Free-space optics startup LightPointe Communications Inc. is strengthening its position in China.

Today, the company announced an OEM deal with Chinese telecom equipment provider, Huawei Technologies Co. Ltd. The deal calls for Huawei to resell LightPointe’s FSO equipment under the Huawei label.

While the deal is a smart strategic move for the startup, it may hit a nerve with one of its key investors, Cisco Systems Inc. (Nasdaq: CSCO), which along with Corning Inc. (NYSE: GLW)invested $33 million in LightPointe back in July 2001 (see Cisco, Corning Invest in LightPointe). Cisco has been embroiled in a patent and copyright infringement lawsuit with Huawei’s U.S. subsidiary, FutureWei (see Cisco/Huawei Brawl Begins).

From a legal perspective, the lawsuit should have no impact on LightPointe, since the partnership with Huawei is exclusive to China. But it could complicate the company’s relationship with Cisco. Even though LightPointe does not have an official reseller agreement with Cisco, it is a member of Cisco's grandly titled Ecosystem Partner Program, which means Cisco helps integrate the technology into its customers’ networks and also helps market LightPointe’s solutions to these customers.

The two companies have sold products alongside one another throughout the world, including accounts in China. Last October, LightPointe announced a distribution agreement with Century Man Communications Equipment Co. Ltd. of Shenzen, a Chinese integrator, which was deploying LightPointe’s Flight FSO equipment in tandem with the Cisco Catalyst 6500 series and the Cisco ONS 15454 Multiservice Provisioning Platform (see LightPointe Signs Chinese Reseller).

“We have partnerships with other Cisco competitors,” says Larry Prior, chief marketing executive for LightPointe. “And it has never been a conflict for us. Our product works at the transport layer, so we need to be able to interoperate with Layer 2 and Layer 3 equipment from every vendor.”

Cisco did not respond to requests for comment by press time.

LightPointe announced a reseller deal with Siemens AG (NYSE: SI; Frankfurt: SIE) back in March 2003, and the German telecommunications giant has already been selling LightPointe’s gear in India (see LightPointe, Siemens Team on FSO). It also has a partnership with Avaya Inc. (NYSE: AV), which competes with Cisco in the enterprise switch and router market.

From a strategic perspective, the deal is a good move for LightPointe. China is a huge market for free-space optics. LightPointe predicts the worldwide market to generate about $400 million in 2005. At least a quarter of that revenue will likely come from China and South East Asia, says Prior.

With acceptance into the World Trade Organization and deregulation of its telecommunications monopolies, China has been scrambling to build out its communications infrastructure. China’s need to build quick and inexpensive access networks has made FSO a key technology for incumbent wireline carriers building out their networks. Wireless carries have also been interested in FSO to link cellular bay stations and backhaul wireless traffic to IP and telephony networks.

So China might promise a big opportunity for FSO equipment makers, in contrast to the U.S. market, which has been slow to adopt the technology.

“We are all testing FSO in the United States,” says David Britz, principal technical member at AT&T Research Labs and chairman of the FSO Alliance. “But there hasn’t been any large rollout yet.”

The typical way to tap the Chinese market is through local resellers and distribution channels. LightPointe is already selling gear through Corning and a few smaller resellers. Going forward, it will only sell products in China through Corning or Huawei, says Prior.

Huawei will be a key partner, considering it's one of China’s largest telecom equipment companies. In 2002, it generated about $2.7 billion in revenue. Most of this business was for traditional telecom and optical gear sold in China. Huawei has a small installed base of Layer 2 and Layer 3 IP switches and is already partnering with 3Com Corp. (Nasdaq: COMS)to address the enterprise market (see 3Com Taps Huawei in Enterprise Battle). The company has also entered into reseller agreements with Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), a U.S. router vendor (see Avici Joins Huawei for China Push).

LightPointe isn’t the only FSO company making headway in China. MRV Communications Inc. (Nasdaq: MRVC) and Terabeam Corp. have also been active there. In the last few months, Terabeam has announced deals with China Unicom Ltd., Great Wall Broadband Network Service Co. Ltd. (GWBN), and China Railcom Co. Ltd. (see China Unicom Picks Terabeam, Terabeam Climbs the Great Wall, and China Railcom Deploys Terabeam FSO).

— Marguerite Reardon, Senior Editor, Light Reading