U.S. bans American companies from selling to Chinese phone maker ZTE

LONDON/NEW YORK (Reuters) – The U.S. Department of Commerce has banned American companies from selling components to Chinese telecom equipment maker ZTE Corp for seven years after breaking an agreement reached after it was caught illegally shipping goods to Iran, U.S. officials said on Monday.

The U.S. action, first reported by Reuters (reut.rs/2H3p0Vl), could be devastating to ZTE since American companies are estimated to provide 25 percent to 30 percent of the components used in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.

The ban is the result of ZTE’s failure to comply with an agreement with the U.S. government after it pleaded guilty last year in federal court in Texas to conspiring to violate U.S. sanctions by illegally shipping U.S. goods and technology to Iran, the Commerce Department said.

The Chinese company, which sells smartphones in the United States, paid $890 million in fines and penalties, with an additional penalty of $300 million that could be imposed.

“If the company is not able to resolve it, they may very well be put out of business by this. Many banks and companies even outside the U.S. are not going to want to deal with them,” said Eric Hirschhorn, a former U.S. undersecretary of commerce who was heavily involved in the case.

As part of the agreement, Shenzhen-based ZTE Corp promised to dismiss four senior employees and discipline 35 others by either reducing their bonuses or reprimanding them, senior Commerce Department officials told Reuters. But the Chinese company admitted in March that while it had fired the four senior employees, it had not disciplined or reduced bonuses to the 35 others.

ZTE, whose Hong Kong and Shenzhen shares were suspended on Tuesday, said it was assessing the implications of the U.S. decision and was communicating with “relevant parties.”

The Commerce Department order quoted a ZTE official’s letter admitting it “had not executed in full” some disciplinary measures and that there were “inaccuracies” in a 2017 letter. But, the Commerce order said, ZTE “argued that it would have been irrational for ZTE to knowingly or intentionally mislead the U.S. government in light of the seriousness of the suspended sanctions.”

Under terms of the ban, U.S. companies cannot export prohibited goods, such as chip sets, directly to ZTE or via another country, beginning immediately.

Shares of big U.S. ZTE suppliers fell sharply on the Commerce ban. Optical networking equipment maker Acacia Communications Inc, which got 30 percent of its total 2017 revenue from ZTE, tumbled 35 percent, hitting a near two-year low. Acacia said it was suspending affected transactions and assessing the impact.

Shares of optical component companies including Lumentum Holdings Inc fell 8.9 percent and Finisar Corp dropped 4.0 percent. Oclaro Inc, which got 18 percent of its fiscal 2017 revenue from ZTE, lost 14.1 percent.

ZTE “provided information back to us basically admitting that they had made these false statements,” said a senior department official. “That was in response to the U.S. asking for the information.”

The ban on supplying ZTE comes two months after two Republican senators introduced legislation to block the U.S. government from buying or leasing telecommunications equipment from ZTE or its Chinese rival Huawei Technologies Co Ltd [HWT.UL], citing concern the companies would use their access to spy on U.S. officials.

“China does not play by our rules, and we must be vigilant against Chinese threats to both our economic security and national security,” said Republican Representative Robert Pittenger after the Commerce announcement. Pittenger is sponsoring legislation that would strengthen the U.S. national security review process for foreign investments.

  • ZTE ban hits shares of U.S. optical component suppliers
  • UK’s NCSC says national security risk from equipment from China’s ZTE cannot be mitigated
  • China commerce ministry says hopes U.S. can appropriately deal with issue on ZTE

Meanwhile, Britain’s main cyber security agency said on Monday it has written to organizations in the UK’s telecommunications sector warning about using services or equipment from ZTE.

‘DEVASTATING’

Douglas Jacobson, an exports control lawyer who represents suppliers to ZTE, called the ban highly unusual and said it would severely affect the company.

“This will be devastating to the company, given their reliance on U.S. products and software,” said Jacobson. “It’s certainly going to make it very difficult for them to produce and will have a potentially significant short- and long-term negative impact on the company.”

ZTE has sold handset devices to U.S. mobile carriers ATT Inc, T-Mobile US Inc and Sprint Corp. It has relied on U.S. companies including Qualcomm Inc, Microsoft Corp and Intel Corp for some components.

