Wireless gear vendor Ericsson is hoping the joint mobile phone venture it formed with Sony last week will provide a much-needed reprieve from its market free fall.
The deal came just days after Swedish giant Ericsson posted a first-quarter loss of $485 million and a 51 percent drop in wireless handset sales.
The new company, equally owned by each partner, will be called Sony Ericsson Mobile Communications, but will create a new brand for its products. The companies expect the joint venture to be profitable from the day it opens in October.
Sony and Ericsson have both struggled for a foothold in the mobile phone market. Their most formidable competitor, Nokia, has over the past years propelled itself to the front of the pack, claiming 30 percent of the worldwide handset market, leaving Ericsson with a 10 percent share and Sony with far less.
"Its no secret that we at Ericsson have been looking for possibilities to strengthen our mobile phone business," said Kurt Hellström, president and CEO of Ericsson.
The company claimed that 40 percent of the worlds wireless networks use its equipment.
While some analysts have urged Ericsson to get rid of its handset business rather than let it bring the whole company down, others said such a move isnt really an option during the current migration toward third-generation networks.
"Handsets are a critical component of any 3G deal," said Matt Hoffman, an analyst at Wit SoundView Group. Wireless operators upgrading to 3G networks want their vendors to provide both infrastructure and handsets, and Ericssons weak handset position may have been hurting its ability to score deals. With 26 contracts to supply 3G networks, Ericsson so far has signed the most deals, followed by Nortel Networks and Nokia, according to industry sources.
Even though Ericsson has a larger market share than Japans Sony in mobile phones, Ericssons recent struggles in the weak market gave Sony the upper hand in the joint venture. "There are already murmurings of a full exit by Ericsson," said Andrew Cole, global wireless practice leader at consultant Adventis. He said Sony aspires to become the sole owner of the joint venture.
The Ericsson/Sony deal could be the first of many marriages between East and West. The same day that Ericsson and Sony announced their intentions, Mitsubishi denied reports that it was in talks with Motorola about a similar type of handset joint venture. But Mitsubishi conceded that the companies have discussed such a deal in the past.
In November, Siemens and Toshiba said they would collaborate on the development of 3G handsets, produced under their respective brands.
Asia, especially Japan, has proved to be a hotbed for consumer electronics. European and U.S. handset makers may find they can benefit by combining their radio know-how with strong consumer goods companies.
"We need a deeper understanding of consumer electronics, of entertainment, audio, video and design," Hellström conceded. The match with Sony can fill that void at Ericsson.
Japanese vendors may hope such deals will open doors to the European and U.S. markets.