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UPDATE 2-Ericsson job cuts hit Sweden hard as network challenge persists

* Innovation in Cisco tie-up slower than expected, exec says

* Ericsson struggles to offset declining mobile tower demand

* Company repeats it does not need big M&A deal

* To recruit about 1,000 R&D jobs over three years

* Share price largely unchanged as cuts confirm speculation (Adds executive comments on state of Cisco partnership)

By Olof Swahnberg and Helena Soderpalm

STOCKHOLM, Oct 4 Ericsson is cutting about a fifth of its Swedish workforce and hundreds of consultants as demand for its network equipment shrinks and competition from China's Huawei and Finland's Nokia intensifies.

The 3,900 job cuts remove most of Ericsson's remaining manufacturing presence at home, where it had 5 percent of global production, and come before it has found a new chief executive to replace Hans Vestberg, who was pushed out in late July as major investors revolted over the Swedish firm's performance.

Failure to offset waning demand for telecom equipment has caused Ericsson shares to lose a quarter of their value this year and politicians and unions had scrambled in recent weeks to save jobs at the company, which was founded in 1876 as a maker of telegraph equipment and is one of Sweden's biggest employers with a global staff of 116,500.

"It is a knife in the heart," Swedish Enterprise Minister Mikael Damberg said on Tuesday. "I feel for the affected families and municipalities."

Ericsson still has the backing of prominent Swedish investors, the Wallenberg family-backed Investor and Industrivarden, but is under growing pressure for being too slow to take full advantage of the global explosion in data traffic, enterprise networking and cloud computing.

Last year, the company joined forces with U.S.-based Internet router maker Cisco to fill a gap in its product line and sell combined network solutions to bolster sales.

But the partnership has yet to announce any major sales breakthrough and some investors have expressed concern over whether the collaboration will deliver.

Ericsson's deputy head of strategy Mikael Back said new product innovation was a bit slower than anticipated although the partnership was going largely according to plan.

"A little bit of what I think people are disappointed about is that the creation of fantastic new things is taking a longer time than we had expected," Back, who has served as deputy head of Ericsson's strategy for over four years and first joined the company in 1994, told Reuters.

The Cisco tie-up is a test of Ericsson management's claim that it does not need a big merger to match Nokia's acquisition of Alcatel Lucent.

"There isn't a silver bullet which can solve everything," Back said when asked about big M&A, adding that organic growth remained at Ericsson's core.

Ericsson and Cisco aim to generate an extra $1 billion in sales apiece by 2018 by integrating IP and wireless solutions and collaborating to create new products, an ambition acting CEO Jan Frykhammar said still stands.

PIGGY BACKING?

In its quarterly report in July, Ericsson said that through its partnership with Cisco more than 30 deals had been closed to date, a good start towards reaching its 2018 sales target.

However, some worry about the lack of real sales figures to prove the partnership is working.

"It is difficult to say what it generates sales-wise, if Cisco helps and sells or if they just piggy back on Ericsson," said Inge Heydorn, a fund manager at Sentat Asset Management which invests in telecom and IT shares globally but currently holds no Ericsson shares. "Because this is not known...there is definitely a concern."

One former high-ranking manager at Ericsson, who spoke on condition of anonymity, said he sees problems with the partnership as both firms sell directly to some key telecoms operators and sales cooperation is difficult.

A more limited fixed line partnership with Cisco in 2004 failed to generate any real value due to disagreements between sales forces, he said.

Back said this time both firms had been working on better cooperation.

"For the team out in the field, it may not be natural to cooperate from day one, so we must push them and Cisco must push them. But I think we saw that problem very early," he said.

Ericsson said in addition to 3,000 job cuts in production, research and development and sales, 900 consultancy positions will go. But to soften the blow, it will hire about 1,000 researchers and developers in Sweden over the next three years.

In July, Ericsson said it would step up efficiency measures due to a tough market, having already announced a 9 billion Swedish crown ($1.1 billion) cost-cutting programme in 2014. (Additional reporting by Johan Sennero and writing by Mia Shanley, Editing by Mark Potter and Alexander Smith)

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