U.S. Tech Firms Could Feel Backlash in China After Hacking Indictments

Experts Say Obama Administration's Latest Move Could Further Sour Market for Foreign Players

By

Paul Mozur in San Francisco and

Carlos Tejada in Beijing

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May 20, 2014 9:10 a.m. ET

Alleged cyberspies from the Chinese military have "wanted" posters out for their arrest. Who are they accused of hacking? Will they face trial in the U.S.? WSJ¹s Jason Bellini has #TheShortAnswer.

U.S. officials didn't list any U.S. technology firms among the victims when they indicted five Chinese military officers for allegedly hacking U.S. companies and others.

If past events provide a guide, such companies could figure prominently in China's response.

The U.S. move on Monday adds to growing tensions between Washington and Beijing over cybersecurity issues that are creating obstacles for U.S. companies in the nearly $324 billion Chinese information technology market. Experts say the friction has already hurt sales for companies like Cisco Systems Inc., CSCO -0.94% International Business Machines Corp. IBM -1.13% and others in the wake of disclosures about U.S. information-gathering efforts from former U.S. National Security Agency contractor Edward Snowden.

The U.S.'s move to name five Chinese officers for hacking attacks on U.S. firms will lead to growing tensions between Washington and Beijing, and U.S. tech firms may caught in the middle. WSJ's Brian Fitzgerald reports. Photo: Getty.

The worry, those experts say, is that the Obama administration's latest move against China over alleged hacking could further sour a vast and growing technology market for foreign players.

"This is just another straw on the camel's back, which is already overloaded by previous events," said David Wolf, managing director, global China practice for consulting firm Allison+Partners.

A number of major tech companies doing business in China, including Cisco, IBM, Microsoft Corp. MSFT -0.18% and Oracle Corp. ORCL -1.42% , didn't have immediate comments on the matter.

China's Foreign Ministry said Tuesday it had summoned the U.S.'s newly arrived ambassador, former Montana Sen. Max Baucus, to express displeasure over the indictments, and it and China's Defense Ministry warned of repercussions.

"We will take further action," Foreign Ministry spokesman Hong Lei said at a daily briefing. He said that Beijing already suspended participation in a year-old working group with the U.S. on cybersecurity, and he demanded that Washington scrap the charges. "What the U.S. should do now is to withdraw the indictments," Mr. Hong said.

Defense Ministry spokesman Geng Yansheng, in a separate statement, said the U.S. move runs counter to generally improving relations between the countries' militaries and "severely damages trust between the two sides."

Both spokesmen said China had been hit by U.S. cyberattacks—Mr. Hong said targets included government agencies, universities and individuals—and both accused the U.S. of hypocrisy.

"We urge the U.S. to give us a clear explanation of what it's done and stop all relevant actions," Mr. Hong said.

The unprecedented criminal indictment of five Chinese military officers adds strains to a U.S.-China relationship already being tested by Beijing's assertive pressing of maritime claims against U.S.-allied Japan and the Philippines. It also lands on a busy agenda that diplomats said gives Beijing ample opportunity to retaliate. Both sides are preparing for an annual meeting of cabinet ministers scheduled for July that is convened to address a broad array of security and economic issues. An annual human rights dialogue has yet to be scheduled, and negotiators are hoping to finish work on a treaty to clarify rules for investment and remove barriers to it.

Research firm Gartner Inc. estimates China's information technology spending will rise 38% over the next five years, from $323.9 billion in 2013.

Still, some foreign companies report obstacles. Late last year Cisco Chief Executive John Chambers, when asked on an earnings call about reports of the NSA's surveillance activities, said "it is an impact in China." Last year, Qualcomm Inc. QCOM +0.06% 's chief executive said U.S. restrictions on Chinese companies and NSA surveillance were affecting the company's business in China.

In a recent interview, Shang-Wen Hsiao, the chief financial officer of 21Vianet Group, VNET -0.62% Inc., which runs data centers in China, said the company had seen a trend of China's state-run companies—which have a significant presence in the world's No. 2 economy—purchasing more equipment from local Chinese tech companies.

