When China Mobile announced the results of its latest round of contract negotiations for the manufacture of 230,000 5G base stations in April, Ericsson won 11.5% of the contracts, whilst Nokia – which previously secured around 6% of business in China Mobile’s first phase of its 5G roll-out – got nothing.
Ericsson beat out Nokia for the percentage of the tender that went outside of China, with $4.6bn of an estimated $5.2bn going to Chinese companies, most notably Huawei (57%) and ZTE (29%).
And Ericsson has made much of this success, and in a statement released today it said that it had improved its position in China over the last 12 months.
“The strengthened market position is strategically important for Ericsson as this will generate scale advantages and strengthen Ericsson’s position in the world’s largest 5G market, which is expected to be an important driver of critical future requirements and new feature developments,” the release said.
However, included in the Q1 2020 earnings report was the news that the initial gross margin of the 5G contracts in China is negative, due to high initial costs for product introduction. This has forced Ericsson into asset write-downs of SEK1bn ($108.5m). This news saw Ericsson’s share price drop from SEK88.40 to SEK86.16 when markets opened today.
“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,” the release said. “In addition, the second quarter will be impacted by a cost of around SEK1bn related to asset write-downs of pre-commercial product inventory for the Chinese market.”
Despite the asset write-down, though, Ericsson says that its Chinese business is “expected to contribute positively to gross and operating income from the second half of 2020”, which is in line with Ericsson’s business plan, and will be profitable over time.
However, as governments around the world look to disaggregate their 5G networks, so they can move away from a reliance on single vendors such as Huawei, it’s unlikely that Chinese contracts will continue to be awarded to western companies if the majority of western companies freeze Huawei out of the picture.