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What China's Distrust Means for IBM as the Nation Pulls the Plug

Stocks in this article: IBM

NEW YORK (TheStreet) -- Is China really cutting the cord on IBM (IBM)?

IBM has had an expansive reach into China's corporate IT world for over 30 years with its heaviest imprint most notably made in its e-commerce and financial institutions. However, China has been actively urging  state-owned and private entities to move away from IBM servers and services, resulting in domestic rivals winning more contracts and cutting out Big Blue.

The Chinese government's move is largely viewed as retaliatory after the U.S. indicted five Chinese officials for stealing trade secrets. China has been reassessing whether its financial and national security is being compromised by what it deems an unacceptable reliance on IBM technology.

The Ministry of Finance has requested a trial program for certain banks that mandates the inclusion of indigenous servers in lieu of IBM's. This is a troubling development in a market that is supposed to be one of IBMs greatest generators of growth. IBM shares closed Thursday at $180.37, down nearly 4% for the year to date.

IBM has had eight consecutive quarters of revenue decline. China is not helping matters with revenue within the country falling a precipitous 20% or greater over the last two quarters.

The Chinese distrust has been going on a while, too. Back in 2013 China Economic Weekly ran an article, He's Watching You that singled out IBM among other U.S. tech firms, as "guardian warriors" and a potential threat to Chinese economic and national security. These warriors have struggled within China ever since.

Last year 14% of IBM's $99.8 billion in revenue  -- the first time its failed to surpass $100 billion since 2010 -- originated from the Asia-Pacific region, excluding Japan. Nearly 10% of total revenue is derived from its server business. Several analyst estimates have concluded that approximately 4 % of total revenue originates from China, or roughly $4 billion. So while this does not shake the entire foundation of the company by any means, it is not an insignificant sum for a corporation that can't increase revenue to save its life lately.

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