Monday, May 26, 2014

China Retaliation from cyber hacking indictments and blowback from NSA Spying Updates May 26 - 27 , 2014 -- In addition to tech companies ( IBM , Cisco , Microsoft ) being cut off by China , consulting outfits seem next to get cut loose ---- State-owned Chinese companies will cease to work with US consulting companies like McKinsey and Boston Consulting Group over fears they are spying on behalf of the US government........

First Cisco And Microsoft, Now IBM: China Orders Banks To Remove High-End IBM Servers

Tyler Durden's picture

A week ago, in retaliation to the inane charges lobbed by the US accusing 5 Chinese army officials of spying on US companies (when the NSA spying scandal on, well, everyone refuses to leave the front pages), China announced it wouldban the use of Windows 8 on government computers (considering the quality of Windows 8, this is likely a decision government computers would have taken on their own regardless). Today, China has expanded its list of sanctioned companies from Microsoft to include IBM as well, following a Bloomberg report that the Chinese government is pushing domestic banks to "remove high-end servers made by International Business Machines Corp. and replace them with a local brand."
Why is MSFT and now IBM sowing the seeds of the US government's stupidity and failed attempts to distract from its own spying scandals? We don't know. Here is what we do know:
Government agencies, including the People’s Bank of China and the Ministry of Finance, are reviewing whether Chinese commercial banks’ reliance on IBM servers compromises the country’s financial security, said the four people, who asked not to be identified because the review hasn’t been made public.

The review fits a broader pattern of retaliation after American prosecutors indicted five Chinese military officers for allegedly hacking into the computers of U.S. companies and stealing secrets. Last week, China’s government said it will vet technology companies operating in the country, while the Financial Times reported May 25 that China ordered state-owned companies to cut ties with U.S. consulting firms.

Harriet Ip, a Singapore-based spokeswoman for IBM, referred questions to IBM in the U.S. Jeffrey Cross, a Somers, New York-based spokesman, didn’t immediately respond to an e-mail seeking comment outside U.S. business hours.

“Security trumps everything,” said Duncan Clark, chairman of BDA China Ltd., a Beijing-based consultant to technology companies. “China doesn’t need the U.S. companies in the way it did for the last few decades.”
Perhaps somewhat ironically, IBM sold its low-end server business to Lenovo, itself a part of IBM once upon a time, several months ago for $2.3 billion.
But if this wasn't enough of an insult to IBM's top line, here is another concern about IBM margins: China simply believes Big Blue's products are too expensive:
In addition to concern about Armonk, New York-based IBM’s equipment as a security threat, China’s government also believes IBM servers are more expensive in China than in other regions, the people said.

China Postal Savings Bank Co. is using servers made by Jinan-based Inspur Group Ltd. as part of a trial program that began in March 2013, the people said. The government plans to expand that trial to other banks, they said. The group’s Inspur International Ltd. unit gained 10 percent to HK$1.53 at 2:57 p.m. in Hong Kong trading today. In Shenzhen, Inspur Electronic Information Industry Co. rose 4.7 percent.
That's ok though: since news and fundamentals don't matter, we fully expect IBM stock to also be up several percent on what now appears to be the terminal loss of one of the company's largest export markets. And not only IBM: other stocks set to surge on this bad news are MSFT and, of course, Cisco, whose CEO was recently crying about Obama's NSA policies, and whose sales in China are once again assured to crater. But as they say in the movies: tis but a scratch - who needs top line growth when a company can issue debt to buy back its share and pretend all is well?

China Blocks "High-Level Hooligan" US Consultants Amid "Spying Concerns"

Tyler Durden's picture

It appears the tit-for-tat cyber-spying debacle between China and the US is escalating (unless it's all curious coincidence). Having blasted the US as a "mincing rascal" and "high-level hooligan" in the Chinese (state-run) media, The FT reports that authorities have ordered state-owned enterprises tocut ties with US consulting companies such as McKinsey and Boston Consulting Group because of fears they are spying on behalf of the US government. Furthermore, the crackdown is worse as, in the face of the "US hacker empire," China’s leaders announced on Thursday that all foreign IT products and services sold in China would be subject to a new security screening process. So it seems China has entered both the currency war (CNY weakness) and protectionism racket... now how has that ended for the world in the past?

As The FT reports, China has ordered state-owned enterprises to cut ties with US consulting companies such as McKinsey and Boston Consulting Group because of fears they are spying on behalf of the US government, according to people close to senior Chinese leaders.
The instruction comes days after the US Justice Department indicted five People’s Liberation Army officers on charges of cyber-espionage and stealing trade secrets from US corporations including Alcoa, US Steel and Westinghouse.


