China has been a huge growth market for many technology companies, but as the country's policies and economics have changed, so have revenues for some major U.S. tech companies.
- "While we had some execution problems during the third quarter, we were affected by the process surrounding China's development of a broad-based economic reform plan." -- IBM Senior Vice President and CFO Mark Loughridge
- "The U.S. and parts of Western Europe were particularly strong, while China was weak." -- Microsoft CFO Amy Hood
- "China continued to decline as we and our peers worked through the challenging political dynamics in that country." -- Cisco Chairman and CEO John Chambers
This past quarter, Microsoft said China was it weakest market, while IBM reported a 22% decrease in sales in China just last month, and Cisco recently reported that orders from China fell 18% this past quarter.
So what gives?
As with any sales market, there's no simple answer for why revenues are down, but there are a few things that explain China's cutback on U.S. tech orders.
First, back in August the Chinese government laid out cyber-security standards for local companies, which resulted in Chinese tech companies getting preference over foreign-made products when at all possible. The move is similar to what a U.S. congressional committee said last year when it recommended U.S. companies and the government not use telecom equipment from Chinese companies ZTE and Huawei. The committee said there were security concerns because the two companies have worked closely with the Chinese government and military in the past.
If that weren't enough, China may be a bit uneasy about buying tech from American companies because of the recent leaks about America's National Security Agency spying. It's no secret (anymore) that that the NSA has been pilfering communications from Americans and other countries' governments, and that's bound to have some impact on at least a few technology companies.
Cisco definitely thinks so. In its quarterly earnings call last month, Chambers answered a question about the potential for NSA's spying to hurt IT companies by saying, "I think if you look at it, it is an impact in China. I think we're all aware of that." As Reuters pointed out earlier this month, Cisco may be at an even greater disadvantage in China right now because it competes directly with Chinese companies ZTE and Huawei.
But aside from NSA spying and cyber-security standards, there's one very important factor that may be hurting tech companies in China: economic reforms. The reforms include everything from loosening the one-child policy and welfare system updates, to private banking and IPO changes. IBM cited the economic reforms as part of the reason it's experiencing a slowdown in China.
In the third quarter of this year, China's economy grew 7.8%, up from 7.5% in the second quarter, but it still has a rough road ahead. Financial Times reported last month that in China, "Economic growth has decelerated in 11 of the past 14 quarters, falling from an expansion rate of nearly 12 per cent at the start of 2010."
Obviously, U.S. tech companies aren't doomed in China, and some -- like Qualcomm --are doing very well right now. But as China works through its own economic reforms and political concerns, it seems U.S. tech companies may have a bumpy road ahead.
Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.