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IBM to share technologies in China amid regulatory pressure

The IBM logo in Yorktown Heights, NY, in February of last year. Photo: Bloomberg

US technology giant International Business Machines Corp. (IBM) has bended to China's increasingly xenophobic technology policy with a makeshift strategy that allows the Big Blue to open technology licensing to local firms in exchange of more opportunities to continue to grow its business amid the country's tougher environment for foreign companies.

At a forum recently held in Beijing, IBM CEO Virginia Rometty explicitly proclaimed that her company is willing to share its technologies relating to semiconductor chips, IBM architecture-based servers and software running on those machines with local firms in expectation of helping China nurture its own IT industry, as the country has been at full blast promoting the use of more Chinese and less foreign-made technologies since revelations by Edward Snowden, ex-US National Security Agency contractor, about the US' global cyber surveillance.

"If you are a country, as China is, of 1.3 billion people, you would want an IT industry as well...I think some firms find that perhaps frightening. We, though, at IBM, find that to be a great opportunity," Rometty said at the China Development Forum, calling for a change in the entrenched view that foreign companies simply treat China as a sales destination or manufacturing base.

Although Rometty sketched out a blueprint of establishing a shareable ecosystem in China where local firms will be able to produce their self-developed chips by being given access to IBM's technologies, some industry insiders still believe that the move, a latest and clearest sign of foreign companies adopting a different approach in dealing with China's increasingly nationalist industrial policy for the technology sector, stems from two other considerations: the goal to revive the sales in China and the ambition to break the monopoly of Intel Corp. in the country's chip market.

Compared with the same period a year ago, IBM posted a trifling 1 percent drop in revenue in China during the fourth quarter of 2014, a robust resilience from the third quarter of 2013 when the Armonk, New York-based company was badly hit by a dreadful fall in sales in the country due to Snowden's revelations. Therefore, the strategy of sharing technologies with Chinese companies is seen as a cardiac for IBM to continue to consolidate and even further boost its sales in China.

On the other hand, the new approach can also contribute to the enhancement of IBM's presence in China's microchip market where Intel, IBM's major adversary, holds a dominant position. Intel currently supplies chips to most big Chinese Internet companies and cloud services providers, dwarfing IBM whose chip market share has hugely shrunk in China. In recent years, IBM has shifted its focus to the cloud computing data center market in China.

Adapting to survive

At the forum, Rometty said that the significant digital revolution that China is undergoing gives IBM a great opportunity to deepen partnerships with local firms by means of sharing its chip technologies, as the country's semiconductor chips are basically imported from foreign manufacturers.

IBM CEO Virginia Rometty speaks at the Mobile World Congress in 2014. Photo: Feature Photo Service/Creative Commons

IBM and Beijing Teamsun Technology have signed a cooperation agreement, under which the American technology giant allows the Chinese computer system provider to develop and sell its own innovative products based on IBM's technologies. A Teamsun Technology statement said that IBM will swiftly complete the first handover of the source codes to the Chinese company. IBM also authorized Teamsun Technology to use its Informix software source codes in a deal that the two sides struck on database last November. The moves are illustrated as IBM's sincerity of helping Chinese companies produce self-developed servers and databanks.

IBM has also formed an alliance with China's Suzhou PowerCore Technology, allowing the latter to produce a version of IBM's Power8 chip that runs on Chinese servers. The Chinese version of the Power8 chip is expected to be launched in June, Zhu Yadong, the Chinese company's chairman, said.

In 2013, IBM initiated the OpenPower Foundation, an open technical membership organization, with the goal to give authorization to produce the Power chips to eligible companies including a number of Chinese companies like Teamsun Technology and Suzhou PowerCore Technology.

"IBM is open to Chinese enterprises. We not only want to share our designs with them, but also want to help them design the next-generation microchips," Wang Yang, IBM's senior vice president and general manager of the company's China Development Center, said in Shenzhen in March.

Hailing an ecosystem shared with Chinese companies as a boost to IBM's business in China, Wang admitted that the new approach is currently only applied to Chinese firms at a time when the Chinese government is planning to carry out a new regulation which restricts domestic commercial banks from using foreign information technology equipments on the grounds of national security, a bank technology rule that the US has snubbed for hurting the interests of American high-technology companies. Coincidentally, IBM's Power line of processors is often used for intensive calculations in the financial services.

Moreover, China is also deliberating on enacting an anti-terrorism law which requires high-technology firms doing business in the country to hand over encryption keys and install backdoors to facilitate counter-terrorism investigations. The decision has also been condemned by the US.

In a statement, IBM said that its cooperation agreements with Chinese companies are not a response to the new Chinese rules and that it is seeking a win-win situation where more Chinese people can apply IBM's technologies.

"They (the agreements made with the Chinese companies) were inked due to the high demand in (the Chinese) market," Wang said, adding that IBM hopes that the partnerships will speed up the company's development in the world's second largest economy.

Surprisingly, China has recently reportedly agreed to postpone implementing the new bank technology rule, sending a message that the government likely prefers a moderate approach to realizing localization of the foreign-owned cutting-edge technologies by pressing foreign companies to lift restrictions on technology exports to China through regulatory pressure.
 


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