industrial laboratory. From its founding in 1925 to its divesture in 1995, it averaged one patent per day, and by 1995 it was averaging three patents per day.4 Fortune called it “the world’s greatest industrial laboratory.”5 It was responsible for some of the most im­portant inventions of the twentieth century, including cellular tech­nology, digital switches, fiber optics, lasers, the transistor, solar cells, satellite communication, undersea cables, and the UNIX operating system.6

What made the U.S. telecom system the most envied in the world was the close relationship between Bell Labs, Western Electric, and AT&T. The needs of AT&T informed the science at Bell Labs and the engineering at Western Electric, and the innovations from both went into AT&Ts network. For example, just three years after Bell Labs invented the transistor in 1947, Western Electric began commercial production. This leadership meant that twenty-one of the top twenty-three semiconductor innovations between 1951 and 1964 were Ameri­can—with nine from Western Electric, five more than the runner-up, General Electric.7

While Western Electric was the most internationalized U.S. com­pany, it was part of a regulated monopoly, AT&T, at which the trustbusters in the Justice Department had long looked askance. Because of pressure from the antitrust bureau, in 1925 AT&T sold its foreign manufacturing subsidiary to a smaller American firm, Inter­national Telephone and Telegraph (ITT). Led by its charismatic foun­der, Colonel Sosthenes Belm, ITT grew to one of the world’s lar­gest multinationals. By 1972 it accounted for 60 percent of French tele­communications equipment exports, dominated in the UK, and had a monopoly in Spain.8 It was also highly innovative. In the late 1970s it developed the first digital telephone switch, the System 12, at its R&D center in Connecticut. So for half a century America was home to the two largest telecommunications companies in the world: Western Electric and ITT.

But a third company would also become a leader: Nortel. Northern Telecommunications was established by Western Electric to serve the Canadian telecommunications market, in part because of the high tariff wall the Canadian government had erected.9 But again, because of pressure from the Department of Justice, Western was forced to sell off Northern to Bell Canada. Eventually renamed Nortel, the company grew rapidly, especially after AT&T was broken up in the early 1980s. By 1999 it had become the second largest telecom equip­ment provider in the world.

As late as 1997 the U.S. produced one-third of all telecom equip­ment in the world, with exports of $13.1 billion and a trade surplus of $3 billion.10 This was to be the high-water mark.

And while I will not discuss in detail the decline of Motorola, it is worth noting that its history follows a similar pattern of innovation, dominance, and collapse. This Chicago-based maker of wireless phones and networking equipment was the first company to produce a cellu­lar phone and communication system, and until 1998 it was the world’s largest producer of cellphones. But Motorola eventually exit­ed the business, selling its mobile infrastructure business to Nokia in 2010, which itself exited the business soon after.

The Birth and Death of Lucent Technologies

Since AT&T’s formation, the Justice Department had sought to break it up, to “sever some limbs,” as one attorney called it.11 It was only with the rise of neoclassical economics the 1970s, however, with its focus on consumer welfare and competitive markets, that the political winds shifted in the DOJ’s direction. Realizing it could lose in court and wanting to get into new markets, AT&T agreed to a consent decree in 1982, according to which it spun off its local telephone business into seven regional Bell operating companies (RBOCs). But because AT&T was now competing with the RBOCs to sell local phone service, management decided that it was also necessary to spin off its telecom equipment division as a separate company; the new company would then have a better chance of selling to the RBOCs. So, in 1995, Lucent Technologies was formed.

At first the future seemed bright. As Lucent’s 1997 annual report touted,

Lucent Technologies had an extraordinary first year as an inde­pendent company. We grew our business to record levels and strengthened our company for future growth and market lead­ership. Now, as the two words on the cover of this annual report say, we’re reaching higher.

The company told its shareholders that these numbers would “likely grow as technological advances and deregulation continue to expand the global market.”12 It also expected to grow because it “was generat­ing 23 percent of its revenues outside the U.S., but it held only 3 percent of the non-U.S. market.”13 In 1999, Lucent was the world’s largest telecommunications equipment company, earning $38.3 billion in revenue, making $4.8 billion in profits, and employing 153,000 workers, while controlling more patents than any other company.

