TELECOMS: Cisco Courts Beijing with Inspur Tie-Up

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Bottom line: Cisco’s new joint venture will mostly resell its networking equipment into China, and is unlikely to ease Beijing’s worries that its products could be used by Washington for cyber spying.

Cisco calls on China with new JV

Networking equipment giant Cisco (NYSE: CSCO) has become the latest global tech firm to capitulate to China’s national security paranoia, announcing the formation of a new joint venture with a local partner. The tie-up with Inspur Group is just the latest in a recent string of new China-based partnerships involving big western tech firms. Those companies, whose ranks also include IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), fear that without such well-connected local partners, they could get locked out of the lucrative IT services market under tough restrictions imposed by a new Chinese national security law.

Announcement of the new joint venture with Inspur marks a major shift for Cisco, which up until now has preferred to do its business in China by itself rather than with a local partner. Cisco’s earlier go-it-alone posture has already come with a high cost it in a country where Beijing prefers to see big foreign tech names transfer technology to local partners. Thus this latest partnership should perhaps help to ease some of that pressure, even though it could ultimately put some of Cisco’s intellectual property at risk.

According to the latest headlines, the new joint venture between Cisco and Inspur will have investment of $100 million, and is part of a much larger $10 billion China commitment announced by Cisco in June. (English article; Chinese article)The deal includes software and hardware development, and the venture will also resell Cisco’s core router and switching products to Chinese customers.

Struggling PC giant Dell announced its own $125 billion commitment to China earlier this month (previous post), in one of the many new China-related commitments unveiled by big US tech names in recent months. I suspect these massive headline figures mostly represent procurement and manufacturing activities rather than any real investment in production or product development, and are mostly designed to generate goodwill.

One of the earliest companies to make such an announcement was IBM, which last year formed its own tie-up with Inspur. (previous post) Since then, Intel (Nasdaq: INTC) has formed a series of tie-ups with Beijing-based telecoms technology company Tsinghua Unigroup. Earlier this year year, Hewlett-Packard announced its own major new tie-up with the same Tsinghua Unigroup. That deal saw HP sell Unigroup a controlling stake in its China-based company that makes the same kinds of routers and switches that compete with Cisco’s.

Rooted in Snowden Scandal

Industry watchers will know that China’s growing paranoia about national security is one of the main forces driving this sudden string of tie-ups by big western tech firms. That paranoia dates back to the Edward Snowden scandal of 2013, which saw a former US intelligence contractor leak information that revealed massive cyberspying by Washington.

Cisco reportedly became one of the first victims of Beijing’s reactions after the Snowden scandal broke, with media reporting at the time that its products were shunned by one of China’s 3 main telcos over security concerns. (previous post) Earlier this year, Cisco blamed a downturn in its China business for weakness in its global sales, though it didn’t provide any specifics on the market. (previous post)

I’ve previously said that Beijing’s concerns are partly valid, since Washington has shown that it’s quite willing and capable of spying on its friends and adversaries alike. But I’ve also said that Beijing’s concerns that US tech companies are somehow complicit in the spying don’t have any basis in reality. After all, these companies are all private entities that traditionally kept their distance from Washington.

All that brings us back to this latest Cisco tie-up, and whether it will help or hurt the company in China. Inspur will hold a controlling 51 percent stake in the venture, which could help to ease Beijing’s concerns. I do suspect the venture will be a shell that will mostly resells Cisco routers and switches to the Chinese government and big state-run companies, rather than engaging in any real product development. That strategy could work in the short-term, but could ultimately backfire if Beijing decides that Cisco is simply using the joint venture to circumvent restrictions under the new national security law.

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