Shares of Taiwan’s MediaTek Inc, which sells smartphone chips and competes with Qualcomm, were not trading when the announcement was made.

The U.S. action against ZTE is likely to further exacerbate current tensions between Washington and Beijing over trade. After the U.S. placed export restrictions on ZTE in 2016 for Iran sanctions violations, China’s Ministry of Commerce and Foreign Ministry criticized the decision.

A five-year federal investigation found last year that ZTE had conspired to evade U.S. embargoes by buying U.S. components, incorporating them into ZTE equipment and illegally shipping them to Iran.

ZTE, which devised elaborate schemes to hide the illegal activity, agreed to plead guilty after the Commerce Department took actions that threatened to cut off its global supply chain.

The U.S. government had allowed the company continued access to the U.S. market under the 2017 agreement.

The new restrictions stem from a Jan. 16 report by a U.S. monitor appointed by a federal judge in Texas who accepted the guilty plea in March 2017. Although Commerce Department officials would not discuss the report, they said the department followed up in February.

The U.S. government’s investigation into sanctions violations by ZTE followed reports by Reuters in 2012 reut.rs/2H3p0Vl that the company had signed contracts to ship millions of dollars’ worth of hardware and software from some of the best known U.S. technology companies to Iran’s largest telecoms carrier.

(Read the Reuters report that exposed the practice: reut.rs/2H3p0Vl)

Visitors pass in front of the Chinese telecoms equipment group ZTE Corp booth at the Mobile World Congress in Barcelona, Spain, February 26, 2018. REUTERS/Sergio Perez

Reporting by Karen Freifeld in New York and Steve Stecklow in London; additional reporting by Noel Randewich and Peter Henderson in San Francisco; Munsif Vengattil in Bangalore and Sijia Jiang and Anne Marie Roantree in Hong Kong; Editing by Chris Sanders, Jeffrey Benkoe and Lisa Shumaker

Asia stocks waver after China data, earnings in focus

TOKYO (Reuters) – Asia stocks wavered on Tuesday after data showed both hot and cold patches in the Chinese economy, but losses were limited as investors turned their focus to corporate earnings from Syria.

An investor looks at an electronic board showing stock information at a brokerage house in Nanjing, Jiangsu province, China April 16, 2018. REUTERS/Stringer

Spreadbetters expected European stocks to open higher following overnight Wall Street gains, with Britain’s FTSE rising 0.15 percent, Germany’s DAX gaining 0.3 percent and France’s CAC climbing 0.3 percent.

The dollar was barely changed, with demand for safe-haven U.S. Treasuries ebbing as risk appetite improved in parts of the broader market as investors took the view that Western-led strikes on Syria were a one-off intervention.

China’s economy grew a welcome 6.8 percent in the first quarter of 2018 from a year earlier, official data showed on Tuesday, unchanged from the previous quarter.

But separate data showed March industrial output missed expectations and first-quarter fixed-asset investment growth slowed, tempering equity market gains.

“There are two stories here, one backward looking and one forward looking,” said Robert Subbaraman, chief economist for Asia excluding Japan at Nomura in Singapore. “Underneath the stable GDP growth is quite rapid rebalancing from industrial, investment and old economy sectors to consumption, services and new economy sectors like tech. This is encouraging.”

“The more timely March data, however, point to nascent signs of a growth slowdown underway, led by these old economy sectors,” Subbaraman said.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged down 0.15 percent.

South Korea’s KOSPI dipped 0.15 percent and Hong Kong’s Hang Seng was flat.

Shanghai’s index shed 0.35 percent and Japan’s Nikkei was unchanged. Australian stocks gained 0.3 percent with mining shares gaining on higher aluminum prices.

While Saturday’s missile strikes were the biggest intervention by Western countries against Syria, investor risk appetite improved on speculation that the attacks would not lead to prolonged conflict.

“The markets had been bracing for a possible escalation in Syria following President Trump’s earlier warnings. Military action, however, has been limited, bringing relief,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.