The expectations for the future were high. As one industry analyst noted, “Lucent is positioned to be the technology company that de­fines the decade—and quite dramatically, the beginning of a millennium.”14 Likewise, a 1998 International Trade Commission report stated that, “according to some analysts, Lucent experiences a global competitive advantage over EU producers of network telecommunications equipment in leading-edge technology.”15

But trouble was brewing under the surface. With the dramatic falloff in telecom equipment spending in 2000, Lucent’s revenues fell from $30 billion to $12 billion two years later. In 2001, it lost $16.1 billion; more than the sum of all its profits to date, and then lost an­other $7 billion in 2002. Its stock price fell from $65 in September 1999 to just 76 cents in September 2002.16

As the market rebounded, by 2004 its stock price was up to $3.17, and it earned $2 billion in profits. But it struggled, particularly as other companies, including an emerging Chinese company named Huawei, starting taking market share. By 2006, Lucent’s revenues had fallen by more than 75 percent from their peak to $8.8 billion, and its employment was down more than 80 percent. As William Lazonick and Edward March note, “both figures were lower than those of its three major rivals [Alcatel, Ericsson, and Nortel], even though all of the companies had gone through wrenching declines as the Internet boom turned to bust in the early 2000s.”17 Finally, a shell of its for­mer self, Lucent merged with French national champion Alcatel in 2006. But one year later, Alcatel’s stock had lost 44 percent of its value, and in 2015 Nokia paid €15.6 billion for Alcatel-Lucent.

Nortel’s story is similar. For most of its life, Nortel primarily served the modestly sized Canadian market. It was not until the court‑ordered opening up of the U.S. market in the 1980s that its U.S. sales took off. And after the 1996 Telecommunications Act, it grew rapidly, doubling its revenues between 1997 and 2000. But like Lu­cent, Nortel provided equipment on credit, and as one study notes, “the rapid increase of physical and human resources led to an increase in overhead and duplication.”18 Nortel went from being valued at $136 billion in December 1999 to just $14 billion in April 2002.19 Lagging behind foreign competitors, including Huawei, it closed its doors in 2008.

We should not forget ITT. After it bought the foreign assets of Western Electric, telecommunications services and equipment were its major businesses. But by the late 1950s corporate America was caught up in the conglomerate merger wave, with companies seeking to grow by buying completely unrelated businesses. This was in part due to stricter limits imposed by U.S. antitrust authorities on conventional mergers. As a result, ITT entered a wide array of businesses, including car rental and insurance, and acquired a huge amount of debt.20 The high interest rates of the early 1980s, coupled with threats from newly minted corporate raiders, meant that it had to sell off units, and telecom equipment was the first to go. ITT sold its telecom equipment business in 1986 to Alcatel Alsthom, a subsidi­ary of the state-owned French corporation Compagnie Générale d’Electricité (CGE), forming Alcatel NV, the world’s second largest telecommunications company. One analyst called the purchase “the most important development in CGE’s modern history.” With that, the second largest U.S. player was gone.

The conventional view is that these companies either failed or were acquired as a result of poor management. If their leaders had just been better, the story goes, things could have turned out differently. Tim Dempsey, a former Nortel HR executive, writes that “the fear-based culture, and the leadership system that it engendered, created an environment that enabled poor decisions as inevitable [sic].”21 This is a comforting story, as it suggests that major corporate failures are somewhat random, the result of bad personnel choices. But it does not hold up. If Nortel had bad leadership—the same leadership that was supposedly responsible for its demise—how had it grown to become the second largest telecom equipment company in the world?

A related view is that these companies were made up of “Bell­heads,” not the “Netheads” of Silicon Valley who were transforming the world with internet technology.22 But these companies didn’t lose to Silicon Valley companies, which were not able to enter the telecom equipment business successfully. They lost to European and Chinese “Bellheads”—companies that were tightly linked to telecommunications services. And besides, both Lucent and Nortel vigorously em­braced internet technology, like broadband communications.

To be sure, management and cultural factors played a role. But they are deeply inadequate as explanations. In reality, the failures stem from a combination of the unique challenges imposed by the Anglo-American economic system, systemic failures of U.S. government policy, and strong—and in the case of China, aggressive—for­eign industrial policies aimed at acquiring U.S. market share.

Anglo-American Capitalism: A Hostile Environment

It is striking that no Anglo-American nation is home to a competitive telecom equipment provider. The United Kingdom had several firms until the 1980s, but they either went out of business or were bought by continental European firms. And of course, Canada and the United States lost ITT, Western Electric/Lucent, and Nortel.

