The ‘Snowden effect’ In China

Edward SnowdenPhoto by AK Rockefeller

Edward Snowden’s revelations about NSA spying have most led to political fallout so far, but analysts have worried about how much the ‘Snowden effect’ could hurt tech companies’ revenues abroad. Most large-cap tech companies have blamed weak numbers on macro conditions, but looking at the changing market share in China could give a better indication of what such a loss of confidence looks like.

“We believe the fallout from the NSA revelations for enterprise technology companies will be felt first, and most acutely, in China,” write Bernstein Research senior analysts A.M. Sacconaghi Jr. and Mark L. Moerdler. “China has been pushing to have more government and business entities purchase from Chinese vendors instead of U.S. tech vendors.”

Not all sectors are vulnerable to product substitution, but where a viable alternative exists the difference between global and Chinese market share is dramatic – Huawei’s share of the Ethernet switch market being just one example. ethernet switch global marketshare

ethernet switch china marketshare

All large-cap tech companies are global

The US government has played a similar role in defending its tech sector, and Congress has recommended that US companies use American vendors in favor of Huawei or ZTE whenever possible because of the possibility of state influence. To some extent, the competition between US and Chinese tech companies is straightforward nationalism, but the bigger concern is the risk of contagion – that other countries will start to avoid the US tech sector as well. China represents about 9% of international tech spending, and different companies have different levels of exposure to it, but every major US tech company relies on international sales for the majority of its revenue.

China Share of Tech Spending

china tech spending percent  tech revenue outside US

Four factors that determine risk from the ‘Snowden effect’

Sacconaghi and Moerdler argue that the risk of other markets avoid US tech products depends on four factors: “How sticky (vs. transactional) the product(s) they are selling are; whether attractive home country alternatives (particularly in China) are available; how important that area/product is for espionage; a vendor’s relationships (real or perceived) with U.S. military and defense agencies.”

But another way to see the ‘Snowden effect’ is that it creates a need for local alternatives that may not have existed before. Two quarters may not be long enough to gauge whether foreign companies have decided to stick with US vendors, or whether they simply haven’t had enough time to find a suitable replacement.

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About the Author

Michael Ide
Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.

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