14 DAY TRIAL // As many other IT hardware companies, 3Com is considering moving its production base to Asia, because of lower costs in term of manpower. That work force in Asian countries is much cheaper that in the U.S. or Europe and companies can squeeze a bigger profit margin.
3Com management hopes that by moving the company's production facilities to China, it will increase its chances of successfully competing against rivals like Cisco Systems. "There is one large player who is enjoying 68 percent to 70 percent gross margin on its products, while others are enjoying 40 percent to 45 percent gross margins," Edgar Masri, 3Com's CEO and president, said in an apparent reference to Cisco, as cited by InfoWorld. At the same time, the great disparity in salaries between China (and the other Asian countries) and countries on other continents give 3Com an "arbitrage opportunity."
Arbitrage is the practice of exploiting price differences between two markets and while Cisco and other network equipment manufacturers are relying on extensive and expensive engineering, the 3Com's CEO is betting instead on a price advantage. He is expecting that the lower labor costs in China will give 3Com the possibility to have prices lower with 30 or even 40% than its competition. Not the first company to employ such tactics, 3Com seems to have learned from the Chinese telecommunications hardware maker Huawei Technologies, which took the same path, relying on the cheaper labor in China to undercut its competition. Now Huawei Technologies is a major player in building telecommunication hardware, with deals both in Asia and in Europe.
Huawei Technologies and 3Com set up together a joint venture in China in 2003 and on March 3rd, 3Com acquired all the remaining shares in H3C Technologies from its Chinese partner. As a result of this venture and acquisition, 3Com has already in place a number of 2400 research and development engineers. Claiming that Cisco's and other rivals' production costs are much higher (up to five times higher, in fact), the CEO Masri said that the China-based operation will give his company a decisive advantage.