"Snowden is hurting everyone," Mr. Hsiao said, referring to U.S. tech companies, though he added that China's privately run companies still seemed interested in foreign-made gear.

China is busily building up its own high-tech industries, and has made massive strides in areas such as telecommunications gear with the rise of Huawei Technologies Co. and ZTE Corp. 000063.SZ +1.70% Still, China lacks know-how in specialized areas such as software, high-end servers and certain other types of mission-critical equipment, experts say.

The market presents other difficulties. The office that sets procurement guidelines for China's vast government bureaucracy issued a notice last week prohibiting the installation of Microsoft's Windows 8 computer operating system. The notice dealt with energy-saving guidelines but didn't explain why Windows 8 failed to meet the criteria. Last month, Microsoft ended support for its widely used, 13-year-old Windows XP operating system, drawing criticism from consumers and commentators in China.

Microsoft said in a statement that it was surprised by the move and is working with government agencies to ensure its products meet procurement requirements.

Chinese cyberattacks in U.S. targets have picked up again after a lull following a report last year by U.S. cybersecurity firm Mandiant alleged that a Chinese military group stole secrets from more than 100 companies, including many in the U.S., according to Adam Meyers, vice president of intelligence at CrowdStrike, another cybersecurity firm.

Alleged Chinese cyperspies in a wanted poster displayed at the Justice Department in Washington on Monday AP

In particular, he said, the intrusions are focused on a large number of high-tech firms that he said often held technology key to the stated goals of China's economic development.

"We've seen them a lot more over the past few weeks, a lot of Chinese intrusions," Mr. Meyers said, without naming the companies targeted.

Any impact on U.S. companies from the indictments may not be immediate or apparent, said Mark Natkin, managing director of Beijing-based research firm Marbridge Consulting.

He cited the case of Google Inc., GOOGL +0.29% which pulled search servers out of China four years ago after declining to implement Beijing's censorship restrictions. After months passed, some services such as search and its Google Drive cloud service worked only intermittently there. The government moved at "a time when the spotlight was off them, at a time much less likely to draw criticism for doing something punitive," Mr. Natkin said. A Google spokesman said it still has thriving advertising and other businesses there.

Mr. Wolf, of Allison+Partners, said the indictments could add to barriers keeping the U.S. and China from striking new deals. U.S. and industry officials are trying to get Beijing to sign on to an updated version of an agreement that eliminates tariffs on high-tech goods. China hasn't been willing to agree that certain semiconductors, medical equipment and other high-tech goods should be tariff-free, in part, because it is looking to build up domestic industries in those areas.

"This will have a broader chilling effect on international technology exchanges as a whole," Mr. Wolf said.

—Chuin-Wei Yap in Beijing

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China Bans Windows 8 From Government PCs

• By
• Brian R. Fitzgerald

China banned Microsoft'sMSFT -0.18% Windows 8 from new government computers, a blow as the company tries to shift customers to its latest operating system.
The Central Government Procurement Center said desktop, laptop and tablet computers bought by the government must use a different OS. The decision comes more than a month after Microsoft officially pulled the plug on providing support for its aging but widely installed Windows XP software. In the weeks after ending support, a major security hole was found in Microsoft’s Internet Explorer browser, and despite its past statements the company patched bug for XP users.
China’s official Xinhua news agency Tuesday said the ban was aimed at ensuring computer security after the shutdown of XP. The ban didn’t specify whether new government computers would consider a different Microsoft OS like Windows 7. While the ban targets new purchases, it wasn’t clear whether Windows 8 was prohibited from existing government machines, though it is unlikely the older hardware could run the OS anyway.
Microsoft said it was surprised by decision, and that it has been working with Chinese officials to make sure its products met the government’s specifications. The decision came last week in a post on energy-saving guidelines on the procurement agency’s website.