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Huawei’s Smartphone-Like Network Switch to Challenge Cisco (1)

August 07, 2013

Huawei’s Smartphone-Like Network Switch to Challenge Cisco

The diversification into new products will help reduce Huawei Technologies Co Ltd.’s reliance on network-equipment sales that made up 73 percent of revenue last year, Deputy Chairman Guo Ping said in April. Photographer: Daniel Acker/Bloomberg

Huawei Technologies Co., China’s largest phone-network equipment maker, will offer a new line of switches that can be upgraded like applications on a smartphone as the company steps up its challenge to Cisco Systems Inc. (CSCO:US)

The new S12700 series of switches, programmable by software enabling four times faster updates than hardware-based switches, will be released globally in October, William Xu, head of Huawei’s Enterprise Business Group, said in an interview in Beijing yesterday.

Huawei is diversifying into smartphones and business-computing products and services as sales of its network equipment are blocked in the U.S. on security concerns. Cisco had a 58.8 percent share of the market for switches, which connect computer networks, in the first quarter compared with Huawei’s 2 percent, according to data from IDC and Bloomberg Industries. Xu said he expects the new gear to help boost Huawei’s share by 2 percentage points in a year.

Developing hardware for a traditional switch takes about two years, while software can be written to upgrade the S12700 in about six months, Xu said. “This is like migrating from an old feature phone to a smartphone. With smartphones, applications can be upgraded by software.”

The push to sell products and services to businesses and governments comes amid calls from state-owned Chinese media outlets for restrictions on Cisco after revelations of U.S. surveillance programs by former National Security Agency contractor Edward Snowden in June.

Security Concerns

Cisco’s 13,000 patents and dominant market share will make it hard for Huawei to compete, said David McCulloch, a spokesman for San Jose, California-based Cisco.

“Cisco clearly has many advantages over Huawei in terms of its proven innovation leadership, and a very extensive and loyal customer base,” McCulloch said in an e-mail. “Other competitors have been surprised by how difficult it is to translate success in service provider networking into the enterprise segment, and Huawei clearly faces a similar uphill battle.”

China should develop its own Internet technology because the U.S. can attack China almost at will, the Global Times newspaper wrote in an editorial in June. U.S. companies, including Cisco, represent a security threat, the official China Daily reported the same week.

Huawei’s enterprise business in China isn’t growing any faster than its overseas sales, indicating the company isn’t benefiting from a shift away from Cisco because of security concerns in its home market, Xu said.

‘Tough Competitor’

“We consider Huawei to be a meaningful and tough competitor in the enterprise market,” said Alex Henderson, a New York-based analyst who recommends holding Cisco shares at Needham & Co. The effect on Cisco has been noticeable in the Asia-Pacific region “where Cisco’s growth has been clipped,” he said.

The calls in China’s media for a shift away from U.S. companies, including Cisco, are starting to mirror hurdles Huawei faces in the U.S.

A U.S. congressional committee in October said Huawei, based in Shenzhen, and cross-town rival ZTE Corp. (000063) provide opportunities for Chinese intelligence services to tamper with telecommunications systems for spying. Huawei was barred by the U.S. in 2011 from participating in building a nationwide emergency phone network.

Diversification Plans

The diversification into new products will help reduce Huawei’s reliance on network-equipment sales that made up 73 percent of revenue last year, Deputy Chairman Guo Ping said in April. That will decline to 60 percent of the total by 2017, Guo said at the time.

Huawei is targeting 10 percent compound annual revenue growth in the next three to five years by expanding its smartphone and cloud-computing businesses, the company said in April. Huawei’s sales in the first six months rose 11 percent to 113.8 billion yuan ($18.6 billion), the company said last month.

Huawei projects sales at the enterprise group will rise to $2.7 billion this year from $1.8 billion last year, Xu said. It plans to increase that to $10 billion by 2017, he said.

“Products and solutions driven by innovation will sustain our growth and win recognition from customers,” Xu said. “If we are just followers, it’s going to be hard for us to hit that target.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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