I spy spies

BUSINESS

Fear of China

Feb 3rd 2005 HONG KONG
From The Economist print edition

American politicians are attacking IBM's big Chinese deal

NOTHING gets a politician's juices flowing like a good scare story. Following the decline of offshoring as a hot issue on the stump, America's Republicans have latched on to a new one: national security. After taking “our” jobs, is China now sending us its spies?

Three senior Republican Congressmen are lobbying against the proposed $1.75 billion purchase of IBM's personal-computer business by Lenovo, China's largest PC maker. They claim that it will allow the Chinese government to acquire sensitive American technology and, potentially, use IBM's facilities to spy for the Chinese armed forces. In a letter to the treasury secretary, John Snow, the trio wrote that the deal “may transfer advanced US technology and corporate assets to the Chinese government”. Lenovo's parent company was founded, and is still controlled, by the Chinese Academy of Science.

On January 28th, the Committee on Foreign Investment in the United States, which examines national security aspects of corporate sales to foreign buyers, extended its routine 30-day investigation into the deal to a more thorough one that will take 45 more days. Most experts still expect the panel to clear the deal, perhaps with modest changes to the terms. But a surprise is possible. In 2003, the committee objected to Hong Kong's Hutchison Whampoa buying a stake in Global Crossing, a telecoms provider. In 1999, it blocked a Chinese-led consortium from acquiring $450m-worth of satellite assets.

The national security argument put forward by the three Republicans is hard to take seriously. Certainly China has little respect for intellectual property. Huawei Technologies, China's leading telecoms-equipment maker, was successfully sued by Cisco for intellectual-property theft in an American court. Chinese car firms counterfeit foreign models—one local favourite is half Mercedes, half BMW. The next Harry Potter books are out in China—though the real author has not written them yet. China is especially keen on advanced technology. Despite putting a man into space, China has a low-tech economy. Some 85% of the high-tech goods produced there are controlled by foreign firms. China consistently runs a $10 billion-plus annual trade deficit in technology.

But the PC and laptop operations that Lenovo is trying to buy from IBM are mature technologies with no clever applications and no real military use. As William Reinsch at the National Foreign Trade Council told the media, “the assets are low-tech, ubiquitous, and the Chinese have this technology anyway.” Although IBM invented the PC, “all the smart bits are provided by Intel and Microsoft these days,” notes Johnny Chan, an analyst at J.P. Morgan. IBM is selling its PC business because it is declining and barely profitable. True, it has some contracts to supply the American government. But if the committee believes that this leaves the country open to counter-intelligence, it can always insist that they are excluded.

In truth, the fuss over the Lenovo and IBM deal says more about Republican attempts to reverse the relatively liberal attitude that America took towards China during the Clinton years than genuine national-security fears. As such, the agitated congressmen reflect a real fear of China's growing economic clout, twinned with an uncertainty about its political direction. One of the three Republican objectors, Donald Manzullo, said this week that Lenovo, as a state-owned Chinese company with no requirement to make a profit, “threatens America's economic security”. Since the group “already dominates the Chinese market”, it would surely “come in and try to dominate the US market as well”.

But even that claim is wrong. Far from “dominating” the Chinese market, Lenovo's 27% share and its margins are being squeezed by competition from America's Dell and Hewlett-Packard at the top end and by cheap unbranded machines from local rivals at the bottom. No wonder Lenovo's boss, Yang Yuanqing, complained recently that “the IT market in China is a battlefield”. As its finance director, Mary Ma, concedes: “If we just focus on China we cannot generate returns for our shareholders.” Perhaps it really is IBM's sales that Lenovo wants, not its information.

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