Cisco Systems chooses localization

In this article we have studied the case of the multinational Cisco Systems Company which have suffered from sanctions. Unlike other companiesinstead of leaving the Russian market Cisco decides to take a proactive stance.

Cisco Systems

Cisco Systems Inc. is an American multinational company specializing in high technology, development and sales of network equipment.  The company is an industry leader currently producing a wide variety of Internet devices: Wi-Fi access points, routers, Ethernet hubs and switches, IP-telephony equipment, wired modems, etc.

Company’s revenue in Russia is 600 mln USD, however despite of such turnover Cisco Systems has only one small plant in the Russian Federation (in Tver), the manufacturer of wireless access points and digital TV set-top boxes. All other products are imported from abroad.

Cisco problems caused by sanctions

After the United States announced its sanctions against Russia, there were associated delays in issuing of the export license by a US department. So Cisco faced difficulties with an equipment supply for the Russian Federation security forces, primarily the Defense Ministry of Russia. Thus, in the 3rd quarter of the 2014 fiscal year exports to Russia have decreased by 29% compared to the previous period. 

If the sanctions war continues, the Russian import substitution policy will probably affect Cisco. This summer the Ministry of Industry and Trade proposed a massive prohibition of imported goods in state procurement so that 80% will be purchased from Russian producers and companies from the Eurasian Customs Union countries. Currently at least 60% of telecommunications networks in Russia are built using Cisco products, with 70-80% of Cisco’s turnover gained in the public sector. Cisco clients are ministries and departments and all major state-owned companies and banks, such as "Gazprom", "Rosneft", Sberbank and VTB. 

In addition, in the event of further sanctions tightening a number of products manufactured by the company may fall under other restrictions. For instance, it can happen if the produced equipment is recognized as "high-tech" or "dual use" products.

The possible ban on the "American" products procurement amid Russian growing patriotic spirits is another risk for Cisco Systems. So, according to some sources, a prohibition on Microsoft products import is now being discussed by authorities. A year ago due to E. Snowden’s publications about NSA backdoors in Cisco equipment, the company suffered significant financial and image losses. Given the fact that the incident is not forgotten, there is a danger that the position of the Cisco brand in Russia may not be very stable.

Сompany’s reaction

It is clear that the company does not want to lose a significant part of the Russian market and, unlike many others, is ready to take a proactive stance. In this regard, Cisco had an old agreement with Dmitry Medvedev, envisaging cooperation in the field of innovative technologies within the "Skolkovo" center. Four years ago, at a meeting with the ex-president, Cisco has pledged to invest 1 billion USD in the development of business in Russia, but the company was not in a hurry to fulfill the promise. In the current situation, Cisco suddenly recalled its obligation and now the company is preparing to establish the equipment manufacturing in Russia.

In order to avoid the sanctions and to fit to the requirements of the Russian Ministry of Industry and Trade, the company had decided to create a new unique local brand, intellectual property rights of which will subsequently be transferred to a Russian factory (EZAN)

Products manufactured in Tver since 2011 (wireless access points and digital TV set-top boxes) are produced under the brand of Cisco, all of the rights belong to the parent company Cisco Systems International BV. According to the Cisco Russia and CIS Business Development Director, Leo Levin, there are very few precedents of transferring the intellectual property rights on the Cisco manufactured equipment to local partners in the world, so this case can be called exceptional. 

In turn, the executive secretary of the State Duma Committee Commission for Science and High Technology Andrew Tchernogorov has already said that if the production of this equipment will be really located in Russia, and intellectual property rights will be transferred to EZAN, the equipment can be considered domestically produced. However, currently we are talking only about IP-telephony, technical equipment for protection and security solutions of the mining industry workers, but if the project is successful the story is likely to be continued.