Why China is making life miserable for big U.S. tech
On Sunday night, Citizenfour, a film about Edward Snowden holed up in a Hong Kong hotel room revealing the global spying programs run by the U.S. National Security Agency, won the Oscar for best documentary for its chilling portrait of technology and surveillance.
Three days later this week, in China, news surfaced that the country has removed from a central government purchase list some of the largest U.S tech firms implicated in the very affairs revealed by Snowden, including most notably Cisco Sistems (CSCO), but also Apple Inc (AAPL), Citrix Systems (CSTX), and Intel’s (INTC) McAfee security business.
The companies were recently stripped from a China central government approved purchase list for small contracts, according to an analysis of the government-procurement list by Reuters. The number of approved foreign tech brands on China’s purchase list fell by a third. A Cisco spokesperson says the company can continue to sell to Chinese governments, while an Intel spokesperson says McAfee did not apply for this year’s list.
Whether China is really worried about U.S. tech firms jeopardizing state security, or if it’s simply using the Snowden news as pretext for favoring domestic technology firms, is being debated. But U.S. companies being banished from the government purchase list clears up any doubt that China is an oppressive market for big U.S. tech firms.
China reacted almost immediately after Snowden divulged the NSA programs in mid-2013. Cisco said afterwards its China business had slowed to a crawl, in part because its IT-equipment was associated with spying. (It was later reported that the NSA intercepted Cisco routers to install surveillance equipment without the company’s knowledge, which Cisco CEO John Chambers later complained about to President Obama.) Last year, Microsoft’s Windows 8 was banned from Chinese government computers for what the government said were security concerns. Today, the country is trying to cleanse key industries in banking, state-owned enterprises, and the military from U.S. technology by 2020, according to reports.
China hasn’t explicitly banned U.S. tech products, but it has gradually distanced itself from foreign tech. Earlier this month, China’s banking regulator said it was planning to require source code from any suppliers of IT products used by its banks. That is greeted as a nonstarter by Microsoft Corp (MSFT) IBM (IBM), and Cisco. If approved, the rule would effectively shut them out of billions of dollars of contracts. Industry analysts say the Chinese are years away from building their own equipment on par with say, Cisco’s, but they are getting closer.
The stripping of Cisco and Apple from the approved government list is the latest salvo in an ongoing tech conflict between the U.S. and China. The U.S. has similarly discriminated against Chinese telecommunications equipment makers for “state security” reasons. In 2012, a U.S. congressional committee warned that Huawei products could be used for spying—a charge the company continues to deny—but did not release evidence to support its claims. Huawei, the biggest telecom infrastructure maker in the world, can’t bid for U.S. government projects or large U.S. telecom contracts. ZTE (ZTCOY), the second largest telecom infrastructure maker in China, is similarly banned.
In China, the situation has grown so poor for foreign IT that Cisco, in its latest quarterly results announced two weeks ago, said China sales dropped by 19%. Cisco’s public relations department won’t even directly address the topic of discrimination in China.
Except for Apple, which posted record sales in large part because its iPhone 6 dominated China’s market, there’s little reason to expect future good news for big U.S. tech in the Middle Kingdom. Snowden changed the dynamics in an already uneasy relationship. Now the effects are showing.
Correction: Story has been updated to reflect that companies were removed from a Chinese government approved purchase list, but not banned from government contracts.