Cisco, IBM China sales hit by NSA spy scandal

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Cisco, IBM China sales hit by NSA spy scandal

Government pushing for less reliance on US tech.

US technology companies including Cisco and IBM are facing unprecedented difficulties selling their goods and services in China, as fallout from the US spying scandal starts to take a toll.

Cisco said its revenue would drop 10 percent this quarter, and continue to contract until the middle of 2014, in part due to a backlash in China against revelations about US government surveillance programmes worldwide.

"The US government isn't doing any favours for Cisco," said Evercore Partners analyst Mark McKechnie, after the company's shares fell 10 percent in late trade.

In June, former US National Security Agency contractor Edward Snowden revealed the spy agency had hacked network backbones around the world to gain access to sensitive information.

The leaks 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 capabilities, analysts and businessmen say.

"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.

In a call with analysts, Cisco chairman John Chambers said Cisco "and our peers" were facing "challenging political dynamics" in China.

One of those peers, IBM, reported in October a 22 percent drop in China revenue, leading to a decline of 4 percent in third-quarter profit for the world's biggest technology services company.

IBM CFO Mark Loughridge attributed the company's problems to the "process surrounding China's development of a broad-based economic reform plan", which caused state-owned enterprises and governments to delay purchasing.

The company subsequently reassigned the head of its growth markets unit. IBM declined to comment for this story.

Foreign companies mistrusted

Beijing has long mistrusted foreign technology companies, China executives said, and the Snowden revelations have exacerbated those concerns.

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

"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.

Beijing is especially focused on security for government, energy, transport, and finance networks.

In August, the National Development and Reform Commission, China's top economic planning body, published a statement setting cyber-security 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 have received a "top-tier" rating from the Ministry of Industry and Information Technology.

China National Software's share price has gained nearly 250 percent since Snowden first revealed the existence of the NSA's clandestine data mining programme in June.

Longstanding rivalry

"We hope and demand that relevant foreign companies respect China's laws," Chinese Foreign Ministry spokesman Qin Gang said 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."

Cisco's problems in China have been particularly severe due to the company's longstanding rivalry with Huawei, which has faced stiff political opposition to selling equipment and buying companies in the US and Australian telecom markets.

CFO Frank Calderoni said China was where Cisco 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.

"Between economic and political issues that are occurring in emerging markets we had a significant impact," Calderoni said.

China-based executives say that the impact of China's localisation drive was expected to be uneven in the months and years ahead.

For telecommunications equipment, for example, domestic carriers will look to buy products from Huawei and ZTE over Sweden's Ericsson or Cisco, the former telecoms executive said.

Huawei, too, is making rapid progress in its server business, with shipments jumping 258 percent in the second quarter. IBM saw its market share shrink to 13 percent, from 18 percent, during the same period, according to Jefferies LLC.

Huawei now is the second-biggest server vendor in China's double-digit growing market, behind Dell, which retains a market share of 23 percent but is growing at a rate beneath the market's 15.4 percent pace.

For other hi-tech products, including chips and database solutions, China will need more time before its products will be competitive.

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