Just as the operator announced a substantial contract win with O2 as it embarked upon a large modernisation programme and extension of its 5G network in the UK, Ericsson is set to take a hit of SEK 1bn in costs related to asset write-downs of pre-commercial product inventory for the Chinese market.
Following the launch of O2’s 5G commercial network in the UK October 2019, the extended partnership with Ericsson includes hardware, software and service upgrades in the west of the UK, bringing greater coverage, voice and data capacity.
The expansion will see products and solutions from the Ericsson Radio System portfolio deployed in the O2 5G radio access network (RAN) across the UK as part of a substantial network modernisation programme in key cities in the country, including Liverpool, Manchester and Cardiff. This will include new multiband and wide-band 5G radios as well as new 5G-optimised basebands to build sustainable sites in preparation for future increases in 5G coverage and capacity.
Ericsson and O2 are also upgrading the existing 2G/3G/4G sites, and developing an innovation cluster as part of a trial platform to evaluate future mobile architecture, technology and systems. An innovation cluster will also be developed as a collaboration platform to evaluate and test future mobile architecture, technology and systems as O2 builds further towards the potential for network migration to 5G Standalone (SA) architecture.
“We are pleased to be moving forward with Ericsson as one of our primary supplier for our 5G roll-out,” said O2 chief technology officer Brendan O’Reilly. “Telecommunications has never been more important in keeping the country connected, and we look forward to bringing the enhanced capabilities of 5G to our customers.”
Arun Bansal, president of Europe and Latin America at Ericsson, said: “5G will be crucial for the UK’s economic recovery and underpin its digital future. We are committed to ensuring that the UK achieves its gigabit connectivity targets so that enterprises and society at large benefit from high quality connectivity. We are delighted to be continuing our long-term partnership with O2 with this 5G network evolution.”
Delighted is almost certainly far from the mood in China. Despite noting that it has strengthened its market share in China, winning 5G contracts with all three major operators, and that its overall 5G business in China is expected to have what it says is a “healthy profitability” in line with the planning assumptions included in its first quarter of 2020 earnings report, Ericsson revealed its initial gross margin of the 5G contracts in the Chinese market is negative due to high initial costs for product introduction. As a result, it warned that in Q2 2020 it will be impacted by SEK 1bn in costs related to asset write-downs of pre-commercial product inventory.
The firm still sees potential in China, noting that it was the world’s largest 5G market, one that is expected to be an important driver of critical future requirements and new feature developments. It added that its enhanced market position would be strategically important as this would generate scale advantages.
The company predicted that while the deployment of 5G in China would continue to be dilutive to gross margin in the short-term, it is expected to contribute positively to gross and operating income from the second half of 2020 and in line with the business plan to be profitable over time.