Cisco: Sold on India

Back in early 2003, Cisco Systems Inc executive Rangu Salgame

hopped into a taxi at Bombay airport and struck up a conversation with the

driver. Returning to his native land to work for the first time in 20 years,

Salgame was thinking of taking the helm of the networking giant's India

operation.

SALGAME He sees a market in transition

At that point, China was the focus of Cisco's Asian

energies, and the India operation was a Cisco backwater. Making it big enough to

matter to the massive company would be a big challenge. Salgame figured he would

start his due diligence right in the cab. "So how's life in India these

days?" he asked, expecting the usual litany of woes. To his surprise, the

driver answered: "Pretty good. My children are at school, doing well and

learning English. I earn OK For the first time, I am feeling there's a future

in India."

That was the start of what has become a love affair between

Cisco and the Indian market. Salgame took the job, and after three months of

intensive research he came to the conclusion that India was on the cusp of a

major economic leap forward wherein its companies would use technology to become

major players on the global stage. "I had no time to waste," Salgame

recalls. "Once you spot a market transition, you've got to go for

it."

Unconventional Thinking



Salgame and his staff wrote a report to Cisco ceo John Chambers asserting that
India's telecom, technology, finance, and other companies were ready to spend

big bucks on upgrading their information technology networks. Within months,

Salgame had secured permission to triple his sales staff and boost the company

headcount from 1,000 to 1,400. Just two years later analysts say he has a $550

mn business-and it will hit $1 bn by 2008. Last month, Chambers announced $1.1

bn in new investment in Cisco India.

And Cisco's China business? On November 9, in a conference

call, Chambers made a striking prediction: "It would not surprise me to see

India actually challenge China, in terms of our business revenue, three to

four years."

Chambers' statement certainly goes against conventional

wisdom. After all, China boasts a $1.6 trillion economy that's growing at a 9%

annual clip, and it's the world's largest market for many products. India,

with the same 1 billionplus population, has a $700 bn economy that's growing

at 7%.

And Cisco itself has been a major beneficiary of China's

buildout. From the late 1990s through 2003, China's massive state-controlled

phone companies built nationwide networks that connected more than 30 mn homes,

and Cisco profited greatly. Many Western companies, meanwhile, are banking on

China remaining their single biggest source of new growth. Says Meichun Hsu, a

Hewlett-Packard Co executive who will run a new research and development lab in

Beijing: "China's potential is greater than India's for the next

decade, even though India could be the bigger economy in the next 25

years." Others are even more skeptical about India matching China.

"Maybe in 50 years," says Toshiba Corp CEO Atsutoshi Nishida.

What is Cisco thinking? The company is betting that India's

growth rate is going to pick up smartly-in part because deregulation of its

telecom industry is leading to vast investments in new Internet infrastructure.

"We are witnessing the advanced stages of an enormous evolution of the

Indian market as the government rolls back state control and as the economy

becomes liberalized," says Cisco senior vice-president Daniel Scheinman.

That creates a huge new market for Cisco with big phone companies, including

state-owned BSNL as well as private players such as Bharti and Tata Group, which

are rolling out state-of-the-art broadband networks. That in turn is leading to

demand from consumers and companies.

While Cisco says it's not reducing its commitment to China,

it perceives that China's centrally controlled economy is taking a breather.

Beijing recently delayed a $6 bn-plus disbursement related to construction of a

new 3G wireless network. What's more, Cisco sees a wave of Indian

entrepreneurship that, together with tougher laws on intellectual property

rights, will make the nation an attractive place to set up r&d and venture

operations. Cisco is not alone in this view.

In China, meanwhile, the picture is hazy. There Cisco faces

pressure from scrappy homegrown rivals such as Huawei Technologies and Harbour

Networks Co. By undercutting Cisco's topshelf prices by as much as 50%, the

locals have helped take a bite out of Cisco's market share, which has dropped

from 75% in 2001 to some 48%, according to market researcher idc. Cisco's

revenue in China hit a five-year low of $150.1 mn in the second quarter. While

Cisco posted nearly 30% growth in China in its most recent quarter, it could be

hard-pressed to maintain that pace. "Several years ago nobody could compare

with Cisco," says Li Yinan, president of privately held Harbour. "Even

today we don't have brand name, but our products and technology

can meet local requirements."

India, on the other hand, grew 70% in the most recent quarter

and should continue to grow at 40% or more in coming years. Cisco's share of

the India market: 74%. "In China, you've got Huawei. In India, you've

got nobody," says jmp Securities llc analyst Samuel C Wilson.

Part of Cisco's China problem is its own success. Its first

priority is sustaining its sky-high 68% gross margins. In this regard, the

Chinese corporate market is particularly challenging. Besides matching rivals'

low prices, winning market share means investing in huge sales and field

operations, in part because there are fewer of the local tech distributors and

integrators that Cisco relies on elsewhere. "The market> in China is tough," says Thomas F Mendoza, president of

storage-gear maker Network Appliance Inc. "The promise is there, but very

few are making money." As Cisco shifts focus to India, someone is going to

learn a tough lesson: Cisco, if it leaves too much business on the table in

China, or its rivals, if Cisco has guessed right about what it believes is the

best growth market of them all.

By Peter Burrows and Manjeet Kripalani



With Bruce Einhorn in Beijing