China Needs a Mainframe

It's a tough time to be an US-based technology multinational in China. Sure, there's always been the risk of intellectual property theft and concerns about local copycat companies popping up overnight, but for the most part, those concerns were mostly for companies that make cheap consumer goods, not tech giants like IBM. Sure, the Communist Party of China built a "Great Firewall" to censor the flow of information and monitor domestic traffic for dissent, but this has mostly impacted Internet firms such as Google, which were potential portals to information critical of the ruling Communist Party.

For the most part, IBM avoided these issues and controversies. It surely was attacked by cyber-spies of the Peoples Liberation Army, but unlike Google, it chose to be diplomatic and keep quiet. According to an Enterprise Executive article entitled What’s Behind the Chinese Enchantment With Mainframes?, IBM gained first-mover advantage in China precisely because, unlike DEC, which decided that dealing with the whims and diktats of the Communist Party was more trouble than it was worth, IBM dove in headfirst. By adopting its own form of Ostpolitik and engaging the Chinese market through cooperation with Chinese companies and government agencies, IBM adeptly transformed China into a new market for IBM systems, software, and services. Given the massive scale of China and the growing middle class' increasing use of banking services, the IBM mainframe seems to have particularly benefited from this trend. According to the IBM Academic Initiative Website, thirteen schools in China (including Hong Kong) somehow integrate mainframe and "enterprise computing" topics into their curricula. For example, the Open University of Hong Kong offers a course teaching "major mainframe technologies, including TSO, COBOL, DB2 and CICS."

IBM looks uncertain due to increased mutual distrust between the US and China following the Snowden whistleblowing incident. Chinese officials now regularly point at NSA snooping as proof that the US effectively does the same sorts of snooping activities at the Peoples Liberation Army. The incident seems to have generated perceptions that American technology has hidden backdoors that open Chinese firms and agencies to American spying, leading the Chinese ruling party to decide to phase out dependence on foreign technology companies. Even if IBM doesn't actually collaborate with the National Security Agency, Chinese officials seem to view it as a strategic imperative to source Chinese infrastructure from companies such as Lenovo or Huawei.

The US Attorney General's recent indictment against five People's Liberation Army officers for "maintain[ing] unauthorized access to victim computers to steal information from [US companies] that would be useful" to the victims' competitors in China has further increased tension, and IBM seems caught in the middle. Similar to last week's announcement that Windows 8 is banned from all Chinese government computers, this week the news broke that the People’s Bank of China and Chinese Ministry of Finance have started to ask banks to remove ‘high-end' IBM servers and replace them with a local brand as part of a trial program. This clearly is an attempt by the Chinese government to wean the Chinese banks off of the IBM mainframe technologies that they've used to deal with the explosive growth in demand for banking services over the past decade. Despite adherence to Chinese rules and regulations and close collaboration with Chinese partners, including the divestitures of the ThinkPad line and Intel-based x86 server portfolio to Lenovo, IBM seems increasingly at the mercy of geopolitical forces.

This complex situation naturally leads to numerous questions. Given the importance of the Chinese market to the IBM Systems and Technology Group, how might this recent announcement impact IBM's internal transformation? What happens to the numerous IBMers based in China, some of whom perform research and development activities associated with the creation of next-gen mainframes? What happens to the Chinese banks that are facing political pressure to decrease collaboration with IBM and re-platform onto a computing architecture that Chinese vendors can provide? Will this impact IBM's divestiture of Lenovo? None of these questions can be clearly answered at the moment.

When Deng Xiaoping opened up the Chinese economy, he warned that "if you open the window for fresh air, you have to expect some flies to blow in." At the time, he was referring to foreign ideologies that might threaten the ruling Communist Party. However, the quote can be easily turned on its head and applied to IBM. In contrast to the staid and stagnant economies of the US and Europe, China has epitomized the "fresh air" of growth markets opportunities. As a high-value technology services and solutions provider, this environment has been fruitful for Big Blue, IBM shareholders, and Chinese clients. Considering how the IBM mainframe has allowed China to expand banking services out to the growing Chinese middle class, it's hard to view the opening of the window to China as anything less than a win/win. The Edward Snowden situation may have recently led to an increase in Chinese flies blowing in from this window (some of them have even landed in our shareholders' soup), but I sincerely hope that all stakeholders involved can weather this political storm and reach a reasonable rapprochement.

Let's not close the window just yet!

This post was originally hosted on the Millennial Mainframer blog