By Li Xiaoxiao, Qin Min, Zhang Yuzhe, Nan Hao, Qu Yunxu and Zheng Peishan
BEIJING ( Caixin Online ) — 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. /zigman2/quotes/203856914/composite IBM -0.35% , Oracle Corp. /zigman2/quotes/202180826/composite ORCL -0.25% and EMC Corp. — a tripartite powerhouse with deep roots in corporate IT departments across China.
Domestic rivals of these companies such as Huawei Technology Co. /zigman2/quotes/208254801/delayed CN:002502 -2.04% and Inspur Co. /zigman2/quotes/204641906/delayed CN:000977 -1.55% /zigman2/quotes/209495000/delayed HK:596 -4.26% 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 was 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.
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Alibaba thus followed in the footsteps of other major Internet companies such as Amazon /zigman2/quotes/210331248/composite AMZN -0.81% , Google /zigman2/quotes/205453964/composite GOOG +0.20% /zigman2/quotes/202490156/composite GOOGL +0.31% and Facebook /zigman2/quotes/205064656/composite FB -1.29% , 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.
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.
The now-famous 2013 revelations 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 /zigman2/quotes/204682472/delayed HK:3988 +0.96% /zigman2/quotes/201568493/composite BACHY +0.50% /zigman2/quotes/209359942/delayed CN:601988 -0.30% 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 ($1.6 billion) on IT.
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“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% 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 on 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% 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, China’s cabinet, 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. /zigman2/quotes/207732364/composite MSFT -0.77% and Hewlett-Packard Co. /zigman2/quotes/203461582/composite HPQ -0.82% 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 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.