This week, China restricted government purchasing of Symantec and Kaspersky software and Apple's iPads and MacBooks. In May, China similarly restricted Windows 8.
Chinese technology competition has been formidable within China, with domestic servers eating into U.S. companies' market share and new smartphone manufacturers quickly becoming market leaders.
Growing Chinese competition and continued government restrictions should reduce many growth estimates for hardware and software makers, and especially those that have become more reliant on China for growth.
According to Chinese press, the nation just restricted Apple's (NASDAQ:AAPL) iPads and MacBooks from government procurement. Similarly, earlier this week, China's Public Security Ministry updated its list of approved security software programs and/or suppliers for government departments, and no longer approves the purchasing of antivirus software from Symantec (NASDAQ:SYMC) and Kaspersky Lab. The antivirus list names only five Chinese supplier options: Qihoo 360 (NYSE:QIHU), Venustech, Kingsoft, Beijing Jiangmin and Rising.
China increased scrutiny of foreign companies and decreased purchasing of foreign technology following Edward Snowden's leaking of a National Security Agency spying program. Since then, China's state-owned media has been critical of Apple and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) for claimed cooperation with such spying, and in May, Microsoft's (NASDAQ:MSFT) Windows 8 was similarly excluded from a government purchasing order, though older versions of Windows are still permitted. Also in May, China indicated it would investigate technology companies for potential breaches of national security.
China has not excluded all foreign technology or all technology from these U.S. behemoths. Apple's iPhone is a popular consumer choice. Also, in July, Microsoft's Xbox One became the first foreign game console in over a decade to receive Chinese approval, being made available exclusively available through state-owned China Telecom (NYSE:CHA).
China's current exclusions regarding Microsoft and Apple products relate to government procurement rather than retail consumers. Moreover, the Xbox primarily competes with Japanese products, such as Sony's (NYSE:SNE) Playstation 4, which may make the Chinese government see the Xbox One as the lesser of two evils, at least for now.
Though IBM (NYSE:IBM) hasn't faced state-mandated restrictions against its hardware, the company's business within China has declined over the last two years. This decline is likely due to both fallout from Snowden and the growth of competitive Chinese alternatives, such as Lenovo (OTCPK:LNVGY). IBM has already chosen to simply get out of the way of some of these headwinds and in January, IBM announced it would sell some of its server business to Lenovo for $2.3 billion. Lenovo was previously the buyer of IBM's personal computer business, such as ThinkPad.
As time goes on, Chinese competition and government restriction is likely to only increase for U.S. hardware and software manufacturers. This will be problematic for future growth projections, as many forecasts anticipate a substantial rate of growth within China. Moreover, as Chinese companies continue to increase in size, some will likely become formidable competitors outside of China.
Some of these companies, such as Lenovo, are already global competitors. The next line of Chinese competition is likely to include Xiaomi, which has quickly become a formidable smartphone manufacturer within China, and which will likely expand its product line. Nonetheless, the products offered by companies like Lenovo and Xiaomi are still dependent upon operating systems from U.S. suppliers, such as Google's Android or Microsoft's Windows.
In the coming quarters, it should be expected that many hardware and software manufacturers will reduce their expected rates of growth in China. Moreover, The May exclusion of Windows 8 and these most recent restrictions of Apple, Symantec and Kaspersky products may be harbingers of other and further restrictions that might only exacerbate the probable slowing of Chinese consumption of U.S. hardware and software.
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