IBM’s Investments In China Threatened?
June 2, 2014 Dan Burger
A published report in Bloomberg News May 27 described IBM as in a problematic position with the Chinese government. At risk are the large server contracts Big Blue has within the banking industry. According to Bloomberg, the Chinese government may force state-owned banks to remove IBM servers because of a perceived threat to national financial security. The report cites “people familiar with the matter” pointing the finger at the intensifying dispute between the United States and China stemming from allegations of spying.
This unfolding drama involving IBM was revealed a week after five Chinese military officers were indicted by U.S.-based prosecutors for hacking computers and stealing secrets from U.S. companies. In quick retaliation, the Chinese government promised a close examination of its technology ties to companies with headquarters outside China. In effect, it sent a signal to the U.S. that it was putting IBM’s substantial business dealings there in limbo along with other investments from companies such as Microsoft.
In addition to concern that IBM’s equipment poses a security threat, it was also reported that China’s government believes IBM servers are more expensive in China than in other regions. So the threat may have another motive, bargaining with IBM for lower-priced servers.
It’s an educated guess IBM has a substantial Power Systems deployment in the Chinese banking industry along with mainframes.
According to the Bloomberg report, 14 percent of IBM’s 2013 revenue, which totaled $99.8 billion came from the Asia/Pacific region excluding Japan and approximately 9.7 percent of total revenue came from its server business. That report also included a separate estimate from analyst Toni Sacconaghi, at Sanford C. Bernstein & Co., showing IBM revenue in China totaling $4 billion.
IBM does not release revenue figures by country.
The significance of the China market is also reflected in recent reports from Forrester Research, which estimated China’s investment in information technology products will reach $125 billion in 2014, an increase of 11 percent over 2013.
The analysts and researchers at IDC pegged Chinese spending on server technology to rise 8.4 percent each year for the next three years. That’s nearly four times the growth estimate of the global server market.
IBM’s server business has been in a revenue decline for more than a year, with some of the losses attributed to a flagging economy in China.
IBM announced its intent to sell its System x server business in January to Lenovo Group for $2.3 billion. The details of the deal are still subject to approval by the US government who will likely approve it, based on how Lenovo has maintained the presence of its PC business in North Carolina after purchasing it from IBM in late 2004. The transaction includes BladeCenter and Flex System blade-style servers–slim devices that slide into racks–along with switches that run corporate computer networks.
IBM issued a statement May 28 that read: “IBM is not aware of any Chinese government policy recommending against the use of IBM servers within the country’s banking industry. 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.”