Cisco, Juniper Find New Foe

China's Huawei is taking aim at the big-router market.
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A price-cutting rival threatens to horn in on a corner of the Internet-construction market controlled by

Cisco

(CSCO) - Get Report

and

Juniper

(JNPR) - Get Report

.

Worldwide demand for big routers, the traffic-management gear at Internet junction points, is expected to rise 20% in 2006, says Dell'Oro analyst Shin Umeda. But if that sounds robust, consider that the market expanded 50% last year.

The cooldown threatens to become an even bigger deal for shareholders in Cisco and Juniper as a new challenge looms from China's

Huawei

. The upstart, known best for its joint ventures in other networking businesses with

3Com

(COMS)

and

Nortel

(NT)

, is taking aim at one of the market's few remaining growth areas.

Huawei's entry into the big-router market looks particularly threatening, since the company has deep-pocketed support from the Chinese government. It also lends money to its customers, says Umeda.

Nearly every major phone company or Internet operator uses gear from Juniper or Cisco. For now, Huawei is not a direct threat to Juniper and Cisco's major markets. But the upstart gearmaker has managed to crack the developing markets.

Umeda says Huawei had a big fourth quarter by selling to many second-tier service providers in places like China, Russia, Africa and South America.

The emergence of Huawei seems to have taken some business from Cisco last quarter. Cisco's core router market share fell nearly 2 percentage points from third-quarter levels, to 53.3%. Juniper managed to hold its 36% stake, and Huawei jumped to 8% from 6% the prior quarter and a mere 2% in the year-ago period, according to a Dell'Oro report.

Those modest gains come as Cisco and Juniper struggle to show investors that their growth prospects remain alive and well. Juniper shares, which are off 20% this year in the wake of the company's

fourth-quarter earnings disappointment, rose 19 cents Thursday to $17.93. Cisco, up 15% for 2006 off its

second-quarter blowout, rose 7 cents to $19.74.

China's Inroads
Huawei nibbles at Cisco's lead

Source: Fourth-quarter router market share, Dell'Oro data

Huawei's routers are not yet in the same class as Cisco and Juniper's advanced models. But its cut-rate pricing has a big appeal to some smaller-scale telcos, says Umeda.

"Overall pricing hasn't come down to date, since the markets where Huawei sells are pretty isolated," says Umeda. "But Huawei could increase its market share because the areas where they play are growing faster."

Even so, analysts aren't exactly predicting overnight success for Huawei. As Juniper and especially Cisco have stated emphatically, the key strength in this networking gear is the software that controls all aspects of the network.

Also, as Umeda points out of Huawei, "It's not clear if they have a sustainable business model. Or if they have the service and maintenance force that Cisco and Juniper have."