Case Study - 3Com-Huawei, The Peaceful Rise of the Chinese Networking Industry Macro Industry Context: In early 2002 the Communications and Networking Industry was beginning to recover from the Internet bubble collapse. But with the downturn, several things had changed:

- LAN Switching and Routing Markets were maturing o The US and Europe market growth slowed down to low single digits

as Enterprises and Service Providers were trying to absorb the excess capacity created by the CAPEX overspend during the bubble

o LAN Switching and Routing technologies began to mature and become demystified as technology standards were established

o Emerging markets remained a bright spot for the above product categories - Growth rates in these markets were being driven by infrastructure build outs – China emerged as the fastest growing market – 35% CAGR

- Return to Economic Sanity o IT budgets were no longer unlimited - CIO’s had to justify a

financial return on their IT budgets. Gone were the days of Y2K when companies spent millions of dollars on IT infrastructure and applications

o IT Outsourcing - US and European companies began to offshore IT functions and development to locations like India and China to reduce their costs

o Equipment vendors started focusing on cost reduction to drive growth in earnings versus relying solely on top line growth

- Shift in Basis of Competitive Advantage o Incumbents began gaining advantage based on scale and account

control versus startups that focused on technological or business model innovation

CLEC’s and DLEC’s disappeared and large PTT’s and ILEC’s were the survivors as the industry attempted to squeeze out excess capacity

Massive shakeout in the equipment vendor space as technology startup’s went under or were swallowed by large Incumbent vendors like CSCO etc

Attackers like Extreme and Foundry were relegated to niche technology providers as they saw their market capitalizations plummet

o Low cost competitors began emerging in the networking vendor space – Huawei, ZTE, Dlink etc

The 3Com Opportunity: 3Com was going through a major transformation as it attempted focus all its resources on building a successful Enterprise Networking Business. The company had undergone a careful portfolio pruning and restructuring process between 2000 and 2002 including:

- Spin-off of Palm as a separate company focused on the PDA business - Divestiture of Carrier Networking Business to UTStarcom - Wind-down of the Home Networking Business - Harvesting the client card business (aka NICs, or Network Interface

Cards)

3Com management saw the very same trends in the industry and decided to embark on a strategy to embrace these trends to take advantage of the potential market opportunity implied. Management established several strategic objectives:

- Accelerate penetration of high-growth Asian markets (esp. China) - Establish a low cost R&D platform for a large segment of the Enterprise

Networking Market – LAN Switching and Routing - Broaden the enterprise product portfolio to be able to serve as a “full

line” vendor to chosen markets As management began embarking on this strategy it quickly realized that the timely execution of such a strategy would require a partnering approach vs an organic build from the ground approach. The criteria management used to evaluate and select a partner were as follows:

- Established vendor with leading position in the China market - A Vendor who shared a common vision with 3Com around the key market

trends and opportunities - A partner who had global growth aspirations but understood the

importance of Brand and Distribution channels that 3Com could bring to the table

- A vendor with complementary products Huawei – A Promising Partner: Based on exploratory discussions with various potential partners, the 3Com team quickly narrowed down its choice to Huawei Technologies Ltd. Huawei was a unique enterprise in China. It had quickly established a business in carrier networking, and had the distinction of being employee-owned at a time when many of the leading Chinese companies were at least partially state-owned. Huawei had also established a segment of its business focused on enterprise networking. This segment was relatively small, but was expected to grow quickly. The key to its growth would be the presence of an international sales force and channel. Huawei believed that building this sales force and channel internally would be expensive and time consuming. As 3Com and Huawei entered into business discussions, they were both encouraged by the fit. 3Com believed that Huawei could provide a meaningful presence in the fast-growing China market, could offer a low-cost source of R&D, and could supplement 3Com’s existing product portfolio. Huawei believed that 3Com could provide an international go-to-market engine along with a respected brand. Discussion Topics – the Transaction: As the team started to structure the partnership it had to wrestle with two important questions:

- What should be the appropriate structure for the partnership at the outset (OEM; Joint Venture; M&A etc)?

- How should the partnership be structured to preserve future flexibility– one two and three years from formation

Discussion Topics – Reaching the End State: The JV operated for a couple years with mixed success - the JV was producing very impressive growth in China, but international sales of its products were ramping slower than management had hoped In November, 2006 3Com acquired a majority stake in the JV per it’s original intent.

• How should the governance processes change (if at all) to reflect the business results that were being achieved?

• Joint Ventures don’t tend to persist as long-term entities. What are the range of potential outcomes for this joint venture?

• Should 3Com consider acquiring 100% of the JV as a longer term strategic move ?

