TELECOMS: VMWare Joins China High-Tech Train with New JV

By on

Bottom line: VMWare’s new China joint venture is the latest such tie-up for a major western tech firm to ease Beijing’s national security concerns, and could prompt the US to implement tougher restrictions on technology transfers to China.

VMWare in China cloud joint venture

EMC (NYSE: EMC) and its acquirer Dell are jumping on a high-tech train that goes directly to Beijing, with word that EMC-controlled VMWare (NYSE: VMW) has become the latest IT firm to set up a joint venture with a Chinese partner. The trio of high-tech giants join a growing number of other leading US tech firms to form similar ventures, with Hewlett Packard (NYSE: HPQ), IBM (NYSE: IBM) and Cisco (Nasdaq: CSCO) all forming similar tie-ups over the past year.

The rush to form such alliances comes as China rolls out a new national security law that could otherwise limit the big multinationals’ ability to sell their products and services to the Chinese government and big state-owned enterprises. But at the same time, a new New York Times report is pointing out that many of the Chinese firms in these new tie-ups also have links to China’s defense establishment, potentially setting the stage for a showdown between Washington and Beijing over national security.

According to the latest headlines, VMWare is teaming up with a Shanghai-listed Chinese firm called Sugon (Shanghai: 603019) to form the joint venture in VMWare’s core area of cloud computing. (Chinese article) The 2 sides announced the tie-up at a ceremony attended by VMWare Pat Gelsinger.

Sugon made an IPO late last year ago, but the reports point out the company was previously closely tied with China’s prestigious Chinese Academy of Sciences, indicating that it still has strong government ties. In a revealing detail, it appears that foreign media weren’t invited to the joint venture announcement ceremony, since news of the tie-up is absent in English-language media reports.

That indicates that VMWare was more interested in attracting attention in China with this venture, and would probably prefer the news gets minimal coverage in the west. There’s not much more detail in the reports, though they do point out that Sugon will hold a controlling stake in the joint venture. That would parallel a model use by nearly all the other major tie-ups between big western tech names and Chinese partners.

Such arrangements are designed to ease Beijing’s concerns about security of imported western IT products and services, since they would allow authorities easier access to the ventures through their controlling local partners. IBM was one of the first to form such a tie-up last year with local partner Inspur, and Cisco announced its own joint venture with Inspur a month ago. (previous post) HP formed its own China tie-up when it sold a controlling interest in its China-based networking equipment arm, H3C, to local partner Tsinghua Unigroup earlier this year.

Conduit for EMC, Dell

This new VMWare alliance looks more far-reaching than the others, because it could also serve as a conduit into government business for EMC, which owns 83 percent of VMware, and also for Dell, which is in the process of acquiring EMC. EMC already has its own alliance with leading Chinese PC maker Lenovo (HKEx: 992), which also has its roots in the same Chinese Academy of Sciences as Sugon. Dell, meanwhile, is pinning big hopes on China as it tries to transform from a traditional PC maker to a more diversified IT products and services provider. (previous post)

As this latest China-foreign love affair gains momentum, the New York Times is also pointing out that most of these Chinese partners have government ties, including selling to the country’s defense establishment. (English article) The report says there’s nothing to suggest the partnerships have broken US laws, though it also points to at least one major private study that suggest such tie-ups could undermine US security interests.

These foreign tech giants are all quite politically savvy and thus I doubt anyone will get punished for illegal activity with all of these new tie-ups. But at the same time, the flurry of activity could prompt Washington to conduct its own internal policy review, and lay out new guidelines on what kinds of technology transfers are and aren’t permissible in this kind of partnership.

Related posts:

(Visited 204 times, 1 visits today)