case study:case study: cisco in china
TRANSCRIPT
AgendaAgenda
Introduction to CiscoIntroduction to Cisco
China Research & Development Center
Investments
Trademark (counterfeiting)
Standards (AVC, wifi)
© 2006 Cisco Systems, Inc. All rights reserved. Cisco ConfidentialPresentation_ID 2
Innovation EvolutionInnovation Evolution
Started at Entered ReleasedFirst Acquired Started at Stanford
Entered service provider market with high-end router
Released wireless LAN products
Firstacquisition (Crescendo)
qScientific Atlanta
router
19921984 1986 1988 1990 1994 1996 1998 2000 2002 2004 2006
IPO; 192 l
Released C t l t
Shipped first t
19921984 1986 1988 1990 1994 1996 1998 2000 2002 2004 2006
Shipped first IP t l h
Acquired Li kemployees Catalyst
switchrouter telephone Linksys
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Cisco WorldwideCisco Worldwide
2006 revenue: $28.5B2006 revenue: $28.5B$3.22B spent on R&D49000 employees in 77 countries
$3.22B spent on R&D49000 employees in 77 countries
San Jose,San Jose,CACASan Jose,San Jose,CACA
ResearchResearchResearchResearchBoxborough, MABoxborough, MABoxborough, MABoxborough, MA
Toronto, OntarioToronto, OntarioToronto, OntarioToronto, OntarioLondon, UKLondon, UKLondon, UKLondon, UK
Milan, ItalyMilan, ItalyMilan, ItalyMilan, Italy
77 countries40% Engineering/IT, 30% Sales, 30% all
th
77 countries40% Engineering/IT, 30% Sales, 30% all
th
Richardson, TXRichardson, TXRichardson, TXRichardson, TX
Research Research Triangle Park, NCTriangle Park, NCResearch Research Triangle Park, NCTriangle Park, NC
Bangalore,Bangalore,IndiaIndiaBangalore,Bangalore,IndiaIndia
Tokyo, JapanTokyo, JapanTokyo, JapanTokyo, Japan
SingaporeSingaporeSingaporeSingapore
SShanghaihanghaiChinaChinaSShanghaihanghaiChinaChina
others> 1,100 issued patents
others> 1,100 issued patents
North SydneyNorth SydneyNorth SydneyNorth Sydney
g pg pg pg p
North Sydney,North Sydney,NSW, AustraliaNSW, AustraliaNorth Sydney,North Sydney,NSW, AustraliaNSW, Australia
© 2006 Cisco Systems, Inc. All rights reserved. Cisco ConfidentialPresentation_ID 5
Introduction to CiscoIntroduction to Cisco
Network is the focus but increasingly diversifiedNetwork is the focus, but increasingly diversifiedHigh end routers, switchesNetworking and security softwareg yHome networking, entertainment devices
Increasing consumer focusLinksys, Scientific Atlanta
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Cisco in ChinaCisco in China
Huge marketHuge market1.3 billion people, GDP growth 7-9%
High technology adoptiong gy pBroadband easier to obtain in many Chinese cities than in USInnovative technology efforts
CERNET tens of millions of users often 90% utilizationCERNET – tens of millions of users, often 90% utilizationIPv6 network funded by government
Still many challengesy gStill immature and emerging (GDP/capita: US$1,728 in 2005)Huge investment to raise China to developed countries level
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CRDC MissionCRDC MissionLocalize existing Cisco products
Design, develop, test and support Cisco products sold worldwide Maintain close relationships
with government and academia
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academia
CRDC HistoryCRDC HistorySept ’04 – Cisco announces $32M investment establishing CRDCinvestment establishing CRDC
Jan‘05 – Est. 2nd Shanghai Branch of Cisco Systems (China) Networking Technology Co, LtdLtd
Jan'05 - First local staff hired
Aug'05 – Est Cisco Systems (China) R&DAug 05 – Est. Cisco Systems (China) R&DCo, Ltd
Aug'05 – Move to Shanghai Caohejing Hi-Tech ParkTech Park
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CRDC OverviewCRDC Overview
Diversified development activitiesDiversified development activitiesEven division between hardware and software developmentMore design-oriented (versus maintenance)Bottoms-up approach towards selection of development projects
Continued strong growthCo ued s o g g oCurrently 360 employees, doubling each yearHiring rate impossible in US
Wholly owned subsidiaryJV no longer requiredAvoid technology transfer issues
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Avoid technology transfer issues
Benefits of China DevelopmentBenefits of China Development
Engineering talent poolg g pChina graduates more engineers than USAttrition rate comparable to Silicon ValleyS SStill low cost relative to US
Create governmental good willLocal government important for operations enforcementLocal government important for operations, enforcementCentral government connections important for sales, policy
Proximity to manufacturingProximity to manufacturingBenefits hardware development
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IP Protection Issues in DevelopmentIP Protection Issues in Development
GenerallyGenerallyDistinguish counterfeiting vs. leakage in operationsIP risk not necessarily greater than elsewherey g
