On May 19, 2014 the U.S. Justice Department indicted 5 alleged PLA Chinese cyber-attackers in Shanghai for corporate espionage. On May 21, the Chinese government condemned these charges. On May 25,and announced through a variety of public statements that it would mandate restrictions on State-owned Enterprises procuring U.S. consulting services, referencing McKinsey, Cisco, Bain, Boston Consulting Group, IBM and other major U.S. multinational consulting firms. The initial impression is that the restrictions would be limited to digitally delivered services, but it might extend to other services, as well. This declaration followed an earlier prohibition on government agency procurement of Microsoft’s Windows 8 platform and limits of purchases of Cisco and IBM servers and software by government agencies and State owned companies.
No procedures have been specified for implementing this declaration, but they will be forthcoming as formal protocols or, more likely as ad hoc limits, threats and delays. The major beneficiaries of these announcements are the Chinese digital players, like Huawei, ZTE, Inspur and other domestic IT firms. According to the New York Timers, Inspur has invited IBM employees to jump ship and join their company, as they aim to replace IBM server sales in China.
It is hard to estimate the cost of the Federal executive indictment decision to U.S. companies because the value of U.S. digitally deliverable business service revenues from China is all over the place. For example, the U.S. Department of Commerce tabulates U.S. cross border digitally deliverable services to China at $11 billion dollars in 2011. This figure does not square with the $7.8 billion that McKinsey made in China in 2012; the $3.9 billion made by Boston Consulting Group; $5 billion made by IBM in 2012 and the roughly similar figure made by Microsoft. Add to this Cisco, Qualcomm, Oracle, Intel and Google’s Android services; and many other U.S. digital service players in China, and the author roughly estimates $30 billion in annual digitally delivered revenues to U.S. companies. These sales are now in jeopardy. Cisco sales in China dropped 18% in the 1st quarter of 2014.
The most interesting thing about these events is that, according to the NYT, “Some American executives say the Justice Department’s indictment took them by surprise. They are now nervous over the May 22 announcement by China’s State Internet Information Office that the government has established procedures to gauge potential security risks of (U.S.) Internet technology and services.”
The key to this story is that U.S. foreign policy and national security policy is disconnected from the major U.S. multinational drivers of the U.S. economy in global trade, consumption and investment. IT is among the top sectors of the U.S. economy. Did the President Obama bother to examine and weigh the likely China response to its inflammatory innocuous indictments, since the indicted parties are beyond the reach of U.S. judicial authority?
For the sake of a symbolic gesture the U.S. government opened the door to China’s goal of advancing the domestic market share of its own IT companies. The door was already ajar after the consistent refusal by the U.S. government to allow Huawei and ZTE to commercially compete in the U.S. market. There was bound to be China push back on this matter alone, at the right time. China only had to wait. The U.S. indictments, particularly in the context of the Snowden affair, provided the right time for China to advance its domestic economic agenda to reign in U.S. digital service multinationals and move Chinese IT technology to the world stage.
Only the Chinese leadership knows how far they will go to pushback “the eight guardian warriors” – Cisco, IBM, Google, Intel, Qualcomm, Apple, Oracle and Microsoft, which Chinese news services report that the U.S. government use to “infiltrate” Chinese government agencies and enterprises. In view of the substantial Chinese revenue and bottom line profit contribution to these U.S. IT giants, these companies are most likely kicking up a storm in Washington to lay-off of China.
U.S. companies lobby government to protect their intellectual capital in China; but they expect this to be done by diplomacy, not humiliating criminal indictments that only backfire on U.S. companies. If U.S .companies operating in China cannot depend on U.S. diplomacy to protect their interests, they will turn to other vehicles of self protection. U.S. government help may not be worth the cost, if it cannot synchronize its interests with the business community.
There are numerous defensive deals which U.S. companies can work out with China, irrespective of U.S. foreign and security policy. After all, Pfizer offered to move its legal domicile from the U.S .to UK in its bid to acquire UK’s Astra Zeneca. There may come a time when the national security politics of U.S. foreign policy becomes so aggressive and costly to U.S company profits, that U.S. IT companies seek a safe haven corporate domicile.
A fair number of U.S. Fortune 500 energy, electronic, insurance and pharmaceutical companies, e.g. Ensco, Eaton, Aon, and Actavis have already done this for tax reasons. A 2011 study by Ernst % Young found that the U.S. had lost a total of 46 headquarters of Fortune Global 500 companies over the previous 11 years. Currently, a total of 21 companies currently included in the S&P 500 are technically headquartered overseas.The next generation of U.S. company domicile exit may not only be for tax reasons, but only for insulation from the government arm hold of “national security.”
We are no longer in the 20th Century, when foreign technology could not hold a candle to U.S technology and everybody wanted IBM. In the 21st century China, India and Brazil, not to mention Europe, has the financial and intellectual means to compete and win against the U.S. in sectors of advanced technology which are vital to U.S. economic growth. The rest of the world is already winning in alternative energy, nanotechnology, and optical electronics. Now they are going after the IT business service sector.
The U.S. government needs a new paradigm of policy that is genuinely constrained by the business community in its decisions, lest these fish swim away from U.S. toxic fields of “national security.”
 NYT, American Business in China Feel Heat of a Cyberdispute, by Edward Wong, May 31, 2014
U.S. Department of Commerce, Economics and Statistics Administration,
Digital Economy and Cross-Border Trade: The Value of Digitally-Deliverable Services, by Jessica R. Nicholson and Ryan Noonan, ESA Issue, January 27, 2014
 Reuters, The Escalating US-China Spying War is McKinsey’s loss to Huawei’s Gain, by Heather Timmons, May 26,2014
 Forbes, Cisco Earnings Preview” Emerging Market Slowdown, Product Transition in Focus, by Trefis Team, February 11, 2014
 NYT, Ibid.
6. Forbes, Actavis: The Latest Form 500 Company to “Leave” the U.S. for Tax Reasons, By Brian O’Keefe, May 21, 2013