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The IT giant is strategizing with governments from Saudi Arabia to South America on their technological futures—hoping to score mega-contracts
King Abdullah Economic City, Saudi Arabia - Two limos hurtle through the desert north of Jeddah, Saudi Arabia, at 110 miles per hour, blown at times into the slow lane by the winds coming off the nearby Red Sea. The delegation from networking giant Cisco Systems (CSCO), including Senior Vice-President Paul Mountford, is running late for a gala groundbreaking ceremony hosted by the Saudi king at one of the biggest construction projects on the planet. King Abdullah Economic City (KAEC) is mostly sand dotted by cranes now. But by 2020 the Saudis expect 2 million people to be living in a futuristic metropolis three times the size of Manhattan, with some of the most advanced technology money can buy. As the black Lexuses arrive, one traveler remarks on the frenzied pace, and Mountford laughs. "That was nothing," he says.
Not with so much at stake. King Abdullah plans to build four brand-new cities and upgrade the country's infrastructure at a cost of $600 billion over the coming years, and Mountford is chasing scores of similar projects in emerging markets around the world. This goes beyond China and India. Mountford's mandate is to tap the next tier of emerging nations, from Saudi Arabia and Russia to Brazil and Chile. It's a sprawling group that Cisco, and companies like it in technology and beyond, is counting on for much of its growth. But as the financial crisis hammers many of these economies, Mountford will have to hustle to deliver.
The groundbreaking at KAEC makes clear how hard Cisco is pushing. Its executives form the largest Western contingent by far, and, after the event, the company hosts the king in an adjoining tent for a demonstration of Cisco technology that allows a person elsewhere to appear on stage as a holographic image. All this before the company has won a dime of business for its products.
Cisco isn't just selling technology. Mountford's pitch is that Cisco, more than any other company, can help countries such as Saudi Arabia modernize their economies and become leaders in the Internet Age. The company argues that, by investing in the Internet infrastructure Cisco sells, these governments can better educate their citizens, improve health care, and boost national productivity. They may even be able to create their own tech sectors, giving citizens the opportunity to become well-paid "knowledge" workers like those in Bangalore or Guangdong, China. It's the promise of the Cisco Effect. "This is a chance for Cisco to [influence the world] on a much bigger scale," says John T. Chambers, the company's chief executive. "It's about raising standards of living and creating large middle classes."
One parallel is Bechtel. Just as the construction giant built dams, power plants, and airports last century, Cisco believes it can build essential infrastructure for today. It sells everything from the million-dollar routers that direct traffic through the Net to $300,000 videoconferencing systems for executive suites to set-top boxes for cable TV. But it does more than peddle gear: Cisco provides consulting services to help government officials figure out how best to use the Internet and pays for training centers to churn out the technicians to make such plans real. All told, the company is investing billions in emerging markets in hopes of snaring future business. "Cisco is getting itself designed into the fabric of these countries' economic plans, because Cisco is helping their leaders imagine the future," says tech consultant Geoffrey Moore of TCG Advisors. "It's thought leadership at a level I've never seen before."
The question is how much these countries will pay for vision, especially in tough economic times. Despite Cisco's efforts, it lost out on the first major contract from King Abdullah Economic City. The developer of the city gave the $84 million deal for a citywide phone and Internet system to Ericsson (ERIC) after the Swedish equipment maker submitted a bid more than 20% lower than Cisco's, sources say. "I was shocked," says Ahmad Al-Yamani, the top technology officer for the Saudi Arabian General Investment Authority, a government group that worked closely with Cisco on the blueprint for the new city. "But sometimes dollars talk."
As governments struggle with the current financial turmoil and scale back on their grand plans, Mountford faces the sales challenge of his life. For years he's been a fair-haired boy at Cisco, delivering annual sales growth of more than 30% and building his group to $4.5 billion in revenue. Cisco needs that growth more than ever. The company's stock has stalled in recent years, largely because investors doubt an outfit with $39 billion in sales can maintain the double-digit annual growth Chambers has promised. Those fears were fanned on Nov. 5 when Cisco said revenues in the current quarter could fall 5% to 10% because of the economic slowdown.
If Mountford can keep delivering strong growth, Cisco will have a shot at hitting Chambers' target. But analysts are skeptical given the global tumult. Richard Dean of Pyramid Research just slashed his forecast for Mountford's group by more than half, to an average of 15% over the next three years. Overall, Dean thinks Cisco will increase revenues by an average of 5% through fiscal 2011, far short of the double-digit goal. "Mountford can influence Cisco's fortunes over the next few years like no other business leader in the company," says Dean.
