NSA Revelations Kill IBM Hardware Sales in China

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

The first shot was fired on Monday. Teradata, which sells analytics tools for Big Data, warned that quarterly revenues plunged 21% in Asia and 19% in the Middle East and Africa. Wednesday evening, it was IBM’s turn to confess that its hardware sales in China had simply collapsed. Every word was colored by Edward Snowden’s revelations about the NSA’s hand-in-glove collaboration with American tech companies, from startups to mastodons like IBM.

But the fiasco was tucked away under the lesser debacle of IBM’s overall revenues, which fell 4.1% from prior year, the sixth straight quarter of declines in a row. Software revenue inched up 1%, service revenue skidded 3%. At the hardware unit, Systems and Technology, revenue plunged 17%. Within that, sales of UNIX and Linux Power System servers plummeted a dizzying 38%. Governmental and corporate IT departments had just about stopped buying these machines.

IBM quickly pointed out that there were some pockets of growth in its lineup: business analytics sales rose 8%, Smarter Planet 20%, and Cloud, that new Nirvana for tech, jumped 70%. But in the overall scheme of things, they didn’t amount to enough to make a big difference.

All regions were crummy. Revenues in Europe/Middle East/Africa ticked up 1%. In the Americas, they ticked down 1% – “The improvement came equally from the US and Canada and once again, we had strong performance in Latin America,” is how CFO Mark Loughridge spun the situation during the earnings call because it was less bad than last quarter.

But there was nothing to spin in Asia-Pacific, where revenues plunged 15%. Revenues in IBM’s “growth markets” dropped 9%. They include the BRIC countries – Brazil, Russia, India, and China – where revenues sagged 15%. In China, which accounts for 5% of IBM’s total revenues, sales dropped 22%, with hardware sales, nearly half of IBM’s business there, falling off a cliff: down 40%.

Mr. Loughridge, in his prepared statement, tried to come up with a logical-sounding panic-free explanation: 

We were impacted by the process surrounding China’s development of a broad based economic reform plan, which will be available mid-November. In the meantime, demand from state-owned enterprises and the public sector has slowed significantly as decision-making and procurement cycles lengthened.

So, would that unprecedented collapse of demand for hardware in China end after mid-November? Nope. These “changes will take time to implement,” he warned. In fact, he did not expect demand to pick up “until after the first quarter of next year.” Not anytime soon.

No one believed that rigmarole.

When an analyst needled him, Mr. Loughridge began to deviate from the scrip: “The hardware business across those elements of the product line accepting zSeries performance (IBM mainframe computers), it was down substantially. We were talking 40%, 50%. Enormous reductions on a year-to-year basis in a geography where we intended to see growth rates.”  

They’d intended to see double digit growth rates. He referred to last year, when sales in China were up 19%, “driven heavily by really strong performance in hardware base,” he said. But suddenly, hardware sales collapsed “40%, 50%” from last year. IBM didn’t even have time to come up with a credible excuse. He was struggling to make sense of it, grasping at flimsy straws and the same economic reform plan theory that no had believed earlier, but this time, it got all tangled up:

And you got to look at that and say, what significantly accounts for that. And I would say, quite honestly, if you look at the elements in China and we have worked with the team in China that simply has been a substantial impact as the process surrounding China’s development of broad based economic reform plan takes shape. And that is going to be announced and available, we think in November and probably it will take some time to implement. So I think we are looking at a couple of quarters, but once that economic plan is announced, it adds clarity to market, we should see, I think and fairly within our team, a recovery in the demand pattern for state-owned enterprise public sector.

The explanation is more obvious. In mid-August, an anonymous source told the Shanghai Securities News, a branch of the state-owned Xinhua News Agency, which reports directly to the Propaganda and Public Information Departments of the Communist Party, that IBM, along with Oracle and EMC, have become targets of the Ministry of Public Security and the cabinet-level Development Research Centre due to the Snowden revelations.

“At present, thanks to their technological superiority, many of our core information technology systems are basically dominated by foreign hardware and software firms, but the Prism scandal implies security problems,” the source said, according to Reuters. So the government would launch an investigation into these security problems, the source said.

Absolute stonewalling ensued. IBM told Reuters that it was unable to comment. Oracle and EMC weren’t available for comment. The Ministry of Public Security refused to comment. The Development Research Centre knew nothing of any such investigation. The Ministry of Industry and Information Technology “could not confirm anything because of the matter’s sensitivity.”

