U.S. companies may see China backlash over cyber spying charges

BEIJING/SHANGHAI Wed May 21, 2014 1:18am IST

The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv October 24, 2011. REUTERS/Nir Elias/Files

The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv October 24, 2011.

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BEIJING/SHANGHAI (Reuters) - American technology companies appear most likely to feel any backlash that could come from China after the U.S. government charged five Chinese army officers with cyber spying and stealing trade secrets.

U.S. equipment and software providers such as IBM Corp (IBM.N) and Cisco Systems Inc (CSCO.O) have already seen their China sales drop after last year's revelations by former National Security Agency contractor Edward Snowden of U.S. spying.

IBM's China sales have fallen by a fifth or more for three straight quarters, the firm reported in April. Cisco said last week that its China business declined 8 percent in the quarter to April 26.

Microsoft Corp (MSFT.O) has long struggled with sales and the government is not using Windows 8, the company's latest operating system.

Doing business in China could now get even tougher, although any retaliation may not be immediate or obvious, industry analysts and executives said.

"U.S. companies were having difficulty anyway. This will give them more difficulty," said Howard Anderson, a senior lecturer at MIT's Sloan School of Management. "The Chinese will use any excuse to turn to internal suppliers."

Officials with IBM and Cisco did not respond to requests for comment. Boeing Co. (BA.N) had no immediate comment. An Intel Corp (INTC.O) spokesman declined comment.

Experts said U.S. technology executives are unlikely to publicly complain about the decision to indict five members of a Chinese People's Liberation Army unit on hacking charges, which

Assistant Foreign Minister Zheng Zeguang denied in a meeting with U.S. Ambassador Max Baucus.

James McGregor, chairman for advisory firm APCO China, said that if American technology companies are "losing their intellectual property to cyber hacking they probably see this action as necessary and worrisome."

Another person who works closely with U.S. technology firms said that the damage is so pervasive that no company is going to say that the U.S. government acted inappropriately.

"Companies in any industry seen as a priority for China's industrial policy could be at risk," the person said.

In December, Google Inc (GOOGL.O), Microsoft Corp and six other companies called for an overhaul of practices and laws to limit how governments collect user information amid growing concerns about online surveillance.

Last week, Cisco CEO John Chambers wrote to President Barack Obama calling for "standards of conduct" to ensure that Washington's surveillance programs don't undermine U.S. technology firms ability to sell overseas.

Graphic - U.S. hacks China r.reuters.com/mev49v Some U.S. companies in China were caught off guard by the charges. People at several U.S. firms and trade sources said they were given no advance notice.

"It was very surprising to see that it came out in the way that it did," said a person at a China-based business lobby. "I don't think it will be overt retaliation, but there will certainly be ways that the Chinese government will preclude foreign companies from certain sectors."

Other experts said the indictments were largely symbolic because no one expected the five people accused to be arrested or to answer the charges in a U.S. court.

Dean Cheng, a China expert with the Heritage Foundation, said the U.S. government was sending a powerful message, but China was unlikely to change its behavior unless other countries followed suit. He said similar actions by European countries who believe their companies are also victims of Chinese hackers could increase pressure on Beijing.

Tensions over cyber security were ratcheted up in late 2012 after Washington banned Chinese communications equipment makers Huawei Technologies Co Ltd and ZTE Corp (0763.HK)000063.SZ from building U.S. telecoms infrastructure.

Beijing responded by pressuring big state-owned firms to stop buying U.S.-made hardware, emphasising security risks following Snowden's revelations, people in the industry said.

(Additional reporting by Jim Finkle, Andrea Shalal, Adam Jourdan, Noel Randewich and Marina Lopez; Writing by Paul Carsten; Editing by Ian Geoghegan and Grant McCool)

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