Ericsson's gross profit margin in China may be negative this quarter

Ericsson said it expected to write down its inventory of Chinese products by about 1 billion crowns ($109 million) in the second quarter, Reuters reported.

Ericsson said it expected negative gross margins in China this quarter due to the high initial costs of new products. Ericsson had warned in its first-quarter report that a rising share of strategic contracts would affect profitability in the second quarter, mainly due to negative gross margins in China.

According to media reports, China's three major telecom operators - China Mobile, China Telecom and China Unicom - have awarded billions of dollars worth of 5G contracts this year, most of which are to Huawei and ZTE. Analysts at JPMorgan Chase said in a client note that Ericsson's write-down may be related to free products provided to Chinese telecom companies, not a one-off, and needs to be included in gross profit margin estimates.

Ericsson said that while 5G deployment in China would hurt gross margins in the short term, it expected healthy profitability over the life of the contracts.