The predicted deficit is due to asset write-downs of product inventory in China and will reported in Ericsson’s Networks segment, effecting gross margin.
The news follows the company increasing its footprint in China after winning 5G contracts the country’s three major operators.
The increased share of strategic contracts will negatively impact Ericsson’s profitability in Q2 2020, driven by temporary negative gross margin in China.
Ericsson’s strengthened market position will generate scale advantages and bolster the company’s position in the world's largest 5G market.
Despite the temporary impact of inventory write-down Ericsson's 5G business in China is expected to have healthy profitability over the life of the contracts.
Additionally, while the deployment of 5G in China will continue impact the gross margin of Networks segments in the short-term, it is expected to contribute positively to gross and operating income from the second half of 2020.
“With current visibility we maintain the financial targets for 2020 and 2022,” the company stated.
Earlier this year, Ericsson president and CEO Börje Ekholm called on the industry to rethink the future role of networks, saying “more than ever, connectivity is key.”
