Cisco Faces Challenges As Chinese Media Urge Switching To Domestic Products For National Security Reasons In Wake Of NSA Surveillance Leaks

Edward Snowden, who leaked the National Security Agency's secret surveillance program and claimed the U.S. used equipment made by Cisco Systems Inc. (NASDAQ:CSCO) to spy on China, could have dealt a blow to the U.S. company's $2 billion in annual sales there -- after Chinese media said Cisco poses a security threat and urged a shift to domestic suppliers.

Earlier this month, Snowden claimed the NSA had monitored mobile and computer networks in China using Cisco routers, prompting Chinese media to denounce the company's products and describe products made by certain U.S. companies as a “terrible security threat."

Chinese daily Sina claimed eight major U.S. companies -- Cisco, International Business Machines Corp. (NYSE:IBM), Google Inc. (NASDAQ: GOOG), Qualcomm Inc. (NASDAQ: QCOM), Intel Corp. (NASDAQ: INTC), Apple Inc. (NASDAQ:APPL), Oracle Corp. (NASDAQ:ORCL) and Microsoft Corp. (MSFT) -- are U.S. government's proxies in the surveillance program. Sina's report also claimed that China's national security is vulnerable to attacks from the U.S.

In an editorial this week, Global Times, a major Chinese newspaper, said that the country should develop its own Internet technology. Chinese media reports said efforts to reduce reliance on U.S. companies will help China ward off security threats and benefit domestic companies at the same time.

Shantou-based Huawei Technologies Co. (SHE:002502) is poised to benefit from any clients seeking alternatives to Cisco's products, according to China Daily, which publishes an English-language newspaper in the U.S.

“Huawei will take this and run with it, to leverage its position with customers in its home turf,” Ray Mota, founder of U.S.-based ACG Research, a networking-equipment industry consulting firm told Bloomberg News.

Cisco has been struggling to retain market share in China amid competition from local players including Shenzhen-based ZTE Corp. (SHE:000063). The San Jose, Calif., company has denied participating in the NSA’s surveillance program and said it sells the same equipment in all countries where it has a presence. A spokesman for Cisco told Bloomberg News that China accounts for less than 5 percent of its revenue and profit.

Cisco’s market share in China fell to 18 percent from 21 percent between 2010 and 2012, while ZTE’s share soared to 29 percent from 18 percent, Infonetics Research Inc. said.