“That said, the underlying picture has not changed. Conflict continues in Syria and trade issues remain unresolved. Geopolitics will impact the markets again.”

The Dow gained 0.87 percent and the SP 500 rose 0.8 percent on Monday, with the biggest boosts from technology and healthcare sectors as investors were optimistic about the earnings season and appeared less worried about U.S.-led missile attacks in Syria.

SP 500 companies are expected to report an 18.6 percent jump in first-quarter profit, on average, the biggest rise in seven years, according to Thomson Reuters data.

The dollar index against a basket of six major currencies was little changed at 89.415 after losing 0.4 percent overnight.

The euro was steady at $1.2382. The dollar was effectively flat at 107.055 yen

The pound rose to $1.4355, its highest since June 2016, with focus on data that could cement expectations of a May interest rate increase from the Bank of England.

The Hong Kong Monetary Authority (HKMA) stepped into the currency market again on Tuesday, buying HK$5.77 billion ($735 million) in Hong Kong dollars as the local currency repeatedly hit the lower end of its allowable trading band.

The 10-year U.S. Treasury note yield was at 2.834 percent after rising to 2.865 on Monday, its highest since March 22.

U.S. crude oil futures rose 0.5 percent to $66.57 a barrel after tumbling nearly 1.8 percent overnight as concerns over tensions in the Middle East waned.

Brent crude climbed 0.3 percent to $71.66 a barrel.

Aluminum hovered near seven-year highs reached the previous day after U.S. sanctions on Russian producer Rusal stirred supply concerns.

Aluminum on the London Metal Exchange was at $2,386 per tonne after surging 5 percent to $2,403 on Monday, its highest since September 2011.

Reporting by Shinichi Saoshiro; Additional reporting by the Hong Kong and Singapore newsrooms; Editing by Eric Meijer and Jacqueline Wong

China’s economic growth holds steady amid trade dispute

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China’s economic growth held steady in the quarter ending in March amid a worsening trade dispute with U.S. President Donald Trump, buoyed by strong e-commerce and factory output.

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The world’s second-largest economy expanded by 6.8 percent over a year earlier, in line with the quarter ending in December and down slightly from 2017’s full-year expansion of 6.9 percent, data showed Tuesday. It was above the official 2018 target of “around 6.5 percent,” which would be among the world’s strongest if achieved.

A government spokesman expressed confidence China’s $12 trillion-a-year economy can withstand Trump’s threatened tariff hikes on up to $150 billion of Chinese goods in a dispute over technology policy.

China has “room to maneuver” following efforts to develop more self-sustaining growth based on domestic consumption and reduce reliance on trade, said Xing Zhihong, spokesman for the National Bureau of Statistics.

“China is fully capable of responding to Sino-U.S. trade frictions, responding to challenges and maintaining sustained and healthy economic development,” Xing said at a news conference.

Forecasters expect Chinese growth to cool this year as Beijing tries to rein in rising debt seen as the biggest threat to economic stability by tightening controls to cool a boom in real estate sales and bank lending.

Last year’s expansion was unexpectedly strong but activity began to weaken in March.

“China’s economy entered 2018 with solid growth momentum,” Louis Kuijs of Oxford Economics said in a report. “But momentum slowed in March, compared to the first two months, pointing to slower growth ahead.”

The statistics bureau said growth compared with the previous quarter, the standard used by other major economies, slowed to 1.4 percent from 1.6 percent in the final three months of 2017. Beijing has begun to report such quarter-on-quarter figures in recent years but its headline number is measured against a year earlier, which makes Chinese growth seem smoother than that of other economies.

Europe and other trading partners also complain China is flooding global markets with unfairly low-priced steel, aluminum and other goods, threatening jobs abroad.

“We worry about the long-term implications but view a trade war with substantial short-term growth impact as unlikely,” Kuijs said.

The ruling Communist Party is trying to steer China to slower, more sustainable growth based on domestic consumption instead of trade and investment. But Beijing has repeatedly set that back by relying on infusions of bank lending to shore up the economy since the 2008 crisis, adding to rising debt.

