Cisco Systems Inc. isn’t talking much to the media about its latest decision to invest $10 billion in China, but at some point the data and networking equipment company will have to present a much clearer picture of how it intends to turn around its fortunes in a market where the government has blacklisted its products in favor of Chinese made technology.
In a press release announcing the initiative, the company said the $10 billion investment “marks a new chapter” in its relationship with China. Cisco, like many other foreign technology companies that want to expand their business in the Chinese market, understands that there’s a lot at stake for it in the country. The market for data and networking equipment is large and growing with huge room for further expansion as the country continues to industrialize and roll out new technology platforms.
While the opportunities are alluring, however, there’s a wrinkle in the China market for Western technology companies. The Chinese government is seeking to replace foreign technology with Chinese made products at banks and government agencies. That’s bad news for companies like Cisco in a communication equipment market estimated by Forrester Research at $39 billion in 2014, an 11 percent growth rate compared to 2013.
To tap into new opportunities in China, Cisco says it has signed two Memorandum of Understanding (MoU) documents: one with China’s National Development and Reform Commission (NDRC) and the other with the Association of Universities (Colleges) of Applied Science (AUAS). Under the MoU with the NDRC, Cisco will focus on opportunities for innovation, equity investment, research and development and job creation.
Cisco’s MoU with AUAS is an agreement “established under the guidance of China’s Ministry of Education, to advance the training of information and communications technology talent. Through the existing Cisco Networking Academy Program, Cisco will invest in a four-year program with 100 universities (colleges) of applied science recommended by AUAS.”
Cisco’s press statement also outlined broad goals and declared that the initiatives would “combine Cisco’s strengths with the direction of China’s industrial transformation, helping the country innovate and globalize. These initiatives will help power the development of China’s economy and society in order to create a sustainable environment.”
However, Cisco’s statement raises questions about how the company’s planned $10 billion investments will increase its revenue in China. History indicates the company may not get what it wants from China. It has already invested more than $10 billion since 2002 in China but its sales in the country have not kept pace with the financial outlay. Cisco still generates the bulk of its annual sales from the Americas with China contributing a minuscule amount. For the first three quarter of the company’s fiscal 2015 year, for example, it reported product and service sales of approximately $5.25 billion from Asia Pacific, Japan and China, accounting for 15 percent of the company’s total revenue of $36.32 billion for the period.
This situation raises many questions: Where does Cisco go from here; what are the company’s prospects to improve market share in China; why does it think its latest initiatives will increase business opportunities in China and; are the investments being made enough to overcome the Chinese government’s ban on Cisco’s products or the competition it faces from Chinese companies selling similar products to Chinese entities?
Cisco declined to comment directly on the latest program. In response to EPS’ emailed request for an interview, the company’s Beijing-based public relations spokesperson said executives could not answer questions at this time about the $10 billion investment.
“We have an understanding with the parties involved to share the information already provided in the release, but reserve additional details for future announcements,” said Cisco's Beijing-based media contact Chunbo Wang.
The latest investment strategy is occurring at a time when the company’s revenues from China have declined since the government banned Cisco technology from its procurement list, a move the Chinese government took after Edward Snowden, a former National Security Agency contractor, said U.S. spy agencies embedded code in American-made technology sold overseas as a way to snoop on foreign entities.
In the aftermath of Snowden’s public comments Cisco and other American technology companies, including IBM Corp. and Hewlett-Packard Co. have faced a tougher business climate in China, and the results are hurting Cisco’s bottom line; in the fiscal third quarter ended April 25, Cisco reported a 20 percent decline in revenues from China.
“Cisco has lost its market share in the networking market in China, primarily due to the government’s policy to use local products for security reasons. Huawei has a broad networking product portfolio, and competes with Cisco in all networking product lines,” said Gene Cao, senior analyst at Forrester Research. “Cisco is shrinking in shipments of both new product sales and refreshment of installed base.”
Since Cisco first established operations in China in 1994, the country has become the world’s second largest economy and has developed companies that compete with Cisco. Unlike two decades ago when Cisco had less local competition, today companies like Huawei Technologies Co. Ltd., ZTE Corporation and Ruijie Networks are developing the necessary switches, routers and other technology that Chinese customers can buy instead of Cisco’s technology.
In the meantime, analysts say Cisco’s latest initiative is a way to reset the company’s business strategy in China, but they have their doubts that the investment will pay off.
“With the bulk of the projects in China coming from the public sector, this announcement seems to be a way to get back into the good books of the Chinese government, and hopefully public sector projects,” said Adeline Phua, senior research manager with IDC’s Asia/Pacific enterprise computing – networking group. “If nothing else, [the $10 billion investment] indicates their continuous commitment to the Peoples Republic of China market.”
Forrester’s Cao notes that the government’s policy to use locally made products and Huawei’s ability to manufacture equipment that can replace most of Cisco's products increases Cisco’s challenges in an already difficult market.
“It will take time for Cisco to win back [business] through their China investment plan,” Cao said. “In the short-term their business performance in China will remain negative.”