« BP " the story of the week, Wed., Aug. 9, 2006, 2:59 PM | Main | Crisis in Alaska: "And you, Brutus?", Wed., Aug. 9, 2006, 4:55 PM »

August 9, 2006

The beast in Cisco's midst, Wed., Aug. 9, 2006, 3:16 PM

Readers have been inquiring about the impact on America's biggest tech manufacturing company, Cisco, of competition from China's largest maker of telecom communications equipment. That company is Huawei.

It's hard to argue with the revenue and earnings growth of Huawei, but it is only about one-third the size of Cisco. Having said that, it was, just two years ago, about one-sixth the size, and four years ago, just one-eighth as big. Wow. That's a phenomenal growth, which is shown by this graphic.

Here is the Huawei link to videos. Sometimes it pays to see a picture of the future, just to grasp how fast our world is changing and why we have to drop from our portfolios the stocks of companies that just cannot keep up. Unfortunately, being the Luddite I am, I couldn't get my video to work. :-) But I can imagine it's good stuff.

Getting out of my area of competence on a second front, I'd say that Huawei has been eating the lunch of Avaya (AV) and Nortel (NT) in the past two years, more so than Cisco, which is something a reader alluded to earlier today.

But that's for telecom equipment manufacturing analysts to say.

In any event, Huawei is still a private company, so it can't make the Cara 100. If and when it does go public and lists shares in the U.S., under U.S. GAAP accounting, then I'm sure it would make the list. The company really is a beast " 2004 revenue and earnings growth of +42.1 pct and +62.5 pct Y/Y respectively. In 2005, revenue growth was +47.0 pct.

For a multi-billion dollar sales company, those are numbers anybody can respect. Cisco cannot hope to match that.

At the point that Huawei meets my requirements, it would join the Cara 100, but Cisco would also likely stay on the list as well.

To put this to bed, I still think Cisco is headed lower " I'll add considerably lower -- than today's $19.90. I didn't even like it at $17, close to where it was a day ago.

But I like the company, and there will be an Accumulation price hit in the next couple months that will return superb returns over the 12-24 months that follow that.

Posted by Posted by Bill Cara on August 9, 2006 03:16:45 PM | Category: 45 Info Technology , Cara Global 100 Best Companies

Discourse

Don't be misled. The chance of Huawei being publicly traded in the U.S. slim to none. This is largely due to Huawei's business practices and ethics. Huawei is like Enron and MCI combined and multiplied by twenty. Their earnings are grossly (exponentially) exaggerated and severely unreliable. This would be financial suicide for any investor.

Huawei has allegedly unlawfully copied and misappropriated Cisco's IOS software... and infringed numerous Cisco patents" (effectively - it is alleged - stealing Cisco's router technology, even down to the software bugs, as well as illegally copying its router manuals).

Nortel – Huawei has allegedly copied Nortel's optical gear and naming conventions as well.

While these tactics and business practices are accepted in China and other governments it wouldn't fly in the U.S.

Everything they make is in effect a knockoff sold to China, third world countries without the capital for real infrastructure, and by bought politicians and high ranking officials pushing Huawei for a kickback.

"According to press reports dating back to February and March 2001, Huawei Technologies acted in violation of UN sanctions in constructing a fiber optic air defense network for Iraq around Baghdad. For example, according to a Washington Post article of 1 March 2001, the company was the subject of an official U.S. inquiry to China regarding the extent to which Huawei helped Iraq "improve links between antiaircraft missiles and the radar systems that guide them." This militarily-relevant construction project with a regime that has repeatedly sought to shoot down U.S. pilots patrolling the No-Fly-Zone ultimately led to U.S. and British bombing sorties on February 16, 2001 intended to disrupt or destroy the network built by Huawei. "

http://www.centerforsecuritypolicy.org/index.jsp?section=papers&code=02-C_38

Posted by: ryanhicks [TypeKey Profile Page] at August 9, 2006 8:51 PM [link]

Ryan,

You have made some serious allegations here. What evidence and expertise do you have? I'm not questioning it; I'd just like to know.

I have a lot of tech-savvy readers. Maybe others can comment on Ryan's comment?

Sincerely,

/Bill

Posted by: Bill Cara [TypeKey Profile Page] at August 9, 2006 9:30 PM [link]

For those who don't know, Huawei is a joint venture with 3Com (COMS). 3Com owns 51% of Huawei (look on their website under Corporate Information then partnerships).

Its about the only thing 3Com has done right the past few years as their US business continues to languish. None the less it is a potentially a compelling out of favor investment as few seem to be aware of the JV and ultimate potential of Huawei.

Posted by: johnf [TypeKey Profile Page] at August 10, 2006 12:28 AM [link]

Ryan is dead on. I work in the bay area and Huawei strikes fear among many of my friends here. They are the borg and will encroach on any turf they see fit, regardless of intellectual property.
They will never go public and if they do, expect it to be of a severely restricted nature. Also, CSCO has not been bantering about design wins in China very much. All US based companies are having a very tough time cracking that market. Huawei is cleaning everyone's clock. Beware.

Posted by: arctic_dolphin [TypeKey Profile Page] at August 10, 2006 8:22 AM [link]