New U.S. Cyber-Security Law May Hinder Lenovo’s Sales Growth

The funding bill President Barack Obama signed this week didn’t just prevent a government shutdown. It also included a provision requiring that U.S. government technology purchases first go through a cyber-espionage review process–a move that could potentially impact the sales of Chinese tech companies like Lenovo, which relies on sales to U.S. government agencies and schools as an important part of its North American growth strategy.

The provision came to attention via a blog post by lawyer Stewart A. Baker, a former Assistant Secretary in the U.S. Department of Homeland Security under George W. Bush. Baker wrote that the sanctions “[demonstrate] remarkable bipartisan angst about Chinese hacking and the risks in Chinese high tech equipment.” The law means that NASA, the National Science Federation, and the Justice and Commerce Departments, need to get approval from federal law enforcement officials before buying information technology systems in order to assess “cyber-espionage or sabotage” risk. In particular, federal law officials must first assess “any risk associated with such system being produced, manufactured or assembled by one or more entities that are owned, directed or subsidized” by China.

Baker writes that the legislation “could turn out to be a harsh blow for companies like Lenovo that have so far escaped the spotlight trained on Huawei and ZTE.”

In 2011, the U.S. imported a total of $129.5 billion in “advanced technology products” (ATP) from China, according to a May 2012 report on China-US trade by the Congressional Research Service, or 33.5 percent of total U.S. ATP imports that year. Lenovo currently serves the U.S. military and several government entities, including NASA. Last August, Lenovo said that a key part of its growth strategy is targeting Dell’s share of sales to U.S. schools and government offices. Thomas Looney, vice president and general manager for Lenovo North America, told Bloomberg that Lenovo can achieve “hyper-growth” of more than 20 percent a year in computer sales to elementary and secondary schools as well as local, state and federal agencies.

But Chinese tech companies may not be the only ones impacted by the new law. Baker also wrote that the legislation may bring “some surprises for American companies selling commercial IT gear to the government” because they might not know which suppliers and assemblers are directed or subsidized by the Chinese government. As Baker noted in another post, the new law restricts purchases from Chinese state-influenced companies, no matter where they manufacture their products. “This means that the provision could prevent purchases of Lenovo computers manufactured in Germany, or Huawei handsets designed in Britain,” Baker said.