I’d warned about its impact at the time [read.... US Tech Companies Raked Over The Coals In China]. Snowden’s revelations started hitting in May. Not much later, the Chinese security apparatus must have alerted IT buyers in government agencies, state-owned enterprises, and major independent corporations to turn off the order pipeline for sensitive products until this is sorted out. As Mr. Loughridge’s efforts have shown, it’s hard to explain any other way that hardware sales suddenly collapsed by “40%, 50%” in China, where they’d boomed until then.

This is the first quantitative indication of the price Corporate America has to pay for gorging at the big trough of the US Intelligence Community, and particularly the NSA with its endlessly ballooning budget. For once, there is a price to be paid, if only temporarily, for helping build a perfect, seamless, borderless surveillance society. The companies will deny it. At the same time, they’ll be looking for solutions. China, Russia, and Brazil are too important to just get kicked out of – and other countries might follow suit.

In September, IBM announced that it would throw another billion at Linux, the open-source operating system, to run its Power System servers – the same that China had stopped buying. It seems IBM was trying to make hay of the NSA revelations that had tangled up American operating system makers. Linux, free of NSA influence, would be a huge competitive advantage for IBM. Or so it would seem. Read.... The Other Reason Why IBM Throws A Billion At Linux (With NSA- Designed Backdoor)

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pupdog1's picture

So, buyers in a country that has been around for thousands of years don't want computers with chips that say MADE IN THE NSA on them. Go figure.

GCT's picture

Fascism brings out the best in corporations that collude with the government.  IBM and many other American tech companies will no longer be apart of the world after Snowden.

luckylongshot's picture

Cause and effect continues to prove it is a law rather than a theory.

MarcusLCrassus's picture

Beautiful.  Another victim of their own complicity. 


The interesting thing is, this is the type of thing we will soon be reading about with the dollar itself- countries fleeing the dollar.


Great American Edward Snowden's legacy grows by the day. 

dunce's picture

I have always thought that there should be many closed private limited internet systems, not just firewalls and encryption. As far as i know there is no technical reason stopping the development.

dunce's picture

Software and hardware back doors are  double edged swords. They are only effective as long as the victim is unaware of where they are and how they work. False data can be fed into them or virus programs. As for the companies, we will not likely ever know what pressure the govt. brought to bear to get them to join the efforts.

q99x2's picture

Sheez if the NSA is a security threat to China what are they to the USA?

The same: A national security threat.

fourchan's picture

ref. see water cooled utah Citizen spy center.

Izznogood's picture

"many of our core information technology systems are basically dominated by foreign hardware and software firms" - Well, if they stop buying them, what is going to replace them? It seems to me there are at least two losers here, IBM and China ..

geekgrrl's picture

It was obvious that as soon as Snowden started releasing documents, foreign countries would eschew American hardware. But it's nice to see that intuition backed up by hard data. Nice job Wolf.

My thought is that we should call this "The Alexander Factor." This would be the percentage decline in exports due to the fact that for some wacky reason, other countries don't like NSA backdoors.

lakecity55's picture

"IBM sales collapse Worldwide due to NSA scandal."

"Microsoft, Google Dumped Worldwide by 38 countries."

"Google Executive Victim of Assassination in Europe."

spinone's picture

The problem with Cloud services is that it cannabalizes the much more profitable hardware and (to a lesser extent) consulting businesses.  Companies will be buying less hardware as they virtualize their applications and move them to the Cloud.  Cloud services are supposed to be standards based, easy to implement and widely available - economies of scale and mass production if you will.  That means artisan craftsment IT consultant services are much less in demand.

The era of sweet margins is over.  IT is commoditized.

StychoKiller's picture

Clouds are only good for precipitation and shade, I'll hang onto my own data and programs, thank you very much!

Notarocketscientist's picture

Light box in LAX:  SAP runs FEMA Camps

Bunga Bunga's picture

Finally CNBS can blame it on Snowden.

RovingGrokster's picture

But have we learned our lesson in return?
Have US companies started banning Huawei?

To the commenter who said "but a lot of IBM hardware is made in China", I say that it's the software which is riddled with NSA back doors.

In huawei's case, it is the chips which are riddled with People's Army back doors.

the tower's picture

It's all about firmware, the embedded software in the hardware.

A big problem is that using NSA backdoors, hackers can infiltrate a Windows (or Mac or iOS or Linux or Android) machine and change the firmware.

Even after completely erasing and re-installing the OS, the machine stays compromised.

This is how backdoors make the world less safe, instead of the opposite.

The NSA (and the Chinese) know this of course. We are all just collateral in the proxy war that is being fought. And they even make us pay for it (our internet bills, our computers, our handsets).

Psychos (not terrorists) have take over the world and made it an extremely dangerous place indeed.

Bastiat's picture

Another demonstration of the destructive power of government. The business "black thumb."

tnquake's picture

Many of the IBM Power, X Series, SAN, and Storage components, if not whole systems are produced in China!

