Cisco's China Syndrome
When the going gets tough, the tough go to China. Yesterday, Cisco Systems Inc. (Nasdaq: CSCO) hinted at a new Asian emphasis, as it announced deals with Chinese telecom provider Hangzhou Netcom Information Harbor and China Telecom (see Cisco's All Over China).
Hangzhou Netcom will buy Cisco's 12000 series Internet routers to build China’s largest broadband metropolitan area network (MAN), and China Telecom is deploying Cisco's ONS 15801 long-haul DWDM system over its ChinaNet backbone network between Shanghai and Hangzhou. The size of the deals was not disclosed.
Cisco has been one of the major players on the Chinese networking scene for eight years, and it looks to benefit from an area of the globe where networking technology is still booming. While the Chinese national GDP has a growth rate of 8 percent (according to the CIA World Factbook), Network Test Inc. president David Newman says that networking growth in the country is probably closer to 20 percent.
“The networking scene there is like it was here 10 years ago,” says Newman, pointing out that the market is so good that China still has lots of tiny, independent Ethernet switch vendors. They are sometimes so small, he says, that it would be the equivalent of seeing “Joe Schmoe’s barber, shoeshine, and switch company” in this country.
China has been an area of success for Cisco’s routers since the company opened its first office in Beijing in 1994. But the company’s long-haul technology is generally not a market leader, and, according to some observers, leaves much to be desired. Some analysts warned not to make too much out of yesterday's announcements, specifically the long-haul DWDM deal.
"I really don’t know how they got the win,” Nikos Theodosopoulos, an analyst with UBS Warburg, said, speaking of the long-haul annoucement with China Telecom. And he feels it shouldn’t be blown out of proportion. “From what I understand, it was point to point [from Shanghai to Hangzhou – only 180 kilometers in a country that covers 9,596,960 square kilometers],” he says. “It didn’t sound like a national deployment.”
Terry Alberstein, Cisco’s director of corporate affairs for Asia-Pacific, admits that, at present, Cisco doesn’t have any other long-haul deals signed with ChinaNet. However, he believes more deals might soon materialize.
“It’s a very successful program we’ve done with them,” he says. “We’re hopeful that it will lead to more of the same.”
The Chinese market is definitely a hot spot for optical networking. According to an RHK Inc. report last August, it accounts for roughly 31 percent of the optical transport gear sold in the Asia-Pacific region. RHK also estimates that the sales of optical gear in China will show 54 percent growth in 2002, while the transport market will reach $5.5 billion by 2004.
Cisco, however, isn’t the only one that wants a piece of the Chinese pie. In addition to U.S. players like Juniper Networks Inc. (Nasdaq: JNPR), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT), Cisco faces harsh competition from local Chinese vendors. And while the domestic products aren’t always as stable as the products from proven vendors, national pride often leads to pressure from buyers for domestic solutions.
“There are a lot of domestic companies that want to be the next Ciscos in China,” Newman says. “I don’t think [Cisco] will ever get the 85 percent that they enjoy in the rest of the world.”
This is, however, a point of dispute. “We’re a clear leader in the total market,” Alberstein contends. Referring to an IDC report from December 2001 showing that Cisco has 60+ percent of the total LAN market share in China, he notes, “[Cisco’s] total market share in China is similar to [its market share in] most other countries in the Asia-Pacific, and to most other countries in the world. China Telecom is building their entire backbone with Cisco products.”
Cisco must be doing something right in China. The word on the street is that one of the company’s major Chinese competitors has been imitating Cisco's products. Huawei Technologies Co. Ltd. is the leading local telecom equipment provider in China, holding close to a third of the optical transport market share in the country, according to RHK.
Cisco’s Alberstein would not comment on the claims. “We have a lot of respect for them. We watch them very closely. They’re aggressive and good competitors.”
Despite this, Alberstein says, Cisco is not worried. In addition to other customers, the company has a longstanding relationship with ChinaNet, which has the largest Internet network in China. And in China, long-term relationships are almost as valued as domestic solutions. “Dealing with people that you know under terms that you’re comfortable with is really important,” Newman says. “A lot of Chinese companies lose money because of it.”
“[Cisco does] have a good relationship in that geography, and that helps,” says Salomon Smith Barney analyst Alex Henderson, musing over how Cisco pulled off the long-haul deal. “And they have good penetration in that area, and that helps.”
Another thing that has probably helped Cisco land deal after deal in China is the size of the company. While some observers say that its size has helped impress companies into buying, Alberstein claims that it’s purely a practical matter. “China is a huge country,” he says. “People who can provide customers with [maximum] support have a big competitive advantage.”
Well, if size is what matters, Cisco certainly stands a chance of winning more deals in China.
— Eugénie Larson, Reporter, Light Reading