3Com builds on Chinese expertise

Best known as the developer of Ethernet, the networking protocol at the centre of most current business networks, 3Com has gone through many different evolutions and is indeed a shadow of its former self. Revenues have entered a continued tailspin and many employees have moved on to other network equipment companies.

But now the company has found a strategy to turn itself around: it is turning Chinese. From boasting a market capitalisation of $654m (£330m) in 2005, thanks to a billion-dollar-plus merger with the Chinese network systems supplier H3C, the company has remodelled itself. Once solidly American, now 4,900 of its 6,200 staff are based in four centres across China, headquartered in Shanghai.

The man brought in to mastermind the difficult process of consolidation is 3Com veteran, chief executive Edgar Masri. He has spent many years with the company, including a stint as the head of 3Com in the UK, before leaving in 2000 to work in venture capital. He returned in August last year and, as he told ZDNet UK, he is enjoying coming to terms with the enormous challenges of his new role.

Q: Why did you return to 3Com?
A: Because I believed that 3Com had the capability to strategically re-insert itself as a major player in the enterprise after it had focused on the SMB and tried to claw its way back into the enterprise through the acquisition of H3C [3Com owns 51 percent of the combined company]. Now we are a company with $1.3bn in revenue, profitable and with very good market share of the enterprise.

For us to be a credible player in the market we had to reach profitability, and we did that in the past six months through several key initiatives. Firstly, the joint venture [with H3C], which put a healthy amount of profit into the picture. That could not have done it alone. It took an improvement in gross margin, which had risen by almost five points in the non-joint venture business.

What is the vision?
Our vision is that the world is flat and that this industry, like the oil industry before it, is ripe for globalisation. We are the only company I can think of that is really living up to this globalisation potential. We have an engineering presence in the US and in Europe and we have engineers in China and in India. That is our vision for the enterprise.

People say to me: you have 6,200 employees and 4,900 of them are Chinese or in China; doesn't that mean you are a Chinese company? I say: we are a global company, the first truly global networking company.

Would it be fair to say you are doing what a lot of other companies would like to do but cannot? That is, using another country to establish a true global presence?
You have only seen the tip of what we can achieve. Today you can see that, according to the Financial Times, the Chinese market, in terms of the stock exchange, is bigger than the rest of Asia combined. It cannot continue growing at the same rate, because in two years you would need another planet Earth.

We continue working with the Chinese government to get them to continue to recognise the Chinese nature of our business. We do that through subsidies we get from the Chinese government because of the business we are in. That is a good portion of our profit. We are pleased to be able to say that we had to prove that our business is increasing the intellectual property in China, particularly in software. We believe it is a win/win.

The Chinese government wants to take advantage of the growth that the internet brings. But, while they want to take advantage of that, they also want to control it. How do you deal with that?
As a global company and a US company, we are very respectful of people's privacy. But, at the same time...

...we take a very literal approach when it comes to established policies. I think China is grasping what it means to be a global economic power and is addressing these issues. We would like to be a force that takes this to a positive outcome. So far we are not facing an issue, partly because we are not in the content — we are in the plumbing. So it doesn't come to use. It is the Googles who have to face it.

But I can tell you that, should this come up and be an ethical issue, we are very keen on respect of individuals' privacy [and] human rights and we shall make the right call.

Surely it is already an issue as we see the government wants to control the pipeline?
All I am trying to say is that, perhaps because we are selling to enterprises and not to carriers, we don't face that dilemma where the carriers are telling us to control something. I don't know why we are not seen as a carrier provider, but they are Chinese companies.

So what about the issue of intellectual property? You are quite a big stakeholder and IP must be a substantial part of your assets?
Absolutely. It is on the front page of any presentation from 3Com and I can tell you that not one quarter goes by without us being approached to sell a patent or to have the opportunity to get royalties from a patent. We have one of the richest patent portfolios in the industry and we are increasing it at a very steady pace. Particularly in China. We are very aggressively filing and publishing patents in China. TippingPoint [a company owned by 3Com] is also responsible for the rest of our patents. In the last quarter we had $4m from royalties in patents that we have grown.

But what about respect for intellectual property in China? Is that an issue?
Historically there have been various concerns about that and, while one has to always be cautious and paranoid, China is evolving from being a user and receiver of intellectual property to a producer of intellectual property.

The attitude at government level and enterprise level is shifting from one of lax attitude and less reaction to IP protection to being one of [strength] in enforcing it. When Chinese companies have their own IP, they have something to lose. We can see the self-interest of the Chinese and the Chinese government to respect IP.

When we started the joint venture, we had 1.7 million lines of code. Today we have over 7.5 million. 80 percent is owned by H3C. This is owned by 4,900 Chinese employees, so they want to protect it the same way we want to see any idea protected. So, for example, we are very close to passing Sarbanes-Oxley, in China, in a matter of a few weeks.

How will you develop the rest of the business?
The stated strategy to grow outside of China is to leverage the enterprise business of 3Com, which has always been there, outside of China, but did not have the rich product line that H3C has provided. We have begun by integrating our sales force in the Asia/Pacific Rim outside of China. We are soon to complete the integration in America and soon all the countries will follow. This will achieve phenomenal cost reduction.

People should think of us as an enterprise networking player offering the richest set of solutions but also with a leading-edge perspective on how networks are evolving in the enterprise.