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Cisco, Inspur Pen $100M JV under $10B China Investment Plan

On Wednesday, Cisco Systems Inc.CSCO announced a $100 million joint venture (JV) with China's information technology firm, Inspur Group, to sell networking and cloud computing products in the country.

The deal, part of Cisco's plan announced in June to invest up to $10 billion in China, will overlap with Chinese President Xi Jinping's visit to Seattle.

Cisco will invest $49 million - representing 0.5% of the $10 billion target - for a 49% stake in the JV.

U.S.and China

Ever since the U.S. National Security Agency (NSA) contractor, Edward Snowden, claimed that the agency was using U.S. technology products to spy overseas, the country's technology suppliers have been facing a difficult business environment in China.

In retaliation, China increased the use of domestic technology and is drafting more stringent technology security measures for foreign suppliers. Also, the country is increasingly promoting domestic technology suppliers to guard state secrets and data. Thus, foreign tech firms are facing immense pressure in China, the world's biggest Internet market.

In fact, in 2013, Chambers, Cisco's long-serving chairman and then CEO, accepted that security concerns hindered the company's Chinese expansion moves.

This deal comes while China is being accused of frequently hacking into U.S. computer networks and the latter of allegedly spying on the former.

This hasn't, however, stopped U.S. tech companies from exploring China's growth potential. In September last year, Intel Corp. INTC purchased around 20% of Tsinghua Unigroup Ltd. (owner of China's second- and third-largest chip-design firms).

One cannot deny the fact that China is an enormous revenue source for U.S. tech firms.

In fact, according to the Wall Street Journal (WSJ), President Xi is scheduled to meet several tech industry leaders like Apple's AAPL Tim Cook and Microsoft's MSFT Satya Nadella.

Cisco's Incentive

Cisco's current CEO Chuck Robbins wrote in the blog post announcing the venture, "Today, China represents approximately 3% of our business, and being the world's second-largest economy, we see the potential to increase this considerably over time". "Our fiscal Q4 results in China were more encouraging than any quarter over the past two years", he added.

Cisco spokesman Nigel Glennie said that the deal is in essence a "cooperative" agreement rather than a definitive pact. The agreement basically allows both the companies to negotiate a more permanent deal.

Glennie also said that as the entity will be based in China, Inspur Group will have the majority stake.

Last Word

Unlike a couple of decades ago, Cisco and other U.S. tech firms are up against stronger local competitors in China. In fact, according to the WSJ, entering into partnerships with local Chinese players is becoming essential for multinationals trying to make their presence felt in this enormous emerging market.

Cisco currently has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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