Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) is aggressively going after the Chinese IP router market.

On Wednesday, the company announced an OEM deal with Chinese telecom equipment provider, Huawei Technologies Co. Ltd. (see Avici, Huawei Team on IP). The deal calls for Huawei to sell Avici’s SSR and QSR core routers as part of Huawei’s IP routing portfolio.

“The deal looks good on paper,” says Kevin Mitchell, an analyst with Infonetics Research Inc. “The Chinese market is important, and Avici would have been hard-pressed to succeed there without a partnership like this.” The deal also is one in the eye for market leader Cisco Systems Inc. (Nasdaq: CSCO), which is embroiled in a patent and copyright infringement lawsuit with Huawei’s U.S. subsidiary, FutureWei (see Cisco/Huawei Brawl Begins).

The legal wrangling between Huawei and Cisco in the U.S. shouldn’t affect the Avici OEM deal, which is exclusive to China -- a territory that could turn into a monster market for Avici in the long term.

"The lawsuit has nothing to do with us," says Esmeralda Swartz, director of strategic marketing for Avici. "That's between Huawei and Cisco. Besides, this agreement is exclusively for China, but even if we were to expand it, it still wouldn't matter to us."

Japan and South Korea are considered the two most important Asian markets for telecom spending in the near future. But China’s growing population, which already exceeds 1.2 billion people, and its use of IP technology for telecommunications, makes it a key market, too. Stephen Kamman, an equities analyst with CIBC World Markets, traveled to China at the end of 2002. He says that most of China’s long-distance voice traffic is already transported via IP.

“They are a classic case of a developing country leap-frogging the installed base in the United States,” he says. “As a result, there is a real need for routers, and they are using up a lot of the capacity.”

Huawei is one of China’s biggest telecom equipment companies. In 2002, it generated about $2.7 billion in revenue [ed. note: that's about $2.25 per Chinese native]. 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). However, it’s struggled to gain traction for its service provider IP routing gear, and it’s been especially weak in the core IP router category, according to Kamman. Avici’s routers will definitely fill another hole in Huawei’s product portfolio.

So will Huawei help Avici catch up with the leaders in the core router market? It’s going to be tough on a couple of counts.

First, Avici is a long way behind the market leaders. In the first quarter of 2003, Avici only had about 2 percent of the worldwide core routing market, according to Infonetics. Cisco dominated with 72 percent and Juniper Networks Inc. (Nasdaq: JNPR) had about 21 percent. These figures are consistent with the market-share figures over the past several quarters, adds Infonetics' Mitchell.

Second, if Avici's partnership with Huawei proves successful, then Cisco and Juniper might follow suit and find local partners. Huawei isn’t the only panda in the park. Other Chinese equipment vendors, such as ZTE Corp., are of a comparable size to Huawei. And if Cisco were to do a deal with ZTE, for instance, Huawei could end up dropping Avici and clubbing up with Juniper.

The majority of the $7.6 million in revenue Avici reported in the first quarter of 2003 came from sales in North America, and most of those sales have been to AT&T Corp. (NYSE: T) (see Avici Posts Q1 Loss, Gets Partners). That company has not been very successful in Asia, although it has signed up some system integrator partners in Hong Kong, Seoul, and Taipei.

Avici has worked hard over the past year and a half to enhance its software and hardware features to better address carrier needs. Earlier this week, it announced a series of new software programmable line cards that will allow carriers to switch or route Asynchronous Transfer Mode (ATM), Frame Relay, or Internet Protocol (IP) as they migrate their networks to Multiprotocol Label Switching (MPLS) backbones (see Avici Intros Multiservice Line Cards).

Last year, Avici announced software additions to improve security (see Avici Adds Core Router Software). The company has also enhanced its resilience and reliability features (see IP Routing Gets a Restart). And it has introduced two new smaller platforms, the SSR and QSR, to better fit the size requirements of smaller providers (see Avici Intros Tiny TSR and Avici's Incredible Shrinking Router).

— Marguerite Reardon, Senior Editor, Light Reading