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

Swedish kit vendor Ericsson is writing-down the value of its Chinese inventory by around a billion krona in Q2 2020.

Considering the growing tensions between China and the west, Ericsson was understandably proud of its ability to get a piece of the 5G action at all three major Chinese mobile network operators. This latest news, however, indicates the vendor had to seriously drop its pants on price to secure the business. We don’t know if Ericsson is charging less than its competitors for the work, but the suddenness of this write-down indicates a last-minute and unanticipated price adjustment.

“In the Q1 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,” said the announcement. “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 simple conclusion is that Ericsson having to discount each piece of kit, on average, by a billion krona divided by the amount of kit it’s flogging in China. “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,” concludes the announcement.

Well that’s nice isn’t it? They do expect to make a profit in China eventually, so no worries. China is the world’s biggest telecoms market by some way, so its operators are in a strong negotiating position thanks to their exceptional spending power. Ericsson’s mid-term targets remain unchanged, but some investors may start to wonder whether the cost of doing business in China is worth it. Ericsson’s shares were down 2% on the news, at time of writing.

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7 comments

  1. Avatar Colin Barnes 08/06/2020 @ 2:20 pm

    Then they should leave China as they are not competative enough and Huawei has much better equipment>

    • Avatar Guillaume 09/06/2020 @ 11:47 am

      It’s difficult to compete with a State Subsidized Company.

      • Avatar G.C. 09/06/2020 @ 11:41 pm

        There may be research investments, but other countries invest in R&D too. It’s normal.

        The advantage is the complete supply chain. It just cost less and more efficient. Why do you think other companies set up factories in China?

    • Avatar Frank Tiernan 09/06/2020 @ 6:18 pm

      Tell us how They have way better equipment

  2. Avatar Gary setiadi 09/06/2020 @ 2:35 pm

    India is an even way more competitive market for vendors in terms of pricing pressure. They have had major consolidation of market in recent years as Telecom operators went bankrupt. The 3 remaining operators Jio, Bharti and Vodafone are not profitable. Expect Ericsson to lose more money upfront in that market and hope to recoup profits over time

  3. Avatar Saab 09/06/2020 @ 2:51 pm

    all those international investors buying into jio Reliance will get burned badly because as soon as the freebies are gone the Indian customer will start skimping on their usage of the jio platform making profits meagre for the company

  4. Avatar persius 09/06/2020 @ 5:26 pm

    They would have to make up the these losses in other markets. Ericsson gears are a greater competition to Huawei and are more reliable going by legacy Radio technology.

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