E-commerce companies and banks in China are scrapping hardware and uninstalling software for mainframe servers made by American suppliers in favor of homegrown brands said to be safe, advanced, and a lot less expensive.
The movement has taken special aim at products made by the American companies IBM Corp., Oracle Corp., and EMC Corp.—a tripartite powerhouse with deep roots in corporate IT departments across China.
Domestic rivals of these companies such as Huawei Technologies Co. Ltd. and Inspur Co. Ltd. are winning contracts from state company and bank IT departments at an accelerating rate. Some companies such as e-commerce giant Alibaba Group have been building internal computer networks with open-source software and commonly available hardware.
The movement dates to 2008, when Alibaba's computer network department director Wang Jian proposed cutting back on foreign suppliers and replacing their wares with equipment and technology developed almost entirely in-house.
What Wang wanted to get rid of most of the so-called IOE system, an acronym for an IT network based on the names of three suppliers: IBM, whose servers are packaged with the Unix operating system; Oracle, which supplies database management systems; and EMC, the maker of data storage hardware. Wang dubbed his campaign the "De-IOE Movement."
Wang decided to revamp Alibaba's network by replacing its Unix-based servers with less expensive, X86-based PC servers running on the open-source Linux operating system. In such a system, several PCs with X86 microprocessors inside can be linked in a chain to function as a server, replacing a mainframe server. The e-commerce company also built a database management system of its own with an open-source structure, and started storing data on an internal cloud-storage system.
Alibaba thus followed in the footsteps of other major Internet companies such as Amazon, Google, and Facebook, which earlier built their own computing networks.
De-IOE Movement milestones were reached in May 2013 when Alibaba pulled the plug on its last IBM server, and two months later when Alibaba's advertising department abandoned its Oracle database. The rest of the company's databases are scheduled to switch to a homegrown system from Oracle's by 2015.
IT departments at companies and banks across the country are now following Alibaba's example—and hitting their longtime American suppliers in the pocketbook.
Bank Withdrawal
The switch to servers made at home has been a slow process for Chinese banks. Ultimately, the banks' IT experts have been making these decisions, although they're being encouraged by the government to choose Chinese suppliers, according to a source close to the China Banking Regulatory Commission.
A now-famous 2013 episode involving former U.S. computer security expert Edward Snowden, who blew the whistle on government espionage, gave a boost to proponents of the De-IOE campaign.
But the switch is not happening overnight. A Bank of China IT department employee said some Chinese suppliers have yet to meet the security and stability standards that are required of any bank computer network working with customer accounts. Moreover, he said, a system overhaul can carry a high price tag. BOC already spends more than 10 billion yuan on IT.
"It's not easy for major banks to change their core systems due to high replacement costs," said the employee, who asked not to be named.
IOE systems have been commonly used in Chinese banks since the late 1990s, and are at the heart of the IT networks driving 70 percent of the world's banks and other financial institutions.
The rise of Internet banking is spurring major banks to explore new IT options and cut back IOE systems. A source at a state bank noted, however, that basic computing for customer accounts still relies on IOE systems.
In 2007, according to a survey that year by the National Development and Reform Commission (NDRC) and Ministry of Finance, less than 2 percent of the IT equipment operating at major financial institutions nationwide had been supplied by Chinese companies.
Homegrown servers were slowly introduced over the next five years. Banks then picked up the pace after the State Council issued guidelines for protecting sensitive data in the name of national security. An increasing number of bankers decided to follow these guidelines by reducing their reliance on IOE systems.
What security risks are posed by IOE systems? According to an official at the People's Bank of China, one risk is that IT employees at a Chinese bank might fail to detect technical problems in a product that is made by a foreign company. Moreover, he said, political friction between China and other countries, such as the United States, could affect contracts with IOE suppliers.
Additional changes will not happen overnight, partly because the IOE companies as well as America's Microsoft Corp. and Hewlett-Packard Co. (HP) offer customers integrated solutions that make it difficult to replace individual pieces of equipment or software. An IT consultant who advises banks said IBM, for example, is so entrenched that China's banks would likely need about 20 years to replace all IOE systems.
"Getting rid of IOE means that all of the software must be moved and made compatible to domestic server systems, which seems to be a mission impossible," said the consultant.
Big banks are thus moving cautiously, said the BOC employee, because they want to protect their huge customer and transaction databases. They cannot afford to be hasty because replacing one part of a network can affect others.
And replacement costs can be astronomical. "The basic technology networks for an IOE system and a 'De-IOE' system are totally different," said the another source a state bank. "De-IOE will lead to transforming personnel and management. It's hard to estimate how high the costs will be."
Ultimately, said the IT consultant, Chinese banks will only manage to kill off IOE systems if products made by Chinese suppliers can provide comparable security and capacity levels, and if the new hardware and software are compatible.
