What's Wrong With Cisco and IBM Today? Blame the NSA

Only 10 of the 30 Dow Jones (DJINDICES: ^DJI  ) stocks were trading lower today in early afternoon trading, and the blue-chip index as a whole was up 65 points for a 0.4% gain. But if the markets were on orders to look good today, IBM (NYSE: IBM  ) missed the memo: Shares sank 0.9%, making it the biggest Dow loser this morning. Big Blue took 11 points off the Dow, all by itself.

So what's wrong with IBM today?

There are two significant news items on IBM today, but only one that would explain a sudden share price drop. The other one, which likely didn't move shares at all, was the company's commitment to sell IBM-branded storage solutions where storage specialist NetApp (NASDAQ: NTAP  ) used to provide the goods. Bad news for NetApp, which derives about 2% of its sales from a long-standing IBM partnership, but not a needle-mover for IBM itself.

With that distraction out of the way, let's focus on the bigger news.

Beijing's Forbidden City is becoming off-limits for IBM and other American tech companies.

According to Bloomberg, the Chinese government is thinking twice about ordering IBM hardware these days.

China is an important market for IBM. Twenty-three percent of IBM's revenue came from the Asia-Pacific division in 2013, down from 25% in 2012. Chinese sales have fallen more than 20% year over year in each of the last three quarters. IBM wrote this off as typical challenges in high-growth markets coupled with a tricky period of economic reform in China.

But that wasn't the whole story, according to Bloomberg's sources.

In an ironic role reversal, Beijing is worried about American hardware carrying National Security Agency-approved tools that help Westerners spy on China, and not without reason. The Edward Snowden files have not only raised the possibility of such efforts, but contained photographic evidence of Cisco Systems (NASDAQ: CSCO  ) routers being implanted with data-collection gadgets before being shipped abroad.

If this can happen to Cisco's networking equipment, then why not to IBM's servers and storage devices as well? Besides, China has its own brands of enterprise-grade hardware these days, including some of IBM's former product lines under the Lenovo banner. Even if the Chinese government weren't truly worried or upset over these alleged spying tactics, this is a great excuse to promote local brands over foreign powerhouses such as IBM and Cisco.

Cisco shares aren't following IBM down today, but the networking stock found a cushion to this particular blow. The stock got a fresh buy rating today from major investment bank Deutsche Bank, smoothing over this reminder of Chinese suspicions. Big-name upgrades often lead to big jumps; Cisco is beating the Dow today, but not by the big margin you might expect.

Don't blame the whistle-blower
So IBM's weakness today leads right back to the Snowden files. I would not be so quick to condemn Snowden over the damage his reports are doing to American business interests, though.

The underlying NSA activity would still remain, with or without a spotlight revealing its existence. The blowback against U.S. companies would surely be just as strong if the Chinese found the implanted tracking devices on their own.

This international reaction hurts right now, but at least the security concerns are out in the open. I still believe that Snowden did America a big favor in the long run. Not only do Cisco and IBM have an opportunity to fight back against the NSA's invasive procedures, but our government has fresh incentives to curb the craziest spying efforts.

Implanting data-collecting devices in big-ticket products such as server systems and networking routers should be among the first ill-advised ideas to go. IBM and Cisco would appreciate it even more than China's counterintelligence agencies.

Without that move, alongside a broad overhaul of the NSA's authority in general, American companies will fight huge headwinds in China and other international markets for years to come. Congress and the White House should team up to take some teeth out of the NSA's bite -- the sooner, the better.

Say goodbye to "made in China"!
American interests are at odds with China in more ways than one. For example, The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

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  • Report this Comment On May 27, 2014, at 2:26 PM, Momintn wrote:

    The first Bloomberg report I read last week was old information about IBM's problems outlined by hedge funds who are short IBM stock. Being short means these hedge funds have sold IBM stock they do not own, they have to pay dividends to the real shareholders quarterly, and cover their short positions by buying IBM stock to return the stock to the shareholders of record. Further reports from Bloomberg Businessweek seem to repeat this anonymous report of banks being told to replace IBM servers with no verification from anywhere else as to the truth of it.

    Chinese factories build components for these IBM servers and the low-end server line is being sold to Lenovo, a Chinese company. Data inside servers is encrypted and is of no use to anyone. IBM was not listed as a vendor who participated in Prism according to Snowden's documents. According to Gartner, IBM is a leader in security. And IBM has recently won the 2014 Global Frost & Sullivan Award for Customer Value Leadership, in recognition of its integration of various mobile security, mobile identity, and access management solutions. As the four leading Chinese banks compete in the global financial industry for accounts, with many of these account owners accessing their accounts from their smartphone, they will not risk their business to replace IBM products without justification.

    Read the Reuters report as it includes all the statements saying that the information from Bloomberg is not true.

    "IBM is not aware of any Chinese government policy recommending against the use of IBM servers within the country's banking industry," said IBM spokesman Ian Colley. "IBM is a trusted partner in China and has been for more than 30 years."

    "A spokesman at the National Development and Reform Commission (China) said the country's top economic planner has not told companies to change their IBM servers, nor received orders from higher levels of the government to do so."

    "Sources at China's "big four" state-owned banks said they had no knowledge of pressure for a technology change, saying any replacement of such systems would not be an easy task.

    "We haven't heard about the order," an official at one of the bank's IT department said, declining to be identified because he was not allowed to speak to the media.

    "There aren't any locally made hardware around that can handle the massive amount of data in the banking industry."

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Anders Bylund

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

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