In a positive sign for efforts to encourage consumer spending, retail sales rose 9.8 percent, accelerating from December’s 9.4 percent growth, according to the statistics bureau. E-commerce sales surged 35.4 percent, up 3.3 percentage points from the previous quarter.

Factory output rose 6.8 percent over a year earlier.

“While we don’t think China’s economy is expanding as rapidly as the official figures claim, there is broader evidence to suggest that a recovery in industry did prevent growth from slipping too much last quarter,” said Julian Evans-Pritchard of Capital Economics in a report.

Investment in factories, real estate and other fixed assets rose 7.5 percent, up from 2017’s 7.2 percent growth.

“Outside of industry, activity looks to have cooled recently,” Evans-Pritchard said. “Construction growth is slowing as local governments pare back infrastructure spending in order to control debt levels.”

China’s trade balance swung to a rare deficit in March as exports shrank 2.7 percent over a year earlier. Trade accounts for less of China’s economic activity than in earlier years but still supports millions of jobs.

In a speech last week, President Xi Jinping promised to open China’s markets wider, cut import duties on autos and ease restrictions on foreign ownership in the auto and finance industries. He gave no details and didn’t directly address Trump’s complaint that Beijing improperly pressures foreign companies to hand over technology.

The ruling party’s annual development plan, announced last month, calls for further cuts in the bloated state-owned steel industry and a bigger role for market forces and entrepreneurs.

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National Bureau of Statistics (in Chinese): www.stats.gov.cn

AP FACT CHECK: Trump’s tax-form claims are exaggerated

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On the eve of Tax Day, President Donald Trump is exaggerating the government’s plans to shrink the much-dreaded federal income tax forms.aa

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He is promising a simplified, one-page tax form for next year that basically already exists — the 1040EZ. And after weeks of promises, Trump appears to be dropping a pledge to create an even smaller, card-size tax form. There are no signs the IRS is planning any such thing for the 2018 tax year.

Meantime, Trump’s tweet Monday accusing China and Russia of “playing the currency devaluation game” is at odds with the Treasury Department, which has not reached the same conclusion in recent economic reports.

A look at the statements and how they don’t hold up:

TRUMP: “Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable.” — tweet Monday.

THE FACTS: Trump’s claim misstates the current economic situation and contradicts his own Treasury Department, which on Friday released a report showing no country was labeled a currency manipulator.

Trump during the 2016 presidential campaign had vowed to brand China a currency manipulator immediately after taking office. But in three straight currency reports issued since Trump took office, the administration has not branded China or any other country as a currency manipulator.

Asked why the administration has not labeled China a currency manipulator in the Treasury reports, White House press secretary Sarah Huckabee Sanders said Monday that China was placed on a watch list and “that’s something that the Treasury Department is watching very closely, and we’re continuing to monitor it.”

Trump’s tweet also inaccurately describes the economic situation. China’s currency, the yuan, has actually been rising in value and now stands at the highest levels against the dollar in about three years.

By contrast, Russia’s ruble has been falling against the dollar and did plunge sharply last week. But that reflected new economic sanctions the United States imposed on Russia — not rising U.S. interest rates or efforts by the Russian government to drive down the ruble’s value.

Trump is correct that rising U.S. interest rates could contribute to boosting the dollar’s value against other currencies by making investments in the United States more attractive to foreign investors. But U.S. interest rates are only one factor that can determine the dollar’s value against other countries.

It is not clear what Trump meant by calling the current situation “not acceptable.” It is true that a stronger dollar can increase America’s trade deficit by making American exports more expensive in overseas markets while making foreign goods cheaper for U.S. consumers.

But the Federal Reserve’s current moves to gradually raise U.S. interest rates are being taken to ensure the economy does not overheat at a time when unemployment is at a 17-year low and the economic expansion is now the second longest in U.S. history. Previous administrations have usually been careful not to make public comments about Fed interest-rate policies to protect the Fed’s political independence.

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TRUMP: “This is the last time you’re going to fill out that long, complicated, horrible return. … Tomorrow, last day. Very importantly, next year, it’s going to be a simple — for the most part, one page. It may get a little bit bigger. But it will be simple and easy to do.” — remarks Monday at a business roundtable on taxes in Hialeah, Florida.

