The Strategist

Cisco to Invest $10 Billion in China

06/18/2015 - 16:18

Cisco Systems Inc. to invest and joint projects in China worth more than $ 10 billion in the next few years to strengthen its position in this key market, reports MarketWatch.

Phil Wiffen via flickr
Phil Wiffen via flickr
Cisco unveiled the investment plan after a meeting of top managers - the leaving CEO John Chambers and his successor, Chuck Robbins - with Vice Premier Wang Yang and other Chinese officials in Beijing.

The company has not disclose information about specific projects. Cisco has also signed an agreement of intent with the State Committee of Development and Reform of China, providing the company's investments in those areas, which will help China achieve long-term goal, that is, development through innovation.

Previously, Cisco Systems reported a slight increase in revenue. This is good news for the retiring CEO John Chambers.

The company said that the fiscal net profit increased by 12% in the III quarter, while revenue grew by 5.1%. The result on sales is not very well fit into the previously specified range: Cisco said that the revenues will add 3-5%, but, as we see, was able to beat its own forecast of 0.1%. 

The activities of American companies in China compounded by the worsening political relations between Beijing and Washington on the background of mutual suspicion in cyber espionage. Previously, the ban hit IBM servers, the operating system Microsoft Windows 8 and Symantec Kaspersky Lab antivirus software- now, these products cannot be used for the procurement of public funds. Restrictions also affected Cisco equipment. 

John Chambers said that he is optimistic about the improvement of the contacts between the US and China, what apparently goes for Cisco. However, the top manager acknowledged that the company has the risk of investing $ 10 billion, and at the same time not significantly increasing the volume of business in the country.

According to James McGregor, a senior advisor for public consultation in APCO Worldwide, Cisco is stronger than other IT companies suffered in China, and now it is not clear what the company's investments can cause.

In the past financial quarter, closed April 25, 2015, sales of Cisco in China fell 20% compared with the previous year. The share of China makes 5.1% of the total Cisco’s revenue.

A few of Cisco leaders had been dismissed against the background of poor performance in China, including President Hahn Tu and vice-president Fredy Cheung, Wall Street Journal reported.

The decision to dismiss the top managers was made after Cisco has recorded a 20% drop in sales in China in the last quarter ended April 25, 2015, compared to the same period in 2014.
According to Bernstein Research, during this period the market share of Cisco routers in China fell to 9.4% against 21.2% a year earlier. This market position has given way to the local company Huawei Technologies.
The decrease in sales is mainly determined by erupted around the US National Security Agency scandal in 2013, when the documents, released by Edward Snowden, revealed the installation of bugs in Cisco routers, going for export. Also, it became known that US intelligence agencies are engaged in industrial espionage at the headquarters of Huawei in China.