Intense Bowel Movement!

janus's picture

seems more than likely...; actually, it's far past the highest degree of probability -- 'certain' is what needs saying; right, it's certain and inevitable that all these tech titans, accustomed to soaring through the ether perched atop the leading edge of eagle's wings, have made themselves liable to damages totaling in the trillions for knowingly and actively abetting corporate espionage.  and, really, ZHealots, controlling and monitoring our every step (and complex huristics coding the hue of our poo) is just the gravy -- stealing industrial secrets is, was and will remain the biscuit.  

we are a good and quasi-virtuous people 'led' by a cabal of the vilest specimins of human detritus imaginable...a den of thieves, thugs and deviants.  

just keep voting.

now, cue the next mega-major false flagger.


a cage of every unclean and hateful bird...



Non Passaran's picture

The vid is crap but at least it has some naked chicks in it

orangegeek's picture

Huawei is blocked from selling network switches into the US even though they cost less than Cisco and the rest of the switch vendors.


So IBM can't sell hardware into China.  Makes sense. 




Emergency Ward's picture

I suspect they are both infected with backdoors.  That being the case......

Running On Bingo Fuel's picture

Ever look at a preconfigured Lenovo disk (Windows).

There's a hidden volume. Looks strangely like a root kit to an abstract eye...

StychoKiller's picture

Nah, that's just stupid MicroShaft recovery space.  Most spyware for Windoze is in the executable files on the hard disk(s).

ebworthen's picture

Payback's a bitch.

Widowmaker's picture

The giant irony in this is the Communists in China believe more in freedom than Unkle-Fascist Sam.

What amount of damage control incorporated can possibly rebuild trust?  Do the Fascists think this can be bought?!

Doing business with the NSA opens up pandora's box and all but assures declining revenues or even continued viability.  Only -23B in IBM market cap today alone.

Hey Tyler, Widowmaker sees Google +1, Google Adsense and Google Analytics all scraping traffic to this post on behalf of the NSA.

kchrisc's picture

"Breaking 'News': This just in, the US government has added anyone not buying or using US IT equipment on the 'terrorist watch list.' Drones are being dispatched to seek out and take out any and all that threaten the existence of the US by using competing equipment. As always, those killing and maiming for the US in certain foreign countries are exempt. Now back to Honey Boo Boo,"

Lost Word's picture

Government goes back to work and my internet slows down. Coincidence?

Maybe IBM can sue the NSA and the Gov for billions in damages.


doctor10's picture

America will have the world's doors shut in its face.


Within the country, capital is worthless. The regulatory burden, the tax burden and now the fact that any number of 3 letter alphabet agencies are in your computer files, phones and laptops effectively eliminates whatever competitive edge any business requires to get a leg up.

In all probablity it will take SEVERAL eelction cycles to get those agencies back behind the Fourth Amendment-IF They choose to let it happen.

The 21st Century can easily be the start of another Dark Ages

logicalman's picture

IBM seems to like working with fascists.

They helped keep track of concentration camps for Hitler too.


carlnpa's picture

The German camps were just the practice runs for what they plan to do to us.

All those Operation Paperclip immigrants, that took over our government, have been waiting for this moment.

Son of Loki's picture

Is this a form of "Blowback?"

monad's picture

Did the Chinese find spy code signed by the NSA in the circuits when they were reversing engineering, or when they were adding theirs?

neidermeyer's picture

They found it 15 years ago (maybe more) when they were reverse engineering Cisco routers ... maybe they thougt it was limited to network equipment.

Widowmaker's picture

Already have:


Fascism eats your privacy for breakfast and shits your freedom for lunch.

mbutler101's picture

Yeah, I'm a back door man 

Iam_Silverman's picture

"Yeah, I'm a back door man "


Knock knock.....



Heh.  Couldn't pass that offer up.

stant's picture

martin armstrong warned of this. goodbye siliconvalley dont dance with a devil who steps on his own wing

Femme Meatwad's picture

IBM suffers from the perception of "full service for those needing hand holding." With a plethora of offerings increasing in the enterprise and cloud space, competition from lower price (but not quality) entrants is getting fierce. IBM's stock will get cut in half.

Professor Fate's picture

Why would anybody want to buy any component built in America?  Exactly who does that component report to and what?

Fate the Magnificent
"Push the Button, Max"

azzhatter's picture

Why would anybody buy anything made here and soon nobody would want to live here. Forward

lakecity55's picture

"The new census in Mexico has revealed a stark fact: most Mexicans have immigrated to the US, while US citizens now form the majority of Mexico's residents."