Swedish telecom-gear maker Ericsson is likely to benefit from its presence in China’s 5G market despite a more than $100 million asset write-down from its China operations in the second quarter, industry analysts told Caixin.
Ericsson AB flagged a major loss in its second quarter earnings of around 1 billion krona ($109 million) due to asset write-downs of pre-commercial product inventory for the Chinese market. The cost will be reported in its “Networks” segment, which is likely to make a loss in the second quarter of this year due to high initial costs for new products, the global telecom giant said in a statement released early Monday.
“The write-off is likely related to early give-away of 5G equipment to the Chinese telecom operators for the early-stage trial network building, in order for them to compete with Huawei and ZTE and secure market share in China,” Edison Lee, a telecom analyst at investment bank Jefferies & Co., told Caixin.
Prices for 5G equipment pricing are low in China due to stiff competition with homegrown players such as Huawei and ZTE. However, it is important for Ericsson to maintain presence in China given the size of its market, which could help lower unit costs in the long run and improve Ericsson’s competitive ability, especially for large-scale 5G rollout in other parts of Asia, Lee said.
Ericsson won 5G contracts from all three of China’s major state-owned telecom operators in 2020. China Mobile, the largest, disclosed in March, that Swedish company had won about 11% of its 5G base station purchases for 2020. The other two, China Unicom and China Telecom, announced in April that Ericsson ranked third behind Huawei and ZTE in their bidding results, although neither operator disclosed the companies’ exact shares.
Ericsson’s 11% share of China Mobile’s 5G market is nothing to sniff at, according to IDC senior research manger Cui Kai. China would make up most of the world’s total 5G investment in 2020, IDC predicted before the pandemic. In its wake, many countries will invest less in 5G due to economic pressure, while China is likely to invest more amid its “New Infrastructure” campaign, the industry expert said.
“The overall 5G business in China is expected to have a healthy profitability and is in line with our plans,” and Ericsson will maintain its existing financial targets for 2020 and 2022, the company said in the Monday statement.
The company had previously warned in its first quarter report that an increasing share of strategic contracts was expected to hurt profitability in the second quarter, primarily due to negative gross margins in China.
Ericsson shares closed down 1.46% at $9.48 Monday in New York.
Yang Ge and He Shujing contributed to this report.
Contact reporter Isabelle Li (liyi@caixin.com) and editor Gavin Cross (gavincross@caixin.com)
