NSA spying hurts business of large U.S. hardware makers

John Shinal | Special for USA TODAY

SAN FRANCISCO — With evidence mounting that NSA spying has damaged the business of some of the largest U.S. technology companies, the question now is how long it will take them to win back the trust of overseas customers.

Without any changes in U.S. law that restrict the agency's ability to use tech for surveillance, the answer may be "never."

That may be the case in China, where IBM, Microsoft, Hewlett-Packard and, most notably, Cisco Systems have reported substantial drops in sales since the NSA surveillance program came to light.

Yet sales are falling for several of these giants not only in China but in other parts of Asia and in other developing economies, too, and the trend may have as much to do with privacy concerns as with the pace of global economic growth.

Cisco, whose switches and routers lie at the core of Internet traffic around the globe, saw its top five emerging markets post year-over-year order declines between 18% and 30% in its most recent quarter.

"It was pretty brutal," Cisco CEO John Chambers said on a conference call last month.

Chambers was hesitant to blame security concerns for the company's performance worldwide.

He called the impact on the company's total emerging markets business "fairly nominal," and pointed to macroeconomic uncertainty and the introduction of new products that overseas customers are cautious about investing in.

"I do think we're seeing a slowdown in their decision-making, and in their economies," Chamber said on the call. "I do not think (privacy) is the major factor across all emerging markets. I do think it is a factor, however, in China."

It's true Cisco this year has been rolling out new, expensive switching and routing platforms, trying to sell expensive gear to foreign phone companies, large businesses and governments just as the NSA revelations were disclosed.

The technology transition is proving to be a tough sell for the company, because it's hard to alleviate customers' security concerns if they believe Cisco's gear has a back door that enables NSA snooping — especially when one of Cisco's selling points has been that its equipment is secure.

While Chambers was careful to parse his words regarding the impact of those concerns, another Cisco executive on the conference call last month went a bit further.

"The issue has caused a number of customers to pause and re-evaluate," said Robert Lloyd, the company's president and head of sales, adding "it's not having a material impact, but it's certainly affecting decision-making" in emerging markets, which comprise a fifth of the company's sales.

Given Cisco's emerging market order growth went from 13% for the quarter ended in April to -12% in the most recent period — post NSA-flap — it appears privacy concerns are having a material impact. A negative swing of 25% gets one's attention.

But it's not just Cisco that's having trouble in emerging markets like China.

IBM last month reported a 22% decline in revenue from China, which contributed to a 4% drop in the company's quarterly profit.

HP said all of its businesses in China had year-over-year sales drops last quarter — except in networking gear, in which it competes against Cisco. HP posted a 3% rise in sales.

All this happened as China's economy grew almost 8% in the third quarter.

China may prove to be an exceptional case, as the country views the U.S. as a strategic rival and has punished American companies before for various reasons.

Earlier this year, for example, Apple's iPhone sales growth there did a reversal after the company was publicly chastised in China for its warranty practices.

Cisco has a long and complicated history with the country, which it has accused of allowing a rival, Huawei Technologies, to steal Cisco's intellectual property.

Still, if China's new rulers believe U.S. hardware and software makers are helping a strategic rival to spy on it, U.S. companies will likely see sales there continue to fall.

And if the same concerns grip other overseas customers and governments, American tech executives may have a tough time convincing them otherwise.

John Shinal has covered tech and financial markets for 15 years at Bloomberg, BusinessWeek, the San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others