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Did Edward Snowden's NSA Papers Really Hurt American Business Interests?

It seems only yesterday American leaders were wary of Chinese computing equipment. The congressional Intelligence Committee said Chinese telecoms and networking-equipment vendors "can't be trusted," and American network operators with government contracts were steered away from vendors like Huawei and ZTE. Yep, that was last year.

The shoe is on the other foot today.

China's Ministry of Public Security is diving into American computing giants over security concerns. Database software specialist Oracle (NYSE: ORCL  ) is on the list, presumably due to its big bet on server and storage hardware. So is storage systems expert EMC (NYSE: EMC  ) . Even jack-of-all-trades IBM (NYSE: IBM  ) is under investigation.

"At present, thanks to their technological superiority, many of our core information technology systems are basically dominated by foreign hardware and software firms, but the Prism scandal implies security problems," said Chinese media services, according to Reuters.

This is in reaction to the data security scandal that NSA contractor Edward Snowden uncovered at great personal risk and cost. It's not the first sign of Chinese eyebrows being raised; it's just the most formal backlash so far. In June, Cisco Systems (NASDAQ: CSCO  ) presumably lost a major contract with massive telecom China Unicom over similar concerns.

With at least one Dow Jones Industrial Average (DJINDICES: ^DJI  ) member in the Ministry's sights right now and another losing business over the Prism surveillance system controversy, Snowden's disclosures are having a real effect on American business interests.

But just how important is the Chinese market to our networking, big-storage, and computing vendors? Well, some supposed targets care more than others.

EMC sees China as a rapid growth opportunity, but the market isn't a major factor in current results. Losing Chinese sales might slow down the company's expansion plans but won't hurt short-term results all that much.

China is a bigger deal to IBM. The Asia-Pacific region accounts for 24% of Big Blue's total revenue, and China delivers the lion's share of that. The company also has a hundred-year legacy to defend, and I find it unlikely that IBM would risk its global reputation by building government backdoors into its equipment. Maybe I'm naive here, but it just doesn't compute, so I'd expect Chinese investigations to come up empty-handed here.

I have somewhat less confidence that Oracle has sparkling-clean hands, but then, Asia overall only adds up to 16% of the company's sales. So any lost business here won't be very painful. The same theory holds for Cisco as well: Asia accounts for 15% of the company's revenue.

So Snowden and his Prism disclosures might put a slight damper on American computer-sector business in China until the whole affair blows over. But it won't be a game-changing backlash for any of these companies. The Dow will survive this storm in a teacup. In the end, I'm still convinced that Snowden did America a service by unveiling shady policy moves, and he's not a business-breaking pariah. Share your own opinion on these matters in the comments box below.

American IT businesses are fighting these headwinds in China, but the market remains enormous and growing. There's good reason to believe that the most successful investors over the next few decades will be those with exposure to China's massive and growing population of domestic consumers. And there are few things that these consumers are likely to purchase with more enthusiasm than cars and trucks. In this brand-new free report, our analysts get out in front of this trend by identifying two automakers that are poised to surge along with China's middle class. If you want to be among the smart investors who get rich from this growing trend, then you'd be well advised to instantly download our free report on the topic by clicking here now.

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  • Report this Comment On August 16, 2013, at 6:30 PM, PhineasTBuford wrote:

    A small quibble; while I don't at all think that this was your intention, the headline to your post smacks a bit of "shoot the messenger". Snowden is not the underlying cause, but rather, it is the bloody NSA and it's illegal espionage on the public.

    One of the writers on Samizdata predicted this would be the case shortly after the news hit. (Sorry- don't have time to get the link for you.) Why would any foreign business trust it's data to American IT companies who are naturally more vulnerable to the NSA's heavy hand.

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