The Escalating US-China Spying War Is McKinsey’s Loss and Huawei’s Gain

US consultants may be the next victim of the US and China’s escalating battle over cyber-spying. Chinese officials have asked state-owned enterprises to stop employing US consulting companies, the Financial Times reported (paywall), because of fears they are reporting company secrets to the US government.

The ban could boost the business of a company once slammed with allegations of spying for the Chinese by the US government. Equipment maker Huawei gave up on the US market after it was unable to convince the US government it was spying for Beijing, but still grew revenues 8.5% in 2013, as business in Europe and Asia grew.

The new rules come after Beijing forbid Chinese government offices from using Windows 8 last week and said they would vet imported IT equipment, and the US Department of Justice indicted five Chinese army personnel for stealing corporate secrets from US companies. Also last week, China’s Ministry of Finance proposedthat foreign accounting firms be banned from working on mainland Chinese accounts without a local partner, a move that could be as much about protecting China’s domestic industry as it is spying concerns.

The most recent ban could have a wide impact, depending on how Beijing decides to define “consulting.” Wall Street’s big investment banks, after all, advise and consult with numerous state-owned enterprise clients in China on everything from raising money to foreign takeovers. Some of the US’s biggest public relations firms have a big presence China, where they’ve been advising state-owned clients on IPO road shows and presentations to raise foreign capital.

So far, though, it appears to be limited to companies that work on setting up information technology systems, the FT reports. “The top leadership has proposed setting up a team of Chinese domestic consultants who are particularly focused on information systems,” the paper said, citing a senior policy adviser in Beijing. Huawei, the largest telecommunications manufacturer in the world, already gets 36% of its business from China and has been growing its information technology advice business and other areas that involve the company directly with client decision-making.

It’s nearly impossible to predict how the ban may impact profits at US consulting companies, because most don’t publicly disclose who their clients are and rarely break down revenues by geography. But the biggest consulting companies have spent years building up a sizable presence in China, where they employ hundreds of people, many of them Chinese.

Boston Consulting Group, which made $3.95 billion in total revenues in 2013, has worked on more than 1,000 projects in greater China in the past five years, according to the company’s website, and has four offices in China, Taiwan and Hong Kong that employ 400 people—about 4% of the group’s total employees.

McKinsey & Co. made $7.8 billion in revenues last year, and has 600 people in four offices in China, Taiwan & Hong Kong, about 3.5% of the company’s employees. Thirty percent of its clients in China are state-owned enterprises, the company says, in industries including oil and gas, technology and banking.

The ban may violate China’s own pledge to World Trade Organization members that state-run companies to “would make purchases and sales based solely on commercial considerations,” as Donald C. Clark, a George Washington Universitylaw school professor points out, and could be challenged by US companies. But any such challenge would probably entail an lengthy wrangle within the WTO, while US consulting companies will be losing business in China immediately.

Reprinted with permission from Quartz. The original story can be found here.