This one will scare the pants off you!

by Brad Hoppmann,

John Chambers to Obama: NSA is Killing Us!

When any government, anywhere, screams, “They’re spying on us,” it’s a good bet that the spying is mutual. If not, it is only because one side lacks the capacity.

On Monday, Attorney General Eric Holder announced criminal charges against five members of the Chinese Army.

Their alleged crime: hacking into U.S. corporate networks to steal trade secrets.

Edward Snowden’s NSA revelations indicate the U.S. government engages in similar hacks, against both foreign governments and private companies. The non-American targets weren’t happy about it.

The irony and hypocrisy are rich, but the technology industry has a much bigger problem. Cisco Systems (CSCO) CEO John Chambers is nervous enough to practically beg Obama for help.

Why is Cisco in trouble? Glenn Greenwald, the journalist Edward Snowden chose to spill the NSA beans, is out with a new book called No Place to Hide. In the book, he shares some photos from a classified, internal NSA newsletter.

The writer congratulates fellow agency staffers on their ability to intercept new networking gear as it was shipped to customers, implant tracking devices inside, and then seal the packages back and send them on their way. This jargon-filled quote describes the practice.

“Here’s how it works: shipments of computer network devices (servers, routers, etc,) being delivered to our targets throughout the world are intercepted.

“These devices are then re-packaged and placed back into transit to the original destination. All of this happens with the support of Intelligence Community partners and the technical wizards in TAO.”

Along with the above text was this fuzzy photo of NSA workers resealing a package.

Notice the Cisco logo I circled in yellow. The NSA modified the products inside, apparently without asking Cisco’s permission and certainly without the buyer’s permission.

How do you think Cisco customers outside the U.S. reacted to this picture? To say they are angry is an understatement. They’re furious … and I don’t blame them.

Last week’s CSCO quarterly report showed sales plummeting in fast-growing emerging markets like Brazil and China. Cisco can’t afford to lose business in those places — but it’s hard to see how they retain it after this latest news.

Cisco CEO John Chambers sent a letter to President Obama last week complaining about the interdictions. I suggest you read the full text, but here is the most interesting part.

“We simply cannot operate this way. Our customers trust us to be able to deliver to their doorsteps products that meet the highest standards of integrity and security…

“Moreover, the result could be a fragmented Internet, where the promise of the next Internet is never fully realized.”

This is the leader of one of the world’s top technology companies. He may be a hypocrite, too, but I think we still have to take his warning at face value. U.S. tech companies are already losing overseas business, and it will likely get worse.

Cisco is particularly vulnerable because it makes infrastructure hardware used by large businesses and governments. Others in this space include Juniper Networks (JNPR) and International Business Machines (IBM). Consumer-facing tech companies like Apple (AAPL) are in a little less danger — for now.

The biggest problem I see is that Cisco and its peers have no way out. They can’t fix the damage, even if Obama swears off this kind of interdiction. Foreign technology buyers will presume the NSA found some other way to infiltrate their systems.

I think the “fragmented Internet” Chambers foresees is a real possibility. It will be a world in which U.S. customers buy only U.S. technology, Chinese companies buy only Chinese technology, Brazilian companies buy only Brazilian technology, etc.

The evidence gets stronger almost every day … and I haven’t even mentioned the European court decision ordering Google to censor its search results.

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