NSA Damage Control: IBM Chief Executive Heads to China

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International Business Machines (NYSE:IBM) CEO Ginni Rommety is reportedly visiting China this week in an attempt to convince Chinese leaders that they can use the company’s products without being spied on by the U.S. government.

Technology companies have been hit hard by the fallout from last summer’s National Security Agency scandal after Edward Snowden leaked documents showing that the U.S. government was spying on customers both in the U.S. and abroad through data provided by American tech companies. It has been estimated that the U.S. tech industry will lose billions of dollars in foreign business as companies turn away from American businesses to avoid the possibility of being spied on. That practice has caused the revenue of IBM’s China business to fall more than 20 percent in the past six months.

Reuters reports that Rommety arrived in Beijing on Wednesday to talk to Chinese leaders and attempt to persuade regulators there that their privacy is safe while using IBM products. Rommety is set to meet with economic policy Vice Premier Wang Yang, officials from the Ministry of Industry and Information Technology, and IBM’s biggest Chinese customers. Reuters says that Rommety is the second IBM executive to be sent to China in the last four months.

In December, a group representing some IBM shareholders filed a suit against the company over the damage the NSA scandal has had on its business. The Louisiana Sheriffs’ Pension & Relief Fund, the plaintiff in the suit, said that IBM knowingly risked its business in China by giving the government more information on Chinese customers than the company was required to by law. IBM has denied the allegations.

The NSA scandal has wrecked havoc on IBM’s already less-than-perfect financial results, particularly in China. In the third quarter of 2013, total revenue fell 4 percent year over year, and operations in the Asia Pacific region plummeted 25 percent. Sales in China alone fell 22 percent, and hardware sales in the country dropped 40 percent.

For the fourth quarter of last year, IBM’s earnings release showed that revenue declined 5.5 percent to $27.7 billion, below the $28.25 billion projected by analysts. Annual revenue was equally as grim: Coming in at $99.8 billion, sales decreased for the second straight year and failed to surpass $100 billion for the first time since 2010. IBM forecast that revenue from what it calls BRIC countries — Brazil, Russia, India, and China — is expected to decline another 14 percent in 2014.

IBM has been attempting to move away from investing so heavily in hardware, the arena that has had the biggest drag on IBM’s financials in recent years as companies switch to cloud-based services. China is still one place that buys a lot of IBM’s hardware, with hardware sales accounting for 40 percent of IBM’s revenue in the country, according to figures from Reuters.

Some of Rommety’s recent efforts to move away from hardware include a recent sale of the company’s low-end server business to the Chinese tech company Lenovo (LNVGY.PK), and the company is reportedly making moves to sell its semiconductor chip business, as well. It remains to be seen if Rommety will be able to rebuild China’s trust enough to stop the financial bleeding from the company’s hardware unit as IBM restructures to depend less on hardware sales.

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