THE SONY-ERICSSON ENDEAVOUR1
PART I

by
Jon Sigurdson
Working Paper No 190
April 2004






















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Telephone: +46 8 736 93 60 Telefax: +46 8 31 30 17 E-mail: japan@hhs.se Internet: http://www.hhs.se/eijs

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Working paper
April 7 2004
Jon Sigurdson








The Sony-Ericsson Endeavour2
Part I









2 This working paper was prepared while Visiting Professor at the Institute of Innovation Research of
Hitotsubashi University in Tokyo which provided superb conditions for my research interest on structural
changes in the sector of Information and Communication Technologies ( ICT) in Japan. I am greatly indebted to
staff of the Sony Strategic Institute (SSI) who supported my work on the Sony Ericsson joint venture. In
particular I want to thank Mr. Hiroyoshi Furutachi, Mr Takayuki Fujikawa, both of SSI, and Professor Seiichiro
Yonekura who introduced me to SSI. This version should be seen as a preliminary entry for an in-depth case of
Sony Ericsson Mobile Communications, and all errors and lack of understanding of this complex joint venture
remain solely with the author.

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Abstract
Two losing teams in mobile telecommunications entered into loose talks in the summer of
2000 to join forces – for Ericsson to cut its dreadful losses and for Sony to re-enter the global
arena in mobile handsets. Serious discussions followed by the end of the year, although real
planning for a full-scale joint venture started only after a Memorandum of Understanding had
been signed in April 2001. The two companies brought together complementary resources and
made bold statements at the start on October 1 2001. This paper discusses the background and
partially covers the implementation process. Sony has been able to considerably broaden its
platform for mobile communications which it considers of great significance for its future
presence in advanced electronics consumer products and systems. Ericsson has
simultaneously departed from consumer products and focused its strategy on mobile
infrastructure.

JL: L21, L22
Keywords: mobile telecommunications, Sony, Ericsson, joint venture, technology strategy,
supply-chain-management (SCM)







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Table of contents

Summary _____________________________________________________________________ 4
Creating a Successful Joint Venture _______________________________________________ 5
Introduction___________________________________________________________________ 9
Sony Background ___________________________________________________________________ 10
Major changes in organization _______________________________________________________ 12
Ericsson Background_________________________________________________________________ 19
Sony Entries into Mobile Communications ________________________________________ 23
Soft Alliance with Qualcomm, and Soft Alliance with Siemens________________________________ 23
Ericsson in Mobile Handset Business _____________________________________________ 26
Early Success in Handset Technology____________________________________________________ 26
Origin of Losing Markets _____________________________________________________________ 28
Exit Options________________________________________________________________________ 29
The creation of Sony Ericsson Mobile Communications______________________________ 33
Ericsson and Sony entering into Negotiations______________________________________________ 33
Consolidation_________________________________________________________________ 36
Sony-Ericsson design approach in Japan _______________________________________________ 37
Supply Chain Management__________________________________________________________ 38
Technology Transfer - Handset Technology and the role of EMP ____________________________ 39
Sony Partnership with NTT DoCoMo _________________________________________________ 41
Conclusions __________________________________________________________________ 44
References ___________________________________________________________________ 45



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Summary
This paper is a first attempt to analyse the creation of Sony Ericsson Mobile Communications
that was established on October 1 2001. The paper incorporates different strands of
information. The objective is to understand not only the process as such but also preconditions
and the momentary outcome for this joint venture.

Two losing teams in mobile telecommunications entered into loose talks in the summer of
2000 to join forces – for Ericsson to cuts its dreadful losses and for Sony to re-enter the global
arena in mobile handsets. Serious discussions followed by the end of the year, although real
planning for a full-scale joint venture started only after a Memorandum of Understanding had
been signed in April 2001. The two companies brought together complementary resources and
made bold statements at the start on October 1 2001. Managers from both companies stated
that Sony Ericsson Mobil Communications would become a market leader and regain the
marker shares that Ericsson has disastrously lost in the preceding years. They also stated that
the new company would become profitable during its first year of operation. Despite the
explicitly stated goals the company did not become modestly profitable until the end of a two-
year period – and only after the parents had contributed another US$500 million.

