Ericsson said it will write down approximately SEK 1 billion worth of pre-commercial product inventory for the Chinese market in the second quarter. This will be reported under the Networks segment and will affect the gross margin. The vendor still expects the Chinese 5G business to be profitable over time and maintained its financial targets for 2020 and 2022.
In its first quarter report, Ericsson had warned that that an increasing share of strategic contracts was expected to weigh negatively on profitability in Q2, mostly caused by a temporary negative gross margin in China. The vendor has increased its footprint in China through 5G contract awards from all three major operators there, it said.
Ericsson said that its 5G business in China is expected to have healthy profitability over the life of the contracts, but that margins in the second quarter of 2020 are expected to be negative, because of high initial costs for new products. It will write down around SEK 1 billion worth in pre-commercial product inventory for the Chinese market in Q2.
The vendor says the strengthened market position is strategically important as it will generate scale advantages and strengthen Ericssons position in the world’s largest 5G market, which is expected to be an important driver of critical future requirements and new feature developments.
While the deployment of 5G in China will continue to be dilutive to the Networks segment's gross margin in the short term, it should contribute positively to gross and operating income from the second half of 2020, and in line with the business plan, should be profitable over time.
With current visibility, Ericsson is maintaining its financial targets for 2020 and 2022.
