China Targets IBM In Foreign Tech Crackdown

Beijing probes IBM servers on security

The latest reports that Beijing is pressuring Chinese banks to stop using high-end servers from computing giant IBM (NYSE: IBM) don’t come as a huge surprise, amid escalating tensions between China and the US over cyber spying. This particular development is just the latest in a series of similar moves that dates back to last year, when Beijing began quietly pressuring many big state-run firms to stop using US tech products following revelations from the Edward Snowden cyber-spying scandal. The ironic element of Beijing’s anti-foreign tech campaign is that it could actually make the nation’s technology networks and systems even more vulnerable to spying, since most domestic products are far less sophisticated than their foreign counterparts.

I’ll be quite open with my own view that most of Beijing’s concerns about the safety of equipment and software from major US firms seems more political than due to actual security issues. Chinese leaders are unhappy that Washington and Europe have taken separate steps to limit sales by 2 of China’s biggest tech names, Huawei and ZTE (HKEx: 763; Shenzhen: 000063), due to concerns about security and unfair state subsidies. Similar moves against Chinese solar panels in a more trade-related dispute are also a sore issue for Beijing.

Neither the US nor Europe has done anything to limit the sales of Chinese computers, cellphones or software in their markets, and Chinese giant Lenovo (HKEx: 992) is a major player in both places. Regardless of the reasons, China is now reportedly pressuring its big state-run banks to stop using high-end servers from IBM in their IT networks, and replace them with local brands. (English article).

An IBM spokesman said he was unaware of any such orders from Beijing, but a media report noted the move comes just a week after the US charged 5 Chinese military officers of trying to steal trade secrets from US companies. The report added that China’s central bank and finance ministry are reviewing whether use of the IBM servers compromises China’s financial security.

This latest report comes the same week that other reports emerged saying China was telling big state-owned companies to cut their ties with western consulting firms. It also comes just a week after Beijing forbid government agencies from purchasing Microsoft’s (Nasdaq: MSFT) newest Windows 8 operating system for unspecified reasons. (previous post) This gradual freeze-out of western tech firms dates back to late last year when some state-run companies reportedly cut back on their use of networking equipment from US giant Cisco (Nasdaq: CSCO). (previous post)

I might disagree with anyone who sees a broader conspiracy by China in this series of moves. Tensions between Beijing and Washington over security have been building for much of the last 2 years, starting with a US ban on the import of Chinese telecoms equipment due to security concerns. Revelations from the Edward Snowden scandal caused tensions to rise further, and last week’s industrial espionage charges by Washington against China made the situation even more tense.

I would expect the tensions to heat up a bit more before perhaps the situation begins to cool next year if no major new accusations come out. But as I said at the outset, the biggest loser in all this could easily be China, since the domestic products that government agencies and big state-run enterprises will have to buy now are almost certainly far less secure than comparable products from more experienced western names like IBM, Microsoft and Cisco. But in this case actual security seems to be a secondary concern, and politics will play a far bigger role in this ongoing war of words until tensions finally start to cool.

Bottom line: Tensions between Beijing and the west over high-tech security are likely to rise further this year, resulting in lost China sales for big tech names like Microsoft and IBM.

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