Short Circuit for Foreign Electronics Vendors; A ‘buy local’ push sparked by security concerns is hurting foreign and helping domestic makers of electronic gear

11.27.2013 15:53

Short Circuit for Foreign Electronics Vendors

A ‘buy local’ push sparked by security concerns is hurting foreign and helping domestic makers of electronic gear

By staff reporter Qin Min

(Beijing) – What’s hot lately in China’s electronics industry is not the latest gadget but procurement guidance from the central government that is starting to sting Western companies. That guidance can be summarized in two words: Buy local. Several sources close to the American electronics giant Cisco Systems Inc. told Caixin that Chinese government agencies and state-owned enterprises (SOEs) have been told to “when possible” turn their backs on electronics equipment offered by overseas firms in favor of domestic company products.Beijing’s concerns on Cisco products increased since June, when the company’s computer network routers were named by American intelligence agency whistleblower Edward Snowden as devices used by U.S. spies to monitor data traffic in China. Cisco denied the charge.

Meanwhile, in another corner of China’s electronics sector, which is by far the largest in the world, the U.S. company Qualcomm Inc. recently reported that it is being targeted for alleged anti-trust violations by the Chinese government’s National Reform and Development Commission, which has not commented. The telecom gear maker thus could join Cisco as an unwelcome vendor in China.

Meanwhile, Chinese electronics manufacturers including Huawei Technologies Co. and ZTE Corp. have ratcheted up marketing campaigns against foreign competitors by introducing products as sophisticated as anything offered elsewhere. Locals are thus winning larger shares of the integrated network solutions market for telecom providers, educational institutions, government agencies and SOEs.

The domestic sector has several rising stars benefiting from the “buy local” push. An 18-year-old company called Shanghai Bell Enterprise Communication Co., for example, recently won sizeable orders from Chinese-German joint venture Shanghai Volkswagen and state-owned China Eastern Airlines.

“In the future, we will spare no effort to expand our (China market) share, gradually rising from small to large scale, in the transportation, electricity and other public utility markets,” said Shanghai Bell President Shi Xiaoming.

Domestic suppliers have dominated foreign rivals to provide most of the telecom network equipment bought by government agencies and SOEs.

To further promote domestic electronics products, the government’s Ministry of Industry and Information Technology this year helped jump-start an industry alliance that includes 16 manufacturers with links in the Chinese electronics industrial chain.

“Today, the entire market for government-enterprise networks in China basically has been localized,” said Ren Jingyang, vice president of local equipment maker Sugon Information Industry Co. “These companies are large and small, and they’ve created integrated solutions functions that are not inferior to those sold by foreign manufacturers.”

So Long Cisco

The localization push has been especially hard on Cisco, which has long counted China as a solid source of revenues for products sold to telecom companies, financial firms, educational institutions and public utilities.

Revenues from sales in mainland China fell 5 percent in the first quarter of fiscal year 2014 from the previous quarter, according to company financial reports. The slowdown is expected to worsen.

Moreover, the company said, number of equipment orders from clients in China fell 18 percent between the fourth and first quarters.

The revelations from Snowden, a former contractor at the U.S. National Security Agency (NSA), have also turned some longtime clients away from Cisco, according to a source close to the company. Several state-owned utilities, for example, have started replacing the American company’s products with equipment made by Chinese rivals. Those making a switch include Shanghai Unicom, Guangdong Mobile and China Telecom, the source said.

At an annual China Telecom vendor auction in July, Cisco did not win a single supply contract for core network routers. The state-run telecom instead awarded contracts to six domestic manufacturers: ZTE, Huawei, Shanghai Bell, Fiberhome, Postcom, and Potevio Guomai.

China Telecom has not written off Cisco. At a follow-up auction in October, the American supplier won a 600 million yuan contract for other types of network equipment, the source said.

But while Cisco used to supply 60 percent of all of China Telecom’s network-related equipment, the source said, its share has been cut and, since the July auction, has fallen to around 30 percent.

Cisco is also at risk of losing business in the country’s financial sector, where its equipment has traditionally dominated computer networks at banks and other institutions.