In the Q1 2020 earnings report, Ericsson said that an increasing share of strategic contracts were expected to weigh negatively on profitability in the second quarter 2020 primarily driven by temporary negative gross margin in China.
Overall, Ericsson's 5G business in China is expected to have healthy profitability over the life of the contracts. However, the margins during the second quarter of 2020 are expected to be negative due to high initial costs for new products. In addition, the second quarter will be impacted by a cost of around SEK 1 billion ($108.6 million) related to asset write-downs of pre-commercial product inventory for the Chinese market.
As previously announced Ericsson has increased its footprint in China through 5G contract awards from all three major operators in China. 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.