All of this has Mountford, a convivial, six-foot-three Brit, squarely on the hot seat. He's the son of a World War II vet who fought the Germans from Dunkirk to El Alamein in Egypt. Mountford the son was determined to escape his working-class town in the British Midlands, so he skipped college to work as a salesman for a garden-tools company. He later joined Cisco and boosted its sales in Britain from $165 million to $1.2 billion in three years. When the dot-com boom turned to bust, Chambers brought Mountford to Silicon Valley to tackle one of the company's most pressing problems—a potential mutiny by the tech resellers, or middlemen, that bring in more than 90% of Cisco's sales. He developed new programs that boosted their profits for helping Cisco move into key markets, such as office phones and network security.
A CHANGE OF PLANS
In 2005, Mountford started looking for a fresh challenge and began to focus on the nascent rise of emerging markets. Countries such as Saudi Arabia and Chile were thriving with the surge in commodity prices, while Turkey and Poland were developing broader economic strength. Yet Cisco approached these markets in the same simplistic way as most Western companies: It had a few sales offices and distributors but no specialized effort. Chambers tells the story of how Jordanian King Abdullah II promised him Cisco would make money in his country after convincing Chambers that the company should work with the government to create the Jordan Education Initiative in 2003. "I said, 'With all respect, Your Majesty, I'll never make money in Jordan and I probably never will in the Middle East, either,' " Chambers says.
Mountford was convinced otherwise. He believed that a growing coterie of progressive governments recognized the need to invest heavily in technology and other capital improvements. Those in the Middle East, in particular, faced a surge of young people coming of age. Without the creation of good new jobs, there could be a host of problems, including a further rise in Islamic radicalism. So in early 2005, Mountford proposed breaking these hot spots out of the existing business units at Cisco and creating a specialized emerging-markets group, which he would lead. Robert Lloyd, then head of the Europe, Middle East, and Africa operation, helped him hatch the idea.
Chambers quickly assented, giving Mountford responsibility for 132 countries in 23 time zones—"so we can have an hour off for lunch," jokes Mountford. But the CEO set a high bar. The straitlaced Chambers, who'd felt facial hair was unprofessional ever since his days as a young IBM (IBM) sales rep, made Mountford promise to lose his beard if the new unit didn't deliver a 35% increase in sales in its first full year, ending in July 2006. Mountford agreed—but only if Chambers would grow his own beard if Mountford hit the mark.
Certain markets were rough going at first, particularly in the Middle East. Tensions between the U.S. and Saudi Arabia lingered after September 11, straining business relationships. Cisco's American employees were hesitant to visit the country. Saudi businesspeople were offended by charges that their nation supported terrorism and by having to wait weeks for visas to the U.S. As Cisco struggled, Chinese companies such as Huawei Technologies were quick to fill the void. "You wouldn't believe how much business Huawei has taken out of Cisco's mouth," says Haitham Abu Aisha, general manager of a Riyadh Internet service provider called Sahara Net.
Still, Mountford's team thrived elsewhere. Particularly in countries such as Russia and Brazil that opened up telecom markets to competition, new carriers were eager to buy Cisco gear. Sales surged for fiscal 2006, to $1.68 billion. At a Cisco conference that year, Chambers made a show of appearing on stage in front of thousands of staffers with a skimpy beard.
In December 2006 the company took a step deeper into emerging markets. It established a huge campus in Bangalore from which teams of engineers could be dispatched to deliver on promises made by Mountford and other salesmen. The India-based staffers began to create products tailored to specific markets, such as a Web site in Turkey that lets small textile companies bid on a variety of contracts. The customized products are then marketed to potential buyers in other, similar countries.
Cisco eventually got on track in Saudi Arabia. Mountford hired a well-connected local, Badr Al Badr, to head the business in the country. Badr brought on more salesmen and engineers and got Cisco involved in major government projects. By early 2007, Saudi orders were growing 70% over the previous year.
Overall, Mountford's emerging-markets group boosted sales an average of 65% during 2007 and 2008. In South Africa, Cisco helped build an advanced wireless surveillance system to deter the theft of gold and diamonds off mining-company trucks. In the United Arab Emirates, the company helped design and build a futuristic Dubai Internet City industrial zone. And in Brazil, it helped construct the Internet infrastructure to provide broadband access in parts of the country where it never existed before.
For the fiscal year ended this July, Mountford's group hit sales of $4.5 billion. IBM, Sun Microsystems (JAVA), and Juniper Networks (JNPR) have all followed Cisco's lead in the past year and formed specialized emerging-markets units.