Suggested Readings 1. The China Price – BusinessWeek, December 2004 2. China – Golf, Sushi and Cheap Engineers, BusinessWeek, March 2004 3. Huawei, More than a Local Hero – BusinessWeek, October 2004 4. 3Com Form 8K – November 2003 5. 3Com Form 8K – July 2004 6. Huawei-3Com Sees 80% Growth – Shenzen Daily, July 2005 Anik Bose Bio Anik Bose currently serves as Special Consultant to the 3Com CEO and 3Com Board Of Directors. Prior to this role Anik served as the Vice President of Corporate Business Development at 3Com Corporation. In this role, Mr. Bose was responsible for long-term company strategy formulation, as well as executing on several elements of 3Com strategy including: a. Mergers, Acquisitions and Divestiture transactions b. Managing 3Com's Joint Venture with Huawei c. Managing 3Com's $250MM Venture Fund activities d. Establishing key strategic alliances including licensing, OEM and broad go to market relationships While at 3Com, Mr Bose had led several elements of 3Com's strategic transformation including the expansion of 3Com's L3 Switching and Routing Product Portfolio, acquiring a emerging position in the Network Security sector as well as strengthening 3Com's VoIP platform capabilities. Specifically Mr Bose had spearheaded several Business development initiatives including: - Leading the structuring of two key transactions - Data Networking Joint Venture in China with Huawei Technologies as well as the acquisition of Tipping Point (leading Intrusion Prevention Security Company) - Spinning out non core assets including the divestiture of 3Com's Carrier business to UTStarcom and spinning out a startup from 3Com in the IP Storage sector(Intransa) - Establishing several strategic relationships with large Global Partners like Siemens, AT&T and British Telcom Mr. Bose has over 20 years of experience working for and consulting to the high tech industry in various business development and strategic planning roles. Companies Mr. Bose has worked for include Cypress Semiconductor, LSI Logic, AMD and Hewlett Packard. Prior to joining 3Com, Anik Bose was a Partner at Deloitte Consulting in their High Tech Strategy Practice in San Francisco. Mr. Bose received his Bachelor of Arts degree in Economics from the Hindu College University of New Delhi in 1983 and his MBA from Boston College in 1986.

DECEMBER 6, 2004 SPECIAL REPORT -- THE CHINA PRICE

"The China Price" They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable -- from furniture to networking gear. The result: A massive shift in economic power is under way

From the rich walnut paneling and carved arches to the molded Italian Renaissance patterns on the ceiling, the circa 1925 council chamber room of Akron's municipal hall evokes a time when the America's manufacturing heartland was at the peak of its power. But when the U.S.-China Economic & Security Review Commission, a congressionally appointed panel, convened there on Sept. 23, it was not to discuss power but decline. One after another, economists, union officials, and small manufacturers took the microphone to describe the devastation Chinese competitors are inflicting on U.S. industries, from kitchenware and car tires to electronic circuit boards. These aren't stories of mundane sunset industries equipped with antiquated technology. David W. Johnson, CEO of 92-year-old Summitville Tiles Inc. in Summitville, Ohio, described how imports forced him to shut a state-of-the-art, $120 million tilemaking plant four football fields long, sending Summitville into Chapter 11 bankruptcy protection. Now, a tenfold surge in high-quality Chinese imports at "below our manufacturing costs" threatens to polish Summitville off. Makers of precision machine tools and plastic molds -- essential supports of America's industrial architecture -- told how their business has shrunk as home-appliance makers have shifted manufacturing from Ohio to China. Despite buying the best computer-controlled gear, Douglas S. Bartlett reported that at his Cary (Ill.)-based Bartlett Manufacturing Co., a maker of high-end circuit boards for aerospace and automotive customers, sales are half the late-1990s level and the workforce is one-third smaller. He waved a board Bartlett makes for a U.S. Navy submarine-detection device. His buyer says he can get the same board overseas for 40% less. "From experience I can only assume this is the Chinese price," Bartlett said. "We have faced competition in the past. What is dramatically different about China is that they are about half the price."

Where the Jobs Went "The China price." They are the three scariest words in U.S. industry. In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials. Makers of apparel, footware, electric appliances, and plastics products, which have been shutting U.S. factories for decades, know well the futility of trying to match the China price. It has been a big factor in the loss of 2.7 million manufacturing jobs since 2000. Meanwhile, America's deficit with China keeps soaring to new records. It is likely to pass $150 billion this year. Now, manufacturers and workers who never thought they had to worry about the China price are confronting the new math of the mainland. These companies had once held their own against imports mostly because their businesses required advanced skills, heavy investment, and proximity to customers. Many of these companies are in the small-to-midsize sector, which makes up 37% of U.S. manufacturing. The China price is even being felt in high tech. Chinese exports of advanced networking gear, still at a low level, are already affecting prices. And there's talk by some that China could eventually become a major car exporter. Multinationals have accelerated the mainland's industrialization by shifting production there, and midsize companies that can are following suit. The alternative is to stay at home and fight -- and probably lose. Ohio State University business professor Oded Shenkar, author of the new book The Chinese Century, hears many war stories from local companies. He gives it to them straight: "If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won't work." Chinese producers can make the same adjustments. "You need an entirely new business model to compete."

