Cisco, one of the leading U.S. tech companies, has lost favor with investors in the last twelve months, as shown below. Market share gains by Huawei, the Chinese leader in network switching equipment, has prompted the concern. Huawei dominates the China market, where demand for new equipment is very strong, and is trying to enter the U.S. and other global markets. Concerns about national security are slowing Huawei down in the U.S. but eventually their competitive pricing will prevail.
(SHE is Huawei. ERIC is Ericsson.)
The strategic issue for Cisco is very similar to what many American companies faced from Japanese competitors in the 1980s. Back then market leaders in Japan, unencumbered by strong local competitors, offered aggressively priced products as a means to enter the large U.S. market.
The companies in the U.S. who were successful in fighting off the Japanese entry fought the battle more in Japan than the U.S. Foreign companies with large domestic market shares use the resulting large cash flows to finance their foreign expansion. Attack your competitor in their home country and you reduce their cash flow for expansion. When you are the leader in a market and the competitor lowers prices you are forced to lower prices for all customers, which significantly reduces cash flow. Alternatively, one can give up market share, which companies rarely opt for, which again results in reduced cash flow. Disrupt the competitors in their home market and you reduce their cash flow for foreign expansion.
Cisco needs to fight Huawei much more aggressively in the China market, offer pricing that is very competitive and probably accompany it with a better financing package. Chinese customers definitely have issues with capital availability and good pricing combined with financing could be attractive.
Another alternative for Cisco is to pursue a strategy similar to Ericsson, whose stock has dramatically outperformed Cisco. See the chart above. Ericsson operates the telecom networks for carriers as an outsourced service, which I wrote about here. Providing outsourcing services to Chinese carriers might be an alternative for Cisco.
I found the story on Cisco here. The chart is from Google Finance.
