Case Study:Case Study: Cisco in China

Case Study:Case Study:Cisco in China

Sherman ChuSherman ChuDirector, Technology Licensing Group

1

AgendaAgenda

Introduction to CiscoIntroduction to Cisco

China Research & Development Center

Investments

Trademark (counterfeiting)

Standards (AVC, wifi)

© 2006 Cisco Systems, Inc. All rights reserved. Cisco ConfidentialPresentation_ID 2

Introduction to Cisco

Subtitle

3

Innovation EvolutionInnovation Evolution

Started at Entered ReleasedFirst Acquired Started at Stanford

Entered service provider market with high-end router

Released wireless LAN products

Firstacquisition (Crescendo)

qScientific Atlanta

router

19921984 1986 1988 1990 1994 1996 1998 2000 2002 2004 2006

IPO; 192 l

Released C t l t

Shipped first t

19921984 1986 1988 1990 1994 1996 1998 2000 2002 2004 2006

Shipped first IP t l h

Acquired Li kemployees Catalyst

switchrouter telephone Linksys


Cisco WorldwideCisco Worldwide

2006 revenue: $28.5B2006 revenue: $28.5B$3.22B spent on R&D49000 employees in 77 countries

$3.22B spent on R&D49000 employees in 77 countries

San Jose,San Jose,CACASan Jose,San Jose,CACA

ResearchResearchResearchResearchBoxborough, MABoxborough, MABoxborough, MABoxborough, MA

Toronto, OntarioToronto, OntarioToronto, OntarioToronto, OntarioLondon, UKLondon, UKLondon, UKLondon, UK

Milan, ItalyMilan, ItalyMilan, ItalyMilan, Italy

77 countries40% Engineering/IT, 30% Sales, 30% all

th

77 countries40% Engineering/IT, 30% Sales, 30% all

th

Richardson, TXRichardson, TXRichardson, TXRichardson, TX

Research Research Triangle Park, NCTriangle Park, NCResearch Research Triangle Park, NCTriangle Park, NC

Bangalore,Bangalore,IndiaIndiaBangalore,Bangalore,IndiaIndia

Tokyo, JapanTokyo, JapanTokyo, JapanTokyo, Japan

SingaporeSingaporeSingaporeSingapore

SShanghaihanghaiChinaChinaSShanghaihanghaiChinaChina

others> 1,100 issued patents

others> 1,100 issued patents

North SydneyNorth SydneyNorth SydneyNorth Sydney

g pg pg pg p

North Sydney,North Sydney,NSW, AustraliaNSW, AustraliaNorth Sydney,North Sydney,NSW, AustraliaNSW, Australia


Introduction to CiscoIntroduction to Cisco

Network is the focus but increasingly diversifiedNetwork is the focus, but increasingly diversifiedHigh end routers, switchesNetworking and security softwareg yHome networking, entertainment devices

Increasing consumer focusLinksys, Scientific Atlanta


Cisco in ChinaCisco in China

Huge marketHuge market1.3 billion people, GDP growth 7-9%

High technology adoptiong gy pBroadband easier to obtain in many Chinese cities than in USInnovative technology efforts

CERNET tens of millions of users often 90% utilizationCERNET – tens of millions of users, often 90% utilizationIPv6 network funded by government

Still many challengesy gStill immature and emerging (GDP/capita: US$1,728 in 2005)Huge investment to raise China to developed countries level


China Research & Development Center(CRDC)(CRDC)

Subtitle

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CRDC MissionCRDC MissionLocalize existing Cisco products

Design, develop, test and support Cisco products sold worldwide Maintain close relationships

with government and academia


academia

CRDC HistoryCRDC HistorySept ’04 – Cisco announces $32M investment establishing CRDCinvestment establishing CRDC

Jan‘05 – Est. 2nd Shanghai Branch of Cisco Systems (China) Networking Technology Co, LtdLtd

Jan'05 - First local staff hired

Aug'05 – Est Cisco Systems (China) R&DAug 05 – Est. Cisco Systems (China) R&DCo, Ltd

Aug'05 – Move to Shanghai Caohejing Hi-Tech ParkTech Park


CRDC OverviewCRDC Overview

Diversified development activitiesDiversified development activitiesEven division between hardware and software developmentMore design-oriented (versus maintenance)Bottoms-up approach towards selection of development projects

Continued strong growthCo ued s o g g oCurrently 360 employees, doubling each yearHiring rate impossible in US

Wholly owned subsidiaryJV no longer requiredAvoid technology transfer issues


Avoid technology transfer issues

Benefits of China DevelopmentBenefits of China Development

Engineering talent poolg g pChina graduates more engineers than USAttrition rate comparable to Silicon ValleyS SStill low cost relative to US

