Daily Archives: April 16, 2010

Cisco’s China Ambitions Likely to be Thwarted

In a recent story in the Ottawa Citizen about Huawei establishing an R&D center in Canada’s capital city, journalist Bert Hill mentioned in passing that the Chinese telecommunications-equipment vendor played no small part in the evisceration and ultimate demise of Nortel Networks, Ottawa’s one-time technology kingpin.

Make no mistake, Nortel had enormous self-destructive tendencies, and it did its worst to expedite its decline and fall. From accounting scandals to delusional and dissolute acquisitions, to ever-shifting product strategies — well, Nortel was on a decade-long, self-harm binge of epic proportions. It was bound to end badly.

Still, there’s truth to what Hill wrote. Huawei, with its standards-based, low-cost, and steadily improving telecommunication gear was a fearsome competitor, one that a chronically mismanaged Nortel was woefully incapable of countering.

In no way will I insult Cisco by comparing it with Nortel, nor will I suggest that Huawei will contribute to the irrevocable decline of Cisco. Nonetheless, despite what’s been written lately about HP-3Com and Juniper, Huawei represents the most serious threat to Cisco’s global hegemony.

Cisco knows it, too. In a press conference last fall, Cisco CEO John Chambers, when asked to cite competitors, considered the big picture and said: “It’s Huawei, Huawei and Huawei.”

That’s not to belittle or denigrate Cisco’s other rivals, who are seeking to capitalize on the networking titan’s imperial overstretch as it moves into a growing number of market adjacencies. Those companies, too, might chip away at Cisco’s grand edifice, but Huawei has the potential to do serious damage.

Huawei is a potent threat not just because it uses its Chinese base to make low-cost gear that gives it pricing latitude and allows it to put margin pressure on Cisco. HP, now that it has 3Com in its stable, can use similar competitive tactics.

Where Huawei and HP/3Com diverge is that the former is an indigenous Chinese company, with close ties to China’s political masters. As a Chinese company, Huawei will benefit from China’s indigenous innovation, the economic and industrial policy prescriptions and regulations intended to make Chinese companies first among equals in their competition against foreign interlopers (Cisco and HP included).

And China is a key growth market, as any technology purveyor will readily tell you. For its part, Cisco, as reported by Reuters, is poised to increase investment and acquisitions in China regardless of trade frictions between Beijing and Washington. Cisco feels it can’t afford not to play in China, even though it faces threats there that other U.S. technology bellwethers, such as Intel and Microsoft, do not face.

Despite the acquisition of the Hong Kong-based set-top box business of DVN Ltd. last autumn, Cisco probably will have to depend on joint ventures as well as acquisitions to broaden its influence and reach in China. Joint ventures, though, aren’t really Cisco’s preferred modus operandi; and joint ventures in China are fraught with risk, especially relating to intellectual property and trade secrets.

China won’t make it easy for Cisco. China’s stated strategy is to develop its own technology behemoths, not to play gracious, generous host to 800-pound gorillas from America. Huawei (and, to a lesser extent, ZTE) will get its government’s backing and support, and in China that counts for a lot.

Cisco will play in China because if feels it has no choice, but can it really win there in the long haul?

Frost & Sullivan analyst Ronald Gruia offered a sagacious assessment:

“No matter how much you’re willing to accommodate and satisfy the Chinese market requirements, there’s only a limited upside for you as a foreign player.”

Aye, there’s the rub.

Cisco is saying all the right things as it embarks on its China strategy. It’s offering enough braggadocio about its Chinese ambitions to placate growth-hungry investors, but it’s also taking care not to say anything that might offend or alienate China’s rulers.

In the end, though, it won’t matter. Cisco might get some business in China, but it will never dominate there the way it dominates markets elsewhere in the world. Cisco will have to accept an accommodation, anathema to those who run the company.