Storm clouds for Western IT in China

Photo by Craig Sunter from Manchester, UK (Storm cloudsUploaded by russavia) [CC-BY-2.0], via Wikimedia Commons

China has long been a difficult market for Western tech companies to crack, and China’s government has been accused by U.S. officials and other sources of widespread hacking for the purposes of industrial and political espionage and IP theft. But where have the chips fallen in the wake of NSA leaker Edward Snowden’s revelations about American cyber-espionage practices?

The future does not look especially bright for many Western technology MNCs in the Chinese market, and recent political events are not helping.

“The bigger they are, the harder they fall,” is a phrase that comes to mind in describing the fortunes of foreign tech companies here.  Google has seemingly abandoned any hopes of search engine dominance after losing market share to Baidu, and relocating their servers to Hong Kong amid a high-profile public relations spat with China’s government.  In June 2013, Executive Chairman Eric Schmidt told shareholders that “the company will continue to stay out of China.

Apple, for its part, despite its impressive brand recognition and clout among Chinese consumers, has of late been heavily criticized in Chinese state-run media, and must contend with strong Asian-based competitors like Samsung as well as IP theft, imitators and a burgeoning black market for their products in China.  As Danwei chronicles, “The signs are clear that regulators and establishment media would both be happy for foreign mobile phone handsets and operating systems to lose market share. This should be remembered by anyone betting on Apple as a China play…”

Social media companies like Facebook and Twitter, of course, have for years been blocked by China’s “Great Firewall” due to censorship, and even in the unlikely situation that the ban were reversed, they would now be ill-poised to compete with domestic Chinese rivals like Sina Weibo and Tencent WeChat. It’s also been argued that the firewall blocks were put in place as a protectionist measure more than a censorship one – a lift of the ban would be a seeming moral victory for the west and the Chinese population while remaining an economic victory for the Chinese government.

Then, there is the trouble of the “Chinese hacking scandal,” which became most heavily publicized in early 2013 after U.S. security firm Mandiant revealed that the New York Times and other clients had been penetrated by hacking attacks originating from China (specifically in the case of the Times, from the Shanghai offices of a People’s Liberation Army unit).  In the IP-dependent tech sector, it is a truism that nothing is more precious than the protection of patents, copyrights and technical know-how. The Chinese legal system, while (very) slowly improving, is notorious for its weakness in protecting intellectual property rights, especially where foreign vs. domestic interests are concerned. To make matters worse, it is now widely acknowledged that China’s armies of agile hackers are actively engaged in industrial espionage, seeking to gain access to advanced Western technology to boost indigenous innovation and economic growth. While not always the most subtle or advanced in their methods, these hackers often have the overt or covert support of the state, allowing them to operate against their targets with virtual impunity.

Now it appears that the worst news may be in store for networking equipment providers like Cisco. After the highly-publicized breaking of the NSA PRISM scandal thanks to whistleblower Edward Snowden, companies like Cisco who have previously done lucrative business in China now face a huge security backlash.  The Chinese along with the rest of the world have now learned that a number of American tech giants regularly share their users’ data with U.S. intelligence services, and already editorials in the Global Times and China Daily have called out companies like Cisco as a huge risk to China’s security. Ironically, as Bloomberg reports, the competitors poised to benefit the most from this backlash are Huawei and ZTE, which had themselves failed to acquire market share in the United States after being effectively blocked by Congress over concerns about national security.

The irony for Cisco, which currently generates about $2 billion in annual sales in China and has made strategic acquisitions to target future growth, may cut even deeper: previously along with other American tech companies, Cisco found itself criticized by human rights watchers and grilled at a Congressional hearing for providing core infrastructure to China’s internet censorship efforts. Cisco allegedly even marketed its products to the Chinese government for aiding in the internal repression of dissidents. But it seems that for the American giant, no amount of toadying to the Party could keep it clear of Beijing’s nationalistic ire once roused.

Despite the tense atmosphere, not all technology MNCs are pessimistic about the future in China. Juniper Systems, a more specialized rival to Cisco in the telecom and IT infrastructure field, has stated its interest in making a bigger play for the China market. Alcatel Lucent says it is optimistic about its prospects in a huge bid to expand 4G/LTE network service in China. It remains to be seen if these plans will be impacted by the current Sino-American row over cyber-espionage, which may lack any real diplomatic consequences other than potentially reducing the U.S.’ leverage over cyber-theft, but will almost certainly have far-reaching effects in the private sector.

9/20/2013 Update: Economic research think tank The Rhodium Group has published an excellent summary of the impact of the “PRISM-Gate” disclosure of NSA snooping practices on U.S. multinationals operating in China, including a larger group of U.S. tech firms, the eight “Guardian Warriors” that have fallen under scrutiny by Chinese state media.  The ripple effects will likely amount to a substantial hit on these firms’ bottom line as the campaign against these companies builds up steam, likely with significant support from the Chinese government.