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Chinese Competitors Chew at Cisco

Light Reading
News Analysis
Light Reading
11/10/2004
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During yesterday's earnings call, Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers took a moment to answer -- sort of -- the question that's been tossed at him repeatedly: What does Cisco plan to do about the anticipated rise of low-cost vendors such as Huawei Technologies Co. Ltd.?

The question is pertinent because Cisco's router sales fell during the quarter ended Oct. 30, clocking in at $1.25 billion, down 12 percent from the previous quarter. Chambers attributed some of the decline to product transitions, as Cisco recently rolled out its integrated services routers -- the 1800, 2800, and 3800 lines announced during the summer -- as well as the CRS-1 core router (see Cisco Disappoints With Q1, Cisco Takes Apps on Board, and Cisco Unveils the HFR).

But the Cisco chief admits that increased competition from Asia was a factor, too, and it's a trend that isn't going to go away. "We anticipate that this will continue throughout the next decade," Chambers said.

The competition with Huawei, ZTE Corp. (Shenzhen: 000063), and others won't be limited to China either, but will spread to other regions. Chinese vendors haven't made much of a dent in North America but have begun challenging Cisco in areas including Europe and South America, Chambers said. The danger to Cisco is that the Chinese vendors can undercut its costs (see Huawei Eyes Super Sales Growth).

Chambers was vague about the strategy against Chinese rivals but said one key will be to shift the emphasis to "ownership" costs rather than hardware and software prices. "Support and facility costs often account for 70 percent" of what customers end up spending, he said.

More important, Chambers said, Cisco will work on products that blend Layers 1 through 7 in the networking stack. The strategy seems to point towards integration of the Layer 7 products offered by P-Cube Inc., which Cisco acquired recently for $212 million (see Cisco Reroutes Traffic Management).

Without more detail to go on, analysts weren't that impressed.

"It's very unclear," says analyst Erik Suppiger of Pacific Growth Equities Inc. "He suggests they're going to win business based on their Layer 4 through 7 capabilities, but we don't view them as the technology leader in Layer 4 through 7. They may have advantages over some of their peers in Asia, but they still don't have the best competitive position."

A separate question is whether Chinese competition really represents Cisco's biggest problem, considering Juniper Networks Inc. (Nasdaq: JNPR) has posted some solid quarterly earnings recently. "I'm not convinced it's all China. Juniper is causing as much heartache as any Chinese firm," Suppiger says.

In particular, Suppiger thinks that Juniper has established a technological edge over Cisco and that this advantage could hold "for the foreseeable future."

But even as analysts acknowledge Juniper's success, many aren't concerned that Cisco will be taken down a notch. In a note published today, analyst Steve Kamman of CIBC World Markets notes that Cisco lost "minor share" to Juniper last quarter but adds that, in the long run, Cisco and Juniper should continue to split the router market 70/30 between them.

Regardless of the cause, analysts want to see Cisco bring some regularity to its router business, which has been "flipping from about +10 percent sequential growth to -10 percent growth in each one of the last four quarters," writes Merrill Lynch & Co. Inc. analyst Tal Liani in a note issued this morning. "For a division with over $5 billion in annual sales, we find these swings too volatile."

— Craig Matsumoto, Senior Editor, Light Reading




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