Beijing’s response to the indictments was swift, with a propaganda campaign in Chinese state media describing the US as a “mincing rascal” and “high-level hooligan”. The decision to ban state enterprises from working with western consulting companies marks a further escalation in Beijing’s response.

Management consultancies including McKinsey, BCG, Bain & Company and Strategy&, formerly known as Booz & Co, have extensive operations in China, which remains a rapidly growing market for them.


In the face of US accusations over cyber attacks and industrial espionage, Chinese officials say their country’s ministries, companies, universities and telecoms networks are under constant attack from the “US hacker empire”.
Furthermore, partial protectionism appears to be looming...
The top leadership has proposed setting up a team of Chinese domestic consultants who are particularly focused on information systems in order to seize back this power from the foreign companies,” said a senior policy adviser to the Chinese leadership. “Right now the foreigners use their consulting companies to find out everything they want about our state companies.”

China’s leaders announced on Thursday that all foreign IT products and services sold in China would be subject to a new security screening process. Any company, product or service that fails the test will be banned from China.

The vetting will focus on products and services used in communications, finance, energy and any other industries the government considers related to national security or “public interest”, officials said.


“Under President Xi Jinping, technology and implementation will look to be converging, so foreign tech firms should be very worried about their prospects.”
The last time the world's largest trading partners devolved into a pissing match over competitively devalued currencies and protectionism... didn't end too well - but this time is different because central banks print magic money to fix everything.

China to ditch US consulting firms over espionage suspicion

Published time: May 26, 2014 11:58
Edited time: May 26, 2014 12:28

Reuters/Lou Dematteis
State-owned Chinese companies will cease to work with US consulting companies like McKinsey and Boston Consulting Group over fears they are spying on behalf of the US government.
US consulting companies McKinsey, BCG, Bain & Company, and Strategy&, formerly Booz & Co., will all be snubbed by state-owned Chinese companies, the Financial Times reported, citing sources close to senior Chinese leaders.
“The top leadership has proposed setting up a team of Chinese domestic consultants who are particularly focused on information systems in order to seize back this power from the foreign companies,” a senior policy adviser to the Chinese leadership was quoted by the FT as saying.
“Right now the foreigners use their consulting companies to find out everything they want about our state companies,” the adviser said.
McKinsey is the largest global consulting group operating in China, and about one-third of clients are state-owned enterprises. McKinsey has 650 employees in China.
Last Thursday China announced that all foreign companies would have to undergo a new security test. Any company, product or service that fails will be banned from China. The inspection will be conducted across all sectors - communications, finance, and energy.
China has already banned Microsoft's Windows 8 operating system from government computers, according to Chinese state media agency Xinhua.
“Under President Xi Jinping, technology and implementation will look to be converging, so foreign tech firms should be very worried about their prospects,” Bill Bishop, an independent consultant based in Beijing, told the FT.
Chinese officials have said that government ministries, companies, universities, and telecoms networks are victims of US hacking, and will try to avoid using US technology in order to protect “public interest”.
The dictate follows the US Justice Department’s indictment of five Chinese military officers it suspects of committing cyber crimes against a number of major US companies, including US Steel, Westinghouse and Alcoa. The US accused the army officers of stealing trade secrets and even published their photos.
Beijing responded by calling the US a ‘robber playing cop’, and more recently said the US is a “mincing rascal” and involved in “high-level hooliganism”.
The US-China fallout came after revelations made by NSA contractor Edward Snowden that the US uses economic cyber espionage to spy on international competitors, including China.
The dispute is only the latest setback in relations between the world’s two largest economies. Issues like Ukraine, Syria, and North Korea have been divisive topics between the two superpowers.


China Focus: Report slams "unscrupulous" U.S. surveillance over world, China   2014-05-26 21:28:22   

