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ZTE will be permanently damaged even if Trump reverses the ban



  Trump Helps Chinese Phonemaker Ban

China's ZTE will find it hard to recover from a ban on the purchase of US components, even though the Trump administration casts a controversial lifeline on the technology giant

ZTE [1

9659004] ZTCOF ) which manufactures smartphones and telecommunications equipment, is in a crisis since the US Department of Commerce banned it six weeks ago from buying critical parts from American companies. The department said that ZTE failed to respect an agreement in which it admitted to violating sanctions against Iran and North Korea.

The Trump government has a cautious solution to get the business going again by lifting the ban and imposing other penalties instead. But a backlash from members of Congress has unsettled the outcome.

Whatever happens next, experts say ZTE faces a long list of issues, including billions in lost revenue, tight relationships with key accounts, and a troubled brand.

Related: Businesses become negotiating donations in US-China trade unrest

ZTE, which employs approximately 75,000 people, relies on US technology for their products and refers to chips from companies such as Qualcomm ( QCOM ) and Intel ( INTC ) . The ban brought his factories to a standstill. Shareholders are now deadlocked and the company's Hong Kong-listed shares have been blocked since the ban's entry into force.

Careful Customers

Even if the ban is replaced by a large fine and an overhaul of the ZTE's management, the company is likely to be out of the crisis.

Charlie Dai, an analyst at Forrester, estimates that the disruption will have wiped out between 10% and 20% of ZTE's expected revenues in the current fiscal year. The company had sales of about 109 billion yuan ($ 17 billion) last year.

  zte peking 2
A ZTE building in Beijing

ZTE did not respond to a request for comment on the financial implications of the ban. His latest earnings report at the end of April said it was "still unable to make a comprehensive and accurate assessment or forecast."

The repeated disputes with the US government could hurt the main business of selling equipment such as wireless base stations and fiber optic cables to telecoms operators around the world.

"ZTE may face greater difficulties in gaining new carriers overseas over the next 12 months as customer confidence is lower now," Edison Lee, a telecommunications analyst at investment bank Jefferies, wrote in a research press.

Related Links: ZTE is at the center of the US-China Trade Campaign

ZTE is its main competitor in Europe – Ericsson ( ERIC ) and Nokia ( NOK ) – could benefit from it.

Analysts of Swiss Bank UBS ( UBS ) said that some of ZTE's international customers could buy more from Ericsson and Nokia, even if the ban on the Chinese Company would be withdrawn.

ZTE may be forced to lower its prices to attract new business, UBS analysts said in a note released this month.

The company has many clients in emerging markets in Asia, Latin America and Africa. The ban has already forced some to look for alternatives. MTN

MTNOF ) a major operator in Africa said earlier this month that it was contingency plans "given our involvement in ZTE in our networks

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Damaged Reputation

ZTE also produces smartphones, a business that accounts for approximately one-third of its annual revenue. The top smartphone market is the United States, where it is the fourth largest seller.

Some analysts say the company may have difficulty repairing its reputation.

Mo Jia, a Shanghai-based analyst at research firm Canalys, said ZTE's brand image is "damaged" with consumers and the operators selling its phones.

Some major operators – MTN and Australia Telstra ( TLSYY ) – have already stopped selling ZTE smartphones due to supply issues.

"It will take time for ZTE to recover or repair its partnerships," Jia said.

Related: China's largest tech companies have cause for concern

The company's devices were popped by US intelligence agencies earlier this year. Top officials from the FBI, the CIA and the NSA testified before Congress in February that ZTE and Huawei, another Chinese smartphone maker, pose a security threat to American customers.

Both companies have repeatedly rejected such allegations, but they have experienced other public setbacks, including the Pentagon, which recently said stores on US military bases said they should stop selling their phones.

Analysts expect this pressure to persist, even if the Department of Commerce suspends the ban on supplying parts to ZTE.

"ZTE's smartphone business will face challenges, especially in the US, where ZTE and Huawei continue to be targeted by other government agencies," said Avi Greengart, New York analyst at research firm Global Data.

ZTE has stronger links with US carriers than Huawei. But Greengart predicts ZTE could lose business with other makers of affordable cell phones like Alcatel and LG.

CNNMoney (Hong Kong) First published May 29, 2018: 7:47 pm ET


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