Huawei Climbs ‘Food Chain’ in Cisco Enterprise Challenge
May 09, 2011, 4:10 AM EDTBy Bloomberg News
(Adds details about Huawei in Australia in 15th paragraph.)
May 9 (Bloomberg) -- Huawei Technologies Co., China’s largest telephone-network equipment maker, is banking on the rising mergers of computer and communication networks to narrow its gap with Cisco Systems Inc. in data routers and switches.
“Cisco is clearly the leader in this domain, but we also believe changes are happening,” Leon He, president of solution sales at Huawei’s enterprise business unit, said in an interview in Shenzhen, China. “When those changes occur, the current market and customer needs will change.”
Huawei is expanding beyond its traditional business of supplying equipment for phone networks as it strives to more than triple sales to $100 billion in the next 10 years. The push to win more orders from businesses and government agencies may pose its biggest threat to Cisco and bolster Huawei in the U.S., where its bids for acquisitions were thwarted.
The time is right for Huawei to push into the enterprise market because of the opportunities created by businesses and governments merging their audio-visual systems with telephone and computer networks for functions including video conferencing, He said. The potential market is in the “trillions of dollars,” Senior Vice President John Roese said in Shanghai on April 27.
‘Food Chain’
“Huawei is definitely moving up the food chain,” Sandeep Shyamsukha, an analyst at Auriga USA LLC in San Francisco, said. “As their products get better and their pricing remains aggressive they can take away market share from other players,” said Shyamsukha, who has a “hold” rating on Cisco and doesn’t own the shares.
Bidding for enterprise business will mean more head-to-head competition with San Jose, California-based Cisco.
“Enterprise is our core capability,” Cisco Chief Executive Officer John Chambers told investors at a technology forum on April 7. “We’re an enterprise company. That’s where we started.”
The enterprise business and public sector contribute about 46 percent to Cisco’s sales, Chambers said. David McCulloch, a spokesman for Cisco, declined to comment.
“The market Huawei sees is huge,” Huawei’s He said. “If we digitize, we will bring a revolution. When the shift occurs from digital to smart networks, that will be another revolution.”
Sharpening Focus
Cisco’s shares have declined 33 percent in the past year, trailing the 16 percent gain in the Standard & Poor’s 500 Index, as the company struggled to maintain its historic levels of profitability amid an expansion into more than 30 side businesses such as smart grids, home networking and digital music hosting.
Cisco’s Chambers has promised to sharpen the network- equipment maker’s focus. The company overhauled management May 5 to concentrate on three regions and rein in its council-style management structure. Last month, the company said it will shut its Flip video-camera unit and cut 550 jobs.
“Cisco’s issues recently could open up some opportunities for Huawei,” said Duncan Clark, chairman of Beijing-based BDA China, which advises technology companies. We’ve seen Huawei’s margin-sucking abilities and they may be applying that to the enterprise segment.’’
U.S. Concerns
Huawei has faced concerns from U.S. lawmakers about security risks from the Chinese company, which it says are unfounded. The company failed in its bids to acquire Santa Clara, California-based 3Leaf Systems’s patents this year, 2Wire and Motorola’s wireless business last year, and 3Com Corp. in 2008.
The Chinese company has seen its global share of switches and routers sold to carriers and telecommunication companies rise to 12 percent last year from 2 percent in 2005, according to Matt Walker, a Chiang Mai, Thailand-based analyst at telecommunications consultant Ovum. Cisco’s share of that market has dropped to 41 percent, from 49 percent, over the same period, Walker estimates.
Huawei said last month it will seek supply contracts with Australia’s A$36 billion ($39 billion) government-backed national broadband network.
The company had less success cracking the market for enterprise routers, where Cisco still holds 81.8 percent of the market in the fourth quarter of last year, compared with fourth- placed Huawei’s 2.5 percent share, according to Redwood City, California-based Dell’Oro Group.
Doubling Sales
Huawei aims to double annual sales at its enterprise group to $4 billion this year, from $2 billion last year, He said. Within three to five years sales will more than triple again to between $15 and $20 billion, He said. Huawei’s Roese said the company is moving 10,000 employees into the new enterprise division, including 6,000 research and development staff. That’s about 9 percent of the company’s 110,000 staff worldwide.
The initiative is being led by William Xu Wenwei, one of four executive directors on the company’s 13-member board, according to its annual report released last month.
Given Cisco’s track record, it’d be foolish to write the company off, said Tim Savageaux, an analyst at Terrapin Research in San Francisco.
“Companies very rarely go from being bellwether, genius, best-in-category to complete and utter idiots in the space of a few quarters” said Savageaux, who has covered the industry for 17 years and doesn’t own shares of the company. “You take Cisco lightly at your peril.”
Rivalry
Huawei set up its U.S. business in Plano, Texas, in 2001 as the company founded in 1987 by Chief Executive Officer Ren Zhengfei began going global. The company was sued by Cisco in 2003 for copying software and infringing patents. That lawsuit was settled in 2004 after Huawei agreed to stop selling some products and alter some designs.
In 2003, Huawei formed a joint venture with Cisco rival 3Com Corp., and sold its stake three years later. Huawei formed a joint venture with Symantec Corp. in 2007 that blended Huawei’s storage and security hardware with Symantec’s software.
Huawei will be a threat with its renewed focus on enterprise, and tends to be “very price disruptive” entering a new market, said Mark Fabbi, an analyst at Gartner Inc. in Uxbridge, Canada.
“You can’t throw 1,000 engineers at a problem that might bear fruit five years from now,” Fabbi said. “Huawei can.”
--Edmond Lococo, Joseph Galante, Editors: Chua Kong Ho, Vipin Nair
To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net
