Obama administration continues its strategy of provocation against its fellow spy state

The ongoing spat between America and China over spying accusations could sink a deal involving a pair of prominent electronics firms.
I. Great Expectations
China's Lenovo Group, Ltd. (HKG:0992) appeared poised to seal a deal to purchase American electronics giant International Business Machines Corp.'s (IBM) server unit.  The deal -- worth $2B USD in cash and roughly $300M USD in stock -- was lauded by analysts who felt it was high time for IBM to divest its server business which had grown a bit long in the tooth in recent years, as IBM's gaze drifted to bolder visions of self-contained supercomputing boxes.  
Recently having celebrated its hundredth anniversary, IBM was looking to continue the bold moves that have helped it survive the last century, while Lenovo was looking to emulate IBM's achievement in the century to come with its mastery of the volatile consumer market.  The deal would only cover IBM's low-end/run-of-the-mill commercial servers, not its high end supercomputing boxes like Watson that are today its chief focus.

IBM sign
[Image Source: Reuters/Rick Wilking]

Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein & Comp. LLC, remarked:

Everybody wins because even if IBM could double the profitability it's still not good enough for IBM. On the other hand, Lenovo doubling the server business margins is a good deal for Lenovo.

With a deal reached, optimism was high, as Lenovo seemed a natural fit.  It had already bought IBM's PC business in 2005 for $1.75B USD ($1.25B USD cash, $500M USD in debt payoffs).  Lenovo's PC unit purchase had been a terrific success.  It was quite a bold move at the time, but it would set a precedent of Chinese firms buying struggling American brands to strengthen their global sales via a familiar name.
The unit has ascended to become the top-selling PC brand in the world, passing America's Hewlett Packard Comp. (HPQ) [Q2 data from Gartner, Inc. (IT)].  According to the Interactive Data Corp. (IDC), Lenovo was also the fastest growing tablet maker, with 224 percent growth year-to-year and a fourth place sales ranking in Q1 2014.  The IDC's smartphone report for Q1 2014 shows Lenovo holding fourth place in that market as well.

Lenovo Ashton

But for all the hope, things quickly showed signs of struggling.  Ironically enough, IBM employees in China began striking over the prospect of working for Lenovo.
Things went from bad to worse this week when the Committee on Foreign Investment in the United States (CFIUS) decided to halt approval of the deal while it investigates potential national security concerns, according to an unconfirmed report in The Wall Street Journal.
II. The World's Top Two Spy States Face Off
The CFIUS is a little known branch of the U.S. Department of Treasury (DOT) tasked with policing sales of American owned businesses to foreign firms.  Since the emergence of China as the chief manufacturer for American electronics makers in the 1990s, China has seen a growing financial friendship with the U.S. and increased mutual business.  Despite that, the CFIUS remains wary of China, likely due to the ongoing economic rivalry between the two nations.

Obama bowing
President Obama has been polite in meetings with Chinese officials, even humbly bowing to the prime minister of China at a 2010 press event.  But in the last several months much has changed.
[Image Source: Reuters]

As a piece of an executive branch department, CFIUS sees its policy trickle down from the President of the United States.  Under the Obama administration, scrutiny has reached new heights; 2012 set a record for most CFIUS probes according to a Dec. 2013 report to Congress.
But this year could set an even higher record, as the U.S. and China's relationship has recently taken a turn for the worse.  Ironically, the source of the contention is one of the countries' strongest points of common ground -- their quest to eliminate privacy and spy on the world.
Both countries have spied on many of their allies in Europe -- and each other.  Both spy on their domestic population recording citizens' emails, "metadata", and internet traffic.  Both nations' unprecedented, Orwellian efforts have been enabled in recent years from strong nationalistic rhetoric at a national government level, that has left much of the population in each country largely apathetic to their nation's growing identity as surveillance states.
When it was revealed that the U.S. was recording hundreds of millions of emails and phone conversations -- virtually every unencrypted communication in at least five nations, including the U.S. -- China remained largely silent (and for good reason, at that). But when recent leaks indicated that the U.S. National Security Agency (NSA) had been exploiting routers and other products from Chinese-owned firms, America's largest manufacturing partner broke its silence.
III. Obama Administration Continues Strategy of Provoking China
The U.S. Department of Justice (DOJ) recently charged five Chinese military officers with hacking U.S. companies to steal trade secrets.  As these officers resided in China and allegedly were part of the military, this was pure theater.
China responded earlier this month by threatening "severe" punishments against American firms and has already cut some contracts with IBM, Oracle Corp. (ORCL), and Cisco Systems Inc. (CSCO).  The threat has some American companies like Microsoft Corp. (MSFT) -- fearing losing billions due to the President's decision -- literally pleading that they weren't complicit in the government spying.

The Obama administration claims Lenovo might spy on the Pentagon. [Image Source: CNN]

The official line from the CFIUS is reportedly that it's "concerned" that IBM's x86 servers, which are found in many U.S. data centers and communications network hubs, could be subverted by Lenovo on behest of the Chinese government.  The CFIUS report says that the servers could then become a military threat, targeted at spying on the Pentagon.
The Obama administration believes it knows a thing or two about such tactics, as it has used similar malware intrusions to spy on China and other nations.  It says, however, that China should not be allowed the same rights to spy on and globally sabotage electronics as America does.

IBM servers
The CFIUS reportedly claims IBM x86 servers could be made into spy devices if purchased by China's Lenovo. [Image Source: IBM]

It also reportedly expressed concerns that China could make a really big supercomputer with all those servers, which could aid China's military.  Last, but not least, it complained that Lenovo could abandon support for American customers.
IBM and Lenovo are desperate to try to win over regulators.  They've reportedly re-filed their proposal to give the CFIUS more time to complete its probe.  Lenovo has also reportedly promised in a filing to support IBM's customers "for an extended period" of time following the sale.
The pair must now wait to see if the CFIUS is satisfied with whatever message it was trying to send, or if it decides to take things a step further in the Obama administration's "national security" spat with China.

Obama spying smirk
Observers are watching if the Obama administration decides to shoot down the IBM server unit purchase as another provocative gesture in its spat with China. [Image Source: Reuters]

The probe will likely be closely watched by much of the American tech industry, which is wary of the growing political rift with China.  Much of the tech industry was already opposed to the Obama administration's ongoing efforts to penetrate their networks and spy on their customers.  Those efforts have damaged trust with clients in Europe, South America, and other regions worldwide, costing the U.S. tech industry literally billions in lost revenue, according to analysts.

Sources: WSJ, Reuters

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