NSA spying scandal accelerating China's push to favor local tech vendors

The NSA spying scandal has put a strain on the China business of Cisco and Qualcomm, the companies said recently

While China's demand for electronics continues to soar, the tech services market may be shrinking for U.S. enterprise vendors. Security concerns over U.S. secret surveillance are giving the Chinese government and local companies more reason to trust domestic vendors, according to industry experts.

The country has always tried to support its homegrown tech industry, but lately it is increasingly favoring local brands over foreign competition.

Starting this year, the nation's government tenders have required IT suppliers to source more products from local Chinese firms, said an executive at a U.S.-based storage supplier that sells to China. In some cases, the tenders have required 50 percent or more of the equipment to come from domestic brands, said the executive, who requested anonymity.

Recent leaks by former U.S. National Security Agency contractor, Edward Snowden, about the U.S.'s secret spying program aren't helping the matter. "I think in general China wants to favor local brands; they feel their technology is getting better," the executive said. "Snowden has just caused this to accelerate incrementally."

Last month, other U.S. enterprise vendors including Cisco and Qualcomm said the U.S. spying scandal has put strains on their China business. Cisco reported its revenue from the country fell 18 percent year-over-year in the last fiscal quarter.

The Chinese government has yet to release an official document telling companies to stay away from U.S. vendors, said the manager of a large data center,  who has knowledge of such developments. But state-owned telecom operators have already stopped orders for certain U.S. equipment to power their networks, he added. Instead, the operators are relying on Chinese vendors such as Huawei Technologies, to supply their telecommunications equipment.

"It will be hard for certain networking equipment made in the U.S. to enter the Chinese market," the manager said. "Its hard for them (U.S. vendors) to get approval, to get certification from the related government departments."

Other companies, especially banks, are concerned that buying enterprise gear from U.S. vendors may lead to scrutiny from the central government, said Bryan Wang, an analyst with Forrester Research.

"The NSA issue has been having an impact, but it hasn't been black and white," he added. In the future, China could create new regulations on where certain state industries should source their technology from, a possibility some CIOs are considering when making IT purchases, Wang said.

The obstacles facing U.S. enterprise vendors come at a time when China's own homegrown companies are expanding in the enterprise market. Huawei Technologies, a major vendor for networking equipment, this August came out with a new networking switch that will put the company in closer competition with Cisco.

Lenovo and ZTE are also targeting the enterprise market with products targeted at government, and closing the technology gap with their foreign rivals, Wang said.

"Overall in the longer-term, the environment is positive for local vendors. We definitely see them taking market share from multinational firms in China," he added.

Chinese vendors are also expanding outside the country and targeting the U.S. market. But last year Huawei and ZTE saw a push back from U.S. lawmakers concerned with the two companies' alleged ties to the Chinese government. A Congressional panel eventually advised that U.S. firms buy networking gear from other vendors, calling Huawei and ZTE a security threat.

Huawei and ZTE have both defended the safety of their companies' products, but the security concerns around Huawei and ZTE continue.

At least in China the two companies are enjoying easier access to their home market. This year, IT purchases in the country are estimated to reach US$113 billion, making China the third largest tech market in the world after the U.S. and Japan, according to Forrester Research.

Other U.S. tech vendors, including Hewlett-Packard and IBM, are also reporting a slowdown in their China sales. But analysts believe the decline stems from the nation suspending IT purchases in recent months. Chinese President Xi Jinping took power last November, and authorities have been leading anti-corruption investigations against local officials, which will include scrutiny of government purchases.

The sales opportunity in China, however, remains vast, especially among private commercial enterprises that want cutting edge technologies. More Chinese businesses are moving toward cloud computing, and building new data centers, creating demand for products from HP, IBM and Microsoft.

But at the same time, China's local tech vendors will continue to grow more competitive, putting more pressure on their foreign rivals. Technology is becoming easier for companies to replicate, and China will continue to support local brands, said Kitty Fok, an analyst with research firm IDC.

Tags NetworkingregulationIBMqualcommciscogovernmenttrade

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Michael Kan

IDG News Service

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