Edward Snowden

Spying scandal hits US tech companies in China

Mainland sales of big IT firms may suffer amid fallout from American surveillance revelations

PUBLISHED : Friday, 15 November, 2013, 11:35am
UPDATED : Wednesday, 20 November, 2013, 4:39pm

US technology companies including Cisco Systems, International Business Machines and Microsoft may face new challenges selling their goods and services in China as fallout from the US spying scandal starts to take a toll.

Cisco shares tumbled 11 per cent on Thursday, a day after it warned that revenue would drop 10 per cent this quarter, and continue to contract through the middle of next year, in part due to a backlash in China against revelations about US government surveillance programs.

“All the big US IT companies are concerned,” said Jim Lewis, a senior fellow with the Centre for Strategic Studies in Washington, who is an expert on China and technology. “But so far Cisco is bearing the brunt of it.”

Lewis said Beijing may be targeting Cisco in particular as retaliation for Washington’s refusal to buy goods from China’s Huawei Technologies, a telecommunications equipment maker that the United States claims is a threat to its national security because of links to the Chinese military.

“We hope and demand that relevant foreign companies respect China’s laws,” Foreign Ministry spokesman Qin Gang said on Thursday, when asked about Cisco’s woes.

“At the same time, as the Chinese government, we of course have an obligation, a responsibility, to protect the country’s security.”

... as the Chinese government, we of course have an obligation, a responsibility, to protect the country’s security
Foreign Ministry spokesman Qin Gang

The revelations by US whistle-blower Edward Snowden of extensive US data espionage abroad provoked a storm in the Chinese media and added urgency to Beijing’s efforts to use its market power to create indigenous software and hardware, analysts and businessmen say.

“The US government isn’t doing any favours for Cisco,” said Evercore Partners analyst Mark McKechnie.

Cisco chief executive John Chambers said on a conference call that Cisco and its peers face “challenging political dynamics” in China.

IBM reported last month a 22 per cent drop in China revenue, leading to a 4 per cent decline in its third-quarter profit. Chief financial officer Mark Loughridge attributed the company’s problems to the “process surrounding China’s development of a broad-based economic reform plan”, which caused delays in purchases.

Microsoft executives singled out China as the company’s weakest performing area in the world during the September quarter in an October 24 earnings call.

“The macro conditions in China, which I think are consistent with what some of the other companies have reported as well, have been challenging,” said Chris Suh, Microsoft’s general manager for investor relations.

Company officials could not be reached for comment.

Beijing has long mistrusted foreign technology companies, and those concerns have been exacerbated since Snowden, a former US National Security Agency contractor, first revealed in June the existence of the NSA’s clandestine data mining programme.

While a formal document hasn’t been issued, in the future we will try to buy IT equipment from domestic brands, such as Lenovo
A person familiar with technology purchases at one of China's Big Four state-owned banks

“This is all about China using its own technology, and China building leading technology companies,” said James McGregor, chairman for Greater China at consultancy Apco Worldwide.

Although Beijing has not prohibited state firms from purchasing Western-made technology services and equipment, the government has sent a clear message to choose Chinese-made equipment first, executives based in the country say.

“While a formal document hasn’t been issued, in the future we will try to buy IT equipment from domestic brands, such as Lenovo,” said a person familiar with technology purchases at one of China’s four big state-owned banks.

“The government’s signal is pretty clear – they want to rely less on US products, such as IOE [IBM, Oracle and EMC],” said a former China-based telecommunications executive.

In August, the National Development and Reform Commission, China’s top economic planning body, published a statement setting cybersecurity standards for financial institutions, cloud computing and big data, information system secrecy management and industrial controls.

Four domestic software and hardware makers, including China National Software & Service, announced this month they had received a “top-tier” rating from the Ministry of Industry and Information Technology.

China National Software’s share price has gained nearly 250 per cent since the Snowden revelations.

The revelations have reverberated in other big emerging markets, such as Brazil, Mexico and India.

Cisco chief financial officer Frank Calderoni said China was where the company was most affected by a political backlash but noted that it was difficult to quantify how much of its revenue shortfall was due to politics versus macroeconomic trends.