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We all know China is a huge — or potentially huge — market for U.S. tech goods. We also know that geopolitical realities have restrained trade with China — which is why Huawei has very little presence in the U.S. and also why Cisco(s csco) has seen its market share in China decline in the past few years.
Revelations that the U.S. National Security Agency and its “Five Eyes” analogs in the U.K., New Zealand, Australia and Canada now pose additional hurdles to these U.S. suppliers as they try to sell in China. According to a new research note by Sanford Bernstein’s hardware and software analysts:
“While spying has occurred across many companies, governments and corporations, we believe U.S. technology companies face the most revenue risk in China by a wide margin, followed by Brazil and other emerging markets.”
The degree of risk faced by U.S. providers in China depends on how much domestic competition they face. For that reason the researchers see enterprise software companies as relatively safe because there are fewer domestic offerings to compete with them in China — at least for now. So I guess that leaves companies like Microsoft(s msft) and Oracle(s orcl) in the catbird seat (also, for now). Microsoft, by the way, is offering Azure and Office 365 services in a preview via a partnership with Via21net in China. But, networking hardware vendors including Cisco face considerably more risk because China steers domestic businesses to Huawei. Cisco has pushed the U.S. government to keep Huawei out and it’s clear that effort is not lost on China or on Huawei. (Cisco insists that it has not “lobbied” the U.S. on this, but tomato-tomahto.)
The conclusion? Vendors most at risk are:
“Cisco; Dell; HP (particularly its commercial PC and enterprise businesses); IBM (particularly its hardware business, which accounts for ~15% of total company revenues); and EMC. All of these businesses are transactional and play in markets with Chinese and/or other competitors that could act as substitutes. EMC’s business is transactional and has competitive and substitution risk, but its China exposure is relatively low.”