BEIJING, May 26 (Xinhua) -- A Chinese Internet information body has complained of "unscrupulous" surveillance by U.S. intelligence agencies over the rest of the world, and called for an immediate cessation of the practice.
A report by China's Internet Media Research Center published on Monday said the U.S. has taken advantage of its political, economic, military and technological hegemony to spy without restraint on other countries, including its allies.
The operations have gone "far beyond the legal rationale of 'anti-terrorism' and have exposed the ugly face of its pursuit of self-interest in complete disregard for moral integrity," the report read.
It added that the spying "flagrantly infringed international laws, seriously impinged on human rights and put global cyber security under threat."
In particular, it described China as a main target of the U.S. secret surveillance.
Chinese authorities have looked into the U.S. National Security Agency (NSA)'s secret surveillance program codenamed PRISM, which is revealed by former NSA contractor Edward Snowden.
An investigation carried out by various Chinese government departments over several months "confirmed the existence of snooping activities directed against China," the report said.
Citing the Snowden documents, the report said U.S. secret surveillance targeted the Chinese government and its leaders, Chinese companies, scientific research institutes, ordinary netizens, and a large number of cell phone users.
Foreign media reports suggested that Washington had spied on China's current and former leaders, the ministries of commerce and foreign affairs among other government departments, as well as banks and telecommunication companies.
The U.S. magazine Foreign Policy reported in June last year that an "Office of Tailored Access Operations", created in 1997, under the NSA had successfully penetrated Chinese computer and telecommunications systems.
Earlier the South China Morning Post also reported U.S. hacking of China's telecommunication companies to access text messages, and sustained attacks on network backbones at Tsinghua University, the country's most prestigious university.
Even computer games and social networking software were watched, the report said citing the Guardian and the New York Times reports. It added that Chinese telecommunications giant Huawei is also a target of U.S. surveillance, according to the websites of Der Spiegel and the New York Times.

Cisco CEO Warns Obama To Rein In NSA Or Face Collapse Of Trust In US Technology (And Cisco Sales)

Tyler Durden's picture

Back in November, Cisco stock crateredafter the company was forced to reset its future revenue guidance when as a result of crashing Chinese sales, it became clear that some $2 billion in quarterly revenue had been wiped away from the previous trendline.
Since then, Cisco has managed to regain some of the lost market value as investors have readjusted to what now appears to be a far slower growth rate for the company (a few days ago it reported $11.55 billion in revenue, $1 billion less than firms such as Goldman has expected it would reported as recently as 6 months ago).
However, one question remained - what was it that caused the collapse in sales, and especially those targeting the Chinese market.
For a long time, the most likely speculated reason for the Chinese revulsion against Cisco and its peers were the factual revelations by Edward Snowden detailing the NSA illicit espionage activities, and the role of corporations such as Cisco in them.
Today, this speculation is confirmed, following news that none other than Cisco CEO John Chambers has written a letter to Obama, "warning of a collapse of trust in US technology after evidence emerged showing the National Security Agency breaking into his company’s equipment."
As the Financial Times reports having seen a letter from the CSCO executive, John Chambers called for “standards of conduct” to rein in government surveillance so that national security objectives do not interfere with the US’s leading position in the global technology market.
Ironic that companies kept silent about their pseudo-symbiotic relationship with the US superspy agency, but it was only after billions in sales (and equity) were destroyed that the companies have finally decided to speak up. To wit:
The letter was dated the day after pictures circulated on the internet showing NSA staff opening boxes of Cisco gear so that the US security agency can monitor internet traffic after the equipment has been shipped to customers.

Mr Chambers complained that the NSA actions would undermine confidence among customers of US technology firms. A spokesperson for Cisco confirmed that its chief executive had sent the letter but declined to comment any further.

“We simply cannot operate this way, our customers trust us to be able to deliver to their doorsteps products that meet the highest standards of integrity and security,” the letter from Mr Chambers states.

There have been allegations that the NSA has intercepted IT equipment in transit from manufacturers to customers to help monitor and gain information on surveillance targets. The equipment modified by the NSA included routers, servers and other computer network devices exported from the US, according to the reports.

The NSA responded that “the implication that NSA’s foreign intelligence collection is arbitrary and unconstrained is false” but would not address specific incidences.

The letter from Cisco says that “if these allegations are true, these actions will undermine confidence in our industry and in the ability of technology companies to deliver products globally”.
So now that the blowback from the discovery of the mutually parasitic coexistence of the NSA and firms like Cisco has been laid out for the whole world to see, and especially China, what are the CEOs to do? Why engage in public spectacles of course, such as this one:
In his May 15 letter, Mr Chambers asked Mr Obama “to take more steps and a leadership role to ensure that guidelines and reforms are put into place that can be honoured across the globe”.

Mr Chambers said that confidence in the open, global internet has brought economic benefits to the US, but that this would be “eroded by revelations of government’s surveillance . . . and allegations that governments exploit rather than report security vulnerabilities”.

He added: “Absent a new approach where the industry plays a role, but in which you, Mr President, can lead, we are concerned that our country’s global technological leadership will be impaired. Moreover, the result could be a fragmented internet, where the promise of the next internet is never fully realised.”
We are confident Obama, whose international positioning in the world has never been weaker after one disastrous campaign in Syria and what is shaping up to be another disastrous campaign in Ukraine, will get right on it.