THE FACTS: Trump is promising a new one-page form that is largely in place: the 1040EZ, which has been around for years. It can be used by people who have less than $100,000 in taxable income and no dependents and who meet other criteria. Trump previously had promised a card-size tax form but now appears to be backing off that claim by describing next year’s form as “for the most part one page” that “may get a little bit bigger.”

In fact, there’s no sign that the IRS is planning new filing forms, card-size or otherwise, for the 2018 tax year. It’s been a political gimmick for years.

“The idea of radically simplifying taxes has always been more of a political talking point or sales pitch, more than it’s been part of any reality,” says Joseph Rosenberg, senior research associate at the nonpartisan Urban-Brookings Tax Policy Center.

Although many taxpayers will have an easier time filing because of the doubling of the standard deduction, they’ll still have to do legwork to figure out their taxable income and whether they qualify for the deduction or would be better off itemizing. They will also need to figure in the hit they could take from the capping of deductions for mortgage interest and state and local taxes.

That means pages of data and tables to consult, even if some kind of shorter form is in the future.

At any rate, the overwhelming majority of Americans now file their tax returns electronically, which is how they simplify. The idea of dropping a postcard-type paper with personal financial data into the mail seems old-school.

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Associated Press writers Zeke Miller, Cal Woodward and Marcy Gordon contributed to this report.

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Find AP Fact Checks at http://apne.ws/2kbx8bd

Follow @APFactCheck on Twitter: https://twitter.com/APFactCheck

Walmart goes after Amazon with website revamp

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(REUTERS/Mike Blake)

Walmart is making changes to its website in an attempt to turn up the heat on Amazon.com.

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The world’s largest brick-and-mortar retailer will unveil the major renovation of its online presence at the start of May.

The company is betting that a cleaner, more modern walmart.com will help it win market share.

The Bentonville, Arkansas-based company has been investing in its e-commerce business, trying to have its website and U.S. stores link closer together, making it easier for shoppers to pick up and return online orders in stores.

The changes will include a wider range of colors, fonts and more informal photographs.

The retailer hasn’t revealed how much the resign is costing.

The last time Walmart updated its website was in 2014, but the changes were not as dramatic, Walmart spokeswoman Danit Marquardt said.

The website would soon have different layouts depending on product categories, allowing customers to shop for groceries differently from how they buy clothes and accessories, or home improvement products.

Walmart said in February that online sales increased 23 percent in the most recent quarter, less than half the rate of growth in each of the previous three quarters.

The company posted about $11.5 billion in U.S. e-commerce revenue for the full year. Total U.S. sales were $318.5 billion.

Shares of Walmart are down 12 percent year–to-date.

Reuters contributed to this article.

China to protect ‘legitimate rights’ after US penalizes ZTE

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China’s government said Tuesday it was ready to protect its “legitimate rights” after U.S. authorities penalized one of the country’s most prominent tech companies in a case involving exports of telecoms equipment to Iran and North Korea.

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The Commerce Ministry expressed hope Washington would treat ZTE Corp. fairly after the U.S. Commerce Department concluded it paid bonuses to employees involved in the export scheme instead of disciplining them as promised in 2017.

The Commerce Department on Monday barred state-owned ZTE for seven years from importing American components.

ZTE, headquartered in the southern city of Shenzhen, pleaded guilty in March 2017 and agreed to pay a $1.19 billion penalty for shipping the telecoms equipment to North Korea and Iran in violation of U.S. regulations.

“We hope the United States will properly handle the matter in accordance with regulations and create a fair, equitable and stable legal and policy environment for the company,” a Commerce Ministry statement said.

“The Ministry of Commerce will pay close attention to the progress of the situation and stands ready to take necessary measures to safeguard the legitimate rights and interests of Chinese companies.”

ZTE said in a statement it was “evaluating the possible impact” on the company.

Supreme Court hearing case about online sales tax collection

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The Supreme Court is hearing arguments about whether a rule it announced decades ago in a case involving a catalog retailer should still apply in the age of the internet.

