Cisco: Making a Federal Case out of It

It's suing a rising Chinese rival, alleging brazen piracy

For months, Silicon Valley's cognoscenti have been wondering when Cisco Systems Inc. (CSCO ) would crack down on Huawei Technologies Co. The most famous network equipment company in China has long been racking up sales of switches and routers, some of which perform exactly like Cisco products and sell for a fraction of the price. Analysts and dealers who handle Huawei gear have marveled at the similarities, which extend right down to the user manuals and keyboard programming commands.

The speculation ended on Jan. 24. Despite CEO John Chambers' well-known aversion to litigation, Cisco announced that it was suing its Chinese rival in U.S. district court in Texas, where a Huawei subsidiary is headquartered. "The issue is brazen and blatant copying of our intellectual property. It simply needs to stop," says Mark Chandler, Cisco's chief counsel.

While the lawsuit is a first for Cisco, such complaints about Chinese companies are nothing new. In 2001, U.S. losses to piracy in China exceeded $1.9 billion, up from $1.08 billion the previous year, estimates the International Intellectual Property Alliance in Washington, D.C. But this case is different: Huawei's products--knockoffs or not--are far more sophisticated than the low-price consumer goods for which China is famous. Huawei's successful entry into this market augurs increased competition in the highest circles of information technology. "In the future, we will see a lot of these suits," says Byron Wu, a China analyst for iSuppli Corp.

Huawei declined to speak with BusinessWeek. In a press statement, it denied the charges, saying that the company and its subsidiaries "have always respected intellectual property rights." And whatever happens in Texas, Huawei invests heavily in its own technology. Founded in Shenzhen in 1988 by a former People's Liberation Army officer, the $2.7 billion company enjoyed 68% growth in its international sales last year, to $552 million. In a few years, overseas sales could account for one-third of the total.

Cisco is plainly spooked by the competitive threat as well as piracy. "Huawei is coming along and beginning the process of commoditization," says Andrew Chetham, an analyst with Gartner Inc. in Hong Kong. "There is a clear industry rationale, as well as an intellectual property rationale, for what Cisco is doing."

What's less obvious is the likely outcome. If Cisco wins an injunction against Huawei in Texas, the Chinese company will be unable to sell or distribute the related products in the U.S. That judgment would be enforceable in many other countries, creating a major obstacle to Huawei's expansion.

As for Huawei's domestic business, Cisco is counting on support at the highest levels. "The Chinese government recognizes that appropriate enforcement of intellectual property rights is going to be important to Chinese economic development," says Chandler. Indeed, having joined the World Trade Organization in 2001, Beijing is toughening its legal infrastructure to better protect copyrights and patents, says Jeffrey J. Hardee, vice-president and regional director for the Business Software Alliance in Singapore. The change can't come fast enough to suit Cisco.

By Bruce Einhorn in Hong Kong, with Peter Burrows in San Mateo, Calif., and Paul Magnusson in Washington

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