Ericsson strengthens its position in China and writes down assets
- Ericsson has strengthened its market share in China by winning 5G contracts with all three major operators
- The overall 5G business in China is expected to have a healthy profitability and is in line with our plans
- In line with the planning assumptions included in the Q1 2020 earnings report, initial gross margin of the 5G contracts in China is negative due to high initial costs for product introduction
- In addition, Q2 2020 will be impacted by SEK 1 b. in costs related to asset write-downs of pre-commercial product inventory for the Chinese market
- Group financial targets for 2020 and 2022 remain unchanged
As previously announced Ericsson (NASDAQ: ERIC) has increased its footprint in China through 5G contract awards from all three major operators in China. The strengthened market position is strategically important for Ericsson as this will generate scale advantages and strengthen Ericsson’s position in the world’s largest 5G market, which is expected to be an important driver of critical future requirements and new feature developments.
Overall, Ericsson’s 5G business in China is expected to have healthy profitability over the life of the contracts. However, the margins during the second quarter of 2020 are expected to be negative due to high initial costs for new products.
In the Q1 2020 earnings report we communicated that an increasing share of strategic contracts was expected to weigh negatively on profitability in the second quarter 2020 primarily driven by temporary negative gross margin in China. In addition, the second quarter will be impacted by a cost of around SEK 1 b. related to asset write-downs of pre-commercial product inventory for the Chinese market. The cost will be reported in segment Networks, impacting gross margin.
While the deployment of 5G in China will continue to be dilutive to Segment Networks gross margin short-term, it is expected to contribute positively to gross and operating income from the second half of 2020 and in line with the business plan be profitable over time.
With current visibility we maintain the financial targets for 2020 and 2022.
Ericsson enables communications service providers to capture the full value of connectivity. The company’s portfolio spans Networks, Digital Services, Managed Services, and Emerging Business and is designed to help our customers go digital, increase efficiency and find new revenue streams. Ericsson’s investments in innovation have delivered the benefits of telephony and mobile broadband to billions of people around the world. The Ericsson stock is listed on Nasdaq Stockholm and on Nasdaq New York. www.ericsson.com