In the City the NSA wasn’t a problem… until now

Since the revelations of NSA snooping started to emerge this summer, they have gotten a lot of mileage in the media and across the internet, but I think it is fair to say that life in the City barely missed a step.

There were some suggestions of qualitatively negative consequences, but when you work in the finance industry you get used to unspecific bluster.

There is always a talking head in the background blathering on about how the world is about to collapse. At least this time it was not to be under the weight of our own idolatry and indebtedness.

For the analyst community, if it cannot be translated into the ‘numbers’ in the next year or two – in other words if the impact cannot be quantified at a company level – it remains al-desko lunch fodder.

Outstaying a welcome

Yet on a recent trip to Asia there were some contacts on the ground suggesting there was a specific hardening of policy in China, in particular towards large US enterprise (i.e. those serving large companies) technology firms.

Get the IOC – IBM, Oracle, Cisco – out of China, we heard several times.

Even without Snowden, this has long been held out as a threat.

China’s largest IT names, Huawei and ZTE, are forbidden by law from selling into the US telecommunications infrastructure and a pseudo trade war on this basis has thought to be brewing for years.

Still, smoke, perhaps now a match, but no fire.

Walking the walk

And then suddenly there it was, in the numbers.

IBM’s business in China this last quarter was down 22% from the previous year.

Cisco, who reported their quarter on Tuesday, was down 18% in China and around 20% in other large emerging markets like Russia, Mexico and Brazil.

For most people Cisco do not appear to feature much in daily life, yet they are the world’s leading peddler of switches and routers, the backbone of the modern telecommunications infrastructure.

All the data flying around the world tends to know where it wants to go but has no idea how to get there. That is the way it has been described to me anyway.

Forgive the oversimplification, but Cisco’s switches are like the traffic lights at junctions, controlling traffic flow.

More importantly, they also tell the data which way to head, one junction at a time.

Pretty crucial stuff, and if you are China you can see why in light of the NSA’s activities you might be worried, especially when Cisco’s home country seems concerned enough about the ability to spy using this equipment to enact a law excluding Chinese firms from selling it.

What, one must wonder, do they know can be done with this stuff?

Bad timing

All this may still be dismissed as a coincidence, but the key point is that despite recent “weakness” in the Chinese economy it is now well on the road to recovery.

I use inverted commas because roughly speaking anything below 8% annual growth is considered weak in the context of China, so it is all relative.

Nevertheless, the Chinese National Bureau of Statistics showed industrial output had improved in October by 10.3% over the previous year.

China looks to be emerging from a two year malaise just at a time when business for US tech companies is imploding.

A paradigm shift

The NSA leaks are the story that will not die, and whilst China powers on US companies are starting to struggle there.

Circumstantial as it is, evidence is mounting that the NSA has been a catalyst.

For European companies such as Nokia, Alcatel and Ericsson a huge market might just have lost its biggest competitors.