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.