Create governmental good willLocal government important for operations enforcementLocal government important for operations, enforcementCentral government connections important for sales, policy

Proximity to manufacturingProximity to manufacturingBenefits hardware development


IP Protection Issues in DevelopmentIP Protection Issues in Development

GenerallyGenerallyDistinguish counterfeiting vs. leakage in operationsIP risk not necessarily greater than elsewherey g

ProtectionAddress cultural issues through educationNeed to know accessPartition IP based on sensitivity

IP law uncertaintiesMoral rights can’t be waivedFirst to file regime for patents – favors local companies


First to file regime for patents – favors local companies

Other ChallengesOther Challenges

Management pool developingManagement pool developingExpats higher percentage of managerial team than individual contributor level

Strong executive sponsorship essential

Export ControlUS – may restrict what technology you can bring to ChinaChinese – requires enumeration of what sub will do

Incorporation in China expensiveUp to $60K


Investments

Subtitle

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OverviewOverview

Lots of optimism in Chinap

Innovation, but not yet technology-basedSuccessful ventures based on business model, not core technologyRelationships often important

Significant increase in number of deals across theSignificant increase in number of deals across the board

More funds actively investing in China marketMore funds actively investing in China marketVCs are under pressure to invest, resulting in more but smaller betsCompetition leads to more earlier stage investment


Competition leads to more earlier stage investment

China Venture EnvironmentChina Venture Environment• VC market still very early stage

(4 years of history) 40334500US$ M

(4 years of history)

Data still incomplete and trends difficult to define

4033

3000350040004500

• Fundraising peaked in 05 post successful 2004/2005 exits

• Supply outpace demand1298

699

1849

1000150020002500

pp y p

• Not much visibility on exits

• Increased M&A activities

639 699

0500

1000

2002 2003 2004 2005 1H20062002 2003 2004 2005 1H2006


CSI1

CSI1 What are the units?

What are the exits?

Are returns going to be diminished by the level of investment?Cisco Systems, Inc., 9/26/2006

Cisco’s ActivitiesCisco’s Activities

Cisco is strategic investorCisco is strategic investorMarket learning, technology, demand driver

Primary focus on gaining market learningPrimary focus on gaining market learningIncreasing M&A presence in ChinaExisting direct, indirect investmentsUnderstanding special features of investing in China


Trademarks

Subtitle

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BackgroundBackground

Hardware counterfeiting and software piracy: g p ychallenges for every tech company with global brand

Software piracy tends to be dispersed worldwide, hardware counterfeiting concentrated in manufacturing centerscounterfeiting concentrated in manufacturing centersCounterfeit/pirated products sold around the world

ConsequencesqRevenue impactDissatisfied customersIncreased support cost


Addressing CounterfeitingAddressing Counterfeiting

PreventionPreventionSupport – identifying counterfeitsHolographic labeling of componentsg p g pSelection of reputable manufacturers

EnforcementCisco participates in industry and US-govt encouraged effort to train local police enforcement on identifying counterfeitsShenzhen and Guangdong anti-counterfeiting police groupsShenzhen and Guangdong anti counterfeiting police groupsGenerally, good cooperation, including criminal prosecutions


Standards

Subtitle

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StandardsStandardsStandards important to interoperability

E id d l tEncourages rapid developmentIdeally, benefits IP holders and IP users

Issue of great interest to ChinaDesire to understand how the system works (industry)Desire to understand how governments use standards to benefit local industry (government)

China has top-down approach towards standardsCompare with US – mostly bottoms-up

Participate in international standards or focus on domestic-only national standards?

US has many national standards, in telecom we often bring them to i t ti l b di t i t bilit


international bodies to encourage interoperability

AVS ForumAVS Forum

Driven by negative DVD industry experienceDriven by negative DVD industry experienceFledgling industry forced to pay royalties to patent holders

Consortium to create new video compression standardP i i i i l d j i i l i (S Philli )Participation includes major international companies (Sony, Phillips)Currently focused on domestic marketsWuxi suing Phillips for antitrust violations in San Diego

Advantages in creating standardHuge internal marketDominant manufacturing base

ComponentsPatent PoolStandard


Standard

WAPI StandardWAPI Standard

Wireless Authentication and Privacy InfrastructureWireless Authentication and Privacy InfrastructureWireless security standard

Promoted by Chinese governmenty gChina announced in 2003 that WAPI mandatory in ChinaEncryption algorithm provided only to 11 domestic companiesForeign companies required to obtain license from domesticForeign companies required to obtain license from domestic companiesISO has rejected WAPI

ConcernsLicense costTechnology disclosure


Technology disclosure

Q and A

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Case Study:Case Study: Cisco in China

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