Ericsson Strengthens its Position in China

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Ericsson has increased its footprint in China with its 5G contract with three major operators in China. The strengthened market position is important for Ericsson because this will strengthen Ericsson’s position in the world’s largest 5G market, which is expected to be an important driver in critical future requirements.

Ericsson’s 5G business in China is expected to be profitable over the contract life. But, due to high initial costs, the margins during the second quarter of 2020 are expected to be negative.

In the Q1 2020 earnings report, Ericsson said that an increasing share of strategic contracts was expected to weigh negatively on profitability in the second quarter of 2020 driven by a temporary negative gross margin in China. Also, 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, Ericsson maintains the financial targets for 2020 and 2022.

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