MULTINATIONALS: Seagate Joins China Tech Train with Sugon Tie-Up

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Bottom line: Seagate’s new partnership with Sugon is the latest tie-up designed to give a major western hardware maker continued access to China’s IT services market, even as such partnerships sharply raise the risk of IP theft.

Seagate in new China tie-up

The steady stream of US tech firms bowing to Beijing’s tough new rules for doing business in China has just gained a new member, with word that data storage specialist Seagate (Nasdaq: STX) has just formed a new local joint venture. This particular tie-up comes just a half year after Seagate’s new partner, a company called Sugon (Shanghai: 603019), formed another similar cloud computing partnership with VMWare (Nasdaq: VMW), a unit of data storage giant EMC (NYSE: EMC).

The new Seagate alliance and slightly older VMWare venture come as most major US high-tech hardware makers, including the likes of IBM (NYSE: IBM), Hewlett Packard Enterprise (NYSE: HPE) and Cisco (Nasdaq: CSCO), have all formed similar tie-ups in a new love affair with Beijing. Of course I’m being slightly facetious in calling it a love affair, since these companies really didn’t have any choice in the matter.

At the heart of the issue is Beijing’s tough new national security law that took effect last year, which forces foreign companies to form such tie-ups if they want bid for big contracts with the government or big state-owned enterprises (SOEs). In all fairness, I should point out that big western governments like the US and Australia have previously banned Chinese tech companies from participating in similar contracts, again citing national security concerns about the potential for spying.

But a big difference is that China’s IT infrastructure is far less developed, meaning there’s much more money being spent to build new systems than in the west. In addition, most of China’s biggest businesses are SOEs, meaning the big foreign tech firms wouldn’t be able to do business with big names like leading bank ICBC (HKEx: 1398; Shanghai: 601398) and top oil producer PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) without first forming a local partnership.

Thus the bottom line is there’s really not much the foreign companies can do in this situation, since most want to continue bidding for the billions of dollars in steady new contracts coming from Beijing. China would like to lessen its reliance on the foreign companies and promote domestic tech names instead, but realizes that locally developed technology is often far inferior to that from western companies.

The result is this new stream of uneasy partnerships, which now includes the latest deal that will see Seagate supply some of its cutting-edge data storage products for use in systems being developed by Sugon. (company announcement) Most of Seagate announcement focuses on its storage products that will be used in the partnership, highlighting the fact that this is quite a one-way tie-up that the US company is entering to maintain its access to the China market.

Limited Field of Partners

Any investors with access to China’s domestic A-share market might want to take a closer look at Sugon, which recently became a publicly traded company and appears to be quickly emerging as an IT systems company to watch. The company was previously closely tied with China’s prestigious Chinese Academy of Sciences, indicating that it probably has strong government ties that first VMWare and now Seagate are hoping to tap.

The field of such suitable partners is relatively limited. Another big name to emerge has been Inspur, which has formed tie-ups with IBM and Cisco. A third is a series of companies with names like Unigroup and Unisplendour, which have formed tie-ups with HP and Intel (Nasdaq: INTC) and are all based at the prestigious Tsinghua, China’s leading sciences university. All such names are in Beijing and have close ties with the government, easing concerns that the systems they build might compromise national security.

The big hardware makers haven’t been the only ones bowing to Beijing’s demands. In March, software giant Microsoft (Nasdaq: MSFT) took the highly unusual step of developing a special version of its latest Windows 10 operating system (OS) just for the Chinese government. (previous post) Smartphone giant Apple (Nasdaq: AAPL) has also bowed to Beijing’s concerns by hosting information for its China-based users on servers located inside the country.

At the end of the day, these foreign companies simply want to keep doing business in China, even though these new partnerships put their technology at risk of intellectual property (IP) theft. All of them realize that China is too big a market to ignore, especially as it aggressively builds up its IT infrastructure. Hopefully they won’t regret their decisions in a few years, if and when names like Sugon, Inspur and Unigroup suddenly start producing new hardware that looks and functions remarkably similarly to products from their US partners.

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