IBM Challenger Inspur Woos China Customers Amid Dispute

Chinese server maker Inspur Group Ltd. started a campaign to lure customers from International Business Machines Corp. as the government studies if domestic banks’ reliance on IBM technology threatens national security.

Jinan-based Inspur this week unveiled its “IBM to Inspur” initiative aimed at taking the U.S. company’s market share in China, said a member of Inspur’s marketing department who asked not to be named citing company policy. Inspur hired more than 80 employees from IBM’s hardware arm, he said.

The move may help Inspur capitalize on a growing dispute with the U.S. after prosecutors there charged five Chinese military officers with allegedly hacking American companies. Toppling IBM in China would be a major challenge for Inspur, whose reported 36.7 billion yuan ($5.9 billion) of revenue in 2011 was equivalent to 5.5 percent of IBM’s sales.

“There aren’t that many alternatives for high-end banking servers, so it’s quite hard to find replacements,” Arthur Hsieh, an analyst at UBS in Taiwan, said by phone.

The People’s Bank of China, the Ministry of Finance and other government agencies are reviewing domestic banks’ use of IBM servers and expanding a trial program to replace them with homegrown ones, four people familiar with the matter said May 27. China Postal Savings Bank Co. is using Inspur servers as part of the trial, which began in March 2013, the people said.

Photographer: Ben Torres/Bloomberg

Servers and hard drives stand inside the International Business Machines Corp.'s (IBM) Softlayer data center in Dallas, Texas, U.S. Close

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Photographer: Ben Torres/Bloomberg

Servers and hard drives stand inside the International Business Machines Corp.'s (IBM) Softlayer data center in Dallas, Texas, U.S.

Foreign Ministry

Shares of Inspur International Ltd. rose 9.9 percent to HK$1.67 in Hong Kong trading yesterday, compared with a 0.6 percent increase in the benchmark Hang Seng Index. Another unit trading in Shenzhen climbed by the 10 percent daily limit.

China is issuing rules because Internet and information safety are important parts of its security, Qin Gang, a spokesman for the Foreign Ministry, said yesterday in Beijing.

“I’m not aware of the situation regarding IBM but our principle in this area is, we are raising awareness on the strengthening of our information security,” Qin said, adding that a precondition for foreign companies is that they “adhere to China’s interest and not harm China’s national security.”

The China-U.S. dispute may jeopardize revenue for American companies including Microsoft Corp. and Apple Inc., both of which were mentioned by China’s official Xinhua News Agency as cooperating with the U.S. National Security Agency.

Cisco Criticism

Cisco Systems Inc. has seen China sales drop off since revelations of an NSA spying program by Edward Snowden, according to Mark Natkin, managing director of Marbridge Consulting in Beijing.

Cisco takes advantage of its technology to play a “disgraceful role” in China as a tool for the U.S. to promote its Internet power, said a May 26 commentary posted on the news portal of the Communist Party’s Youth League.

The company doesn’t monitor communications of private citizens or government organizations and Cisco products are reviewed by customers around the world, John Earnhardt, a spokesman for the San Jose, California-based maker of networking equipment, said by e-mail.

The Financial Times reported May 25 that China ordered state-owned companies to cut ties with U.S. consulting firms.

“The top-down push is very strong,” said Duncan Clark, chairman of BDA China Ltd., a Beijing-based consultant to technology companies. “While it used to be that nobody ever got fired for buying IBM, now that’s switching to: everybody gets fired for buying IBM.”

Microsoft Connection

IBM still ranked first for server revenue in the first quarter, with 28 percent market share in the Asia-Pacific region, down from 37 percent in the same period a year ago, according to research firm Gartner Inc. Inspur came in fourth with 9.4 percent, Gartner said.

Based on server shipments, IBM ranked fifth with 12 percent of the Asia-Pacific market, while Inspur came in third with almost 14 percent.

Inspur International lists Samuel Shen, the chief operating officer of Microsoft’s Asia-Pacific Research and Development Group, as a non-executive director. Microsoft, which invested $25 million in the company in 2005, redeemed the remainder of its preferred shares in December and currently isn’t listed as a shareholder, according to data compiled by Bloomberg.

In its 2013 annual report, Inspur International said it maintained “close cooperation” with strategic partners including Microsoft. Joanna Li, a Beijing-based spokeswoman for Microsoft, didn’t respond to an e-mailed request for comment and couldn’t be reached by mobile phone. A U.S. representative for Microsoft didn’t immediately respond to a request for comment.

Trusted Partner

IBM’s China spokesman, Anthony Guerrieri, didn’t respond to a request for comment on Inspur. Jeff Cross, a U.S.-based spokesman for IBM, also didn’t respond to a request for comment.

In a May 27 statement, Armonk, New York-based IBM said it was a trusted partner in China for more than 30 years and wasn’t aware of any government policy recommending against the use of its servers.

IBM shares fell 0.9 percent to $183.08 at the close in New York after dropping 0.6 percent the day before.

The member of Inspur’s marketing department said the company had hired employees from IBM’s Systems and Technology Group and its business process outsourcing department.

Inspur’s predecessor, Shandong Electronic Equipment Factory, began producing computer peripherals and low-frequency tubes in the 1960s, according to Inspur Group’s website. China’s first space satellite, launched in 1970, used Inspur transistors.

To contact Bloomberg News staff for this story: Steven Yang in Beijing at kyang74@bloomberg.net; Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Nicholas Wadhams

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