U.S. firms get caught in China spying crossfire

May 26, 2014

By Ethan Bilby

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s almost a year since U.S. President Barack Obama and his Chinese counterpart Xi Jinping held a cordial “shirt-sleeves summit”. When it comes to the two countries’ internet rivalry, however, bare knuckles have replaced bare forearms. Last week’s indictment by the United States of five Chinese army officers as alleged cyber spies has prompted a backlash against American companies. China’s weapon is shutting them out from future growth.

China responded with predictable speed after the Federal Bureau of Investigation put the hackers on its “Most Wanted” list. The mainland plans to scrutinise foreign information technology vendors in the name of national security. Companies which fail security checks could be blacklisted from supplying products and services. State media reported authorities would also ban Windows 8 from government computers. Meanwhile, the government is discouraging state-owned companies from using foreign management consultants like McKinsey, according to the Financial Times.

It’s hard to know how seriously China will enforce this stance. Even so, the threat is potent. Though the World Trade Organisation bans its members from discriminating against foreign imports, it allows exceptions for national security. That is how the U.S. government keeps Chinese telecom equipment companies like Huawei and ZTE out.

The few Western groups that report their China sales suggest the figures are limited. Consumer electronics group Apple is on the high side: 15 percent of its sales went to China last year, including Hong Kong and Taiwan. It’s hard to see the Chinese government preventing its citizens from owning iPhones. Companies which focus on corporate sales may be more vulnerable, but also have less to lose. For American telecom equipment-maker Cisco Systems, China accounted for only 3 percent of its sales of network backbone equipment in the third quarter of 2013, according to Ovum analysts.

Nevertheless, the threat China might freeze U.S. companies out of its e-commerce boom is a potent one. China sales are already falling at companies like IBM and Cisco, raising the risk that they will miss a key source of future growth. The mainland will fuel roughly a quarter of global growth in core network equipment to 2018, according to Ovum. Fallout from the spying row could yet log them out from future returns.

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