The Chinese government has reportedly started reviewing whether China’s domestic banks’ use of high-end American-made IBM servers compromises the nation’s security, particularly with regards to financial espionage and sabotage.
According to individuals knowledgeable of the situation — as relayed by Bloomberg — the People’s Bank of China and the Ministry of Finance, along with other government agencies, are asking banks to remove the IBM servers and replace them with a locally-made product on a trial run.
On cursory examination, this seems in sync with other actions China has taken in recent weeks in response to revelations leaked by former Booz Allen Hamilton subcontractor Edward Snowden concerning the U.S. federal government’s heavy use of domestic and international electronic signal surveillance in violation of both personal liberties and national sovereignty. The Chinese government recently announced that it will vet foreign technology companies operating in China, and the Financial Times reported on May 25 that China’s state-owned companies have been ordered to cut ties with American consulting firms. In both instances, China has cited national security concerns.
A deeper look, however, reveals that the rationale for China’s crackdown on American technology firms is more retaliatory than security-derived. On May 19, the U.S. Justice Department unsealed an indictment against five members of the Chinese People’s Liberation Army’s Unit 61398, charging them with hacking into the networks of Westinghouse Electric Company, United States Steel Corporation and others. The FBI and the American intelligence community managed to trace the electronic trail of the hackers all the way back to the cyberunit’s Shanghai headquarters.
“Tit-for-tat”
While the indictment is largely symbolic, as it’s almost guaranteed that China will not turn over the indicted soldiers, it still managed to set off a “tit-for-tat” round of allegations across the Pacific. This is despite the fact that the targets listed in the indictment coincidentally read almost exactly like the list of companies involved in major trade disputes between the United States and China, and reports of Chinese espionage have become so common that it’s a pop culture reference.
The Chinese outrage behind the indictments reflects a double standard many Western companies working in China have realized: while it is likely that China will spy and retaliate to defend its own national interests, it is almost impossible to make the country own up to its actions.
IBM has done business with the Chinese government since the 1980s, so the notion that China has suddenly become uncomfortable with the company seems peculiar. Coupled with moves against other American brands — such as the China Central Government Procurement Center’s exclusion of Windows 8 from the purchase of energy-efficient computers on the grounds of computer security and the Communist Party’s Youth League’s criticism of Cisco as a “disgraceful tool” for the U.S. to promote its Internet power in China — this current dust-up is being used as a cover to replace American brands in China with local brands.
“The top-down push is very strong,” said Duncan Clark, chairman of BDA China Ltd., a Beijing-based consultancy to technology companies. “While it used to be that nobody ever got fired for buying IBM, now that’s switching to: everybody gets fired for buying IBM.”
For its part, IBM has decried any indication of a calculated attack of its position in China.
“IBM is not aware of any Chinese government policy recommending against the use of IBM servers within the country’s banking industry,” said Jeff Cross, a spokesman for IBM, in an emailed statement to Financial Post. “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.”
IBM’s problem
The push to replace IBM in China, however, only partially explains IBM’s slacking revenues. IBM’s revenue totals from China have been in decline since 2013, when it was revealed that several American tech companies allegedly participated in the NSA’s top-secret PRISM surveillance program.
According to research firm Gartner, IBM’s first quarter revenues for the Asia-Pacific region reflect a 28 percent market share, down from 37 percent for the same period last year. The company’s revenue fell 20 percent in the first quarter in China, after a 23 percent decline in the fourth quarter of 2013. While IBM’s stock value — as of the writing of this article — has risen against a sagging market, the company’s stock value had previously been stagnant or in slight decline against a previous bull market.
With 50 percent of all IBM sales in China being server sales — compared to 15 percent worldwide — and with most of these server purchases coming from state-owned companies, the impression that IBM was complicit in the NSA’s electronic surveillance has chilled IBM’s sales. The number of shipments of servers in 2013 worldwide grew by 2.1 percent, according to Gartner, but revenue from server sales dropped by 4.5 percent. While some American companies — such as Hewlett-Packard and Cisco — showed some growth, most of the new revenue was focused on Asia-Pacific manufacturers. This is coupled with 2013 being the single-worst year for PC sales, as the PC market contracted by 5.6 percent.