The working paper details the background of the two companies and their earlier perspectives
on handset business and also provides partial information on the creation process and the
following stages of implementation and consolidation. Available information indicates that
the joint venture required considerable time to handle cultural gaps such as differences in
corporate values and differences in business orientation. Such cleft appeared in divergence on
key issues such as supply-chain-management, possibly accentuated by Ericsson late-in-the-
day transfer of large manufacturing facilities to Flextronics, and in the domain of technology
transfer. These issues are now in the process of being fully sorted out. In looking at the
present situation of Sony Ericsson Mobile Communications tentative conclusions include the
following ones. First, different types of cultural gaps must be addressed an early stage.
Second, considerable time is required to identify mutual shortcomings and hidden agenda.
Third, stated goals must be matched with available resources. Fourth, stated goals must be
supported by relevant strategies.

In sum, Ericsson has been able to release itself from a loss-making activity and can
concentrate on its future in mobile infrastructure for which it will benefit from the joint
venture being deeply and directly involved in a demanding and rapidly changing market for
advanced consumer products. Sony has been able to considerably broaden its platform for
mobile communications which it considers of great significance for its future presence in
advanced electronics consumer products and systems.

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Creating a Successful Joint Venture
The formation of Sony Ericsson Mobile Communications was from both sides influenced by
strategic, organisational and financial considerations, which strongly affected the organisation
of the joint venture and the resources that were transferred from partners. The choice of
partners in a major way influences the relations between partners. Various considerations also
continued to influence relations between partners and the joint venture. See figure.


Sony Ericsson JV Relationships






Ericsson
Choice of Partner
Sony







Relations between

Partners


Relationship
Relationship

between Partner
between Partner

and JV
and JV





JV

Sony Ericsson Mobile
Culture
Synergy

Communications










Adapted from Gabriel, Jessie & Svedlind, Maria, Ettlyckligt äktenskap får sin bekräftelse i det gemensamma
åldrandets endräkt – En fallstudie av Sony Ericsson Mobile Communications, Södertörn University College,
May 2002

There are a number of reasons for partners to establish a joint venture. They include both
stated and observed goals such as technology exchange, risk reduction, international
expansion, and various financial goals. Resources transferred to a joint venture include both
tangible and intangible assets, as well as organizational capabilities. The first ones include
physical and financial means while intangible assets technical knowledge and patents,
company reputation and brand name, and also organizational morale. A major advantage of
JVs is the pooling of resources the responsibility of which has barely been addressed in the
empirical literature as a critical feature of success. However, there is no doubt that the flow of
resources from partners constitutes a critical dimension of JV performance.

Both sides in the Sony Ericsson endeavour strongly perceived a complementarity, with
significant synergy effects, would be created by establishing the joint venture. It is natural that
there exist greater possibilities of success when resources, management capability and other
resources are matching. The initial success of collaboration can be judged by different criteria
such as strategic positioning, matching resources, and matching management styles.


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First, the potential partners must initially have a good mutual understanding of strategic goals
of their collaboration, which requires an understanding of both short- and long-term
objectives, although it is not necessary that partners have identical aims. Second, each partner
must contribute, aside from financial resources, knowledge or other resources that
complement each other. An obvious beneficial relationship is where one partner provides
technological competence while the other contributes with marketing skills. Third, there must
exist a common understanding on both sides that their management styles are not exclusive.

Ericsson was not only in dire need of good sales people but also top managers who
understood customer preferences and needs. Not being able to mobilize management for a
recovery of the handset division within Ericsson a joint venture with Sony was seen as an
attractive solution, as Sony was the customer company par preference in electronics. However,
the joint venture was forged by two trailing teams. Sony had failed in handsets on two earlier
occasions and was under pressure to find a new hopefully successful approach. The equal
partnership between the two companies may not have been ideal, as it may have created
uncertainty about which partner makes decision on critical issues. Compounding this
uncertainty was the creation of a new brand name and a logo which it took long time to
become recognized in important markets.

Many joint ventures fail or have to be transformed and the reasons are manifold of which the
cultural dimension is only one factor. Initially both companies allocated staff that would be
responsible for cultural integration, while in early 2002 this duty was fully taken over by an
Ericsson staff member that approached three issues – cultural awareness, cultural change and
managing the JV culture3.

