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UPDATE 3-Ericsson plans cut in China ops on Huawei backlash, flags supply chain issues

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* China sales fall to 3% of total, vs 11%

* CFO says reviewing staffing and offices in mainland China

* Moves come after Sweden banned Huawei from 5G gear

* Sales fall by 3.6 bln crowns in China, total revenue down 2%

* Shares down 0.3%

* Supply chain problems felt towards end of Q3 (Adds comments from CFO, CEO and analysts, shares)

By Supantha Mukherjee

STOCKHOLM, Oct 19 (Reuters) - Sweden's Ericsson announced on Tuesday plans to reduce its operations in China after suffering a big sales drop in one of its biggest markets due to retaliation for Sweden's ban on China's Huawei from selling 5G gear in the country.

The news came as the company reported better than expected third-quarter core earnings boosted by strong sales of 5G equipment in most of the world, offsetting a loss of market share in mainland China and a hit from the global supply chain problems.

Sweden banned China's Huawei from selling 5G gear in the country a year ago and Ericsson has since lost most of its share in the latest rounds of telecom tenders in China.

The proportion of revenue Ericsson earns from China has dropped to around 3% of the total from 10-11%, Chief Financial Officer Carl Mellander said in an interview, offsetting gains made as Ericsson filled the void left by Huawei in several countries as it retreated under pressure from the U.S. government.

Mellander said the decline started in the second quarter and would show as a year-on-year loss until the same period of next year.

China sales declined by 3.6 billion Swedish crowns ($418.14 million) in the third quarter alone and the company is now planning to reduce its sales and delivery organisation in the country.

The reduction in China marks a small retreat for the company that has been in the country for over a hundred years. Chief Executive Borje Ekholm had last month vowed to double down on efforts to regain market share in China.

Ericsson, a rival of Nokia, also said the global supply chain issues had started to bite.

"Late in Q3 we experienced some impact on sales from disturbances in the supply chain, and such issues will continue to pose a risk," CEO Börje Ekholm said in a statement.

The company was not able to deliver certain hardware to its customers due to chip shortage at suppliers, coupled with logistics problems, leading to a drop in revenue, Mellander said.

Shares of the company were down marginally and analysts said that the supply chain constraints could translate into potential upside for next year as demand stayed strong.

Quarterly adjusted operating earnings rose to 8.8 billion Swedish crowns ($1.02 billion) from 8.6 billion a year ago, beating the mean forecast of 7.85 billion, according to Refinitiv estimates.

Securing 5G contracts from all three U.S. telecom firms -- Verizon, AT&T and T-Mobile -- has helped the company to absorb the losses in China.

Total revenue fell 2% to 56.3 billion crowns, missing the 58.14 billion crowns forecast by analysts. ($1 = 8.6258 Swedish crowns) (Reporting by Supantha Mukherjee, editing by Kim Coghill, Kirsten Donovan, Josephine Mason and Louise Heavens)

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