Cisco Joins China Cloud Club In TCL Tie-Up
A new cloud computing tie-up between US networking equipment giant Cisco (Nasdaq: CSCO) and leading Chinese TV maker TCL (HKEx: 1070; Shenzhen: 000100) caught my attention more due to its broader implications for both companies rather than the modest size of the actual investment. The deal comes as Cisco is facing difficulties in China, the direct result of an ongoing spat between Washington and Beijing over cyber security. At the same time, it also represents the latest in a string of recent signals that TCL is eying some new global alliances, a decade after 2 high-profile tie-ups with other western partners ended in disaster.
I used to follow TCL quite closely after first arriving in China more than a decade ago, and was quite impressed by its early leading position in TVs and also its recognition of the huge growth potential in cellphones. But then the company made 2 bad acquisitions about a decade ago, purchasing big European assets in the TV and cellphone sectors that ended in big headaches and write-downs. Those moves drove down TCL’s profile in both sectors, and dealt a sharp setback to its overseas expansion plans.
Cisco has also had a difficult time in China over the past year due to growing tensions over cyber-security between Beijing and Washington. The US regularly cites China as a source of hacker attacks on sensitive information. It has also banned the sale of networking equipment from Chinese giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063) due to concerns that such gear could be used for cyber snooping by Beijing. China has taken some retaliatory measures against US companies, with Cisco emerging as one of the biggest victims of reduced orders from big state-run companies.
Against all that backdrop, this new joint venture between Cisco and TCL looks like an interesting move for both sides, as the former looks for new roads into China and the latter seeks to re-engage with global partners. According to the latest reports, the pair will invest a relatively modest $80 million to set up a joint venture that will provide cloud computing services in China. (English article; Chinese article)
Cisco will initially invest $16 million in the venture, and will hold 20 percent. TCL will hold the remaining 80 percent, and provide $64 million. The investments will be made over 3 stages, showing the partners intend to move slowly into a space that Beijing wants to promote but one that is also quite sensitive due to its use of third-party systems to transmit and store data from commercial clients.
Most major Chinese tech firms including Huawei and leading e-commerce firm Alibaba (NYSE: BABA) have moved into cloud computing, while foreign giants like Microsoft (Nasdaq: MSFT) and Amazon (Nasdaq: AMZN) have also announced their own China cloud initiatives. This new venture will almost certainly buy most of its hardware from Cisco, though the impact to its China sales will probably be negligible for at least the next few years. Still, the move could auger a string of other new initiatives by Cisco to try and shore up its China business in the face of all the recent cyber squabbling.
From TCL’s perspective, the initiative is the latest sign that this quiet early tech leader may be trying to re-engage with major foreign and domestic companies as it tries to carve out a place in an emerging array of new tech products and services. Last week, TCL’s chief Li Dongsheng hinted at a possible tie-up with struggling Taiwanese smartphone maker HTC (Taipei: 2498), (previous post) and last year it also formed an Internet TV tie-up with domestic online search leader Baidu (Nasdaq: BIDU). It’s not clear if any of these initiatives will succeed. But at least they seem to show that TCL is coming out of its shell in a new drive to try and find a place in the booming world of new tech products and services.
Bottom line: A new cloud computing venture between TCL and Cisco reflects an emerging drive by the former into new products and services, and a move by the latter to shore up its weakening position in China.
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