IBM (IBM) has a new problem in China. Amid an escalating international dispute over spying, the government there is pressing banks to replace the U.S. company’s servers with China-made machines, Bloomberg News reported today. It would be the latest development in a back-and-forth that intensified last week, when U.S. prosecutors indicted five Chinese military officers on charges of stealing trade secrets. In addition to straining relations between the U.S. and China, it is also making business more difficult for multinationals looking to the world’s second-largest economy for growth.
IBM urgently needs to increase sales after eight consecutive quarters of declining revenue—a trend that’s the focus of this week’s Bloomberg Businessweek cover story. China is supposed to be one of the company’s most important growth markets, but revenue there has fallen 20 percent or more in the last two quarters. The biggest declines have come in hardware—a magnified version of the problem facing IBM worldwide, as startups and large corporations alike shun expensive servers and mainframes in favor of cheaper cloud computing solutions. Changing hardware needs are affecting IBM’s software business and the services division that knits everything together.
The 103-year-old company, based in Armonk, N.Y., agreed in January to sell its low-end server business to China’s Lenovo (992:HK), a deal that awaits government approval. IBM has consistently sold off its product lines with shrinking profit margins, and it has hopes of reviving the division’s results in the high-performance end of the market. It’s these high-end type of servers that are the focus of today’s Bloomberg report.
“IBM is not aware of any Chinese government policy recommending against the use of IBM servers within the country’s banking industry,” IBM spokesman Jeff Cross told Bloomberg News by e-mail. “In fact, news reports now state that China’s National Development and Reform Commission has not heard of any alleged directive to that effect. IBM is a trusted partner in China and has been for more than 30 years.”
IBM shares fell about 1 percent, to $184.17, in morning trading.