In China, US tech majors weigh Snowden effect

Written by Reuters | Beijing | Updated: Jan 22 2014, 17:16pm hrs
Snowden effectEdward Snowden's revelations about US government surveillance may cost US technology firms billions of dollars in lost sales. Reuters
Battling a perfect storm of government suspicion and pricing probes in China, US technology companies are having to re-think how they sell hardware and services in the world's second-biggest economy.

US multinationals, including IBM, Cisco Systems and Qualcomm, are looking to settle price-gouging investigations and restore trust with Chinese regulators in the wake of reports that US government agencies directly collect data and tap networks of the biggest domestic technology companies.

All US IT firms are on the defensive in China, said Scott Kennedy, director of the Research Center for Chinese Politics and Business at Indiana University. They are all under suspicion as either witting or unwitting collaborators in the US government's surveillance and intelligence gathering activities.

Former National Security Agency (NSA) contractor Edward Snowden's revelations about US government surveillance may cost US technology firms billions of dollars in lost sales, analysts say. The US cloud computing industry alone may lose as much as $35 billion in worldwide sales over the next three years, the Information Technology & Innovation Foundation (ITIF), a Washington, DC-based non-profit think tank, estimates.

The ability of US companies to sell abroad has been seriously compromised by foreign customer concerns about the relationship between the US intelligence community and the tech sector, said Daniel Castro, a senior analyst at ITIF.

Nowhere is the so-called 'Snowden Effect' expected to have greater impact than in China, says Sanford C Bernstein analyst Toni Sacconaghi. US technology companies face the most revenue risk in China by a wide margin, followed by Brazil and other emerging markets, he wrote in a research note this month.

IBM, which reported a 22% drop in third-quarter China sales, led by a 40% decline in hardware revenues, may be a bellwether for the 'Snowden Effect' when it reports fourth-quarter results on Tuesday.

Revenue at the Armonk, New York-based company is expected to contract 3.7% in October-December from a year earlier, to $28.2 billion, though net profit is seen rising 6% to $6.5 billion, according to Thomson Reuters SmartEstimates.

The mutually antagonistic relationship between Washington, DC and Beijing, alongside China's drive to promote indigenous champions and the deep ties between big US tech firms and the government, further complicate the outlook.

On Saturday, China's commerce ministry condemned the $1.1-trillion spending passed by the US Congress last week for including a cyber-espionage review process for federal purchases of technology from China.

For Qualcomm and InterDigital, which face anti-monopoly investigations by China's top planning agency, the National Development and Reform Commission, related to their patent licences for wireless mobile handsets and networks, the challenges may be greater.