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China's ZTE Delays Earnings Amid Confusion Over U.S. Ban

China -- A Chinese national flag and two flags bearing the name of ZTE fly outside the ZTE R&D building in Shenzhen, April 27, 2016
SAN FRANCISCO/NEW YORK, April 18 (Reuters)

China's ZTE Corp on Wednesday postponed the release of quarterly earnings, saying it needs time to assess the impact of a U.S. order that bans American companies from selling it parts, which could undermine its ability to manufacture equipment.

ZTE, a maker of telecommunications equipment and smartphones, was due to release results on Thursday.

It announced the delay as components makers, wireless carriers, retailers, telecommunications firms and Alphabet Inc's Google, developer of the Android operating system, sought to clarify how they will be affected by the order, announced on Monday by the U.S. Commerce Department.

“There are a lot of companies around the world scrambling to find out what this means,” said Washington lawyer Tim O’Toole, a sanctions specialist whose clients include companies that have done business with ZTE. "It’s rare that you go from A-OK to no transactions overnight.”

Under the order American companies are banned from selling parts and software to ZTE for seven years. The action followed ZTE's violation of an agreement reached after it was caught illegally shipping U.S. goods to Iran.

ZTE said its board postponed a meeting to approve the results while it reviews the order. Trading in its shares has been suspended in China since Tuesday.

American companies are estimated to provide 25 percent to 30 percent of the components used in ZTE's equipment.

ZTE has not responded to requests to describe how it intends to respond to the ban, which a senior U.S. Commerce official told Reuters is unlikely to be lifted.“I never say never," the official said earlier this week. "We’re going to have to see how this unfolds. But there is no provision currently for that to occur.”

The Commerce Department initially banned U.S. companies from selling to ZTE in 2016 after the Chinese company was caught shipping equipment with U.S. components to Iran in violation of U.S. export controls.

ZTE then received a special temporary general license that was extended several times, until it pleaded guilty to the charges in March 2017 and Commerce suspended the ban through March 2018.

Washington has not included any "off ramp" under the terms of this week's order, the official said.The Commerce Department has an appeals process for companies to try to get off the list, but it is unclear whether that would be available to ZTE because the case had been previously subject to a settlement.

Even so, ZTE would have little recourse in the near term because appeals would have to be approved by the Commerce Department's Bureau of Industry and Security, the same agency that issued the ban.

Companies must submit appeals to a committee that would issue a ruling within 30 days, according to the agency's website.


One key area of concern is whether ZTE will be able to continue to sell phones running Google's widely used Android operating system.

ZTE and Google have been discussing the impact of the ban, a source familiar with those discussions told Reuters on Tuesday. ZTE shipped 46.4 million smartphones last year, placing it seventh among Android-based manufacturers, according to research firm IHS Markit.

Google declined comment and ZTE did not respond to requests to comment.

Officials at two U.S. wireless carriers said on Wednesday that they were still assessing how the ban would affect their customers. They declined comment on how they would respond if ZTE is unable to provide Android software updates for phones already used by their customers.

At least one U.S. technology company said the ban would not affect its business with ZTE.

New York-based software firm Taboola Inc, which this month announced it would supply ZTE with technology to personalize news feeds on phones, told Reuters it expects the deal to move forward.

"After careful review of the new U.S. policy, we believe that our relationship with ZTE does not fall within the prohibited activities,” Taboola Chief Executive Officer Adam Singolda said in a statement. “We will continue to monitor the situation closely."

The United States is ZTE’s top smartphone market, accounting for 46 percent of its shipments, followed by China at 24 percent, according to research firm IDC. Most ZTE phones sell for below $300, a low-end segment of the U.S. market, ZTE's mobile chief executive, Lixin Cheng, told Reuters in January.

The company has spent billions of dollars licensing technology from U.S. partners, he said.

(Reporting by Paresh Dave in San Francisco and Karen Freifeld in New York Additional reporting by David Lawder in Washington Writing by Jim Finkle in Toronto Editing by Anna Driver, Steve Orlofsky and Leslie Adler)