Image counts, in every way and at every level of purchase decision-making, and Huawei is one who knows that better than most. From the first, it’s been tarred with its association with China at multiple levels; first as a poster child for the “cheap Asian economics” story but also often behind the scenes as a sinister agent of communism. The company’s failure to complete the intellectual property acquisition of 3Leaf was apparently the last straw, and Huawei issued an unprecedented open letter to US officials and in parallel to the US market. “We’re not your enemy” was the sense of the letter, and while there’s no question the message is self-serving and at the economic level inaccurate, it’s true at the political level in my view.
With China, there seems to be a combination of cultural and economic xenophobia that taints our perception of the country. Huawei knows that, and they’re asking us to re-examine our motives. Personally, I think everyone needs to go through that exercise, but whether you do yourself is your issue. Here, I want to focus on the industry import of the move.
Huawei needs to succeed in the US market for sure. US (and other major national) vendors would like them to fail, because as a price leader Huawei is destructive to their margins in the near term and their market share in the longer term. The open letter is a signal that Huawei is going to address the points of resistance to its success, and that it intends to make a more aggressive move in the US. That has major implications/consequences in the market because the US is a proving ground for so many networking innovations.
The first is that Huawei feels that it can compete here, even in a market that’s more driven by trends and coolness and where innovation counts most. Why? Either because Huawei thinks it’s innovative enough to play with the big guys, or because it thinks we’re slipping into commoditization—if you demand polar extremes. I think the truth is that Huawei thinks between the lines here. Networking as a dynamic industry has lost its way for sure; we’re not driving the bus now in services and infrastructure as much as we are driving it in self-indulgence at the consumer level. But we’re still the proving ground. Huawei, I think, understands our fundamental shift of focus toward validating the demand side without any consideration of the supply. They see an opportunity to offer a combination of a little more “transport innovation” and a lot better pricing. They intend to exploit it.
That makes Huawei’s open letter a kind of counterpoint to the recent lightRadio announcement by Alcatel-Lucent and the QFabric announcement by Juniper. Huawei could have offered something in both these areas; they’re engaged in the markets. Other vendors took special steps to create special values. They’re betting those vendors will fail. Historically, they’re probably right because network equipment vendors have failed so tragically at articulating their value propositions that they’d almost just as well not to have bothered to innovate. Our blatant consumerism hasn’t helped; neither the lightRadio nor the QFabric announcements received any truly insightful coverage. Yes, the vendors needed to do better to position, but you can’t reduce all of human history to a 350-word hastily composed “get-me-online-first” blog entry. You can reduce a market to one, or through it. The critical media intermediary between seller and buyer is pretty much gone. Huawei thinks feature validation will fail with the failure to understand the features, and they’re right.
The data center transformation is an IT transformation and not a networking one. Cisco does gain credibility as a driver of the transformation because it fields server products, and we saw that in our strategic credibility survey results. But if we’re going to focus on the data center network, then we have to focus on Cisco’s ability to transform “credibility” into signed orders. Part of that is an ability to pull through networking with its UCS successes, and there I am not seeing the kind of traction Cisco needs to have. The good news for Cisco is that HP is booting it, and that our survey agrees with UBS’ in saying that Oracle is still an also-ran here. The bad news for Cisco is that QFabric could really transform not only Juniper’s position but also the issues driving the market, and that Oracle is certainly not going to finish 2011 in the same strategic data center doldrums it’s started the year in.
If Huawei’s right, then even a success in the data center is going to be less than a full success for Cisco because it will come at the expense of margins. If they’re wrong, it’s looking like somebody other than market leader Cisco will have to prove it.