Networking equipment vendor 3Com is counting on low labor costs in China to help the company earn better margins on its products and compete against rivals like Cisco Systems., the company's chief executive officer said Wednesday.
"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.
However, the disparity in salaries between China and other countries creates an "arbitrage opportunity" for 3Com, he said.
Arbitrage is the practice of exploiting price differences between two markets. While Cisco and others rely on expensive engineering talent in the U.S. and elsewhere, Masri is betting that cheaper labor costs in China will give 3Com an advantage, allowing it to price its products 30 percent to 40 percent lower than its competition.
3Com's strategy bears a striking resemblance to that employed by Chinese telecommunications equipment maker Huawei Technologies Co., which took advantage of lower costs in China to undercut its competitors and build a growing stake in the worldwide telecommunications market. Once a little-known Chinese company, Huawei is now a major player, having won deals across Asia and in Europe.
The resemblance is not an accident. In March, 3Com acquired the remaining shares in H3C Technologies Co., a joint venture the company set up with Huawei in 2003. As a result of that deal, 3Com acquired the 2,400 R&D engineers employed by H3C in China.
The engineers help give 3Com an advantage over its competitors, Masri said, claiming that rivals' labor costs are up to five times higher than 3Com's.