Will Cisco Rewire Asia?
Blistering speeds, supercool applications, Internet telephony -- nowhere in the world is broadband spreading as fast as in Asia. Stuff that once seemed like science fiction -- wireless broadband connections quick enough to handle video downloads seamlessly, mobile phones boasting 30 channels of TV programming -- is fast becoming reality in South Korea. India is launching broadband networks that have leapfrogged copper-wire phone lines and gone to Ethernet systems, akin to the ubiquitous networks found in corporate offices. How fast is digital Asia growing? Well, Chinese broadband penetration grew 99% last year. Fixed-line broadband connections in all of Asia soared 50% in 2004, to 62 million, according research firm Gartner Inc. (IT ).
This is just the market Cisco Systems Inc. (CSCO ), the colossus in networking equipment, loves. It wants the lead role in rewiring the whole region, as Asian telecoms deploy the cutting-edge networks that will drive communications in the next few decades. That should be easy: After all, Cisco dominates the region because it installed the first generation of Internet gear. Asia also could be crucial to reviving Cisco's stock, which has dropped 38% in the past year. Investors want to see double-digit top-line growth at Cisco without much slimming of its fat margins. Cisco's gross margins were 73% in Japan and 68.7% in all of Asia Pacific, vs. 67.6% in the U.S. in fiscal 2004.
Trouble is, Asia isn't just hot, it's hotly competitive. Huawei Technologies Co. is China's home-grown champ, and it won't give ground easily. Indeed, pricing wars may have already started. Cisco CEO John T. Chambers has said the company is already feeling margin pressure from Asian rivals, whom he expects will be Cisco's primary competition in coming years. In a recent earnings call, Chambers said Cisco is "starting to see a stream of good -- and very price-competitive -- competitors, particularly from Asia. And we expect this to continue for the next decade." He must also contend with fast-rising Silicon Valley rival Juniper Networks Inc. and resurgent old-school telecom providers such as France's Alcatel (ALA ). Says Adam Judd, Juniper regional vice-president for Asia Pacific: "Every quarter we are making inroads on Cisco."
THE LONE PLAYER
Cisco's Asia revenues are now $3.68 billion, or some 17% of total sales, up 39% since 2000. It enjoys a 62% share for the Asian routers and switches that hustle data around office networks and the Internet, and an 86.7% share of the bigger routers typically bought by phone companies.
But Cisco developed that dominance largely because it was the only team in the league. Having invented the router back in 1984, the company had won near-monopolies by the time many Asian nations started building Internet infrastructure in the 1990s. As big Asian customers choose gear for the next decade or two, however, they have other options. One recent example: Industry sources say that while China Telecom handed Cisco more than 40% of a massive contract late last year, Juniper got a similar piece of the action. Cisco used to have an almost total lock on orders from China's largest phone company.
Undaunted, Cisco execs in Asia have bold plans to help design and equip next-generation networks that will deliver telephone service, video programming, and Net access over a new set of pipes that are secure, quick, and flexible. That requires "intelligence running through the network -- and that is what we are really about," says Gordon Astles, president of Cisco's Asia Pacific operations.
Cisco also plans to make the most of skills others can't match, including its marketing might and its soup-to-nuts product portfolio. Rather than just sell individual boxes, the company offers consulting and software for a whole range of products, from security software to office phones. This, says Astles, is Cisco's edge in the price wars. "The art of negotiation has been ingrained in Asian culture for over 5000 years," he explains. "But the [client's] primary concern is will it work, and will we be able to give customer service."
Asians appreciate what Cisco can bring to the game. Park Kyung Chul, director of Internet planning at KT Corp. (KTC ), South Korea's top telecom and largest broadband service provider, relies on Cisco for about 60% of KT's routers, vs. 30% for Juniper. "Cisco's strength becomes obvious when they spot a problem," says Park. "They are very good at resolving glitches in a speedy manner." When a sudden data surge in the southern Korean city of Busan threatened to disrupt KT's Internet service in 2003, Cisco sprang into action, quickly installing four-gigabite Ethernet modules that stabilized the traffic.
But even Park says Juniper is more creative when it comes to configuring ultrahigh-speed networks. Meanwhile, in Japan, Cisco boasted about its December deal to sell one of its new high-capacity routers, the CRS-1, to Tokyo-based Softbank Corp. The router, which starts at $450,000 and can handle 93 trillion bits (93 terabits) of data per second, will be used to bolster the backbone of Softbank's Yahoo! BB, the biggest broadband player in Japan, with 4.6 million subscribers. Yet this is one of only a handful of announced contracts for the CRS-1. While technically impressive, the machine is overkill for the corporate buyers that are Cisco's bread and butter. Analysts question whether Cisco can quickly persuade phone companies to take a chance on its first router designed specifically to meet their need for no-downtime reliability.
Cisco faces its fiercest battle for supremacy in China. Its 57% market share in routers and switches is under serious attack from Huawei, which has 20.8% of the pie. "We can't ignore a player with that kind of market share," concedes Astles. There is no love lost between the companies. In 2003 the two settled a patent-infringement case Cisco brought against Huawei. Industry sources say Huawei will discount some of its gear up to 25%. And Huawei is getting ever more muscular. Samuel C. Wilson, an analyst with San Francisco-based JMP Securities LLC, notes Huawei recently landed a $10 billion credit line to fund its market-share assault and says that "many customers have been pleasantly surprised with Huawei's products and commitment to win." Huawei sales have grown 52% and 56% in the past two years, and at $5 billion in revenues the company is nearly 25% the size of Cisco.
Another way to deal with Huawei and other rivals is to win big in India, considered the next hot market. There, high-speed networks -- wired and wireless -- are expanding fast. The number of broadband subscribers jumped 236%, to about 500,000, in 2004 -- and Cisco has 75% of the business for routers and switches. Cisco is working with leading broadband provider Tata-VSNL to switch from copper-wire-based broadband networks to Ethernet and fiber networks that cost half as much to install, says Shashi Kalathil, chief operating officer of Tata Indicom Broad Band Services. Tata-VSNL's broadband network, India's largest, is scheduled to be completed in weeks. "With Cisco's system, we've provided for 1 million lines, but it is easily scalable to 10 million, and that is critical for our business," says Kalathil. The game is getting harder in Asia. But Cisco still has a good hand to play.
By Brian Bremner in Hong Kong and Peter Burrows in San Mateo, Calif., with Moon Ihlwan in Seoul and Manjeet Kripalani in Bombay