On Monday, Ericsson, Swedish multinational networking and Telecommunication Company, said that they expect to take a second-quarter write-down of about $109 million crowns (1 billion) on product inventory in China. The Swedish telecoms gear maker has previously won 5G contracts from three of China’s major operators.
However, the company said they are expecting negative gross margins due to the high initial costs for new products.
Furthermore, in its first-quarter report, the company had warned that an increased share of strategic contracts in the first quarter will hurt profitability in the second due to negative gross margins.
The shares of Stockholm based companies have gained 7% this year which were down by 2.2% in the early trade.
According to media reports, the three largest telecom operators in China namely China Telecom, China Mobile, and China Unicom have awarded 5G contracts to Huawei and ZTE. These contracts are worth billions of dollars. Nokia on of the biggest European rival won shares of China Unicom’s 5G core network.
The investment bank said that this has always been an issue with contracts in China. They cause gross margin issues so this announcement is not a surprise. Investors are expecting more clarity on the extent of the impact.
Ericsson said that while the deployment of 5G will hurt them in the short term in China. However, it is expected to have healthy profitability over the years. The company has also maintained its financial targets for 2020 and 2022.