IBM’s Trouble in China Getting Worse

2 Jul

IBM Corp.’s revenue in China continues to drop as more and more companies in the country adopt Chinese-developed data center and servers. IBM is scheduled to make public its second-quarter earnings report soon, but its revenue is expected to decline for the ninth consecutive quarter.

IBM’s revenue has dropped for eight straight quarters. The U.S.-based tech giant expressed optimism about the revenue in 2014 and 2015; investors are hoping that the earnings per share (EPS) for 2014 could reach US$18 and are anticpating positive signs from the company’s hardware business. Wall Street analysts are skeptical about IBM’s ability to reach its goal of US$18 EPS. According to FactSet Research, analysts on average expected the EPS to be US$17.88. The revenue for 2014 was projected by analysts at US$97.38 billion, down 2.4 percent from 2013.

The trouble in China inevitably added more pressure to IBM. Its sales in China experienced a sharp drop in the third quarter of 2013. The U.S. company attributed the decline to China’s economic reform. The first-quarter revenue in China in 2014 fell 20 percent; this time, IBM said it was because of the slowing procurement process in Chinese government and enterprises as China implemented reforms. IBM was confident that its sales in China will bounce back, but did not specify when.

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Led by the Chinese government, more and more Chinese companies ditched the expensive IT software and hardwares made by IBM, EMC, and Oracle, and turned to Chinese alternatives. Inspur and Huawei have secured orders from government organization, financial institutions and state-run companies. Chinese Internet companies also have been copying Facebook and Google, and developing their own data centers and servers.

IBM’s first-quarter revenue in 2014 was down 23 percent from the same period in 2013. Mainframes were the hardest-hit sector. However, IBM still managed to report growth in its gross profit margin by implementing cost management and stock buybacks.

Chinese companies’ switch to China-made products is a slow process, particularly because the financial institutions still heavily rely on IBM products. Chinese IT makers are temporarily unable to meet the demand of the whole Chinese market. Despite so, the decline of IBM’s market share in China will also reflect negatively on its sales.

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