Margins during the second quarter of 2020 are expected to be negative.
Networking and telecommunications company Ericsson has increased its footprint in China through 5G contract awards from all three major operators in China.
The market position is important for Ericsson as it makes “strengthens” its position in the 5G market. According to Ericsson its “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,” stated Ericsson. “However, the margins during the second quarter of 2020 are expected to be negative due to high initial costs for new products.”
In the first quarter of 2020 earnings report Ericsson has “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,” stated Ericsson. “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,” stated Ericsson.
The announcement comes off the back of media reports that Ericsson was chosen by and Nokia as 5G RAN vendors.
“Ericsson said that will use the vendor’s Radio System base stations and Ericsson’s 5G core, including its 5G Evolved Packet Core. Chunghwa Telecom,” states the article.
It was reported that “Taiwanese operator Chunghwa Telecom became the first telco in Taiwan to receive a license for 5G services, the National Communications Commission”.