U.S. firms brace for China backlash over cyber spying charges

BEIJING/SHANGHAI Tue May 20, 2014 5:07pm IST

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BEIJING/SHANGHAI (Reuters) - U.S. technology companies will likely bear the brunt of soured ties between Beijing and Washington over internet security, after the U.S. Department of Justice charged five Chinese military officers with cyber espionage.

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 (NSA) contractor Edward Snowden of U.S. government spying.

Doing business in China could now get tougher, though any Chinese retaliation over the charges may not be obvious, executives and industry analysts said.

"The environment in China for U.S. technology companies is not very good right now, and this won't make it better," said James McGregor, chairman for advisory firm APCO China. "But if they're losing their intellectual property to cyber hacking they probably see this action as necessary and worrisome."

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

"There's always a risk of retribution in China," said a person who works closely with U.S. technology firms. "(But) the damage is so pervasive that no company is going to say that the (U.S.) government has acted inappropriately."

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

In December, Google Inc (GOOGL.O), Microsoft Corp (MSFT.O) and six other U.S. global technology companies called for an overhaul of practices and laws to limit how governments collect user information amid growing concerns about online surveillance. And last week, Cisco CEO John Chambers wrote to U.S. President Barack Obama calling for "standards of conduct" to ensure that government surveillance doesn't undermine the ability of U.S. technology firms to sell products globally, the Financial Times reported.

China has consistently denied accusations of cyber espionage, and summoned Max Baucus, U.S. Ambassador to China, to a meeting with Assistant Foreign Minister Zheng Zeguang, state media reported on Tuesday.

"The Chinese government and military and its associated personnel have never conducted or participated in the theft of trade secrets over the Internet," the Xinhua news agency quoted Zheng as telling Baucus.

RETALIATION

The U.S. Department of Justice's move signals a new strategy for Washington, but also caught companies operating in China off guard, sparking fresh concern that business could be damaged.

People at a number of U.S. firms and trade sources said they had not been given a heads-up before the hacking charges were made public, and were concerned that China could make life difficult for U.S. firms.

"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. "It was a bit of an untraditional tactic for the U.S. government to go about it in this way."

"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," the person added.

Beijing and Washington have traded blows over cyber espionage and online theft of intellectual property for years.

The tension was ratcheted up in late 2012 after the United States banned Chinese communications equipment makers Huawei Technologies Co Ltd [HWT.UL] and ZTE Corp (0763.HK)000063.SZ from any role in building U.S. telecoms infrastructure.

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

"The issue of cyber security is a major and growing concern for the business community," said Gregory Gilligan, chairman of the American Chamber of Commerce in China.

"AmCham China believes there is a fundamental difference between intelligence gathering for legitimate national security purposes and intelligence gathering for stealing trade secrets, and that the definition of national security ought not include economic interests," Gilligan said in e-mailed comments to Reuters.

(Additional reporting by Adam Jourdan; Writing by Paul Carsten; Editing by Ian Geoghegan)

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