Cisco’s China Investment Mushrooms to $16 Billion

Cisco on Thursday unveiled a long-term plan meant to significantlyexpand its presence in China, saying it would spend as much as US$16 billion — nearly double the $8.5 billion it has spent in the past five years — to build out the footprint it started there nearly 14 years ago.

Cisco laid out a three-to-five year plan that calls for it to work with the Chinese government to boost the country’s economic, societal and environmental goals, Chairman and CEO John Chambers said in announcing the effort at a press conference in Beijing.

The broad program includes significant investments in bringing Web 2.0 technologies to bear in the Chinese economy, including by reaching out to small and medium-sized (SMB) Chinese businesses through Alibaba, Cisco’s new partner.

The Next Chapter

“Cisco has made significant investments in our China business since we established operations in the country in 1994, and this program will lay the foundation for the next chapter in Cisco’s development in China,” said Chambers.

The agreement calls for Cisco to spend more money on procuring goods and services within China. The company is just one of a number of U.S. technology companies angling for a greater presence in China and working in conjunction with the government to funnel their investments to areas meant to boost the overall economy.

For Internet gear maker Cisco, China is particularly fertile ground. The country is already the second-largest market for Internet users and will soon overtake the U.S. as the top such market.

At the same time, Cisco faces potentially touchy issues in China, having supplied the Communist government with the Internet traffic routing gear critics say it uses to keep an iron-tight grip on Web discourse and limit political dissidence.

Shares of Cisco stock were lower Thursday afternoon, caught in a sharply falling market and losing 1.6 percent to $32.53.

Direct, Indirect Investment Seen

Cisco will put its capital to work in China in both direct and indirect ways. It will work with the government to open 300 new vocational training centers across China to teach network skills, with Cisco donating $6 million worth of equipment to those schools, known as the “Cisco Networking Academies.” Cisco had previously helped the government open 200 such schools, and the company said 90,000 people have been trained.

Cisco will also partner with China Development Bank to develop a joint investment program to funnel capital and expertise to small Chinese startups in the technology and environmental spaces.

In addition to making a $17.5 million investment in Alibaba as pat of the Chinese company’s IPO (initial public offering), Cisco will work to help the business portal reach Chinese small and medium-sized companies with solutions for business management and collaboration tools.

Alibaba will help market its online conferencing firm WebEx and related hosted applications to businesses in the country and Cisco will help Alibaba extend its reach beyond China.

The collaboration will help “extend our SMB solutions effectively into the Chinese market,” said Chambers.

Alibaba is itself in the news this week as it stages a record-setting IPO in Hong Kong. The company’s success bodes well for Yahoo, which owns a stake, as well as Cisco, said Sterling Market Intelligence analyst Greg Sterling.

“No one quite knows how much or how fast it can grow, but everyone is excited about the prospects of bringing an entire economy online for the first time,” Sterling told the E-Commerce Times. “The opportunity is very large and it will require a lot of Internet infrastructure to realize it.”

Seed Money

Cisco will also make $400 million of financing available to help Chinese governments buy its gear with low-cost loans and will open a “green technology center” to focus on developing more environmentally friendly technology solutions.

Cisco already employs more than 2,300 people in 12 offices and facilities across China performing sales, customer support, research and manufacturing, it said. It also maintains research facilities in China for two of its acquisitions: WebEx and set-top box maker Scientific Atlanta.

The timing of the deal is interesting. Though it’s been on the ground for some time, Cisco may have a formidable competitor in China lurking in the form of 3Com. Taken private just last month, that networking company had run a joint venture in China along with Huawei and speculation is that its new owners — a combination of private equity firms and Huawei — intend to make a push for Chinese market supremacy as part of a larger strategy.

The sale of 3Com seems in large part based on the China opportunity, said Gartner analyst Ken Dulaney, and Cisco may have accelerated its efforts to not only boost its presence in China but build a better relationship with the government as a result of the deal.

“Cisco can point to a long-term commitment in China, and now it’s got even more at stake,” he told the E-Commerce Times. “Aligning itself with Chinese issues and businesses will help it on the ground.”

The China push is Cisco’s second big overseas initiative of the week, on the heels of a joint venture to develop technologies and solutions with India’s outsourcing leader Wipro and a promise to invest heavily in Indian startups.