Mountford is racing to keep Cisco ahead, logging 100,000 airline miles a year. During a short trip to Saudi Arabia over the summer he shuttled around Riyadh and Jeddah in black limos, meeting with a parade of officials. He didn't spend a moment talking products or prices, though. Instead he talked about "country transformations" and brainstormed big ideas, while partaking of the never-ending stream of Arabian coffee. (It's impolite to refuse, as foreigners soon learn.)
In a sprawling modern building that houses health ministry offices, one official expresses interest in Cisco's high-definition videoconferencing technology, called TelePresence. Mountford explains how it could be used in the nation's military hospitals to improve health care for rural Saudis and promote cutting-edge research on organ-transplant techniques. The official lets slip that he just got another $1 billion added to his $4 billion budget to build a new campus. Mountford heads back outside into the scorching heat and the waiting limo, with an agreement in principle to establish a partnership with the agency.
At the fortress-like offices of the Jeddah mayor, a machine-gun-toting guard eyes the car from behind sandbags. Inside, there's more coffee and sesame candies. The mayor, Adel Faqih, listens with only mild interest as Mountford talks about how Internet technology could be used to ease traffic jams in the city. Faqih perks up, however, when Mountford mentions Cisco's Networking Academy training centers, which offer courses to everyone from Webmaster wannabes to tech novices. "We can make tremendous progress with this," says Faqih. The reason: In a country where unrelated men and women are not allowed to speak to each other in public, a Network Academy just for women would be a socially acceptable means of bringing them into the workforce. Saudi business and government leaders all say the biggest challenge facing the country is a shortage of skilled workers, without which the country can't diversify away from oil.
The exchange isn't unusual. Mountford's meetings tend to drift from employment trends to energy policy. At one point, Tawfig Al-Rabiah, development chief for the country's industrial zones, told Mountford about a project similar to KAEC, called Sudair City. He wanted Mountford's help with a new broadband network, but the Cisco exec homed in on the metropolis' cheap electric rates because of the proximity to rich oilfields. (Electricity costs about 3 cents a kilowatt hour, one-third the price of many U.S. markets.) Why not make Sudair a hub for vast computer data centers? The electric bill is frequently the biggest expense in running these centers, which are increasingly important to Internet companies such as Google (GOOG) and Amazon.com (AMZN). Al-Rabiah liked the idea, one reason Cisco later landed a $280 million contract to create the underlying fiber-optic network for Sudair City and other projects.
Still, countries such as Saudi Arabia have miles to go to catch up with India or China, never mind the U.S. Only 22% of the Saudi population has Internet access, and 98% of those people have sluggish connections unsuitable for online video and other data-intensive activities. There's little evidence the country is making progress in building a knowledge economy. Bart Van Ark, chief economist at the Conference Board, says surging oil revenues in recent years have created construction jobs, but almost nothing in the way of better-paying industries. The progress "is not sufficient to raise average living standards much," he says.
Now the global financial crisis is undermining the ability of emerging countries to invest in technology and other infrastructure. Chambers said during the earnings call on Nov. 5 that emerging-markets orders, an indication of future sales, were "down slightly." That suggests it will be difficult for Cisco to meet the 15% growth expectations of Pyramid's Dean and other analysts.
In several of Mountford's biggest markets, including Russia and Brazil, the local currencies have plummeted, and capital spending has stalled. Oil exporters such as Saudi Arabia have seen prices fall more than 50% since their peak in July. Saudi officials say they're not planning to cut back on their technology investments. Tawfig Al-Rabiah says the turmoil may lead to larger investments, as foreign companies concentrate on relatively stable economies such as Saudi Arabia.
Still, with their economies battered, governments in these markets may well look to cheaper options. That leaves Cisco vulnerable to rivals such as Ericsson and Huawei. Cisco may help governments in places like Saudi Arabia grasp the promise of the Net, only to lose out on the actual business. "We're proud to have won against a company that did as much advance work as Cisco did," says Ericsson marketing executive Peter Linder.
Sitting in a limo at the end of his trip, Mountford is clear about the challenges. He knows that countries such as Saudi Arabia may not complete every aspect of their grand plans. Even if they do, Cisco may not win the business. Still, he sees huge opportunity for the company and for bettering the lives of millions: "That's why I'm stupid enough to work this hard." His father, he says, recalls that his war years, while harrowing and taxing, were also the most special. "Well, this is our time," he says.
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Saudi City of the Future
Why build a city in the middle of the desert? In its Oct. 2 issue, Time magazine explored why the Saudi government is determined to spend $27 billion on King Abdullah Economic City, 100 kilometers north of Jeddah. Amr al-Dabbagh, the governor of the Saudi Arabian General Investment Authority and one of the brains behind the development, explained how KAEC will help to address pressing demographic problems.
To read the story, go to bx.businessweek.com/saudi-arabia-business/reference/
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