This is not by happenstance. Anglo-American capitalism, particularly its emphasis since the 1980s on maximizing short-term earnings and share price while limiting investments in physical assets, makes it harder for firms to focus on long-term growth. One survey of U.S. executives found that 78 percent admitted to sacrificing long-term value to gain short-term earnings benefits.23 As the CEO of ITT wrote, many CEOs “forgot that business and industry cannot max­imize profits for the long term by being concerned, primarily, with the results of the next three-month period. Whatever happened to long-term planning, development scenarios and a vision of the future measured in years?”24

But ITT itself succumbed to this temptation by selling its telecom equipment assets, in part to focus on the faster-growing services market and to make itself less attractive to corporate raiders. AT&T had already done likewise when DOJ demanded its breakup in the early 1980s. It could have spun off its long distance service and be­come a local telephone company, while still keeping Bell Labs and Western Electric. Had it done so, it is likely that Western Electric would be alive and well today, since it would have had strong, loyal customers in the RBOCs. Instead, AT&T chairman Charles Brown spun off the local Bell companies, which he thought were slow grow­ing, in order to be able to enter into the rapidly growing computer industry.25 As one analyst writes, “AT&T wanted to shed the stodgy regulated operating companies and the equipment and service restric­tions that accompanied its regulated monopoly status. Operating companies generated no sizzle with Wall Street. The Information Age was upon us, and AT&T had to unleash its technology to go head-to-head with the likes of IBM.” But it did not work. AT&T’s Computer Systems division turned into “the boat anchor that never turned a profit,” and the lack of results became “a corporate embarrassment.”26

While AT&T’s leaders thought they were acting in the interests of shareholders, they were in fact acting in the interest of only short-term shareholders. By separating Western Electric and Bell Labs from the local operators, they severed the hundred-year-old, two-way learn­ing system that had enabled robust innovation. Over time it became obvious that “without the operating company experience AT&T was losing its way in bringing technology to market. It was losing its ability to manage Western Electric, NCR, and Bell Labs.” This sever­ing was particularly problematic because “a major technology shift beyond digital switching was underway, and they were unable to chart its course.”27

It was even worse because Western Electric now had to compete much more vigorously for the RBOC purchases. Western Electric had previously been assured of a stable market, because the Bell oper­ating companies bought from them. But after the breakup of AT&T, Western Electric was just one more competitor, and after it became Lucent it also had to compete for AT&T’s business. This is why both Ericsson and Nortel identify the breakup of AT&T as the key enabler of their rapid growth in the American market.28

Once Lucent was formed, Wall Street pressures became even more intense and led to a set of ultimately catastrophic decisions. Before the breakup, Western Electric was part of a regulated monopoly. That enabled both Bell Labs and Western Electric to invest heavily in fac­tors necessary for long-term success. But once Lucent was a freestanding company it no longer had that support.

Lucent reveled in its new freedom: as one Lucent employee proclaimed, “hooray, we’re free at last from AT&T.”29 But that free­dom brought new expectations for rapid growth. Indeed, from its first days, Lucent branded itself as a growth company rather than an income stock in order to ensure that its stock price kept rising—a grave error. This meant, as one former Lucent executive wrote, “to keep Wall Street happy, Lucent needed to produce strong and sus­tainable results.”30 He went on to note that it

would have a very difficult time voluntarily saying that the upcoming year’s objectives need to be lowered. . . . In hindsight, moderating lofty growth expectations in a well-articulat­ed and reasoned manner would have been more desirable than ultimately missing expectations—let alone continuing to set, and strive for, subsequent goals which could also prove to be unattainable.31

While rising stock values were helpful in recruiting technical talent who could otherwise go to work for fast-growing Silicon Valley com­panies, short-term share price appreciation was also in the more self-serving interest of Lucent’s executives. As William Lazonick and Edward March note, “when Henry Schacht stepped down as chair­man of the company in February 1998, he cashed in stock options for a gain of $65 million, after less than two years on the job. In that fiscal year, Rich McGinn, the new chairman and CEO, generated $3.6 mil­lion from exercising stock options as part of his total remuneration of $25.3 million.”32

Stock appreciation became an obsession. A 2000 profile of Nortel CEO John Roth reveals him to be absorbed by the market values of his company and its competitors and concluding an interview by checking Nortel’s stock price on his browser.33

Both Lucent and Nortel knew that they needed rapid growth to ensure rapid stock price appreciation, and so they both demanded unrealistic quarterly sales growth targets. This led Lucent to reward its management and its sales force for “booked sales” rather than “collected sales,” which led them to agree to unfavorable terms just to get deals signed before the end of the fiscal quarter.34

An even faster way to grow was to buy other companies. Both Lucent and Nortel’s leaders were lured by the siren song of the internet, seeing telecom as a mature business compared to corporate data networking. The vision of Richard McGinn, who became CEO of Lucent in 1997, was to be “a high-tech growth company in an industry historically plagued by slow growth and gradually evolving product lines.”35 Roth was also convinced that Nortel needed to be more like internet companies. Both gazed with longing at fast-grow­ing Cisco; if they could emulate it, they thought, their share prices would surely appreciate even more quickly.