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The case on Tuesday focuses on businesses’ collection of sales tax on online purchases. Right now, under the decades-old Supreme Court rule, if a business is shipping a product to a state where it doesn’t have an office, warehouse or other physical presence, it doesn’t have to collect the state’s sales tax. Customers are generally supposed to pay the tax to the state themselves, but the vast majority don’t.

States say that as a result of the rule and the growth of internet shopping, they’re losing billions of dollars in tax revenue every year. More than 40 states are asking the Supreme Court to abandon the rule.

Large retailers such as Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores nationwide, generally collect sales tax from their customers who buy online. But other online sellers that only have a physical presence in a few states can sidestep charging customers sales tax when they’re shipping to addresses outside those states.

Sellers who defend the current rule say collecting sales tax nationwide is complex and costly, especially for small sellers. That complexity was a concern for the Supreme Court when it announced the physical presence rule in a case involving a catalog retailer in 1967, a rule it reaffirmed in 1992. But states say software has now made collecting sales tax easy.

The case the court is hearing has to do with a law passed by South Dakota in 2016, a law designed to challenge the Supreme Court’s physical presence rule. The law requires out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect and turn over sales tax to the state.

The state wanted out-of-state retailers to begin collecting the tax and sued Overstock.com, home goods company Wayfair and electronics retailer Newegg. The state has conceded in court, however, that it can only win by persuading the Supreme Court to do away with its current physical presence rule.

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Follow Jessica Gresko on Twitter at http://twitter.com/jessicagresko

Saudi fashionistas flock to kingdom’s first-ever fashion week

In the lobby of Riyadh’s Ritz-Carlton hotel, two Russian models with slick high ponytails glide past a woman draped head-to-toe in black.

Heading for a cigarette break during Saudi Arabia’s first-ever fashion week, Naya Efimova and Ira Titova were both excited and bored. Excited to be “part of history” as the conservative Islamic kingdom opens up, said Titova, 25. Bored, because they’d been told they couldn’t leave the hotel without a male chaperone.

The Riyadh edition of Arab Fashion Week, which showcased local and foreign designers, was another example of the government’s effort to ease social restrictions — and the internal tensions it creates. Under Crown Prince Mohammed bin Salman, who’s trying to overhaul the oil-dependent economy, the government lifted a longstanding ban on women driving and started holding mixed-gender concerts. Contrary to what the Russian models had been told, many women go about the city on their own.

Still, the kingdom is a deeply traditional society, and sometimes it seems like officials aren’t sure how far they can push. There’s been pushback by some Saudis against the concerts, and the unchaperoned women had better be dressed in loose-fitting robes in public.

It was a women-only audience at fashion week, where 1,500 people paid 500 riyals ($133) per show to watch models saunter down the runway wearing shoulder-baring dresses and flowing gowns that could never be worn in public in Saudi Arabia. (They’d be OK for private parties). A Russian ballet troupe performed, and Jean Paul Gaultier was among the international designers to strut his stuff.

“We have a lot of potential and amazing Saudi designers,” said Princess Noura bint Faisal, president of the Arab Fashion Council. “It is a major industry in this market, and the event is just the beginning.”

Princess Noura wants to bring a top fashion school to Saudi Arabia and has dreams for a “fashion city” someday. But for now, the fashion council is treading carefully. The information packet distributed to foreign journalists included a 14-point list on local laws and customs, with reminders that alcohol is banned and homosexual activity and extra-marital sexual relations are “illegal and can be subject to severe penalties.”

Leaving the final show on Saturday, Saudi attendee Fatima Al Otaibi was excited that a Saudi designer had participated.“It’s the first time in my life I’ve attended a fashion show, so it’s really amazing,” she said.

Emirates introduces early bird fares for travel through December 2018

Emirates is offering special “early bird” fares for UAE travellers until April 30, the airline announced on Monday.

The offer applies for outbound travel between April 19 and December 13, 2018.

According to the airline, economy class fares to Middle East destinations start from AED 795, while tickets to European destinations start at AED 2,125.

Additionally, economy class fares to West Asia and destinations in the Indian Ocean region start at AED 945, while fares to the Far East and Australasia start at AED 2,035.