ProtectionAddress cultural issues through educationNeed to know accessPartition IP based on sensitivity
IP law uncertaintiesMoral rights can’t be waivedFirst to file regime for patents – favors local companies
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First to file regime for patents – favors local companies
Other ChallengesOther Challenges
Management pool developingManagement pool developingExpats higher percentage of managerial team than individual contributor level
Strong executive sponsorship essential
Export ControlUS – may restrict what technology you can bring to ChinaChinese – requires enumeration of what sub will do
Incorporation in China expensiveUp to $60K
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OverviewOverview
Lots of optimism in Chinap
Innovation, but not yet technology-basedSuccessful ventures based on business model, not core technologyRelationships often important
Significant increase in number of deals across theSignificant increase in number of deals across the board
More funds actively investing in China marketMore funds actively investing in China marketVCs are under pressure to invest, resulting in more but smaller betsCompetition leads to more earlier stage investment
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Competition leads to more earlier stage investment
China Venture EnvironmentChina Venture Environment• VC market still very early stage
(4 years of history) 40334500US$ M
(4 years of history)
Data still incomplete and trends difficult to define
4033
3000350040004500
• Fundraising peaked in 05 post successful 2004/2005 exits
• Supply outpace demand1298
699
1849
1000150020002500
pp y p
• Not much visibility on exits
• Increased M&A activities
639 699
0500
1000
2002 2003 2004 2005 1H20062002 2003 2004 2005 1H2006
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CSI1
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 ActivitiesCisco’s Activities
Cisco is strategic investorCisco is strategic investorMarket learning, technology, demand driver
Primary focus on gaining market learningPrimary focus on gaining market learningIncreasing M&A presence in ChinaExisting direct, indirect investmentsUnderstanding special features of investing in China
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BackgroundBackground
Hardware counterfeiting and software piracy: g p ychallenges for every tech company with global brand
Software piracy tends to be dispersed worldwide, hardware counterfeiting concentrated in manufacturing centerscounterfeiting concentrated in manufacturing centersCounterfeit/pirated products sold around the world
ConsequencesqRevenue impactDissatisfied customersIncreased support cost
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Addressing CounterfeitingAddressing Counterfeiting
PreventionPreventionSupport – identifying counterfeitsHolographic labeling of componentsg p g pSelection of reputable manufacturers
EnforcementCisco participates in industry and US-govt encouraged effort to train local police enforcement on identifying counterfeitsShenzhen and Guangdong anti-counterfeiting police groupsShenzhen and Guangdong anti counterfeiting police groupsGenerally, good cooperation, including criminal prosecutions
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StandardsStandardsStandards important to interoperability
E id d l tEncourages rapid developmentIdeally, benefits IP holders and IP users
Issue of great interest to ChinaDesire 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 standardsCompare 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 ti l b di t i t bilit
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international bodies to encourage interoperability
AVS ForumAVS Forum
Driven by negative DVD industry experienceDriven by negative DVD industry experienceFledgling industry forced to pay royalties to patent holders
Consortium to create new video compression standardP i i i i l d j i i l i (S Philli )Participation includes major international companies (Sony, Phillips)Currently focused on domestic marketsWuxi suing Phillips for antitrust violations in San Diego
Advantages in creating standardHuge internal marketDominant manufacturing base
ComponentsPatent PoolStandard
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Standard
WAPI StandardWAPI Standard
Wireless Authentication and Privacy InfrastructureWireless Authentication and Privacy InfrastructureWireless security standard
Promoted by Chinese governmenty gChina announced in 2003 that WAPI mandatory in ChinaEncryption algorithm provided only to 11 domestic companiesForeign companies required to obtain license from domesticForeign companies required to obtain license from domestic companiesISO has rejected WAPI
ConcernsLicense costTechnology disclosure
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Technology disclosure