TELECOMS: Beijing Tech Crackdown Takes Bite Out of Cisco
Bottom line: Cisco’s dismissal of several top China executives reflects its struggles in the market, and the situation will only improve if it takes a more conciliatory approach to address Beijing’s national security concerns.
Beijing’s ongoing clampdown on foreign tech companies over national security concerns is taking a toll on Cisco (Nasdaq: CSCO), with word that the US networking equipment giant is laying off several of its top local executives due to falling China sales. This particular development doesn’t come as a huge surprise due to Beijing’s recent obsession with national security and suspicion of foreign tech companies. But Cisco’s struggles do contrast sharply with that of Hewlett-Packard (NYSE: HPQ), which appears to be faring better in China due to its more conciliatory approach to address Beijing’s concerns.
There’s no very good indicator of where this national security tussle between Beijing and the west is headed, which is probably hurting business at foreign companies like Cisco that supply networking equipment and related services to Chinese companies. China is in the process of rolling out a new national security law that would require both foreign and domestic firms to disclose sensitive information like source codes before they could sell their products to government organizations and big state-run companies.
The foreign tech firms have complained loudly about the intrusiveness of such rules and say they go too far, hinting they might not play along with Beijing’s requirements. Cisco has been hit particularly hard, reporting its latest quarterly sales in China fell 20 percent from a year earlier. Its share of China’ router market also dropped sharply to 9.4 percent over that period, from 21 percent a year ago, according to third-party data.
Against that backdrop, the latest reports that say Cisco is planning to cut some of its top China executives seem logical, and are also part of a broader reorganization by the company to streamline its operations. (English article; Chinese article) The reports say several of Cisco’s locally based senior vice presidents have been asked to step down, including Hahn Tu, the company’s China president, and Fredy Cheung, its vice president for Greater China.
Cisco, HP and other foreign tech companies like IBM (NYSE: IBM) have fretted for much of the past year over the new Beijing requirements, and have complained that the rules unfairly discriminate against foreign companies. But the fact of the matter is that Cisco has had a difficult time in China for quite a while.
The company fought a long and ugly battle about a decade ago with Huawei, accusing its Chinese rival of intellectual property theft. The 2 sides ultimately settled their differences, but the dispute didn’t help improve Cisco’s image in China. More recently, Huawei has expanded aggressively into Cisco’s core business of selling routers and switches used in internal company networks. That move is part of Huawei’s broader drive to diversify beyond its older and rapidly slowing business of selling core networking equipment to telecoms carriers.
Cisco was actually one of the earliest victims of the growing national security tensions between Washington and Beijing, which accelerated following revelations from the Edward Snowden cyberspying scandal. Reports as early as 2012 said Cisco was being frozen out of contracts from China Unicom (HKEx: 763; NYSE: CHU), China’s second largest wireless carrier, and a year later the company said revenue was falling rapidly in developing markets, most notably China. (previous post)
Cisco hasn’t been very active about finding local Chinese partners for its business, which may partly explain the somewhat hostile reception it seems to be getting from Beijing. That contrasts sharply with HP, which earlier this year sold 51 percent of its H3C China-based networking equipment business to a Chinese partner, Tsinghua Unigroup, for about $2.3 billion. (previous post)
At the end of the day, the outlook in China is quite cloudy for all foreign tech companies, including both HP and Cisco, as well as others like IBM and Microsoft (Nasdaq: MSFT). But in the face of such adversity, Cisco will need to take a more conciliatory approach to Beijing if it wants to reverse its slide in the market, including forming more tie-ups with local partners and providing some of its product information to the central government.
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