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U.S. May Scrutinize IBM's China Deal

Some See Risk of Industrial Espionage

By Paul Blustein and Mike Musgrove
Washington Post Staff Writers
Tuesday, January 25, 2005; Page E01

The Bush administration is considering launching an extensive probe of whether the pending sale of International Business Machines Corp.'s personal computer business to a Chinese company might pose national security problems, according to members of a congressional oversight group.

Such a probe could disrupt or delay a $1.75 billion deal that has been widely viewed as a dramatic sign of China's transformation into an economic power with ambitions to acquire businesses abroad and create global brands. Under the accord, announced last month, Lenovo Group Ltd., China's largest computer manufacturer, would buy IBM's PC business, which would make it the No. 3 maker in a market that the U.S. technology giant helped pioneer.


A Lenovo store in Beijing. Lenovo is China's largest computer manufacturer. (Doug Kanter -- Bloomberg News)

_____Background_____
Chinese TV Maker Sharpens Focus on Europe (The Washington Post, Dec 13, 2004)
IBM Reassures Workers After Milestone China Deal (The Washington Post, Dec 9, 2004)
IBM Sells PC Business to Chinese Firm in $1.75 Billion Deal (The Washington Post, Dec 8, 2004)
IBM Deal Puts Lenovo on Global Stage (The Washington Post, Dec 8, 2004)
PC Sector Sale By IBM Would Signal Change (The Washington Post, Dec 4, 2004)

The administration has generally sought to foster cooperative economic ties with Beijing, and some experts predicted yesterday that in the end Washington will allow the IBM-Lenovo deal to go ahead because the business being sold is a relatively low-tech operation. IBM has long hinted that it wants to get out of the low-margin "commodity" business of making PCs in favor of pursuing its much more lucrative corporate and government consulting contracts.

But the pact is raising concerns among some federal agencies represented on the Committee on Foreign Investments in the United States (CFIUS), a panel empowered to investigate corporate acquisitions by foreigners and recommend that the president block such deals if they endanger national security.

Some of the fears involve the possibility that Chinese computer experts could use an IBM facility in North Carolina to engage in industrial espionage, according to Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission, which was established by Congress to monitor Sino-American commercial relations.

Wessel said he has discussed the matter with administration officials. Several agencies represented on the CFIUS, including the Defense Department, Treasury Department, Commerce Department and U.S. Trade Representative's office, declined to comment or failed to respond to requests for comment yesterday, after the committee's concerns were reported by Bloomberg News.

In the IBM-Lenovo case, the committee must decide this week whether to open a formal investigation. Edward Barbini, a spokesman for IBM, said the company "has filed the required legal notice with the Committee on Foreign Investments. IBM is following all the normal and routine procedures in the review of this transaction."

IBM has "other facilities" in North Carolina "that do R&D," said Wessel, who as a top aide to former Rep. Richard A. Gephardt (D-Mo.) worked on the 1988 law expanding the CFIUS's role. "So the issue is not just the making of the boxes; it's how the networks work. IBM has service contracts throughout the government, and [knowledge about] how one networks these computers gives one not only the opportunity to do reverse engineering, but greater opportunities to hack in."

Those worries were derided as overwrought by William A. Reinsch, another member of the congressional group, who heads the industry-backed National Foreign Trade Council. The technology to make PCs is "ubiquitous, it's all over the world," he said.

"You've got people at the Pentagon, and I gather other agencies, who don't like [the IBM-Lenovo deal], because the Chinese are bad guys -- they don't know why, but by God, they're going to think of a reason," said Reinsch, who as a Commerce Department undersecretary during the Clinton administration oversaw the controls on exports of high-tech products. "There is nobody that has more of an interest in protecting IBM's intellectual property than IBM. When they sell out of the low end of their business, I have no doubt they'll be able to provide any protections necessary against others acquiring their critical technology."

The CFIUS does not object to the vast majority of foreign acquisitions, but in a handful of cases it has either blocked takeovers of U.S. firms or raised enough concerns to require changes in how the deals are structured. Wessel said he has been told that the committee intends to conduct a formal inquiry, but Reinsch said he has been told that such a decision has not yet been made.

Bruce Schneier, the founder and chief technical officer of Counterpane Internet Security Inc. and the author of books on computer security, said he found the possibility that Chinese operatives could use IBM's North Carolina facility as a beachhead for espionage "implausible." It would be "no more useful than a hotel room" for foreign agents, he said.


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