When IBM posted disappointing third-quarter results this same time a year ago, it made a special exception and broke out China financials. Its woes in the country—revenue crashed 22% in China in the third quarter of 2013—upended the entire quarterly release. IBM shares fell by 6% then, similar to yesterday’s 7% retreat.
Part of its troubles in China were out of IBM’s control: Edward Snowden released his cache of U.S. secrets in the summer, and U.S. tech companies, especially IBM and those selling servers and telecommunications equipment, were punished in China under the cover of “state security.” IBM also said it was being hurt by weak spending ahead of a “broad-based governmental economic plan,” the Communist Party’s agenda-setting Third Plenum.
Whatever the case, IBM had pretty low comparisons to match in this year’s third quarter in China. And yet, it still failed.
In yesterday’s earnings report, Asia Pacific revenue fell by 9%. This time IBM didn’t make a special exception of breaking out China, but it’s pretty clear its revenue in the country has continued falling from already weak levels.
IBM’s struggles are exaggerated in China because the country’s state-owned companies and others haven’t yet transitioned to the cloud. China accounts for about 5% of IBM’s global sales, according to the company, and about 40% of those sales coming from hardware. Elsewhere, hardware accounts for just 11% of IBM’s sales. That means what’s hurting IBM around the world—the move away from hardware sales to the cloud—is magnified in China.
Usually businesses rely on China to compensate struggling sales in the developed markets of Europe or the U.S. With Chinese companies pushing off buying new servers and China’s continued pressure on U.S. tech, IBM is getting especially squeezed.
For Big Blue—just off its 10th straight quarter of flat or declining sales—troubles in China are only extending.