Ericsson preps for temporary hit from China 5G contracts

Ericsson’s financial targets for 2020 and 2022 remain unchanged. (FierceWireless)

Ericsson expanded its business in China, having secured 5G contracts with the country’s three major mobile operators, but on Monday said that a planned write-down of assets will result in a cost impact in the second quarter of about SEK 1 billion ($108.6 million).

The asset write-down is for pre-commercial inventory for the Chinese market, according to Ericsson. The Swedish vendor already disclosed during first quarter results that it expected a hit to profitability in the current quarter, based on a larger share of strategic contracts, primarily due to negative gross margin in China. Ericsson attributed that to the high initial costs for new products.  

The asset write-down related cost will impact gross margin and be recorded in Ericsson’s Networks segment.

Further out though, Ericsson expects its 5G contracts in China to have a positive impact on income later this year.

“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,” Ericsson stated in a press release.

Ericsson’s financial targets for 2020 and 2022 remain unchanged.

RELATED: Ericsson wins 5G deals with Chinese operators, Nokia loses out

While much of China’s business has focused on domestic vendors, Ericsson nabbed 5G deals and looked to strengthen its position there.  

In the announcement, the vendor called a bolstered market position in China strategically important, generating scale advantages in the world’s largest 5G market.

Last month China Telecom and China Unicom named Ericsson as 5G radio access network (RAN) vendor for the nationwide 5G rollout. It’s also supplying gear for China Telecom’s 5G core network. China Mobile selected Ericsson for both 5G RAN and 5G core components for the second phase of the operators New Radio (NR) standalone network.

Chinese media outlets reported that vendors Huawei and ZTE scored about 85% of the 5G deals from the three operators, with Ericsson at about 10%. 

Nokia is largely absent, though out-going CEO Rajeev Suri said on the vendor’s earnings call in April that the Finnish firm secured a 5G core deal with China Unicom, as well as virtualized IMS.

In terms of its role with China’s major operators, Ericsson is providing its Radio System products, including dynamic spectrum sharing tech with its Ericsson Spectrum Sharing software.

China Telecom and China Unicom are tapping Ericsson for outdoor and indoor sites, to expand capacity and coverage using spectrum in the 3.5 GHz and 2.1 GHz bands.

The 3.5 GHz 5G radio products will add capacity needed for high call volumes on the shared network build, according to the vendor’s news announcement. In addition to 5G, Ericsson’s 2.1 GHz solutions will support a combination of 3G and 4G deployments as well.