IBM Gains, Losses Highlight China’s Tech Conundrum
A trio of cross-border news bits is highlighting the complexities in the China-US trade relationship, where accusations of cybersyping from both sides have raised tensions and threatened to derail business dealings in the sensitive high-tech space. All 3 news bits involve tech giant IBM (NYSE: IBM), which was one of the earliest and most active US tech firms to come to China, and thus stands to lose the most from recent tensions. Two of the headlines look relatively positive, including China’s approval of a multibillion-dollar M&A deal and IBM’s launch of a major new business initiative. The third looks more ominous, and has a top lender preparing to ditch its IBM servers in favor of homegrown products in a shift that looks highly political.
All of these moves underscore the fact that China is not a monolithic state when it comes to IT. The central and local governments all have a wide range of needs and will continue to work with companies like IBM in certain areas, especially when there are no comparable products from domestic Chinese firms. At the same time, China could accelerate a drive to nurture development of its own high-tech industries that could someday provide replacement products from big western names like IBM.
One such deal that could help China move in that direction is the recently signed purchase of IBM’s low-end server business by domestic PC giant Lenovo (HKEx: 992), in a deal valued at $2.3 billion. In a positive development on that front, media are reporting that China’s anti-monopoly regulator has officially approved the deal that was first announced back in January. (English article)
China’s approval of the deal isn’t really too surprising, as there aren’t really any anti-trust implications from the purchase. The US is unlikely to block the deal either on anti-trust grounds. But the sale is reportedly coming under scrutiny by the US national security watchdog, which may be feeling political pressure to veto the transaction as tensions between China and the US rise. (previous post) IBM and Lenovo have extended their deadline for closing the deal due to unspecified delays, though Lenovo’s chief executive said just last week he expects the sale to close by the end of this year.
China’s approval of the IBM sale looks modestly positive, showing that politics won’t become too big a factor in one of the world’s biggest trade relationships. A separate piece of news has similar overtones, with IBM announcing a 10-year project aimed at helping China to improve its environment. (English article) This kind of area is clearly a priority for Beijing due to the nation’s highly polluted environment, and IBM’s expertise will certainly be welcome due to lack of comparable skills from Chinese firms.
According to the announcement, IBM’s new “Green Horizon” initiative will focus on 3 areas, air quality management, renewable energy forecasting and energy optimization for industry. IBM says one of its first partners in the initiative is the Beijing municipal government, which is looking to improve the city’s poor air quality. No monetary value is given for the initiative, but presumably it could result in contracts worth billions of dollars over the next decade.
While approval of the Lenovo purchase and the Green Horizon announcement both look positive, a third group of reports about a pilot project to put homegrown servers into domestic banks looks a bit more negative. Those reports are based on news from the People’s Daily, the official newspaper of the Communist Party, which says China Construction Bank (HKEx: 939; Shanghai: 600939) has successfully tested servers from a local supplier over the last few years at its branch in Xinjiang. (English article)
Following that trial period, the branch has begun installing the domestically produced servers in large quantities to replace rival IBM products now used in many of China’s major banks. The People’s Daily report comes less than 2 months after related reports said Beijing was pressuring the country’s major banks to find alternatives to IBM servers due to security concerns. (previous post)
This particular headline isn’t too surprising, especially since it comes from the highly political People’s Daily and was reported in the context of current Sino-US tensions. But it does underscore Beijing’s determination to wean its companies from western technology, especially in sensitive sectors like banking. I do expect we’ll see a wide range of similar headlines in the months ahead, though the negative announcements should probably start to slow down next year in tandem with an easing of cybersecurity tensions.
Bottom line: Security tensions will affect China’s trade relations with the west for technology products in some sensitive areas like banking, but business will be less affected in less sensitive areas.
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