Ericsson is taking SEK 1 billion loss in 2nd quarter of 2020 in doing 5G business in China

According to an official statement published on 8 June 2020.Ericsson will face a SEK 1 billion loss due to pre-commercial written contract in 2nd quater of 2020, the corporate statement said:

“As mentioned previously, Ericsson has previously announced on 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 Quater1 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.”

Industry watchers try to translate that into what is going on in the Chinese market:

Ericsson reveals cost of doing business in China with €100 million write-down

“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 consinues.

“With current visibility we maintain the financial targets for 2020 and 2022.”

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