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US Espionage Blowback: China Drops Apple, Cisco From State Purchase Lists

Another quarter of leaks of ubiquitous US espionage in every corner of the world, and sure enough we get another quarter of China just saying no to spending any more money on companies which are, as far as Beijing is concerned, a natural extension of the NSA. According to Reuters, China has just dropped some of America's leading technology brands from its approved state purchase lists, chief among them Cisco (which already was hammered a year ago due to the Snowden revelations), and everyone's favorite $1 trillion market cap or bust cell phone maker, Apple.

At the same time China shifted production focus away from foreign production approved thousands more locally made products. The reason according to Reuters, and pretty much anyone else: a response to revelations of widespread Western cybersurveillance.

Expect more guide-downs, especially from Apple, for whom China is now seen as a key variable in the doubling the company's forward PE over the past year.

Chief casualty is U.S. network equipment maker Cisco Systems Inc, which in 2012 counted 60 products on the Central Government Procurement Center's (CGPC) list, but by late 2014 had none, a Reuters analysis of official data shows.

 

Smartphone and PC maker Apple Inc  has also been dropped over the period, along with Intel Corp's security software firm McAfee and network and server software firm Citrix System.

 

The number of products on the list, which covers regular spending by central ministries, jumped by more than 2,000 in two years to just under 5,000, but the increase is almost entirely due to local makers.

Thank you NSA: "The number of approved foreign tech brands fell by a third, while less than half of those with security-related products survived the cull."

The official story is the usual politically correct mush: "An official at the procurement agency said there were many reasons why local makers might be preferred, including sheer weight of numbers and the fact that domestic security technology firms offered more product guarantees than overseas rivals."

The reality is far simpler: Edward Snowden unleashed a can of worms that has and will lead to billion in loss profits for companies which were instrumental in granting the NSA unfettered access to all things Chinese:

China's change of tack coincided with leaks by former U.S. National Security Agency (NSA) contractor Edward Snowden in mid-2013 that exposed several global surveillance program, many of them run by the NSA with the cooperation of telecom companies and European governments.

 

"The Snowden incident, it's become a real concern, especially for top leaders," said Tu Xinquan, Associate Director of the China Institute of WTO Studies at the University of International Business and Economics in Beijing. "In some sense the American government has some responsibility for that; (China's) concerns have some legitimacy."

 

Cybersecurity has been a significant irritant in U.S.-China ties, with both sides accusing the other of abuses.

China has taken this action despite the recent complaints of the same companies who will now have to bring the bad news to their shareholders, while blaming it on the weather, or the West Coast port shut down:

U.S. tech groups wrote last month to the Chinese administration complaining about some of its new cybersecurity regulations, some of which force technology vendors to Chinese banks to hand over secret source code and adopt Chinese encryption algorithms.

 

The CGPC list, which details products by brand and type, is approved by China's Ministry of Finance, the CGPC official said. The list does not detail what quantity of a product has been purchased, and does not bind local government or state-owned enterprises, nor the military, which runs its own system of procurement approval.

For now the companies on the receiving, or rather non-receiving end of China's incrasingly more overt espionage protectionism, have nothing to say:

"We have previously acknowledged that geopolitical concerns have impacted our business in certain emerging markets," said a Cisco spokesman.

 

An Intel spokesman said the company had frequent conversations at various levels of the U.S. and Chinese governments, but did not provide further details.

 

Apple declined to comment, and Citrix was not immediately available to comment.

Expect that to change in the coming weeks, as the reduced guidance press releases once again hit the tape.