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Cyber Espionage Spells Trouble for High-Tech Supply Chain Planning

The US and China are entering a new era of mistrust over the issue of cyber espionage. The impact now threatens supply chain planning at US companies seeking to sell hardware, software, and maintenance and support services into China.

The latest chapter in this ongoing saga comes from a recent Bloomberg News report that the Chinese government is considering replacing the IBM servers that run China's banking industry with Chinese-made technology. Chinese authorities say such a move would help them protect their financial data. If this report (which relied on four unnamed sources) is true, high-tech supply chain managers must recognize and prepare for slower sales into China.

Additionally, a new level of competition is about to take place as Chinese technology becomes more sophisticated and capable of managing business processes in sensitive markets that have a huge amount of daily transactions.

Last month, the Justice Department announced that five Chinese military officers had been indicted for allegedly hacking into the computers of major American companies (including US Steel Corp. and Alcoa Inc.) and stealing trade secrets.

For its part, the Chinese government cites Edward Snowden's revelations about electronic surveillance conducted by the National Security Agency Prism project to access, collect, and process foreign intelligence passing through American-made servers. Officials have said the US spies on Chinese companies.

IBM isn't alone
The mistrust between China and the US is now affecting technology companies' business relationships.

Cisco Systems recently said that its business in China declined 8% in the quarter that ended April 26. Additionally, the Chinese government recently decided not to use Microsoft Corporation's Windows 8 operating system for its computers.

One area of technology where companies stands to lose billions of dollars is cloud computing, which runs on high-end mainframe and server technology. According to Forrester Research analyst James Staten, the US cloud computing industry could lose up to $180 billion if foreign customers stop using cloud computing services because of recent revelations regarding the NSA's electronic surveillance programs.

US tech companies need China
The Chinese economy is still expanding, and companies like IBM view it as an important growth market.

According to the latest forecasts from the IDC Worldwide Black Book, worldwide spending on server systems (all types) will grow 1.6% this year over last year. In China, spending on servers is forecast to grow 8.2%.

Also of note, China has made significant strides in developing comparable technology to match IBM servers and mainframe systems such as IBM's System z, which is designed to process large amounts of information.

That's the case being made by Kuba Stolarski, IDC's research manager for servers, virtualization, and workloads. “China does have a track record now of developing its own processors, including an Itanium-compatible chip, a system-on-a-chip, as well as a SPARC-compatible chip that was used in the Milky-Way 2 supercomputer,” Stolarski told us. “If China has developed its own alternative that is compatible with System z architecture, then they could be trying to migrate away from IBM.”

After more than 30 years of providing China's banking sector with high-end servers and other technology, IBM is holding out hope that the quality of its products and the strength of its business relationships will shield it from any decision that tempts its clients to look elsewhere for replacement technology.

However, in the new climate of mistrust and suspicion, and with new developments in Chinese technology emerging, the Chinese will be tempted to use their own technology to secure their sensitive data. Inevitably, this will result in a revenue loss for US companies. How much of a loss remains to be seen.

8 comments on “Cyber Espionage Spells Trouble for High-Tech Supply Chain Planning

  1. Hailey Lynne McKeefry
    June 26, 2014

    China and the US  are so entangled when it comes to the electronics industry. Of course, here you are talking about end product level, but there are similar issues at the compenent level. What do you think is the first string to pull to unravel some of these issues? Is it just the reality of business in this age or can we get past some of these issues?

  2. Houngbo_Hospice
    June 27, 2014

    All these attempts by China to replace US made electronic products with home made products is part of China's plan to dominate global electronics industry by 2015. But China will have a hard time achieving its goal with only companies based in the countries. It will have to pursue deals with companies outside the country, expectably in the US.

  3. The Source
    June 28, 2014

    Hospice_Houngbo 

    Yes, China will have to secure technology deals with other nations, but China is laying the groundwork to do just that. China is investing billions of dollars in South Africa, Australia, Canada, the US and many other countries. The world of investment and business is a complex one, and I wouldn't doubt China's ability to develop technology that can eventually replace US technology. I fully expect China to make deals with other countries that will enhance their high-tech position.  Remember, America is helping China meet its goals.  There are so many Chinese engineers studying in the US and many of them will return to China. 

  4. The Source
    June 28, 2014

    Hailey,

    In business you can get past anything.  For a long time the US was engaged in a Cold War with communists nations. The US and its western allies said they wanted to advance the goals of freedom and democracy.  Wars were fought to contain communism in Vietnam and Korea.  However, China, which today is the largest communist country in the world, is the location US businesses picked to manufacture much of their consumer electronics products. Manufacturers weren't thinking about communism, they were thinking about low wage labor rates and the profits they could make by manufacturing in China. The US will always be important to China, and China will always be important to the US, and both countries will do whatever they can to improve their position in a global economy.       

     

  5. Ashu001
    June 30, 2014

    Hospice,

    Its not just that (China's plan for Global Domination);There is the not very trivial issue of Spying(which America and especially its NSA has become so notorius for ).

    Think about it strategically;if you knew that such a country which openly considers you Enemy No.1 (America);would you want its products Manning your most Important/Strategic Assets.

    I for one would'nt.

    Geopolitics is not something to be laughed at.

     

  6. Ashu001
    June 30, 2014

    The Source,

    How do you know the Chinese are'nt already there?

    They are currently building Aircraft Carriers as well as Stealth Fighters.

    Both these represent the epitome of Technology as we know it.

    In contrast,How hard is building a Few Servers and Switches gonna be?

     

  7. Ashu001
    June 30, 2014

    The Source,

    While this was true previously;It does'nt hold true anymore.

    Primary reasons are rising wages in China(Double Digit Growth Rates in Wages for over a decade now) and falling Energy Prices in the US because of the Shale Gas Revolution.

    In Addition increased Degree of Automation and Depressed American Salaries mean ,most electronics Manufacturing can (and most certainly will) come back home to America today.

     

  8. Hailey Lynne McKeefry
    June 30, 2014

    I agree, and at the same time, the relationship is evolving all the time. I think the cultural differences and the business practices (Is it OK to copy a design?) are going to always be challenging.

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