Ericsson Gains Momentum In China, Writes Down Its Assets

Europe's Ericsson sharpened its market share in China after being awarded 5G contracts with all three major telecommunications operators in the country. The strengthening of the company's position in the Chinese market is expected to generate healthy profitability for Ericsson.

Ericsson announced that it has increased its market position in China through the award of 5G contracts from three major operators in the country. The strategy was deemed a significant move for the company in generating scale advantages and, at the same time, strengthening its hold on the world's largest 5G market.

China was said to be a crucial driver of critical future requirements in the 5G market and would create better developments in the technology sector. Overall, Ericsson's business in China was expected to generate higher profits in the duration of the contracts. The margins from the second quarter of 2020, however, indicated that there might be a negative yield due to high initial costs of establishing new products.

During the first quarter of Ericsson's 2020 earnings report, there was a showing of increased share in strategic contracts. They were said to weigh negatively on profitability for the second quarter of 2020 due to temporary negative gross margin in China.

Furthermore, the second quarter was also adversely affected by the cost of around one billion SEK. These pertained to asset wire-downs of pre-commercial product inventory of the company in the Chinese market. The said costs would be reported subsequently in its segment Networks. This would adversely impact the gross margin of the market.

The deployment of 5G services in China was also perceived to be consistently dilutive to Segment Networks gross margins in the short-term. The result is expected to contribute a positive remark to gross and operating income of Ericsson from the second quarter of 2020. Still, the company might expect higher profitability in the months to come.

Ericsson also announced that it observes current visibility for maintaining its financial targets for the years 2020 and 2020. The Swedish telecom giant would grant a supply base station for its hardware and software to China.

For China Mobile, Ericsson would be responsible for 11.5 percent of the 5G contract. The award rendered Ericsson as the only non-Chinese company to a share of China Mobile's work. Huawei had the largest share with 57.2 percent, while ZTE only took 28.7 percent. Additionally, CICT had 2.6 percent, while Finland's Nokia was rejected from the bid.