Management styles show differences in culture even for companies within the same nation,
and differences become more pronounced when partners originate in different countries, even
if companies are as internationalised as Sony and Ericsson. Thus the partner in a transnational
joint venture have to adjust not only to corporate differences but also to national differences
which requires exceptional attention on how handle these disparities once the partnership has
been established. Success would require not only strategic complementarity but also cultural
similarity which must be achieved in an early phase of the partnership.

It has been important to create a feeling among all staff at Sony-Ericsson that they have a
common goal and the vision should be to move upwards from a market position of number six
– to five – to four and eventually become a number three supplier in the global market for
mobile handsets. This strategy is very different from the earlier Ericsson handset division
where the ambition and vision was to be at the very front – at least on technology
development. The temporary ambition of Sony-Ericsson is to be a follower in a market where
its global share still remains close to 6 per cent. The company would also become a close
follower of Sony in introducing camera functions and games.

Joint ventures offer partners the prospect to pool their resources to achieve jointly what
neither of them could do by themselves. However, a recent assessment made in 2001 indicates
that the success rate is at 53% only slightly higher that it was a decade earlier4. A number of
studies have drawn attention to well-known reasons for failures which include wrong

3 Gabriel, Jessie & Svedlind, Maria, Ettlyckligt äktenskap får sin bekräftelse i det gemensamma åldrandets
endräkt – En fallstudie av Sony Ericsson Mobile Communications, Södertörn University College, May 2002
4 Bamford, James & Ernst, David & Fubini, David G., Launching a World-Class Joint Venture, Harvard
Business Review, February 2004, pp 91-100

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strategies, incompatible partners, unbalanced or unrealistic deals and weak management.
These issues remain serious challenges although more than 5,000 joint ventures have been
started worldwide during the past five years5

An early study of manufacturing joint venture established during the 1980s showed that
balanced-partner responsibility eases the development of the synergies that the partners look
forward when creating the joint venture6. It will also add to cooperation, trust and
commitment. However, a serious dilemma may still be faced by partners who may share a
range of resources under a balanced-partner responsibility scheme. The associated expectation
of high goal achievement and a high level partner involvement in the joint venture also offer
the seeds of conflict. It is obvious that a joint venture will lessen the individual partner control
and that the intricacies of joint management may not only be costly but also time consuming.

Managerial perception of partner satisfaction, or partner goal achievement, has become the
most frequently used measure of JV performance, as objective financial measures are
problematical alternatives7. However, the success criteria of one partner are often different
from the other partner, and independent measures of success cannot be the principal measure.
In order to achieve objectives a joint venture may often be characterized by the fact that
decision-making and control of JV resources is shared between partners and with JV
management.

In the creation of the Sony Ericsson Mobile Communications a number of partner objectives
were explicitly stated while others were only implicitly understood, and in all likelihood
agreed upon. Stated objectives included market leadership, a substantial share of the global
market for mobile handsets and joint venture profits already during the first year of operation.
While none of these objectives were realised within the time frame given other partner
objectives have been realised. Ericsson has through the joint venture cut is serious losses,
retained a noteworthy market position. Furthermore, attractive design has become a hallmark
of Sony Ericsson handsets. Simultaneously Sony has gained access to important markets
outside Japan and also access to needed technology, although uncertain if this latter
expectation has been fully realized. See table..

However, scanty evidence indicates that supply chain management issues caused serious
problems which are understandable given the fact that Ericsson shortly before signing the
Memorandum of Understanding with Sony transferred basically all handset production
facilities to Flextronics. Further problems was caused by failure to reach stated objective of
global market share, with associated plans, that later on caused a serious slackness in the use
of available resources in product development.


5 ibid.
6 Pearce II, John A. & Hatfield, Louise, Journal of Business Venturing 17 (2002), pp 343-364
7 ibid.

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Sony Ericsson
Partner objectives


- market access
important outside Japan

- market retention(capture)

important
- reduction of losses

important
- attractive handset design

Important
- technology access
Important




Partner stated goals


- market leader
X
X
- market share
X
X
- time frame for profits
X
X



Forgotten issues


- supply chain management
Overlooked

- technology transfer
Not completely worked out

- resource slackness
Result of not reaching stated
Result of not reaching stated
goals
goals




It is too early to make a full assessment of the results of Sony and Ericsson pooling their
resources in handset business, as both explicitly and implicitly stated objectives must be
addressed8. Identifying the conditions for success in establishing a joint venture – by drawing
on the Sony-Ericsson experience - remains elusive as many important factors are not yet
known. However, timing and knowing your partner are essential factors. A renewed strong
leadership could have recovered control of Ericsson handsets. With this possibility ruled out a
better joint venture outcome could have been achieved if initial contacts between the two
companies had resulted in an earlier partnership and also given more time to identify more
clearly the advantages and shortcomings of each other.

