3Com, a provider of voice and data networking equipment, is better positioned to chip away at Cisco Systems' domination in the Chinese market, now that it is assuming control of a profitable Chinese joint venture partner.
In a $822 million deal announced after market close in New York on Tuesday, 3Com said it is buying out Huawei Technologies, its partner in a four-year-old joint venture known as Huawei-3Com.
The two partners embarked on the partnership in November 2003 to manufacture Internet Protocol-based routers and switches, devices that are in great demand these days, growing in tandem with the global boom in Internet and broadband connections.
It was this deal that first transformed 3Com into a player in the Chinese technology market, since Huawei was described at the time by analysts as "the leading Chinese networking company."
Huawei-3Com has been doing well by combining Huawei's local knowledge with 3Com's global marketing network. Headquartered in Hong Kong, with principal operations in the coastal Chinese city of Hangzhou, the joint venture has 4,800 employees and reported $324 million in revenues for the first half of 2006.
This strategy of pooling local manufacturing know-how with a global marketing savvy should serve 3Com well. By taking full control of a localized workforce, 3Com can continue to gain by expanding its local presence in China while trimming costs, using inexpensive local R&D talents for 3Com products marketed outside of China.
David Carini, a veteran industry analyst with Maverick China Research, a Beijing-based research boutique, believes the ending of the joint venture is a product of its success. "It is just that both companies wanted more control of it," he says.
3Com is buying the 49% stake it does not already own from Huawei, giving Huawei-3Com a value of $1.8 billion. The buyout was a result of an unusual bidding process initiated by 3Com a year ago, in which Huawei also participated as a bidder. On Monday, 3Com said its last bid finally was accepted by Huawei.
Huawei's decision not to outbid 3Com for control of the joint venture reflected largely its growing focus on "third-generation" (3G) wireless business despite its emergence in recent years as a serious contender to Cisco's leadership in IP-based networking business in China, Carini said.
Huawei has agreed to a non-compete clause for 18 months following the sale of its stake in Huawei-3Com. Edgar Masri, 3Com's president and CEO, said the joint venture business proved to be "a well-established, stand-alone business with substantial market share in China and strong potential to expand globally." It "is a strategic asset, and we believe that 3Com is well positioned to help it expand its global presence," he said in a statement.
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