IBM (NYSE:IBM) is leading the Dow Jones Industrial Average (DJINDICES:^DJI) lower after a report from Bloomberg said that China is asking banks to replace IBM servers with locally made servers due to security concerns. As of 1:30 p.m. EDT the Dow was down 33 points to 16,642. The S&P 500 (SNPINDEX:^GSPC) was down 1 point to 1,910.
IBM is down 0.6% as more investors digest the possibility that IBM's business will be hurt by Chinese government action. In IBM's most recent annual report, Chinese operations are not singled out, but Asia less Japan makes up 14% of IBMs revenue, and China likely accounts for most of that portion. IBM was already hurting in China, with revenue in the country down 12.2% last year (14% adjusted for currency) as business activity slowed in the country. IBM attributed last year's drop to "the process surrounding the implementation of a broad governmental economic reform plan."
This drop was in part due to the multiples releases by Edward Snowden showing that U.S. technology companies worked jointly with the NSA. Many governments around the world broached the idea of moving away from U.S. technology companies or requiring them to store data locally.
Bloomberg reported last night that the Ministry of Finance is asking banks to replace IBM servers with locally made ones, citing security concerns. If this spreads to other industries, IBM would take a large hit in China. While perhaps partly related to the Snowden disclosures, this is more likely related to the U.S.' Department of Justice's case, announced last week, against five Chinese military officials for hacking U.S. companies in relation to trade talks in the steel industry. In that case, U.S. Steel, Westinghouse, Allegheny Technologies, Alcoa, and the United Steelworkers union were hacked in an effort to steal trade secrets.
It's no secret that U.S. companies have been under assault from Chinese cyber espionage units for years. Usually companies do not like to publicize their security breaches, but cover-ups do nothing to end the problem. With the U.S. now publicizing cases of cyber espionage, perhaps the problem will lessen, but in the meantime companies like IBM and other major hardware providers will suffer in China as the U.S. tries to embarrass the Chinese government into stopping illegal trade espionage.
Dan Dzombak has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. 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.