8 At the time of finalising this working paper in early April 2004 an article in the Business Week suggested that
“Sony Ericsson has found its groove”. The same article reported that “quantum leap in features and aesthetics
helped London-based Sony Ericsson sell 27 millions phones last year, up from 23 million in 2002. The company
announced its first profit, a modest $72 million, in the third quarter of 2003. For 2003 as a whole, Sony Ericsson
booked sales of $5.9 billion, up 12%.” (Andy Reinhardt, This High-Tech Marriage is Working, Business Week,
April 12 2004)

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Introduction
The business landscape abounds with failures in capturing synergies and financial rewards
from mergers and acquisitions. Creating joint ventures from pooling existing resources and
integrating management structures from two different partners is no less challenging. A
number of studies have revealed the difficulties and how to solve the problems in creating
joint ventures. Almost all such studies and based on samples of joint ventures and have
attempted to measure the outcome by using different types of methods.

However, few studies exist which attempt to describe the process stages of forming a joint
venture and how resolution of differences and conflicts is done. This paper is a first
instalment in understanding the situation at Sony and Ericsson before Sony Ericsson Mobile
Communications was created in 2001 and its subsequent development for which only
fragmentary information and insights are presently available.

The following case study is not a piece of theoretical research but an empirical study of a
number of activities and views, primarily within Ericsson, that shed light on the background
on creating Sony Ericsson Mobile Communications on October 1 2001, and its subsequent
challenges in meeting its stated objectives. It is the expectation of the author that not only will
this working paper explain some of the intricacies of constructing the joint venture but also
inspire for further research and possibly an in-depth case study of the Sony Ericsson JV9.

The ambition is to highlight two different perspectives. First, my discussion highlights the
adjustment of two major companies who want to remain key actors in a rapidly evolving
global market for telecommunications equipment and services. Second, the investigation also
shows that the two partners although soon realizing that initially stated objectives were not
fulfilled are possibly achieving long term strategic objectives that were only implicitly
clarified at the time of joint venture creation. However, this initial case study of Sony
Ericsson Mobile Communications also offers an important lesson as it suggests that the two
partners did not carry out due diligence and/or did not have the time to fully realise the
immediate constraints in their joint endeavour.

Early contacts between Sony and Ericsson were set in motion in mid-2000 to explore the
possibilities of joining forces in mobile communications. Ericsson and Sony have been facing
serious strategic challenges in the early 2000s. Ericsson assumed that 3G mobile
telecommunication would rapidly replace the 2G systems without any downturn in operator
demand for new equipment. However, the reality turned out to be very different at a time
when Ericsson had already suffered great losses in its mobile handset business. Subsequently
Ericsson attempted a turnaround for its handsets by a major outsourcing of production but was
forced to find a partner for its handset division in order to concentrate its forces on the
restructuring of the company with a distinct focus on mobile infrastructure.

Sony was at the time facing fresh changes for its consumer products where the company at the
time suffered from a drastic reduction of profits. At approximately the same time Sony also
realised that the company had ignored the rapid evolution of flat display TV sets and the
importance of having a more direct control of semiconductors that were used in Sony

9 The working paper is based partly on published sources, although much information and insights is extracted
from a number of interviews in Sweden and Japan for which most of the sources remain anonymous.

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Document Outline

• Summary
• Creating a Successful Joint Venture
• Introduction
  • Sony Background
    • Major changes in organization
  • Ericsson Background
• Sony Entries into Mobile Communications
  • Soft Alliance with Qualcomm, and Soft Alliance with Siemens
• Ericsson in Mobile Handset Business
  • Early Success in Handset Technology
  • Origin of Losing Markets
  • Exit Options
• The creation of Sony Ericsson Mobile Communications
  • Ericsson and Sony entering into Negotiations
• Consolidation
  • • Sony-Ericsson design approach in Japan
    • Supply Chain Management
    • Technology Transfer - Handset Technology and the role of EMP
    • Sony Partnership with NTT DoCoMo
• Conclusions
• References

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