Although this can be explained away by considering that many server purchasers are buying web-application servers capable of cloud application hosting instead of enterprise servers, and that tablet, notebook and smartphone sales have all been on the increase compared to PC sales, it may also be that consumers have lost faith in the major technology brands. Since the publication of the first batch of Snowden’s downloaded classified files, the world has been treated to previously little-known information about the partnerships the intelligence community cultivated with the technology sector.
Last month, an IBM shareholder agreed to end a lawsuit against IBM, in which the shareholder alleged that the company’s concealment of its cooperation with the NSA cost it nearly $13 billion in market value due to the Chinese government’s resistance to work with IBM. The complaint alleged that IBM actively lobbied Congress for a law that would allow the company to share personal data for its Chinese customers in an attempt to protect intellectual rights, among other claims.
IBM is a registered vendor with the NSA’s Trusted Access Program Office, meaning that the NSA depends on IBM equipment as part of its secured operations. While IBM actively denies sharing customer data with the federal government and denies ever receiving a national security order requesting client information, the company’s links to the federal government are hard to deny.
IBM and the question of top priority
IBM was started as the Tabulating Machine Company in the 1880s by Herman Hollerith, a U.S. Census Bureau worker who came up with a punched card reader and tabulator as a way to reduce the time to tally the 1890 Census. Hollerith’s punched card reader would be the standard technology used in major statistical calculations until the 1960s.
The federal government purchased several of Hollerith’s machines to calculate the 1900 Census. When the Census was completed in record time, the company’s relationship with the government was set. Hollerith’s machine became the backbone of the newly-formed IBM under the leadership of Thomas Watson, a former vice president of the National Cash Register Company, and it is recognized as the world’s first programmable computer. The National Cash Register Company merged with Hollerith’s company to form what would become IBM.
IBM would maintain its dominance in the calculation equipment industry until the emergence of the personal computer in the 1980s. This dominance prompted allegations that the company was willing to put profit ahead of ethics, despite IBM having a customer-first culture and one of the more progressive employee relations policies in the history of American industry, including the hiring of handicapped workers and paid employee education in the 1910s.
In investigative journalist Edwin Black’s 2001 book “IBM and the Holocaust,” it is alleged that through its German subsidiary, the German Hollerith Machine Company, IBM maintained a business relationship with the National Socialist German Workers Party, the Nazi Party, during Adolf Hitler’s Third Reich despite calls for an economic boycott. The Nazis used the tallying equipment to identify Jews, Gypsies and “other undesirable ethnic groups.”
“When Hitler came to power, a central Nazi goal was to identify and destroy Germany’s 600,000-member Jewish community. To Nazis, Jews were not just those who practiced Judaism, but those of Jewish blood, regardless of their assimilation, intermarriage, religious activity, or even conversion to Christianity,” wrote Black. “…To search generations of communal, church, and governmental records all across Germany — and later throughout Europe — was a cross-indexing task so monumental, it called for a computer.”
The machine was first used in an ethnic census of Prussia and later to tally and keep track of the prisoners sent to the concentration camps.
Black alleged that Watson knew about this and consented, investing approximately $1 million to build a factory in Germany. This led to Germany being IBM’s second-largest customer during the World War II era. Black also alleged that Hollerith’s machine was crucial to the operation of the Nazi’s “Final Solution.”
IBM has neither confirmed nor denied these allegations, asserting that records from that time in history were “destroyed or lost during the war” and that the Nazis could have obtained the equipment without the subsidiary being aware of its purpose.
However, researchers have came forward to assert that there is a strong possibility that these allegations are true.
Regardless, the impression that IBM — and the technology sector as a whole — may consider motivations other than the consumer in its business decisions may explain the lack of trust these companies are currently suffering with the public.