As a result, they shelled out tens of billions of dollars for acquisitions. In just five years Lucent acquired nearly forty companies, including spending over $20 billion for Ascend Communications.36 Nortel spent $9.1 billion to acquire Bay Networks in 1998, even though an internal Nortel analysis showed that Nortel had never made a financially successful acquisition.37 Almost all these acquisitions were subsequently written off or divested at a significant loss. This meant that, when the tough times came in the early 2000s, both companies were short on cash to tide them over until the market rebounded.

Acquisitions are not inherently bad, but companies should buy at a reasonable price, and the acquisitions should support their core com­petencies. Telecom was not Silicon Valley, however, and the trend towards “everybody provides everything” was never real. Cisco does not make telecom switches and Ericsson makes very little corporate data gear. In putting rapid growth above all other goals, Lucent and Nortel thought they could expand into a wholly different industry. Ultimately, it cost them their core business.

Moreover, in an effort both to cut costs and to improve their return on assets (a key measure used by Wall Street), both companies decided to get out of the business of making products. As Yishai Boasson wrote, Lucent’s “chosen strategy came to be the Virtual Manufacturing Strategy. This strategy meant Lucent was to sell most of its twenty-nine manufacturing facilities to the EMS [electronics manufacturing services] industry, while at the same time outsourcing its manufacturing requirements.”38 Nortel went down the same path. One study of the fall of Nortel notes that its outsourcing of manufacturing to Flextronics with a long-term contract “limited flexibility in terms of future manufacturing decisions.”39 And as Harvard Business School professors Gary Pisano and Willy Shih have noted, such outsourcing weakens the link between R&D and production, making it harder for companies to innovate.40

This push for rapid growth and higher margins also changed the nature of Bell Labs. As one analyst has noted, “Bell Labs with Lu­cent’s bright red innovation ring hanging over the door in 1996 was a very different entity from that which historians eulogize.”41 In fact, it had become a wholly different place:

With the advent of the Lucent spin-off, the corporate wall was removed totally. While there was effectively a “Bell Labs” organization, it was in many cases simply a scattering of hetero­geneous organizations within Lucent. This further reinforced the shift in values from technical competence to shareholder value. . . . Projects not directly associated with current revenue generating products became increasingly difficult to fund. . . . R&D decisions became driven by business executives attuned to investment community motives and incentives, and poorly trained in the underlying technology and development process­es. In doing so they traded their technical soul for mediocrity.42

Finally, short-term pressures meant that when the market turned sharply south in early 2001, Lucent and Nortel cut too deeply. As Lazonick and March write, “failing to sustain revenue growth and with a falling share price, Lucent attempted to address ‘shareholder value’ with the disposal of assets.”43 One financial analyst commented at the time, “Lucent is in a tough position. . . . They have two choices. Don’t cut [headcount] and sustain losses in the hopes the industry eventually turns around. Or, make the swift, necessary cuts to return to profit. It would be best for everyone, especially the employees, if they got there quickly.”44 In fact, it was worse, as cuts only accelerated the decline.

Lucent CEO Henry Schacht summed up the problem when he said, “our execution and processes have broken down under the white‑hot heat of driving for quarterly revenue growth.”45 He went on to note the consequences of a purely revenue-focused approach:

Our growth objectives could not be sustained on a long-term basis. . . . We had placed too much emphasis on short-term rev­enue growth and not enough on long-term value creation. . . . We developed an ever-increasing emphasis on quarterly revenue generation that drove ever-increasing short-term decisions . . . often at the expense of long-term needs.46

Wall Street analyst Thomas Lauria notes that if Lucent and Nortel “could have accepted lower earnings growth rates, they could have invested more in research and development. The new products that could have been developed organically, as opposed to products that were acquired, could have strengthened their long-term competitive positions.”47 As Lazonick and March point out, “the irony for a com­pany like Lucent . . . is that it could have used the speculative stock market of the Internet boom to sell stock on the market to pay off debt or augment the corporate treasury.”48 But that would have been antithetical to the financialized system of U.S. capitalism.

