Spy scandal weighs on US tech firms in China, Cisco takes hit

Spy scandal weighs on US tech firms in China, Cisco takes hit

SINGAPORE - US technology companies including Cisco Systems Inc, International Business Machines Corp and Microsoft Corp may face new challenges selling their goods and services in China as fallout from the US spying scandal starts to take a toll.

Cisco shares tumbled 11 per cent on Thursday, a day after it warned that revenue could drop as much as 10 per cent this quarter, and continue to contract through the middle of next year, in part due to a backlash in China after revelations about US government surveillance programs.

"All the big US IT companies are concerned," said Jim Lewis, a senior fellow with the Center for Strategic Studies in Washington, who is an expert on China and technology. "But so far Cisco is bearing the brunt of it."

Lewis said Beijing may be targeting Cisco in particular as retaliation for Washington's refusal to buy goods from China's Huawei Technologies Co, a telecommunications equipment maker that the United States claims is a threat to its national security because of links to the Chinese military.

Cisco's much smaller network equipment rival Juniper Networks said on Thursday that it was not seeing an impact from leaks by former US National Security Agency contractor Edward Snowden about US spying.

"The Snowden effect is not real," Juniper Chief Marketing Officer Brad Brooks said. "Our business continues to grow in Asia Pac as well as China. As we look at that business there we've not seen those types of conversations from our customers."

Snowden's revelations provoked a storm in the Chinese media and added urgency to Beijing's efforts to use its market power to create indigenous software and hardware, analysts and business executives say.

"The US government isn't doing any favours for Cisco,"said Evercore Partners analyst Mark McKechnie.

Cisco Chief Executive John Chambers said on a conference call that Cisco and its peers face "challenging political dynamics" in China.

IBM last month reported a 22 per cent drop in China revenue, leading to a 4 per cent decline in its third-quarter profit. Chief Financial Officer Mark Loughridge attributed the company's problems to the "process surrounding China's development of a broad-based economic reform plan," which caused delays in purchases.

Microsoft executives singled out China as the company's weakest performing area in the world during the September quarter in an Oct. 24 earnings call.

"The macro conditions in China, which I think are consistent with what some of the other companies have reported as well, have been challenging," said Chris Suh, Microsoft's general manager for investor relations.

Company officials could not be reached for comment.

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