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China tech firms gain from cyber barbs, Snowden revelations

By Kazunori Takada and Matthew Miller

SHANGHAI/BEIJING (Reuters) - Chinese software companies such as Neusoft Corp and China National Software & Service Co Ltd (ChinaSoft) are picking up sales and expanding their marketing as China trades cyber spying accusations with the United States.

For Neusoft, one of China's biggest software solutions providers, that includes selling more networking products and information security software to government and state-owned clients, while introducing higher-value integrated hardware and software packages and consulting services.

"It's understandable for a country to strengthen its information security and cyber security while maintaining its independence and control," Lu Zhaoxia, senior vice president of Neusoft told Reuters. "In the U.S. and Japan, core systems are all domestic."

Based in the northeastern city of Shenyang, Neusoft's clients include some of China's biggest state-owned conglomerates such as State Grid Corp of China [STGRD.UL] and the country's three big telecom operators.

The latest row between Beijing and Washington has brightened the outlook for Chinese software firms, which have already seen improved sales and share prices since U.S. spying revelations a year ago by Edward Snowden, a former U.S. National Security Agency (NSA) contractor. Snowden also claimed the NSA hacked into critical network infrastructure at universities in China and Hong Kong.

Neusoft shares have risen 15 percent to 2-month highs since May 19 when the U.S. Justice Department charged five Chinese military officers, accusing them of hacking American companies to steal trade secrets.

While Lu emphasized Neusoft's commitment to innovation – the firm employs 20,000 workers and over the last 5 years has nearly doubled revenue to 7.5 billion yuan ($1.2 billion), even as profit margins narrowed sharply – the company's stock price has risen around 60 percent since Snowden's revelations last May.

Insigma Technology Co Ltd, Beijing Teamsun Technology Co Ltd and Inspur Software Co Ltd share prices have also spiked higher in the last week, while shares in Shenzhen Kingdom Technology Co Ltd, Yonyou Software Co Ltd and DHC Software Co Ltd have soared 200-300 percent in the past year.

"Relevant government policies are definitely positive for the development of our company," said Gao Han, an investor relations official at DHC Software, which sells its software and services to big and mid-sized state firms, including PetroChina, Sinopec and State Grid.

FINGER POINTING

The U.S. government indictment has sparked outrage in China and added urgency to Beijing's efforts to promote the development of local information technology companies. Chinese media have called the U.S. "a high-level hooligan", while officials have accused Washington of applying "double standards" on issues of cyber spying.

"The U.S. side is not qualified to finger point at others while its own notorious misbehavior stands uncorrected," Foreign Ministry spokesman Qin Gang said on Thursday.

Beijing is emphasizing the importance of network security, particularly for its energy, transport and finance sectors. That effort intensified following Snowden's revelations, just as U.S. technology firms began reporting a drop in their China sales.

In August, the National Development and Reform Commission, China's top economic planning body, set out cyber security standards for financial institutions, cloud computing and big data, information system secrecy management and industrial controls. And last week, China said it will investigate providers of important IT products and services to protect "national security" and "economic and social development." Central government offices have also this year been banned from using Windows 8, Microsoft Corp's latest operating system, in new computers.

"The nation's information security could come under direct threat if the software we use was implemented with backdoor viruses and the like," Mian Wei, a minister at the Ministry of Industry and Information Technology (MIIT), was quoted as saying by the official China Daily newspaper on Friday. "Our job is to make sure such things do not happen."

MORE LOCAL SOURCING

At least four domestic software and hardware makers, including Neusoft and ChinaSoft, have received a "top-tier" rating from the MIIT, allowing them to provide services to government agencies that handle top secret information.

"We have used (in the past) IBM, Oracle and other foreign products and networks," said Lin Shanshan, an investor relations officer at ChinaSoft, which is a subsidiary of China Electronics Corp [CELEC.UL], the central government conglomerate that controls 13 listed companies. "In future, we'll be using more China software for domestically manufactured networks."

ChinaSoft, whose customers include the State Tobacco Administration, Environmental Protection Agency and Meteorological Bureau, is rolling out new cloud products to complement its firmware, security software and operating systems.

"National policy is a bellwether," said ChinaSoft's Lin. "The government is vigorously promoting cloud applications, and we'll certainly need to keep up with this opportunity."

At Neusoft, Lu Zhaoxia says that even as innovation has helped the company expand at home, government policies haven't hurt either, as China's use of online and mobile services become increasingly important and U.S. tech services providers remain suspect.

"For individuals, the state, businesses, data protection has become an urgent issue," Lu said.

($1 = 6.2399 Chinese Yuan)

(Additional reporting by Beijing newsroom; Writing by Kazunori Takada; Editing by Ian Geoghegan)

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