By Eva Dou
BEIJING--The U.S. Navy is looking at dropping IBM servers from
some weapons systems after the server line was purchased by China's
Lenovo Group Ltd., highlighting how security considerations are
affecting technology sales in both countries.
The U.S. Department of Homeland Security identified security
concerns with the IBM unit sale and placed restrictions on federal
government procurement of Lenovo BladeCenter servers, a Navy
spokesman said.
Lockheed Martin Corp., the world's largest defense contractor by
sales and the supplier of the Aegis Combat System, said it is
discussing the issue with the Navy. In response to a question about
the inclusion of IBM servers in the Aegis Combat System, Keith
Little, a spokesman for Lockheed Martin, said, "I can confirm that
we are working with the U.S. Navy to ultimately select an
appropriate course of action."
Lenovo spokesman Ray Gorman said the company doesn't comment on
customer contracts, but that Lenovo continues to sell servers and
other products to the U.S. government. Lenovo acquired IBM's
lower-end x86 server business last year for $2.1 billion.
"We value our productive relationship with the U.S. government
and will work together cooperatively to address the concerns or
issues any individual agency may have," said Mr. Gorman in a
statement.
A Department of Homeland Security spokesman declined to comment,
saying the topic fell under the Treasury Department.
The Aegis Combat System helps U.S. ships attack targets as well
as track and defend against enemy missiles and aircraft. The U.S.
Naval Institute's online news portal, USNI, earlier this month said
the Navy would replace the IBM servers in the Aegis system. It
wasn't clear how big that business is.
Both the U.S. and China are wary of purchasing foreign
technology for use in sensitive sectors due to spying concerns.
Gartner technology analyst Errol Rasit said the trend has
accelerated.
"There has been a shift recently for geopolitical reasons to
bias sourcing decisions to local organizations," said Mr. Rasit.
"Whether that be Chinese technology providers in China, or North
American providers in North America, there is absolutely a shift
there. It may affect the market opportunity for some of these
vendors."
Lenovo, the world's largest PC maker by shipments, has presented
itself as a nonpolitical, multinational company. It also has
headquarters in Morrisville, N.C., and has promoted western
executives to senior positions.
Lenovo is scheduled to announce on Thursday its earnings for its
fiscal fourth quarter ended in March. The company is expected to
post net profit of $111.3 million, down 30% from a year earlier,
according to a Thomson Reuters average forecast. Revenue is
expected to rise nearly 29% to $12 billion, boosted by
acquisitions.
Analysts expect security concerns over Lenovo's takeover of the
IBM server line to hit sales in the U.S., although it will be
partly offset by gains in server sales in China. A slowdown in the
China smartphone market and weak global PC demand are other
factors. Lenovo last week said it would lay off 235 U.S.-based
employees from its enterprise business as part of a usual
adjustment following the acquisition.
In the U.S., China's Huawei Technologies Co. has been
effectively shut out of the U.S. telecommunications equipment
market after a 2012 congressional report that said Beijing could
use the company's gear for spying. After Lenovo acquired IBM's PC
business in 2005, the State Department banned use of the PCs on its
classified networks in the U.S. and abroad, The Wall Street Journal
reported last year citing current and former officials.
In China, Beijing accelerated its shift to Chinese technology
after former U.S. defense contractor Edward Snowden alleged in 2013
that the U.S. government used infrastructure belonging to U.S. tech
firms for spying. China's banking regulator issued strict
guidelines to banks' technology purchases that required suppliers
to hand over proprietary information, but suspended the rules last
month after strong protest from the U.S. government.
Lenovo's purchase of the IBM server unit was delayed last year
by a review by the Committee on Foreign Investment in the U.S., a
panel that screens deals that could have national-security
implications. A U.S. Treasury spokeswoman declined to comment on
whether restrictions have been placed on federal government
procurement of Lenovo or IBM servers, saying that information filed
with the committee couldn't be publicly disclosed by law.
Lenovo said when the deal closed at the end of September that it
would continue to use the IBM brand on the servers for about a year
and that it hadn't made branding decisions beyond that.
For Lenovo, the security concerns are compounded by a tepid
global enterprise market. Global spending on servers will contract
2% this year, Mr. Rasit said.
Write to Eva Dou at eva.dou@wsj.com
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