"Prism" project leads to severe challenges for Cisco's business in China

At present, Cisco's annual sales in the Chinese market are as high as $2billion, but after the exposure of the U.S. government's prism project, Chinese media have said that the use of Cisco's network equipment may pose a security threat, and it is recommended to use the equipment of domestic manufacturers.

Edward Snowden, a former project contractor of the National Security Agency (hereinafter referred to as "NSA"), revealed earlier this month that NSA and the Federal Bureau of investigation (hereinafter referred to as "FBI") are directly using the central servers of nine top US internet companies to extract audio, video, photos, e-mail, documents and connection logs through a confidential project code named "prism", To help analysts track the movements and contacts of individual users.

Although Cisco said it did not participate in the "prism" project, Chinese media still called for restrictions on Cisco products. "The United States can launch cyber attacks against China almost at any time," the Global Times said in an editorial this week. China Daily quoted an anonymous person as saying that some U.S. companies, including Cisco, may pose a "serious security threat" to China.

Ray Mota, founder of ACG research, a network equipment industry consulting company, said that Huawei would benefit from it. He said, "Huawei will take over this part of business by virtue of its position in the Chinese market."

In the Chinese market, Cisco is already facing severe challenges from local manufacturers. After the exposure of the "prism" project, the reports of Chinese media put Cisco under greater pressure. Last year, China's switch and router market reached US $2.58 billion, an increase of 20% over 2010, but Cisco's market share fell from 21% to 18%.

Although Huawei's market share has also declined, its market share in 2012 is still more than twice that of Cisco. In the past two years, ZTE's market share has increased from 18% to 29%.

US government ban

In recent years, the U.S. government has banned domestic mobile operators from using Chinese manufacturers' network equipment out of so-called national security concerns. President Barack Obama also signed a decree in March this year, stipulating that federal agencies should not purchase it systems of Chinese companies without the approval of the FBI.

At the same time, this has also adversely affected Cisco's business in China. Cisco CEO John Chambers said in a conference call on May 15, "Cisco will continue to face challenges in China, but we believe it will make progress, although the challenges in China will continue for several quarters."

Nevertheless, according to Cisco spokesman John Earnhardt, less than 5% of Cisco's revenue and profits come from the Chinese market. Ianhard also stressed that Cisco was not involved in the prism project.

Chinese netizens are not monitored

Ianhard said in an e-mail statement, "Cisco has not monitored China or citizens or government agencies of any country in the world. The equipment we sell worldwide is the same, whether it is China or the United States, and there is no special customization of the equipment."

According to reports, Snowden, the whistleblower of the prism project, also said that since 2009, the United States has repeatedly invaded computer systems in mainland China and Hong Kong. And eavesdropped on the communication records of Chinese mobile operators, stealing millions of text messages.

Nevertheless, Motta, the founder of ACG research, said that Cisco has been doing business in China for a long time, and the negative impact of the "prism" project may not last long. Cisco has been working closely with the Chinese government since the 1990s to deploy Internet infrastructure for China and help technicians conduct equipment use training.

China Mobile

Michael Howard, co-founder of infonetics research, a research company, said that Cisco's supply channels for operators such as China Mobile and China Unicom would not disappear completely because these operators would not risk giving up using Cisco's innovative products.

Cisco recently announced that it will upgrade its largest router, crs-x, with a processing capacity 10 times that of 10 years ago. Howard said, "Cisco's equipment is usually used in China's backbone network, and China's large operators do not want to use only Huawei and ZTE products."

Huawei spokesperson Scott Sykes and ZTE spokesperson David Dai declined to comment on Cisco's operations in China, but Sykes said in an email: "overall, cyber attacks are a challenge facing the world and need to be solved jointly by the government and the industry. The government, operators and manufacturers should assume their respective responsibilities and improve the standards of network security protection."

Huawei ZTE benefits

Ricky Lai, an analyst at Guotai Junan International Holdings Ltd in Hong Kong, believes that Cisco will become the victim of the "prism" project, while ZTE will become the beneficiary, and its network equipment market share will increase. Ricky Lai did not give the specific benefit degree of ZTE, but gave ZTE a "buy" rating.

In an editorial on June 20, the Global Times said, "this incident means that it will take a long time for us to trust Cisco. In the future, Chinese government departments may strengthen the operation supervision of Cisco in China. Moreover, it is not surprising if Cisco's market share in China is quickly eroded by Huawei and ZTE."