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China Reviews IBM Servers for Security in Spy Dispute

Tuesday, 27 May 2014 03:32 PM

China is reviewing whether domestic banks’ reliance on high-end servers from the IBM Corp. compromises the nation’s financial security, in an escalation of the dispute with the U.S. over spying claims, according to sources familiar with the development.

Government agencies, including the People’s Bank of China and the Ministry of Finance, are asking banks to remove the IBM servers and replace them with a local brand as part of a trial program, said the four people, who asked not to be identified because the review has not been made public.

The review comes a week after American prosecutors indicted five Chinese military officers for allegedly hacking into the computers of U.S. companies and stealing secrets, while former contractor Edward Snowden’s revelations last June of a National Security Agency spying program already hurt U.S. technology sales in China. Last week, China said it will vet technology companies operating in the country, while the Financial Times reported Sunday that China ordered state-owned companies to cut ties with U.S. consulting firms.

“IBM is not aware of any Chinese government policy recommending against the use of IBM servers within the country’s banking industry,” Jeff Cross, a spokesman for IBM, said in an e-mail. “In fact, news reports now state that China’s National Development and Reform Commission has not heard of any alleged directive to that effect. IBM is a trusted partner in China and has been for more than 30 years.”

The results of the government review will be submitted to a working group on Internet security led by President Xi Jinping, two sources said..

“Security trumps everything,” said Duncan Clark, chairman of BDA China Ltd., a Beijing-based consultant to technology companies. “China doesn’t need the U.S. companies in the way it did for the last few decades.”

Spokesmen for Bank of China Ltd., China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd. declined to comment. Three phone calls to Agricultural Bank of China Ltd.’s Beijing press office weren’t returned.

U.S. technology sales in China have come under increasing threat following Snowden’s revelations last year of an NSA spying program.

Then, last week the Justice Department accused five Chinese military officials of hacking computers of American companies such as U.S. Steel Corp. and Alcoa Inc. to steal trade secrets.

The U.S. State Department said China's reaction is unjustified, spokeswoman Jen Psaki said Tuesday.

The U.S. expects “the Chinese government to understand that the Department of Justice’s May 19 announcement relates to a law enforcement investigation of individuals who have allegedly stolen intellectual property from U.S. businesses,” Psaki said. It “doesn’t provide, in our view, any justification for retaliation against U.S. businesses or the U.S. government.”

China is now vetting technology companies operating in the country for potential national-security breaches, which may put U.S. sales at risk for companies such as Microsoft Corp. in the world’s largest market for personal computers. Forrester Research Inc. estimates purchases of information-technology products in China will rise 11 percent this year to $125 billion.

Microsoft said this month it was “surprised” to learn that the China Central Government Procurement Center excluded its Windows 8 operating system from a purchase of energy- efficient computers. The official Xinhua News Agency called it “a move to ensure computer security.”

“China’s government is in a strong position given Snowden’s disclosures,” Clark said. “If you give them an excuse, they will aggressively promote domestic brands.”

The review would be a further blow to IBM’s business in China, where spending on server technology may grow 8.4 percent a year through 2017, compared with 2.2 percent globally, according to data compiled by IDC.

“It’s a challenging market, for sure,” Craig Stice, an analyst at IHS Technology, said in a phone interview. “It’s still an important piece because China is considered a growth market.”

The company said its revenue in China fell 20 percent in the first quarter after a 23 percent decline in the fourth quarter. Chief Financial Officer Martin Schroeter said on a conference call this month that the challenges were cyclical because half of its sales in the country come from its struggling hardware business, compared with 15 percent of worldwide sales coming from that unit. IBM also has a “very heavy concentration” in state-owned enterprises, he said.

“We are investing with the idea that China, like the rest of the growth markets, they’re absolutely going to come back and they’re going to be fine,” Schroeter said at an investor conference. “Now you can’t predict when that’s going to happen, but we continue to invest in China because we still see very good long-term opportunity there.”

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Tuesday, 27 May 2014 03:32 PM
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