Making the Switch
An IBM sales manager who caters to Chinese power sector company clients in Beijing and who asked not to be named said that his customers started cutting back orders at the beginning of the year. These clients, the manager said, have pointed to the fact that northern China's electric power distributor State Grid Corp. has not given any of its divisions permission to buy Unix servers since January.
The manager said that China's power sector had long been an important revenue source for IBM. Provincial electric utilities alone, for example, used to spend about 10 million yuan a month on the company's servers.
"The market for Unix servers is shrinking," the manager said.
Chinese companies are replacing IOE systems to save money on items such as maintenance fees. On top of a purchase price, for example, a client may be socked with hefty maintenance costs. Some Chinese have complained about supplier pricing mechanisms they say are confusing and opaque.
Chinese companies are also falling in line with global trends. Prices for X86-based PC server systems have been falling ever since their worldwide sales exceeded Unix server sales in 2007. That same year, the NDRC and the finance ministry started encouraging the use of homegrown IT systems by government agencies and financial institutions.
Research firm International Data Corp. predicted the global market share of Unix servers will decline to less than 10 percent by 2017.
In China, the combination of falling prices for X86 systems and government nudging have opened doors for domestic IT suppliers such as Huawei, Inspur, and Sugon Information Industry Co.
Inspur and Huawei have benefited most from China's changing IT environment. They were ranked No. 4 and No. 5, respectively, among the world's largest server suppliers by market share in the first quarter of this year. Inspur's first-quarter sales of servers increased 61 percent from the same period 2013, and Huawei's jumped 288 percent. Meanwhile, IBM's server sales declined 8.7 percent worldwide during the same period.
According to market analyst Gartner Group, global X86 system sales revenues increased 3.4 percent in the first quarter of 2014 from the same period last year. Sales in China rose 29 percent year on year to 427,000 systems.
Sugon Vice President Zhang Haitao said sales of the company's server products "boomed in the second half of 2011" while the Chinese market shares of IBM and HP were declining. Picking up new contracts from government agencies and state-owned were companies such as Sugon.
Combined sales of Huawei, Inspur, Sugon, and computer manufacturer Lenovo Group Ltd. in China have thus exceeded the combined sales of the IOE companies annually since 2011.
"The pricing mechanism for X86 is quite transparent," said Zhang Xinran, a salesperson at Inspur. "The profit margin is tiny and it's a highly competitive industry."
Chinese suppliers of X86 systems are beating their foreign competitors. Cui Ming, a sales manager for HP in Beijing who focuses on X86 products, said his company would be hard-pressed to win a contract in China when bidding against a Chinese competitor.
Indeed, an X86 server from Inspur can be 20 percent less expensive than a similar HP device. And domestic brands usually cost less to maintain.
Cui fears political factors may play an increasingly important role in how government agencies and state-owned companies make IT purchase decisions. If that's the case, HP's Chinese rivals can expect more business whenever there's friction between the United States and China.
"Only private and foreign firms do not consider the 'De-IOE'" movement, he said. "Big SOEs and government agencies are all inclined" to buy domestic brands.
Inspur's Zhang says his company is winning contracts because it offers technologically advanced products and has the flexibility to meet customer demands—not simply because the government wants to give its business to domestic companies.
Nevertheless, industry watchers say the government appears to be putting more pressure on financial institutions to migrate from IOE systems. A central bank official said the government has not ordered a scrapping of all IOE systems by banks; that would be too expensive. But it does want to rely less on foreign brands and encourage domestic technological development.
Chu Zhuang, chief information officer at trust firm CITIC Trust, said China wants to encourage the use of new technology that will help banks develop Internet financing and open-source cloud computing. These interests overshadow information security concerns, he said.
Another major state bank, China Construction Bank, has thrown its weight behind the migration as well. The bank has contracted for IT services with domestic firms Digital China and Beijing SI Hitech Co. to build IT system for its ATM, telephone banking, and Internet banking services.
Banks need stable IT systems to support Internet financing and mobile Internet systems, since real-time transactions demand the rapid processing of huge amounts of data. Such demands can be met by cloud computing, which is based on distributed rather than central server mechanisms.
Alibaba uses its series of computers for big projects such as its annual Single's Day discount shopping event every November 11. In 2010, the company's chain of 100 computers on that day handled loads exceeding 2.4 billion page views along with 6 million customer chat sessions.
Some critics of the X86, open-source software, cloud computing systems say they're more difficult to manage than IOE systems and pose more security risks. Kang Jianming, president of the online payment company Shanghai Fuiou Payment Service Co., said hackers may successfully target banks that switch to homegrown systems.
But Chu said CITIC Trust disagrees with the critics, which is why the firm has decided to install an open-source system. "I think open-source is safer," he said. "I don't trust any one company."