Back in early 2003, Cisco Systems Inc. () executive Rangu Salgame hopped into a taxi at Bombay airport and struck up a conversation with the driver. Returning to his native land to work for the first time in 20 years, Salgame was thinking of taking the helm of the networking giant's India operation.
At that point, China was the focus of Cisco's Asian energies, and the India operation was a Cisco backwater. Making it big enough to matter to the massive company would be a big challenge. Salgame figured he would start his due diligence right in the cab. "So how's life in India these days?" he asked, expecting the usual litany of woes. To his surprise, the driver answered: "Pretty good. My children are at school, doing well and learning English. I earn O.K. For the first time, I am feeling there's a future in India."
That was the start of what has become a love affair between Cisco and the Indian market. Salgame took the job, and after three months of intensive research he came to the conclusion that India was on the cusp of a major economic leap forward wherein its companies would use technology to become major players on the global stage. "I had no time to waste," Salgame recalls. "Once you spot a market transition, you've got to go for it."
Salgame and his staff wrote a report to Cisco CEO John Chambers asserting that India's telecom, technology, finance, and other companies were ready to spend big bucks on upgrading their information technology networks. Within months, Salgame had secured permission to triple his sales staff and boost the company headcount from 1,000 to 1,400. Just two years later analysts say he has a $550 million business -- and it will hit $1 billion by 2008. Last month, Chambers announced $1.1 billion in new investment in Cisco India.
And Cisco's China business? On Nov. 9, in a conference call, Chambers made a striking prediction: "It would not surprise me to see India actually challenge China, in terms of our business revenue, [in] three to four years."
Chambers' statement certainly goes against conventional wisdom. After all, China boasts a $1.6 trillion economy that's growing at a 9% annual clip, and it's the world's largest market for many products. India, with the same 1 billion-plus population, has a $700 billion economy that's growing at 7%.
And Cisco itself has been a major beneficiary of China's buildout. From the late 1990s through 2003, China's massive state-controlled phone companies built nationwide networks that connected more than 30 million homes, and Cisco profited greatly. Many Western companies, meanwhile, are banking on China remaining their single biggest source of new growth. Says Meichun Hsu, a Hewlett-Packard Co. () executive who will run a new research and development lab in Beijing: "China's potential is greater than India's for the next decade, even though India could be the bigger economy in the next 25 years." Others are even more skeptical about India matching China. "Maybe in 50 years," says Toshiba Corp. CEO Atsutoshi Nishida ().
What is Cisco thinking? The company is betting that India's growth rate is going to pick up smartly -- in part because deregulation of its telecom industry is leading to vast investments in new Internet infrastructure. "We are witnessing the advanced stages of an enormous evolution of the Indian market as the government rolls back state control and as the economy becomes liberalized," says Cisco Senior Vice-President Daniel Scheinman. That creates a huge new market for Cisco with big phone companies, including state-owned BSNL as well as private players such as Bharti and Tata Group, which are rolling out state-of-the-art broadband networks. That in turn is leading to demand from consumers and companies.
While Cisco says it's not reducing its commitment to China, it perceives that China's centrally controlled economy is taking a breather. Beijing recently delayed a $6 billion-plus disbursement related to construction of a new 3G wireless network.
What's more, Cisco sees a wave of Indian entrepreneurship that, together with tougher laws on intellectual property rights, will make the nation an attractive place to set up R&D and venture operations. Cisco is not alone in this view. While makers of consumer goods such as Proctor & Gamble and Motorola are taking advantage of China's vast emerging middle class, many multinationals, especially those that were late to the game in China and are struggling to figure out the political and cultural complexities, are also looking to hedge their bets by investing in India.
In China, meanwhile, the picture is hazy. There Cisco faces pressure from scrappy homegrown rivals such as Huawei Technologies and Harbour Networks Co. By undercutting Cisco's top-shelf prices by as much as 50%, the locals have helped take a bite out of Cisco's market share, which has dropped from 75% in 2001 to some 48%, according to market researcher IDC. Cisco's revenue in China hit a five-year low of $150.1 million in the second quarter. While Cisco posted nearly 30% growth in China in its most recent quarter, it could be hard-pressed to maintain that pace. "Several years ago nobody could compare with Cisco," says Li Yinan, president of privately held Harbour. "Even today we don't have [Cisco's] brand name, but our products and technology can meet local requirements."
India, on the other hand, grew 70% in the most recent quarter and should continue to grow at 40% or more in coming years. Cisco's share of the India market: 74%. "In China, you've got Huawei. In India, you've got nobody," says JMP Securities LLC analyst Samuel C. Wilson.
Part of Cisco's China problem is its own success. Its first priority is sustaining its sky-high 68% gross margins. In this regard, the Chinese corporate market is particularly challenging. Besides matching rivals' low prices, winning market share means investing in huge sales and field operations, in part because there are fewer of the local tech distributors and integrators that Cisco relies on elsewhere. "The [corporate technology market] in China is tough," says Thomas F. Mendoza, president of storage-gear maker Network Appliance Inc. (). "The promise is there, but very few are making money."
In India, by contrast, Cisco has an almost blank slate. Only 550,000 homes are connected via broadband in India, vs. 30 million in China. India's Ministry of Communications & Information Technology hopes to reach 12 million by 2010. Because much of India still lacks phone lines, carriers are installing higher-capacity Ethernet cables all the way to homes -- the same cables found on Cisco office and consumer gear. Indeed, Indian companies are willing to pay Cisco's higher prices in order to create gee-whiz new networks. Jagbir Singh, chief technology officer for cellular service giant Bharti, says "most of our customers have Cisco [gear], so it's easier to interconnect with them" through Cisco networks.
Meanwhile, longstanding suspicions between India and China are hurting Cisco's rival Huawei. Recently, India Technology Minister Dayanidhi Maran expressed concern that Huawei might leak militarily sensitive information about India's infrastructure to Chinese officials. In October, BSNL accused Huawei of failing to live up to its obligations on a big network contract. Huawei, which has a large R&D center in Bangalore and is considering other investments, would not comment on the allegations. But it could be banned from bidding on BSNL contracts for a period of time.
That's just one more reason why India looks good to Cisco right now -- and Cisco knows something about trend-spotting. That's how it caught the wave in China. As Cisco shifts focus to India, someone is going to learn a tough lesson: Cisco, if it leaves too much business on the table in China, or its rivals, if Cisco has guessed right about what it believes is the best growth market of them all.
By Peter Burrows and Manjeet Kripalani, with Bruce Einhorn in Beijing