By Paul Carsten
BEIJING (Reuters) - U.S. technology companies in China are forming alliances with domestic firms, hoping that having a local partner will make it easier to operate in the increasingly tough environment for foreign businesses in the world's second-biggest economy.
China's government has been openly pushing for the use of more Chinese and less foreign-made technology, both to grow its own tech sector and as a response to former U.S. National Security Agency contractor Edward Snowden's leaks about widespread U.S. cyber surveillance.
Simmering tensions over the issue spilled into public view on Wednesday, when U.S. business lobbies urged Beijing to postpone implementing new policies to make China's finance sector more dependent on domestic technology.
In a letter to China's Central Leading Group for Cyberspace Affairs, chaired by President Xi Jinping, a group of U.S. business associations called for "urgent discussions" with China on worries that new government proposals are "discriminatory", require disclosure of sensitive information, and could isolate China's tech sector.
If the proposals are adopted, they will likely accelerate moves by U.S. companies to form partnerships with domestic firms in an effort to localize their operations.
Some of America's biggest enterprise tech firms have already adopted this strategy, including IBM Corp <IBM.N>, Intel <INTC.O>, Dell Inc [DI.UL], Cisco Systems Inc <CSCO.O>, Hewlett-Packard Co <HPQ.N> and Juniper Networks Inc <JNPR.N>.
"In this particular market it's becoming more and more apparent that the partnering mechanism is the right way to go," said Marius Haas, Dell's president of enterprise solutions, in an interview with Reuters in Beijing.
These partnerships can involve firms sharing technology, teaming up on certain projects and, in some cases, the foreign company making an investment into a local counterpart.
"It's more efficient and it aligns well with the priorities set by the country," said Haas, who said that Dell's partnering strategy became "much, much more aggressive" about one-and-a-half years ago.
This was shortly after widespread U.S. spying was brought to light by Snowden, garnering condemnation from China in particular, which the U.S. has often singled out as a perpetrator of cyber espionage.
Dell has been in China for 16 years and, before it went private in 2013, saw annual sales in the country of roughly $5 billion.
Just last week, it announced partnerships with state-owned China Electronics Corporation and the municipal government of Guiyang.
U.S. companies may not have a choice other than forging local tie-ups, as they try to hold their ground in China's information and communications technology market, which tech research firm IDC predicts will grow 11.4 percent to $465.6 billion in 2015.
"With the current preference for local vendors, it's not going to help foreign companies to do their own local development," said Bryan Wang, a Beijing-based vice president at Forrester Research, which analyses the technology industry.
IBM, which has partnered with domestic companies like Suzhou PowerCore, flagged in its annual results call last week a bounce back in China after previously seeing "pretty dramatic declines".
That came after IBM said in August it would help China's largest server vendor Inspur International <0596.HK> design server systems. At the time it was an unexpected development as Inspur had aggressively marketed its servers to Chinese state-owned firms as a replacement for IBM systems.
Days later, IBM said it had deployed a new mainframe computer system for Industrial and Commercial Bank of China <601398.SS>.
Chipmaker Intel has even invested money in its Chinese peers. The company said in September it would pay as much as $1.5 billion for a 20 percent stake in two mobile chipmakers with ties to the Chinese government.
Forrester's Wang predicts the environment in China for foreign technology businesses will become less welcoming as government policies begin to produce the desired results so that Chinese companies become more competitive.
That means that while forging local partnerships is the best option for U.S. firms now, it's unlikely to sustain them in the market over the long run.
"It's a temporary solution, before this localization gets to the next stage and (China's government) requests only Chinese intellectual property. The last stage is pure Chinese companies with Chinese intellectual property."
(Editing by Rachel Armstrong)