Business class passengers traveling to the Middle East will enjoy fares starting at AED 3,155, compared to AED 9,395 to Europe, AED 2,845 to West Asia and the Indian Ocean. Business class fares to the Far East and Australasia start at AED 8,895.

With a new CEO, Volkswagen begins sweeping overhaul to set future course

Volkswagen AG picked a new leader in a management shakeup to ready the world’s largest automaker for a wave of technological change upending the industry’s traditional business models.

Herbert Diess, the head of VW’s namesake brand, will become chief executive officer as well as overseeing technology across the organization, the company said Thursday in a statement. The manufacturer will be grouped into six business areas, with the truck and bus division to be prepared for a potential stand-alone stock listing.

“My most important task will now be to join with our management team and our group workforce in consistently pursuing and pushing forward our evolution into a profitable, world-leading provider of sustainable mobility,” Diess said in the statement. He’s scheduled to hold a press conference Friday at Volkswagen’s Wolfsburg, Germany, headquarters to lay out his plans.

The realignment focuses power in Diess’s hands, as he will continue to oversee the namesake division. Rupert Stadler, who runs the Audi luxury brand and who has repeatedly been under fire over the unit’s role in the diesel crisis, will take on responsibility for group sales. The company’s auto units will be grouped into volume, premium and super-premium segments.

Diess’s appointment to succeed Matthias Mueller, who steps down immediately, will be key to reassuring investors that the highly centralized German industrial behemoth is capable of reform. Excessive spending and poor budget discipline were eroding profit margins even before the carmaker’s diesel-emissions scandal erupted in September 2015. His term will be judged early on by whether he can scale up his revamp of the VW brand to the entire 12-brand group to prepare for an era of battery-powered self-driving cars.

One sign of the overhaul gaining traction is VW entering the home stretch for a potential share sale in its heavy-truck division, the biggest organizational shift since the aftermath of the diesel-emissions crisis. The unit, which shares little or no overlap with the manufacturer’s other divisions, will change its legal structure to prepare its access to capital markets, VW said in a separate statement.

Granting the truck unit more independence from the larger passenger-car business marks the culmination of efforts by division chief Andreas Renschler. He’s worked since 2015 on welding the commercial-vehicle operations more tightly together to reduce costs by sharing development.

Labor Fight

Diess, a former BMW AG executive, who joined VW two months before the emissions cheating came to light, pledged from the beginning to pursue new technology while reining in spending growth. That project became much more urgent as the diesel scandal generated massive costs, and meant taking on established interest groups. Bernd Osterloh, the company’s powerful labour leader, balked at negotiating with him during tough contract talks in 2016, but Diess prevailed with a landmark deal that paved the way to cutting as many as 30,000 jobs and saving 3.7 billion euros ($4.6 billion).

“There have been historic episodes where cost cutters have been brought in to sort out the namesake VW brand, but who then leave or are squeezed out before their work is really done,” Sanford Bernstein analyst Max Warburton wrote in a note. “Instead of being squeezed out, he has been pushed upward, and has been made CEO. It’s a sign of real change at VW.”

Signalling a conciliatory stance, works council head Osterloh said he fully supported the new CEO and Volkswagen’s overhaul plan, according to a letter seen by Bloomberg. A decision on a truck IPO is still “open,” he said.

Gunnar Kilian, from the company’s works council, becomes group head of human resources, succeeding Karlheinz Blessing, who will be available as a consultant until his contract expires. He and Oliver Blume, the 49-year-old head of the Porsche brand, will join the group’s management board. Francisco Javier Garcia Sanz, Volkswagen’s long-time head of purchasing, will leave the company.

As head of purchasing at BMW, Diess was instrumental in the luxury-car maker’s ability to weather the financial crisis by squeezing more than 4 billion euros out of supply costs. He then took charge of development, but was ultimately passed over for the CEO job, when the Munich-based company picked Harald Krueger in December 2014. That spurred his move to Volkswagen.

Diess’s appointment comes two days after a company statement that was as surprising as it was cryptic, saying that Mueller had agreed “in principle” to contribute to a management change, without elaborating or mentioning his chosen successor by name.