Environment

Cisco’s Optimism About Growing Business with Chinese Electric Car Companies

Cisco is "very optimistic" about its growing business with Chinese electric car companies as they expand overseas, according to Ming Wong, Cisco’s Greater China head, in an interview with CNBC. Chinese electric car companies have significantly increased their global expansion in the past year due to heightened domestic competition. Wong stated, “At least as of now, we don’t hear anything from the [EV] customers saying that, ‘Oh, because of this, we need to stop investing, or we need to slow down.’”

Cisco’s Position in the Chinese Market

Located in Dalian, China, Cisco has shown considerable optimism about its expanding business with Chinese electric car companies, particularly as these companies push their boundaries overseas. Ming Wong, Cisco’s Vice President and CEO of Greater China, revealed to CNBC that the EV segment stands as the second-largest for Cisco in the region. Most of Cisco’s revenue in Greater China comes from manufacturing companies, with electric cars forming the largest category within this segment.

Expansion of Chinese EV-Makers

Chinese EV-makers have accelerated their global expansion over the past year as competition within China has intensified. Despite escalating trade tensions, with the U.S. and potentially the European Union increasing tariffs on Chinese electric car imports, this has not necessarily restricted the growth of Chinese automakers. Companies such as BYD are continuing to invest in local factories. Cisco supports this growth by providing networking equipment and software to at least ten electric car customers who are building factories, offices, and research and development centers overseas, according to Wong.

Impact of Trade Tensions

Wong mentioned that despite the escalating trade tensions, Cisco’s EV customers have not indicated any plans to halt or slow down their investments. Instead, there is a positive outlook with ongoing and forward-moving activities. However, Shiv Shivaraman, Asia region leader, and partner and managing director at consulting firm AlixPartners, noted that it is unclear how much spending such business expansions will generate. He suggested that there would likely be significant manufacturing-related and office-related capital expenditures, and that tariffs might accelerate this trend if not increase it.

Challenges in the China Market

Cisco, a U.S.-based tech company, has faced challenges in the China market as both countries increasingly rely on domestic players for national security reasons. In 2019, Cisco CEO Chuck Robbins reported to analysts that the U.S.-China trade war had a significant impact on its business in China. During the quarter ending in late July 2019, Cisco's revenue in China fell by 25% on an annualized basis. Robbins explained that state enterprises were excluding Cisco from bidding opportunities, effectively barring them from participation. Additionally, sales to carriers experienced an even more substantial decline.

Strategic Shifts for Growth

Looking forward, Wong is optimistic that Cisco’s business in China can return to growth this year, although he did not specifically reference the 2019 period. He highlighted that both state-owned and non-state-owned businesses are turning to Cisco as they expand globally, prompting Cisco to shift its focus and portfolio to support these endeavors. Furthermore, Chinese internet companies such as Alibaba, which are expanding globally, also support Cisco’s business. Wong added that Cisco benefits from its ability to connect different graphics processing unit (GPU) providers, a significant advantage in a market where AI giant Nvidia faces restrictions.

Cisco’s Recent Performance

In Cisco’s latest quarterly reporting period, which ended in late April, total revenue fell by 13% year-over-year, with revenue in Asia-Pacific, Japan, and China declining by 12%. Wong pointed out that this recent slump in the Asia-Pacific, Japan, and China revenue is from a high base, and he expects growth to accelerate over the next one or two years. “Asia Pacific is still the highest growth area for Cisco,” Wong emphasized, indicating a positive outlook for the region’s contribution to Cisco’s overall growth.

Conclusion

In conclusion, Cisco’s optimism about its growing business with Chinese electric car companies is backed by the significant expansion of Chinese EV-makers, despite the challenges posed by escalating trade tensions. The strategic shift in focus towards supporting global expansions of Chinese businesses, including internet giants like Alibaba, positions Cisco for potential growth in the region. Despite recent declines in revenue, the high growth potential in Asia-Pacific offers a promising outlook for Cisco’s future in the market.