Cisco's $10 Billion Investment In China: Partners Think It's A 'Smart, Tactical Move'

On June 17, Cisco Systems CEO John Chambers and incoming CEO Chuck Robbins gathered with leaders and government agency officials in China to unveil a $10 billion initiative that includes "renewed commitment" and agreements with the Chinese government to expand partnerships, research, investments in "next-generation" Chinese technology, and spur job creation, according to the company. The money will support local innovation, economic growth and help China transform into the digital age, said Cisco in revealing the investment.

The relationship between China and Cisco had hit a major roadblock last year as tensions arose when the country accused Cisco of allegedly helping the U.S. in cyberespionage activities. Just two weeks prior to the accusations, photos were published showing the National Security Agency allegedly intercepting and implanting surveillance functionality into Cisco equipment going overseas. Cisco, San Jose, Calif., denied the accusations.

In May of this year, Cisco reported sales in China had dropped 20 percent year over year for the third quarter of its current fiscal year. Chambers said during the May 13 earnings call that he and Robbins will visit China every quarter and "eventually get that one turned around."

[Related: New Cisco CEO: Chuck Robbins Replaces John Chambers]

Recent initiatives promoted by the Chinese government such as "China Manufacturing 2025" and its cloud strategy tie in with Cisco's cloud strengths, which will drive development in China's economy, according to Cisco.

"Cisco is deeply committed to our Chinese partners," said Robbins in a release announcing the investment.

Some solution providers here in the U.S., however, say Cisco's move could be a way to prevent Chinese competitors such as Huawei Technologies from gaining more traction in the U.S. market.

"Would I like $10 billion to be spent on North America? Absolutely," said Chris Bottger, senior vice president of collaboration services at IVCi, a Hauppauge, N.Y.-based solution provider and Cisco partner, ranked No. 226 on CRN's 2015 Solution Provider 500. "But if that means in two or three years' time we're going to be overrun by Huawei and ZTE because we didn't protect ourselves from their home base -- we waited until they came here -- then that to me is a bigger problem because that worries me as well."

Bottger, whose company specializes in collaboration solutions, said he's been watching China-based companies gain global market share in video and unified communications. Although these companies haven't yet been able to completely crack the U.S. market, it is a "growing concern" that they could, he said, potentially hurting IVCi's sales.

Andrew Lerner, research director at Gartner, said there's a growing trend of China-based vendors gaining traction and share in various global market segments such as networking, wireless, application delivery and others.

"We see it in our market-share numbers in the various segments we cover," said Lerner. "All the China-based vendors are stealing market share from all the non-China-based vendors within China, absolutely. … It makes sense that Cisco is investing and trying to do things over there because it's a huge, growing market and nobody wants to give up on it."

Huawei is the No. 2 vendor of service provider operational technology products and services in the world, according to Gartner. With 65 percent of revenue from international sales, a strong sales base in China and expanding investments in Europe, the Shenzhen, China-based company is growing quickly and becoming a larger competitor to Cisco globally.

Cisco partners also said they fear heavy hitters such as Huawei could grab a chunk of the U.S. market through acquisitions of other vendors or of top-level solution providers.

"If Cisco's competitors are coming from China to the U.S. and making a market impact, then [Cisco] taking the fight to [China's] streets makes sense to me," said Robert Keblusek, senior vice president of business development at Downers Grove, Ill.-based Sentinel Technologies, ranked No. 128 on CRN's 2015 Solution Provider 500 list. "If they start gaining momentum in the states and start to take deals away from Cisco, then that could mean taking deals away from us."

Solution providers believe the investment provides Cisco with greater visibility and a stronger presence in China to better compete against Huawei and against telecom giant ZTE as well. Cisco is getting ahead of the game and protecting its business by creating a stronger partnership with the country, they said.

"There is a huge challenge by almost all the vendors I cover to deal with the geo-political issues associated with China and the U.S.," said Gartner's Lerner. "Quite frankly, no vendor has figured out how to sell to both sides correctly. There are a lot vendors trying to craft the right solution."

Hewlett-Packard, for its part, recently unveiled its H3C Technologies enterprise computing joint venture in China, selling a 51 percent stake in the joint venture for $2.3 billion to a Tsinghua Holdings subsidiary, Unisplendour Corp.

HP is billing the new H3C Technologies venture, which will be the exclusive provider of HP infrastructure in China, as a $3.1 billion "technology powerhouse."

"HP feels like that's the right solution to mitigate the problem, and HP with their H3C subsidiary does a ton of business over in China, so their hands were forced. Some other vendors are de-emphasizing and/or pulling out of China," said Lerner.

Other vendors such as EMC and NetApp have established OEM partnerships with local Chinese vendors.

Since 2012, a Chinese movement called "IOE Out" -- IBM, Oracle and EMC out -- has urged the government and state-owned enterprises to use local vendors in addition to government-sanctioned regulations, according to Gartner. The movement saw many international companies see market share decline in China, while local providers such as Huawei, Inspur, Sugon and Lenovo have since grown.

Cisco's $10 billion investment shows that it won't be "bullied out," said a top executive solution provider and Cisco Gold partner.

"The $10 billion has to be somewhat symbolic," said the executive, who declined to be identified. "[Cisco] simply can't ignore a huge market, so an investment would show that they won't be bullied out."

Jamie Shepard, senior vice president of health care and corporate strategy at Dallas-based Lumenate, a Cisco partner, said the alliance doesn't just show that Cisco needs China, but vice versa.

"[China's] appetite for technology and all of the things that we have in our daily lives has far outpaced their ability to 'copy' and/or develop themselves, and the black market in China is actually hurting their economy," said Shepard. "Chinese businesses need to scale and be agile, they just can't wait for the likes of Huawei and others to begin to build it for them; they need U.S. products and they need them fast."

Shepard said China is rapidly building cloud infrastructure for an abundance of emerging businesses that is outpacing their ability to respond with technology and innovation.

"They are now in dire need of Western ways and products," said Shepard. "So yes, $10 billion is a real number and might also be on the light side."

Cisco also is reportedly axing Hanh Tu, president of Cisco China, and Fredy Cheung, vice president of Cisco in Greater China. Cisco earlier this month confirmed to CRN that Owen Chan, Cisco's top leader in China, had revealed changes to his leadership team, but declined to confirm whether Cheung or Tu would be leaving the company.

Although all partners CRN spoke with do not see any new sales opportunities created though the $10 billion investment, they were in favor of the networking giant's long-term strategy.

"You don’t want those big Chinese companies to come over to the U.S.," said Bottger. "Chuck and Chambers are getting in front of that by saying, 'OK, we need to be significant in China to protect the business that we have down the road that could be at risk because of Huawei and ZTE.' To me, it's a very smart, tactical move."

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.

PUBLISHED JUNE 29, 2015