America has survived import waves before, from Japan, South Korea, and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That's now open to debate. "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech," says Harvard University economist Richard B. Freeman. "Combine the two, and America has a problem." How much of a problem? That's in fierce dispute. On one side, the benefits of the relationship with China are enormous. After years of struggling to crack the mainland market, U.S. multinationals from General Motors (GM ) to Procter & Gamble (PG ) and Motorola (MOT ) are finally reaping rich profits. They're making cell phones, shampoo, autos, and PCs in China and selling them to its middle class of some 100 million people, a group that should more than double in size by 2010. "Our commercial success in China is important to our competitiveness worldwide," says Motorola China Chairman Gene Delaney. By outsourcing components and hardware from China, U.S. companies have sharply boosted their return on capital. China's trade barriers continue to come down, part of its agreement to enter the World Trade Organization in 2001. Big new opportunities will emerge for U.S. insurers, banks, and retailers. China's surging demand for raw materials and commodities has driven prices up worldwide, creating a windfall for U.S. steelmakers, miners, and lumber companies. The cheap cost of Chinese goods has kept inflation low in the U.S. and fueled a consumer boom that helped America weather a recession and kept global growth on track. But there's a huge cost to the China relationship, too. Foremost is the question of America's huge trade deficit, of which China is the largest and fastest-growing part. While U.S. consumers binge on Chinese-made goods, the U.S. balance-of-payments deficit is nearing a record 6% of gross domestic product. The trade shortfall -- coupled with the U.S. budget deficit -- is driving the dollar ever downward, raising fears that cracks will appear in the global financial system. And by keeping its currency pegged to the greenback at a level analysts see as undervalued, China amplifies the problem. America's Eroding Base The deficit with China will keep widening under most projections. That raises the issue: Will America's industrial base erode to a dangerous level? So far the hardest-hit industries have been those that were destined to migrate to low-cost nations anyway. But China is ramping up rapidly in more advanced industries where America remains competitive, adding state-of-the-art capacity in cars, specialty steel, petrochemicals, and microchips. These plants are aimed at meeting insatiable demand in China. But the danger is that if China's growth stalls, the resulting glut will turn into another export wave and disrupt whole new strata of American industry. "As producers in China end up with significant unused capacity, they will try to be much more creative in how they deploy it," says Jim Hemerling, a senior vice-president at Boston Consulting Group's Shanghai office. That's why China is an even thornier trade issue for the U.S. than Japan was in the 1980s. It's clear some Chinese exporters cheat, from intellectual-property theft and dumping to securing unfair subsidies. Washington can get much more aggressive in fighting violations of trade law. But broader protectionism is a nonstarter. On a practical level the U.S. is now so dependent on Chinese suppliers that resurrecting trade barriers would just raise costs and diminish the real benefits that China trade confers. Also, unlike Japan 20 years ago, China is a much more open economy. It continues to lower tariffs and even runs a slight trade deficit with the whole world -- which makes the U.S.'s deficit with China all the more glaring. Hiking the value of the yuan 30% might help. But that's unlikely. For one thing, Beijing fears what such a shift would do to jobs -- and the value of its $515 billion in foreign reserves. The real solution is for the U.S. to reduce its twin deficits on its own -- but that's more America's issue than China's. Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less

