China reportedly orders state offices to remove foreign tech which could hit US firms like Microsoft

China reportedly orders state offices to remove foreign tech which could hit US firms like Microsoft
By: WNG CNBC Posted On: December 09, 2019 View: 14

China reportedly orders state offices to remove foreign tech which could hit US firms like Microsoft

A visitor tries out Microsoft Corp.'s Windows 10 operating system on a tablet.

Kiyoshi Ota | Bloomberg | Getty Images

China's Communist Party has ordered all state offices to remove foreign hardware and software within three years, the Financial Times reported, in a move which could hit major U.S. firms including Microsoft, Dell and HP.

The policy has been dubbed "3-5-2" because the replacement of the technology will happen at a pace of 30% in 2020, 50% in 2021, and 20% in 2022, the newspaper said, citing a note from brokerage firm China Securities. Analysts there estimate that 20 million to 30 million pieces of foreign equipment need to be replaced in China.

China Securities said that the order had come from the Chinese Communist party's Central Office earlier this year, the FT said. While the directive is not public, two cybersecurity firms told the FT that their government clients described the policy to them.

China Securities did not respond to a request for comment when contacted by CNBC. Meanwhile, China's Ministry of Industry and Information Technology was not immediately available for comment when contacted by CNBC by fax. Microsoft, HP and Dell did not immediately respond to CNBC's request for comment outside of business hours.

Neil Campling, head of technology, media and telecommunications research at Mirabaud Securities, said the move by the Chinese government aims to protect against an escalation of tensions with the U.S.

"That is something that China is looking at to make sure government operations are not affected by escalating tensions with the U.S.," Campling told CNBC.

Trade war impact

Beijing's move comes against the backdrop of the ongoing U.S.-China trade war in which technology has been front and center. China's technology firms have been the target of U.S. pressure. Earlier this year, Huawei was placed on a U.S. blacklist which stopped American firms doing business with the Chinese telecom networking giant.

Washington expanded its blacklist in October to include a number of Chinese surveillance firms like Hikvision, one of the world's biggest companies for such technology. A provision of a U.S. law known as the National Defense Authorization Act also prohibits executive government agencies from procuring telecommunications hardware made by Huawei and another Chinese firm, ZTE.

China's latest policy may be seen as one of the most direct moves against U.S. technology firms during the trade war. While Chinese government offices often use Chinese PCs such as Lenovo, they run Microsoft's Windows software and may also use hardware from Dell and HP. The impact on trade negotiations will depend on how the U.S. "digests" China's move, according to Nick Marro, global trade lead at The Economist Intelligence Unit.

"Discrimination against foreign technology has been a part of the policy framework in China for years now, but it's something that USTR (United States Trade Representative) is already familiar with," Marro told CNBC.

"This might nevertheless complicate the discussions around Huawei, ZTE and other companies in terms of their access to the U.S. market. Much of the popular narrative has centered around the U.S. unfairly banning these Chinese companies from its market; at least with this story, the administration can publicly play the blame game of, 'well, China's doing it too, and they've been doing it for a long time.'"

U.S. companies like Google and Facebook have been blocked from operating in China for several years.

Wider risk

Beijing's directive to remove foreign hardware and software may not be straightforward. While a company like Lenovo is Chinese, it uses chips from American supplier Intel. And China doesn't really have a homegrown alternative to Microsoft's Windows. Huawei released its own operating system called HarmonyOS earlier this year, but it's unclear whether it would be suitable for government use.

Huawei was not immediately available for comment when contacted by CNBC.

But China's move could also been seen as part of its broader push to wean itself off of American technology, try to catch up in areas like semiconductors and even take a lead in industries such as artificial intelligence.

Mirabaud's Campling said that the U.S. firms implicated in Beijing's move would face "limited impact" mainly because it relates to government offices and not consumers. However there is concern that this could be a prelude to a wider backlash against American consumer technology which would hurt U.S. firms much more.

"The wider risk is if the Chinese consumer feels threatened by international relations and the issues. Without doubt, if it goes onto a consumer level, there would be issues into companies such as Apple, which is a staple in terms of U.S. brands," Campling said.

— CNBC's Evelyn Cheng contributed to this report.

Read more on China's directive to remove foreign technology from state offices in the Financial Times.

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