Ericsson plays the long game with Chinese 5G contracts

Ericsson signaled further progress with its ambition to be big in China, although it continued to flag that margins will be hurt in the short term as it plays for gains in the longer term.

The Swedish vendor announced on Monday that the initial gross margins of its 5G contracts with the three major operators in China are expected to be negative in the second quarter, although it said the "overall 5G business in China is expected to have a healthy profitability and is in line with our plans."

The second-quarter gross margin will also be impacted by a cost of about SEK1 billion ($108.7 million), "related to asset write-downs of pre-commercial product inventory for the Chinese market." However, Ericsson expects the deployment of 5G in China to make a positive contribution to income from the second half of 2020, and is maintaining its financial targets for 2020 and 2022.

The news caused a moderate dip in Ericsson's share price, from SEK88.40 at the close of play on Friday to SEK 86.46 at 11 a.m. CEST on Monday. It's worth noting that Ericsson's margins have been moving in the right direction in recent months – its overall gross margin was 39.8% in the first quarter of this year, up from 38.4% a year earlier.

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Ericsson has already indicated its intention to target a bigger role in China than it played during the 4G era, and with good reason. As CEO Börje Ekholm said last October, the 4G market in China is "really more than 60% of the global market and we have no reason to believe 5G will be less." (See Ericsson lifts outlook as it targets a bigger role in China.)

The Swedish vendor is also proving to be key beneficiary of the controversy around Huawei, although China-based vendors still have strong support from local operators. (See Goodbye Huawei, hello Ericsson: Swap-out gathers pace.)

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— Iain Morris, contributing editor, special to Light Reading

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