By Ritsuko Ando - Analysis
NEW YORK (Reuters) - Cisco Systems Inc (CSCO.O) is poised to step up investment and acquisitions in China regardless of trade frictions between Beijing and Washington, aiming to secure its place in a tricky but pivotal market.
Already the world’s largest Internet and mobile phone market, China is likely to become even more crucial to the network equipment maker’s growth as the country’s burgeoning middle class gains access to new technology.
What’s more, Cisco faces growing competition from Chinese companies, unlike other U.S. tech heavyweights like chipmaker Intel Corp (INTC.O) or Microsoft Corp (MSFT.O) that enjoy overwhelming leads in their markets.
The result is that Cisco will likely pursue local joint ventures and acquisitions to compete against the likes of Huawei Technologies Co Ltd HWT.UL and ZTE Corp (0763.HK). That could also help it work around difficult regulations to ensure it fully benefits from the market’s explosive growth.
“China is a high growth market that comes with opportunities but also challenges and unique ways of doing business. Foreign companies will find they will have to rely on joint ventures, local partnerships, and multiple ties across various Chinese agencies,” said RBC Capital Markets analyst Mark Sue.
Analysts say trade disputes between the United States and China are reasons to expand, rather than pull out of local partnerships.
While the United States and China appeared to avert a major collision at a summit this week, some U.S. politicians are still pushing for new tariffs on Chinese goods if Beijing does not loosen its control of the yuan.
China, for its part, has also been planning an “indigenous innovation” policy to promote homegrown technology.
While Beijing this week appeared to step back on some of the most contentious aspects of the original plan, business groups say there is still a risk U.S. computer and other technology companies will find it harder to compete there.
Higher trade barriers could affect a wide range of companies including Microsoft and Apple Inc (AAPL.O). But analysts are keeping a particularly close eye on Cisco, which has been particularly bullish about expanding in China further after investing billions there over the past decade.
In its first acquisition aimed at China, Cisco announced it would buy the set-top box business of Hong Kong’s DVN Ltd (0500.HK) last November, and analysts expect more.
Chief Executive John Chambers has said Cisco is now ready to boost its presence in China, and that the company’s biggest rival in the long run will come from that country.
Analysts agree with the latter, although for now, overlap with Huawei and ZTE is limited, with Cisco selling higher-end gear as well as software and video products.
“It’s important to provide differentiation, and to provide solutions versus commodity products. This is one strategy that has worked for Cisco but it’s not a given that it will continue to succeed,” said RBC’s Sue.
In a sign Huawei is gaining prominence, it was recently approached for a possible acquisition of smartphone maker Palm Inc PALM.O, according to a source familiar with the matter.
And ZTE last week posted a 50 percent rise in quarterly profit due to booming exports, and said that it was “deepening its internationalization.”
Analysts said local joint ventures and partnerships will be crucial for Cisco to win business. A few of those ties may be more strategic than others, and lead to acquisitions.
Some analysts have named Datang Telecom Technology Co Ltd (600198.SS) as a possible partner.
Frost & Sullivan analyst Ronald Gruia said Cisco may pursue something similar to Alcatel-Lucent’s joint venture Alcatel-Lucent Shanghai Bell, seen by many as a local player.
“No matter how much you’re willing to accommodate and satisfy the Chinese market requirements, there’s only a limited upside for you as a foreign player,” he said.
Such a deal, he said, “would make them a home turf player even if they are a foreign player.”
Cisco declined to comment for this article.
Many analysts credited Cisco and Chambers for their experience and savvy in dealing with intellectual property issues and the complex local and state rules in China. Cisco settled an intellectual property lawsuit against Huawei in 2004.
“I believe Cisco’s done it longer and has probably appreciated China to a greater extent than most technology companies,” said Ticonderoga Securities analyst Brian White.
“You would be surprised how many U.S. companies don’t get China. John Chambers gets it, and that’s important.”
Like most U.S. businesses with substantial investments in China, Cisco is expected to occasionally join industry groups in protesting Chinese policies they see as discriminatory, but otherwise negotiate discreetly or work around them.
The San Jose-based company was one of many technology companies that has been silent on Google’s recent announcement that it would close its search engine in China.
“There’s always going to be a political component no matter what. But the good thing about Cisco is that they’ve been able to abstract that part out and say, ‘Let’s focus on the business,'” said Frost & Sullivan’s Gruia.
“If you want to play in the market you have to be aware of the finer nuances, which Cisco has been very good at.”
Reporting by Ritsuko Ando; Editing by Paul Thomasch and Richard Chang