WORLD_ American Businesses in China Feel Heat of a Cyberdispute

American Businesses in China Feel Heat of a Cyberdispute

By EDWARD WONG
MAY 31, 2014
The New York Times


BEIJING — A top Chinese general was in a combative mood as he presided recently over an international security forum at a historic hotel near the Forbidden City. Among the attendees were a retired American admiral and a former American diplomat.

The general, Sun Jianguo, delivered his message in an interview with the official military newspaper: The United States was “the world’s biggest cyberthief,” he said on Tuesday, and had accused China of state-sponsored hacking simply to draw attention away from itself. He invoked a Chinese saying: “A thief always shouts, ‘Stop, thief!’ ”

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Chinese officials are ramping up political and economic pressure on the United States government and large technology companies following the Justice Department’s announcement on May 19 of indictments against five members of the Chinese Army on charges of economic cyberespionage. Prominent Chinese officials, agencies and commentators have announced or called for measures that are widely seen as retribution for Washington’s latest charges as well as earlier related accusations, raising the specter of a trade war and stoking anxiety among American companies that do business here.

At the same time, Chinese technology companies are seizing on the tensions to press state agencies to mandate the use of domestic technology.

Some American executives say the Justice Department’s move took them by surprise. They are now nervous over a May 22 announcement by China’s State Internet Information Office that the government has established procedures to gauge potential security risks of Internet technology and services.

Last week, a Communist Party organization published a scathing attack on Cisco Systems, and a Chinese state-owned technology company trumpeted a campaign to oust IBM from the server market.

“Definitely things have changed in terms of the intensity now,” said Duncan Clark, chairman of BDA, which advises investors on the Chinese technology sector. “There’s an element of gamesmanship here. It could get ugly.”

The threat of tit-for-tat retaliation was made explicit in an opinion piece posted Wednesday on the English website of Global Times, a state-run newspaper. It said: “What has happened or what will happen on U.S.-based companies, especially those closely related to information security, is the consequence of China reinforcing its capability and prudence to defend cyber and information security, thanks to the U.S. ratcheting up its espionage against China in recent years.”

On Tuesday, a website of the influential Communist Youth League published the attack on Cisco, which sells high-end routers to government offices and companies throughout China. The editorial, which was carried by major state news organizations, said Cisco “carries on intimately with the U.S. government and military” and was “becoming an important weapon in the U.S. exploiting its power over the Internet.” Cisco denied the charges.

Some Chinese companies are stepping forward as the official backlash against American technology grows. Alibaba Group, one of China’s biggest technology firms, announced Wednesday that it hoped its cloud computing products would replace storage services that big American companies had sold to Chinese financial institutions.

Continue reading the main story A Chinese state-owned company, Inspur Group, announced Wednesday on a social networking platform that it planned to “completely take over” IBM’s main server business in China, and that it had begun a program called “I2I” or “IBM to Inspur” — part of an “irreversible trend of localization.” Inspur also said that it was open to employing any IBM workers and “transferring projects” from rivals, and that it had already hired 80 employees of “a multinational company.” An Inspur employee said that company was IBM.

Inspur, known in Chinese as Langchao, or Wave, has long been trying to usurp IBM as the dominant player in the server market here. IBM servers are used in state-owned banks. But in March 2013, a nationwide financial institution, Postal Savings Bank of China, began a pilot project to use Inspur servers, according to state news reports at the time. Several provincial banks did the same.

Central government agencies, including the People’s Bank of China and the Finance Ministry, are reviewing the use of IBM servers and considering whether to expand the use of Chinese-made servers, Bloomberg News reported last week.

A spokesman for IBM said the company was not aware of any Chinese government policy recommending that the banking industry not use IBM servers.

Analysts say China’s drive to promote domestic technology companies over foreign rivals is decades old, but competition with American interests became acute after the House Intelligence Committee said in October 2012 that two of China’s largest telecommunications businesses, Huawei Technologies and ZTE Inc., were a national security threat. The companies denied the charges, but the bipartisan report dealt a severe blow to their efforts to win contracts and sell equipment in the United States. (In the China router market, Huawei is the main challenger to Cisco.)

Shortly afterward, Chinese officials had serious discussions over establishing a security review process for foreign technology. That was a precursor to the security review procedures announced on May 22.

Tensions between the United States and China over information security escalated early last year when the Obama administration and an American cybersecurity firm, Mandiant, said the Chinese government and military were big players in global cyberespionage. American officials say the five Chinese Army men indicted this month are members of Unit 61398, which was the focus of the Mandiant report.

The published leaks from Edward J. Snowden, the former National Security Agency contractor, in the summer of 2013 undercut the Obama administration’s criticisms of China and made Chinese officials even warier of American technology. Chinese news reports talked about the dangers of China being “infiltrated” through technology from big American companies nicknamed the “eight guardian warriors” — Cisco, IBM, Google, Qualcomm, Intel, Apple, Oracle and Microsoft.

Cisco’s sales in China have dropped sharply. And the national procurement office recently barred government offices from using Microsoft’s Windows 8 operating system.

The new emphasis on information security is reflected by the fact that China’s president, Xi Jinping, is the head of a new working group on cybersecurity. Attempts to wean China off foreign technology are consistent with longstanding national policy, said Mark Natkin, managing director at Marbridge Consulting, a technology consultancy in Beijing. “There’s this weird foreign idea that everything should be fair,” he said. “Ultimately, what China is striving towards is promoting domestic champions and buying locally.”

But Mr. Natkin and other industry analysts say there may be pushback by Chinese companies and institutions against government orders here to get rid of foreign technology if the move is costly or a domestic alternative is inferior. “There’s a cost consideration and product life cycle,” Mr. Natkin said. “If they’ve purchased equipment recently from IBM, for example, there would be reluctance to swap out.”

Continue reading the main story Continue reading the main story Advertisement China Central Television, the state network, posted an online report on Thursday that revealed similar skepticism in the banking industry. “Everyone uses IBM,” a senior technology officer at a state bank told the reporter. “We’ve been using them for many years. If you say stop using them, isn’t that ridiculous?”

The mission of some powerful government agencies is the promotion of Chinese businesses and technology. One such agency is the Ministry of Information and Industry Technology. Last year, for example, the agency said in a paper on cellphone technology that Google had overbearing dominance of the market for smartphone operating systems.

“In China’s domestic market, the Android system is in a situation where it has almost absolute advantage,” the agency said. It said the Chinese companies Huawei, Alibaba and Baidu had put a “huge amount of money and human talent” into developing viable alternatives, but that they “face commercial discrimination from Google all the time.”

That sentiment was articulated recently on a much broader level by Fang Binxing, who is credited with creating the system of Internet blocking in China known as the Great Firewall. In remarks published May 23 on the website of People’s Daily, the Communist Party newspaper, Mr. Fang said each country needed to build its own main servers because “the Internet is a world that belongs to the U.S.”

“The ability of Americans to carry out Internet attacks is so strong that other people don’t even know how they are beaten,” Mr. Fang said. “They don’t know when and where they are beaten. They don’t have the capabilities to catch the U.S., and thus the U.S. has nothing to fear.”

Kiki Zhao and Bree Feng contributed research from Beijing.

A version of this article appears in print on June 1, 2014, on page A8 of the New York edition with the headline: American Businesses in China May Feel Retaliatory Sting of Cybershowdown.


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