MULTINATIONALS: China National Security Law Bites Trend Micro

Bottom line: Smaller foreign tech companies could follow Trend Micro’s lead and withdraw from China over the next few years, as they suffer sharp business downturns due to restrictions under the country’s new national security law.

Trend Micro sells China unit

This summer has been unusually quiet for big multinationals in China, following campaigns in the last 2 years targeting foreign companies for monopolistic practices and corruption, among other things. But the real turbulence this year has been happening behind the scenes, as foreign technology companies face a major business downturn following China’s recent roll-out of a strict new law designed to protect national security.

Many foreign tech firms have complained the new law is too broad and intrusive, and now security software specialist Trend Micro may have become the first major victim. That’s my interpretation, following an announcement that appears to show Trend Micro is withdrawing from the market. This particular move will see Trend Micro sell all of its China operations to AsiaInfo, a Chinese owned maker of telecoms software.

As a longtime tech reporter who frequently talks with many of these companies, I can testify that many of the biggest multinationals are quite worried about China’s new national security law passed this year. The law requires them to reveal sensitive product information like source codes. Many companies also believe the law will favor domestic firms and pressure multinationals to form joint ventures with local partners when bidding for big contracts from the government and major state-owned enterprises.

The issue has caused the foreign tech companies to complain privately, and many have lobbied for US President Barack Obama to raise the issue in his summit with Chinese President Xi Jinping later this month in Washington. Within the tech space, one of the most vulnerable groups has been security software makers like Trend Micro, which have reportedly been eyed with suspicion by Beijing for the last year.

Against that backdrop, this apparent withdrawal by Trend Micro certainly looks understandable. According to an announcement on the deal, AsiaInfo will purchase all of Trend Micro’s China businesses, including licensing of product and technology rights within the market. (company announcement) AsiaInfo said the move will help it to boost its product offerings for protection of cloud computing and big data systems.

No terms were given for the sale, and not surprisingly Trend Micro also gave no comment on the reasons behind its decision. But the move was almost certainly prompted by Trend Micro’s concerns that its business could suffer a major downturn in China following the introduction of the national security law.

Anti-Foreign Campaign

Foreign security software makers were in similar headlines last summer, when they started coming under new restrictions as Beijing began drafting its new law. In a series of headlines during one of the anti-foreign campaigns at that time, Beijing reportedly banned security software makers Symantec (Nasdaq: SYMC) and Kaspersky Lab from selling to government agencies. (previous post) That move came after Beijing took similar steps against software from Microsoft (Nasdaq: MSFT) and hardware from IBM (NYSE: IBM) over similar concerns.

China isn’t the only country to express national security concerns about imported high-tech products. Washington also took similar steps 2 years ago, when it banned Chinese telecoms equipment from use in both government owned and private networks. That move shut out Huawei and ZTE (HKEx: 763; Shenzhen: 000063), 2 of China’s most prominent high-tech companies, from one of the world’s biggest telecoms markets.

I expect that Obama will raise the new Chinese national security law when he meets with Xi Jinping later this month, though I doubt Beijing will bend on the issue. Accordingly, all of the big foreign tech companies are likely to see sharp downturns in their China business in the next few years, and we could see many smaller names like Trend Micro simply withdraw after deciding the market is too difficult.

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