Cisco Systems And China

Review of Key Issues and Plans for Future Growth

Prepared for John Chambers

Overview

Cisco Systems competitive position in China is threatened. While China's Information Technology market is among the fastest growing in the world today, Cisco's share of that market is shrinking. Cisco's Internet operating system is becoming dated and has been subject to outright piracy in China. The Chinese government is also attempting to manipulate standards for the country's Information Technology products so as to level the technological edge that many foreign companies have over domestic vendors. It is only with careful analysis and work that Cisco can continue to be the dominate player in the internet equipment providers market for many more years to come.

Key Issues

Ð'* Losing market share in China/globally

Ð'* Intellectual property theft is a primary concern

Ð'* IOS is outdated

Ð'* Losing technological edge Ð'-consumer's like the latest and greatest

Ð'* Reactive instead of proactive in creating new markets

Other Issues

Ð'* Negative media coverage surrounding ability of Cisco products to censor the internet in China

Ð'* Chinese government defines the market standards to help local firms

Ð'* On-line systems are still predominately in English

Notes of auxiliary items

Ð'* Declining margins

Five-forces Analysis of Chinese Market Place

Analysis of Key Issues

Simply put, the problem with being #1 at anything is it makes you a target for everyone else that wants to be #1. When you are at the top, the seemingly only direction is down. Continuing to do business based on how you got to be number one in the high tech marketplace is the surest way to not be number 1 for long.

Currently Cisco is losing market share in the Chinese market place bit by bit. The low end of the router and switch markets is already being gobbled up by others and they are setting their sites on the upper tiers of those markets as well. This point is best illustrated by the fact that from '02 thru '06, Huawei's sales increased 4 fold, while Cisco's only increased by 50% worldwide.

Unfortunately, market share is not necessarily being lost to superior products, rather products that have been copied in many ways directly from Cisco's product line. The intellectual property theft is so blatant that even bugs specific to Cisco's routing software have been copied directly on to other's products.

It is our recommendation that action take place to encrypt, or as Microsoft Corporation does, Ð''guard' the source code, for the operating systems of Cisco products so that is much more difficult to simply copy at will and use in other product lines.

Given that the Internetwork Operating System (IOS) of Cisco products has been around for many years, now would be a good time to develop an IOS-2, which incorporates anti-piracy safe guards into it. Years ago when IOS was originally developed, the ability or daring of competitors to outright duplicate the software was not considered. Today it is an obvious issue that should be addressed quickly.

By updating or replacing the IOS with a newer and more robust version, Cisco will be able to recapture lost market share from the outright piracy of its products and technological staleness of those products that has occurred the last few years. A renewed focus on research and development will not only yield better existing products, it can be used to reinvigorate the search for new markets and products for Cisco to produce.

Along with this updating, it is our recommendation that Cisco must continue to fight intellectual property (IP) theft at its very root. This must be done in a multi-prong Ð''educational' attack.

In coalition with other high tech companies such as Microsoft, IBM, and others that have similar issues with IP theft in the country, the Chinese government must be continually petitioned for changes in its laws and educated in the importance of IP rights in a free market economy.

Also, the power of existing trade groups such as the World Trade Organization (WTO) must be brought to bear on the same governmental institutions to emphasize the importance of these issues.

Lastly, just as it took basic hand holding and face to face education for the Chinese government to understand about Cisco's manufacturing business model, the same techniques should be used to educate individuals at the highest levels of government about the importance of IP rights in a free market economy.

Analysis of Other Issues

Just as the Chinese government must be continually educated in basic free market principles regarding IP theft, the American media and American public must be educated in what Cisco products do. Cisco products do not filter and limit internet access for the Chinese people. The Chinese government filters and limits content access.

It