Huawei Can Put Pressure on Cisco’s Router Market Share and Margins

by Trefis Team
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Cisco (NASDAQ:CSCO) competes primarily with Juniper (NYSE:JNPR) in the router and network switches business, but is increasingly feeling the heat from Huawei, a fast growing Chinese telecom equipment manufacturer.

Huawei has been expanding rapidly in the international routers market lately, and though not a prime competitor to Cisco, its growing presence does pose a potential threat to Cisco’s long-term dominance in routers.

A recent 2010 ranking for the World’s Most Innovative Companies by FastCompany.com listed Huawei at number 5, ahead of Cisco which was number 17, and indicative of Huawei’s R&D efforts and ambitions in the router business.

Below we explain how Huawei’s revenues and profits have been increasing, why Huawei’s low-priced equipment can be a challenge to Cisco’s market share and margins, and how Cisco’s stock may ultimately be impacted by Huawei.

Huawei’s Revenue, Profit and Share are Soaring

Huawei’s revenues rose by 19% to $28 billion in 2009 and the company saw a surge in its net profits from about $1 billion in 2008 to about $2.7 billion in 2009.  The company anticipates a 20% increase in revenues in 2010.

In addition to competing with Cisco in the router market, Huawei also competes with Ericsson, Nokia (NYSE:NOK) and Siemens (NYSE:SI) within the broader telecom and networking equipment market.  Huawei is currently the second largest telecom equipment supplier globally with a share of 20% as of Q3 2009, an increase from the 11% share in Q4 2008.

Huawei’s Low Price and Quality Product May Pose Threat to Cisco’s Routers

Within the networking market, Cisco primarily plays in the higher margin router and network switches business.  Huawei is making headway into the router business and has increased its global core router market share from nearly 11% in 2008 to about 12% in 2009.

Huawei’s lower priced yet quality equipment can pose a significant threat to Cisco in the future. Huawei is directing its R&D efforts to manufacture quality equipment at a lower price, and strengthen its foothold in the international markets including North America.

The effect of Huwaei’s efforts can be twofold on Cisco:

1. Cisco can lose some market share due to competition from Huawei.

2. Cisco’s margins can decline if the company resolves to a more competitive pricing to combat competition from low cost manufacturers like Huawei.

Below you can see how Cisco’s stock can be affected if its core router market share and router gross margin were to decline.

For additional analysis and forecasts, here is our complete model for Cisco’s stock.

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