3Com Eyes Expansion From New "home Market" in China

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3Com Corp. may have lost ground in Western markets in recent years, but meantime it has built a low-cost operations base in China that it hopes will attract more and bigger customers in the developed world.

The network equipment vendor has cut costs and gained market share in China since 2003, when it created a joint venture with Chinese counterpart Huawei Technologies, 3Com CEO Bob Mao said in a phone interview.

3Com later fully acquired the joint venture. The company's China operations accounted for almost half of its revenue in fiscal year 2008, Mao said.

3Com holds 35 percent of the market for networking products in China, about as much as Cisco Systems, he added.

"China actually has become our home market," Mao said.

3Com's acquisition of H3C, its venture with Huawei, brought it an established sales force in China and a low-cost research and development team. Its researchers in China have since rounded out the company's product portfolio, helping 3Com beat out competitors who offer only low- or high-end products, Mao said.

3Com made a net profit of US$92.7 million in the first half of fiscal year 2009, a turnaround from a $54.3 million loss in the same period a year earlier. Its third-quarter results are due out this week.

Sales of equipment for IP video surveillance networks in China have been a boon for 3Com. H3C has provided the hardware linking over 100 networks of surveillance camera systems around China, mostly in cities, Mao said. Its largest contract is for a network connecting up to 50,000 IP cameras in Hangzhou, a coastal city of about 6 million people known for its scenery.

"In total the surveillance market is growing, whether you and I like it or not," Mao said. "But the IP-based part [of the market] is the fastest growing part."

3Com's next goal is to expand outside China. It wants to attract more big firms, which currently account for only half of its customers outside of the country, Mao said.

H3C has undercut competitors with low prices and swift action to win government contracts in China, including for large, state-owned firms and the camera networks, said Milly Xiang, an analyst at IDC.

But H3C's growth in China has largely relied on the staff and brand recognition that Huawei brought to the venture, said Xiang. The sales force driving H3C's success in China might not be as effective in other cultures, she said.

"3Com has not made obvious progress outside China in recent years," she said.

3Com held 1.1 percent of the worldwide market for routers last year, according to IDC research.

3Com plans to stay an independent company after a failed acquisition by Bain Capital Partners two years ago, Mao said.

National security concerns in the U.S. derailed that deal, which would have given Huawei a stake in 3Com.

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