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Cisco expected to announce Chinese partner today

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Just another brickmaker in the Great Firewall?Photograph by Justin Sullivan — Getty Images

Cisco Systems Inc.’s (CSCO) pledge to invest $10 billion in China over the next few years “to promote the development of a high-tech industry” appeared desperate to some analysts when it was announced this summer.

Cisco’s business had been reeling in China since 2013, when Edward Snowden’s revelations linked its equipment to the National Security Agency’s spying operations.

Now the company is reportedly making another bid to turnaround its struggling China business.

Cisco is planning a partnership with a state-controlled server maker in China called Inspur, the The Wall Street Journal said Wednesday. The paper said the agreement could be announced today during China President Xi Jinping’s meetings with American and Chinese tech companies in Seattle.

It’s quite the reversal for the company that’s widely acknowledged as building the Chinese Internet, including supplying equipment ultimately used for the censorship apparatus known as the Great Firewall.

There are two main takeaways. The first is that Cisco has lost its position of power in China. New government regulations have favored domestic companies and caused Cisco’s annual revenues in China to drop by a quarter since 2012, according to estimates.

“Like other U.S. technology companies, we’ve acknowledged that Cisco has faced geopolitical challenges in recent years,” said Cisco spokesman Nigel Glennie in an email. “However we’ve always taken the long view. China currently represents 3% of our global business, and we remain optimistic about what that can become.” The WSJ said the two sides are discussing Inspur re-selling Cisco’s equipment, as well as developing products together.

The second is that the agreement will likely involve some level of technology transfer. Cisco is unlikely to discuss the specifics and spokesman Glennie declined to comment. However, the Chinese government has pushed Cisco in the past to license its IP to Chinese companies, according to the report “China’s Drive for Indigenous Innovation” by Jim McGregor in 2010. When a draft of China’s anti-monopoly law was being prepared in 2004, McGregor wrote, an agency surveyed so-called abuses of intellectual property by multinational companies and identified Cisco as not sharing its IP with Chinese companies.

U.S. officials said they have advised U.S. companies to push back against requests for technology transfers, and the Chinese don’t publicly acknowledge the requirements. But consultants and others in China say despite the protestations, the practice of transferring technology is a part of doing business in mainland China—now even more following drafts of new Chinese rules that prevent foreign technology being used in certain industries. China promised to refrain from requiring technology transfers when it joined the World Trade Organization in 2001 and has failed to deliver, according to a report last week from the Information Technology and Innovation Foundation in Washington, D.C.