Case Study:
Cisco in China
Sherman Chu
Director, Technology Licensing Group
1
Agenda
Introduction to Cisco
China Research & Development Center
Investments
Trademark (counterfeiting)
Standards (AVC, wifi)
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2
Introduction to Cisco
Subtitle
3
Innovation Evolution
First
acquisition
(Crescendo)
Started at
Stanford
Entered
service
provider
market with
high-end
router
Released
wireless LAN
products
Acquired
q
Scientific
Atlanta
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Shipped first
router
t
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IPO; 192
employees
l
© 2006 Cisco Systems, Inc. All rights reserved.
Released
C t l t
Catalyst
switch
Cisco Confidential
Shipped first IP Acquired
t l h
telephone
Li k
Linksys
4
Cisco Worldwide
2006 revenue: $28.5B
$3.22B spent on R&D
London, UK
Toronto, Ontario
San Jose,
CA
Boxborough, MA
Research
Triangle Park, NC
49000 employees in
77 countries
Milan, Italy
Tokyo, Japan
Richardson, TX
Bangalore,
India
Shanghai
China
Singapore
g p
North Sydney
Sydney,
NSW, Australia
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40% Engineering/IT,
30% Sales, 30% all
others
th
> 1,100 issued
patents
5
Introduction to Cisco
Network is the focus,
focus but increasingly diversified
High end routers, switches
g and security
y software
Networking
Home networking, entertainment devices
Increasing consumer focus
Linksys, Scientific Atlanta
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Cisco in China
Huge market
1.3 billion people, GDP growth 7-9%
High
g technology
gy adoption
p
Broadband easier to obtain in many Chinese cities than in US
Innovative technology efforts
CERNET – tens of millions of users
users, often 90% utilization
IPv6 network funded by government
Still manyy challenges
g
Still immature and emerging (GDP/capita: US$1,728 in 2005)
Huge investment to raise China to developed countries level
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China Research &
Development Center
(CRDC)
Subtitle
8
CRDC Mission
Localize existing Cisco products
Design, develop, test and support
Cisco products sold worldwide
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Maintain close relationships
with government and
academia
9
CRDC History
Sept ’04 – Cisco announces $32M
investment establishing CRDC
Jan‘05 – Est. 2nd Shanghai Branch of Cisco
Systems (China) Networking Technology Co,
Ltd
Jan'05 - First local staff hired
Aug'05
Aug 05 – Est.
Est Cisco Systems (China) R&D
Co, Ltd
Aug'05 – Move to Shanghai Caohejing HiTech Park
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CRDC Overview
Diversified development activities
Even division between hardware and software development
More design-oriented (versus maintenance)
Bottoms-up approach towards selection of development
projects
Co
Continued
ued sstrong
o gg
growth
o
Currently 360 employees, doubling each year
Hiring rate impossible in US
Wholly owned subsidiary
JV no longer required
Avoid technology transfer issues
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Benefits of China Development
Engineering
g
g talent p
pool
China graduates more engineers than US
Attrition rate comparable to Silicon Valley
S low cost relative to US
Still
S
Create governmental good will
Local government important for operations
operations, enforcement
Central government connections important for sales, policy
Proximity to manufacturing
Benefits hardware development
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IP Protection Issues in Development
Generally
Distinguish counterfeiting vs. leakage in operations
y greater
g
than elsewhere
IP risk not necessarily
Protection
Address cultural issues through education
Need to know access
Partition IP based on sensitivity
IP law uncertainties
Moral rights can’t be waived
First to file regime for patents – favors local companies
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Other Challenges
Management pool developing
Expats higher percentage of managerial team than individual
contributor level
Strong executive sponsorship essential
Export Control
US – may restrict what technology you can bring to China
Chinese – requires enumeration of what sub will do
Incorporation in China expensive
Up to $60K
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Investments
Subtitle
15
Overview
Lots of optimism
p
in China
Innovation, but not yet technology-based
Successful ventures based on business model, not core
technology
Relationships often important
Significant increase in number of deals across the
board
More funds actively investing in China market
VCs are under pressure to invest, resulting in more but smaller
bets
Competition leads to more earlier stage investment
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CSI1
China Venture Environment
•
VC market still very early stage
(4 years of history)
Data still incomplete and
trends difficult to define
•
Fundraising peaked in 05 post
successful 2004/2005 exits
•
pp y outpace
p
demand
Supply
•
Not much visibility on exits
•
Increased M&A activities
US$ M
4500
4000
3500
3000
2500
2000
1500
1000
500
0
4033
1849
1298
2002
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639
699
2003
2004
2005
1H2006
17
Slide 17
CSI1
What are the units?
What are the exits?
Are returns going to be diminished by the level of investment?
Cisco Systems, Inc., 9/26/2006
Cisco’s Activities
Cisco is strategic investor
Market learning, technology, demand driver
Primary focus on gaining market learning
Increasing M&A presence in China
Existing direct, indirect investments
Understanding special features of investing in China
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Trademarks
Subtitle
19
Background
Hardware counterfeiting
g and software p
piracy:
y
challenges for every tech company with global brand
Software piracy tends to be dispersed worldwide, hardware
counterfeiting concentrated in manufacturing centers
Counterfeit/pirated products sold around the world
Consequences
q
Revenue impact
Dissatisfied customers
Increased support cost
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Addressing Counterfeiting
Prevention
Support – identifying counterfeits
g p
labeling
g of components
p
Holographic
Selection of reputable manufacturers
Enforcement
Cisco participates in industry and US-govt encouraged effort to
train local police enforcement on identifying counterfeits
Shenzhen and Guangdong anti-counterfeiting
anti counterfeiting police groups
Generally, good cooperation, including criminal prosecutions
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Standards
Subtitle
22
Standards
Standards important to interoperability
E
Encourages
rapid
id d
development
l
t
Ideally, benefits IP holders and IP users
Issue of great interest to China
Desire to understand how the system works (industry)
Desire to understand how governments use standards to benefit local
industry (government)
China has top-down approach towards standards
Compare with US – mostly bottoms-up
Participate in international standards or focus on domestic-only
national standards?
US has many national standards, in telecom we often bring them to
i t
international
ti
lb
bodies
di tto encourage iinteroperability
t
bilit
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AVS Forum
Driven by negative DVD industry experience
Fledgling industry forced to pay royalties to patent holders
Consortium to create new video compression standard
Participation
P
i i i iincludes
l d major
j iinternational
i
l companies
i (S
(Sony, Philli
Phillips))
Currently focused on domestic markets
Wuxi suing Phillips for antitrust violations in San Diego
Advantages in creating standard
Huge internal market
Dominant manufacturing base
Components
Patent Pool
Standard
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WAPI Standard
Wireless Authentication and Privacy Infrastructure
Wireless security standard
Promoted byy Chinese g
government
China announced in 2003 that WAPI mandatory in China
Encryption algorithm provided only to 11 domestic companies
Foreign companies required to obtain license from domestic
companies
ISO has rejected WAPI
Concerns
License cost
Technology disclosure
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Q and A
26
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