The Advantages of Sweden’s National Capitalism

In his classic 1965 book Modern Capitalism, Andrew Shonfield tried to make sense of the distinctly different flavors of capitalism that had evolved in the post–World War II era, including the German model, in which large banks played a key role in allocating investment, the Japanese model of state-led industrial policy, and the American and British models of largely free market capitalism, albeit leavened with a growing social welfare state.49 These varieties have led to different outcomes for telecommunications equipment competitiveness.

A 1991 International Trade Commission (ITC) study, commissioned by Congress in response to its prescient concern that the divestiture of AT&T would reduce U.S. competitiveness, stated:

[The] causes of this problem include the quarterly demands of stockholders, an overabundance of managers trained in finance rather than engineering, and differences in company structure. In general, members of the industry said that firms with long planning horizons and little pressure from stockholders for immediate profits would be more competitive in the long run because these firms would be able to invest more in research and development and would enjoy more flexibility in marketing strategies.50

The report went on to note that “Japanese and some European firms are willing to sacrifice immediate profits in the expectation of obtain­ing much larger profits in the future in these less developed nations.”51

Nowhere was that more evident than at Ericsson during the 2001–2 crisis. Ericsson was started in 1876 by a mechanic named Lars Magnus Ericsson, and he began producing telephones two years later, but only because Alexander Graham Bell had failed to obtain a patent in Sweden. Helped by Swedish government support and modest in­dustrial espionage against Western Electric (including alleged patent infringement), Ericsson emerged as a viable competitor and grew considerably over the years.52

With the telecom equipment crash of 2001, Ericsson’s sales also took a hit. But it emerged from the crisis to become the global leader, at least until Huawei’s rise. This was not just a case of Ericsson being fortunate enough to have a visionary CEO; it had to do with how the company was financed.

The origin of Ericsson’s financial advantage can be found in the late 1920s, when Ivar Kreuger, the famous Swedish “match king” and international financier, was able to acquire a majority ownership stake in the firm. Ultimately, Krueger’s house of cards collapsed (he fa­mously shot himself in a Paris hotel), and the Swedish government stepped in to save Ericsson. As part of the deal, ownership passed to three major institutions: a major Swedish Bank; Sweden’s Wallenberg family, one of the richest families in Europe; and ITT, which had acquired shares in dealing with Krueger.53 But under Swedish law, ITT could only buy class B shares with few voting rights. The two main Swedish entities owned class A shares with as much as twenty times the voting control as class B stock.

As recently as 2000, Ericsson was 51.4 percent foreign-owned, but foreigners had only 1.2 percent of the votes. Even today, the bank and the Wallenberg family own most of the company’s voting stock.54 This arrangement allows the company to focus on long-term value creation. Indeed, as David Bartal recently noted in his study of the Wallenberg family, “they act in the long term and have not succumbed to chasing after profits for each quarter of the financial year.”55 Bartal goes on to observe that “the Wallenbergs could cash in their chips at any time, as most other wealthy and powerful families have done. Nothing stops them from selling off and moving somewhere with a better climate than Sweden, and lower taxes.”56 But they don’t because they and the bank are committed to the economic welfare of Sweden. This is presumably why, when asked in 1996 if his family has too much power, family head Peter Wallenberg replied, “what is bad about that? Is there not value in somebody hanging around when times are poor?”57

And indeed, that is exactly what Ericsson did, even with a drastic decline in sales in 2001 and 2002 that led Ericsson CEO Kurt Hellstroem to complain, “it’s so gloomy it’s almost unbelievable.” Ericsson cut far less than Lucent and downsized in a deliberate way that left its organizational capabilities intact. While its sales fell by 49 percent from 2001 to 2003, its R&D employment fell by only 34 percent. Ericsson’s view was that they would suffer whatever finan­cial losses were needed for them to emerge as the industry leader. As Hellstroem stated, “we are the main player. We’re going to be the last one to give up.”58 So rather than take the advice of U.S. stock analysts to “make the swift, necessary cuts to return to profit,” Ericsson kept more of its core capabilities, including key technical talent, in order to take advantage of the inevitable rebound. And it did that because its controlling shareholders—the bank and the Wallenberg family—took the long view.

Antitrust Orthodoxy…

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