Information Huawei: networking IC companies on front lines of burgeoning Cisco-Huawei rivalry

Electronic News, August 26, 2002 by Gale Morrison

A drop-off in networking component sales to Cisco Systems and other North American OEMs has sent their suppliers rushing to China and is helping catapult Huawei to world prominence in networking gear.

The rapid rise of Huawei (pronounced WAH-way) and its bitter rivalry with Cisco have been the talk of the networking industry this summer. Huawei is China's largest telecom and datacom equipment supplier and has recently started shipping overseas, including through a Plano, Texas-based subsidiary called Future Wei. Analysts say Huawei routers are tough to distinguish from Cisco's in quality and performance, and Cisco is furiously trying to stop them.

Working in Huawei's favor is a legion of battered communications IC companies that has spent the last four years intensively developing network processors and optical speed-capable transceivers, framers and content addressable memories for Cisco to buy. But Cisco's once robust purchasing has since slowed to a crawl, triggered by a downturn in the communications market that also hit North American rivals Lucent and Nortel Networks.

That has played squarely into Huawei's hands. The embrace of China's largest networking OEM and the effect its lower prices will have on the world market for routers and other Internet protocol-based communications contracts is very significant, analysts say.

"The real issue is Huawei poses a very real threat to Cisco," said one top analyst who, like many other analysts and executives, requested anonymity "due to the sensitive nature of this topic."

Semiconductor companies that supply networking OEMs say Huawei's progress and drive to gain share in this market is something to behold.

"Huawei has made very, very strong progress," said Amit Banerjee, director of marketing for AMCC's framer products division. "They've grown up in this sheltered economy, and they are using that to their benefit. They've said, 'Why do we have to sell only in China? We can sell these things all over the world.'"

That's turned out to be unwelcome news at Cisco.

"Those two companies are competing heavily," Banerjee said. "I can tell you for sure there is no love lost there."

Meanwhile, Cisco isn't saying much--publicly, at least. "Cisco has a healthy respect for all of our competitors," said corporate spokeswoman Robyn Jenkins. She declined to comment further.

Executives and analysts familiar with the market and this rivalry believe Cisco currently is lobbying to see the United States put tariffs on Huawei systems. At the very least, Cisco CEO John Chambers seems to have at least one in" with the government. He traveled earlier this month to Crawford, Texas, to be a part of President Bush's media-friendly "economic summit."

"Perhaps Cisco's only trump card would be to get the U.S. government to slap a ridiculously high tariff on Huawei routers," said the analyst who sees Huawei as a real threat to Cisco. "Of course, to do so would hurt just about every American business except Cisco--from the service providers that have to pay outrageous prices to Cisco to the ASSP makers, such as AMCC--that are struggling since Cisco is all about internal development and grabbing every ounce of margin out of their boxes."

Michael Howard, optical networking analyst at Infonetics Research in San Jose, said from what he's seen, Cisco and others have reason to be defensive.

"Huawei is coming on very strong, and what they are producing are essentially, well, some people call them engineering knock-offs," Howard said. He said Huawei has surged up the ranks of optical networking OEMs with this strategy. And, certainly, enough money and market cap and jobs are at stake to make this a matter of serious geopolitical concern.

"One measure of the growth of Huawei," said Howard, "is that in our Q2 numbers just released, Huawei is number four in the world, and Cisco came in right behind them." He and others noted that this is true because the Asia/Pacific region is right now spending the most on networking, with the Chinese Ministry of Information Industry (MII) having recently redoubled efforts to build the country's communications infrastructure.

Executives at IBM, who two years ago signed a high-level partnership deal with Huawei to supply the Chinese company with IBM's PowerNP network processors and other high-speed electronics, did not want to comment. Inquiries as to whether or not the two are still collaborating were left unanswered. It is known, however, that AMCC--a fierce rival to IBM--is working closely with Huawei now.

"We have conference calls regularly with the (Huawei) team in China. And we make regular trips there," said Banerjee of AMCC. "Just recently I had a conference call with Huawei, and I realized it was 11 p.m. their time, and they had one VP and two directors in the room. I was very impressed. We're making regular trips over there. We have regular talks with the product line managers and the system architects."

Banerjee said AMCC is very willing to lend all of the networking system expertise it has gathered in the last decade. "These things aren't built in a vacuum," Banerjee said. "We work very closely together. We have to. If there's a system function that they need, they've got to tell us to build it into the chips."