than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it. China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game." Fox's point is important. China's competitive advantages are built on much more than unfair trade practices. Some 70% of exports now come from private companies and foreign ventures mainly owned by Taiwanese, Hong Kong, Japanese, and U.S. companies that have brought access to foreign markets, advanced technology, and managerial knowhow. Aside from cheap land and tax breaks in some areas, private Chinese manufacturers get minimal government help. "The Chinese government cannot afford to offer financial support to the export economy," says business professor Gu Kejian of People's University in Beijing. And as capital floods in and modern plants are built in China, efficiencies improve dramatically. The productivity of private industry in China has grown an astounding 17% annually for five years, according to the U.S. Conference Board. China needs U.S. imports, though not as much as imagined when Beijing agreed to join the WTO. U.S. exports to China have risen 25% to 35% annually in the past two years. But China's exports still outstrip its imports from the U.S. by 5 to 1. The U.S. sells about $2.4 billion worth of aircraft a year, and its semiconductor exports tripled in three years. Otherwise the U.S. looks like a developing nation. It runs surpluses in commodities such as oil seeds, grains, iron, wood pulp, and raw animal hides. Meanwhile, the Chinese keep expanding their export base. Chinese competition arrives so fast that it's nearly impossible to adjust through the usual strategies, such as automating or squeezing suppliers. The Japanese, South Koreans, and Europeans often took "four or five years to develop their place in the market," says Robert B. Cassidy, a former U.S. Trade Representative official who helped negotiate China's entry into the WTO and now works for Washington law firm Collier Shannon Scott, which wages dumping cases on behalf of U.S. clients. "China overwhelms a market so quickly you don't see it coming." "Shock and Awe" Georgetown Steel Co. is a case in point. The Georgetown (S.C.) maker of wire rods used in everything from bridge cables to ball bearings had battled Asian and Mexican imports for years. But last year it shut its 600-worker plant, citing a tenfold leap in Chinese imports, to 252,000 tons, from 2001 to 2003. International Steel Group Inc. (ISG ) has since bought the facility after U.S. anti-dumping duties on imports and a rise in global demand helped hike domestic prices. The Gardiner (Mass.) plant of Seaman Paper Co., a maker of crepe and decorative paper, is highly automated. Yet Chinese imports have grabbed a third of the market. It sells 81-foot streamers to big retailers for as little as 9 cents each. That's below Seaman's cost of materials. "We thought we could offset Chinese labor cost by automating, but we just couldn't," says Seaman President George Jones III. In bedroom furniture, 59 U.S. plants employing 15,500 workers have closed since January, 2001, as Chinese imports have rocketed 221%, to $1.4 billion -- half of the U.S. market. Prices have plunged 30%. Dumping certainly seems to be one factor: At its Galax (Va.) factory, Vaughan-Bassett Furniture Co. displays a Chinese knockoff of one of its dressers that wholesales for $105 -- below the world market cost for the wood. But the main competition comes from Chinese megaplants that sell directly to U.S. retailers and can get a new design into mass production in two months. The new Chinese factories of suppliers such as Lacquer Craft Furniture, Markor, and Shing Mark, some of them Taiwanese-owned, employ thousands and are so big they seem meant to build Boeing 747s, making most U.S. factories look like cottage industries. "The first wave is shock and awe," says John D. Bassett III, CEO of Vaughan-Bassett, whose sales and workforce have shrunk even though it has boosted productivity fivefold at its 600-worker

Galax plant since 1995 by investing in computer-controlled wood drying, cutting, and carving gear. "American industry has never encountered [such] competition." As component industries and design work follow assembly lines to China, key elements of the U.S. industrial base are beginning to erode. American plastic-molding and machine-tool industries have shrunk dramatically in the past five years. Take Incoe Corp. in Troy, Mich., a maker of steel components for plastic-injection machines. "When the economy turned soft, we anticipated the business would come back," says Incoe CFO Robert Hoff. "But it didn't. We saw our customer base either close or migrate to China." The U.S. printed-circuit-board industry has seen sales go from $11 billion to under $5 billion since 2001. In that time, PCB exports from China have more than doubled, to a projected $3.4 billion this year, says market researcher Global Sources Ltd. (GSOL ) Most U.S. production of key electronics materials, such as copper-clad laminates, has fled, too. "The whole industry is hollowing out," says Joseph C. Fehsenfeld, CEO of Midwest Printed Circuit Services Inc. in Round Lake Beach, Ill. The migration of electronics to China began when the Taiwanese shifted plants and suppliers across the Taiwan Strait in the late 1990s. As recently as four years ago, though, the U.S. exported $45 billion in computer hardware. Since the tech crash, that number has slid to $28 billion as the industry headed en masse for China, which is even more competitive than Taiwan. "All electronics hardware manufacturing is going to China," says Michael E. Marks, CEO of Flextronics Corp (FLEX )., a contract manufacturer that employs 41,000 in China. Flextronics and other companies are hiring Chinese engineers to design the products assembled there. "There is a myth that the U.S. would remain the knowledge economy and China the sweatshop," says BCG's Hemerling. "Increasingly, this is no longer the case." A visit to Flextronics' campus in the Pearl River Delta town of Doumen vividly illustrates Marks's point. The site employs 18,000 workers making cell phones, X-box game consoles, PCs, and other hardware in 13 factories sprawled over 149 acres. The bamboo scaffolding is about to come down on an additional 720,000-square-foot factory nearing completion. Almost every chemical, component, plastic, machine tool, and packing material Flextronics needs is available from thousands of suppliers within a two-hour drive of the site. That alone makes most components 20% cheaper in China than in the U.S., says campus General Manager Tim Dinwiddie. Plus, China will soon eliminate remaining tariffs on imported chips. In the past five years, electronic manufacturing-services companies such as Flextronics have cut their U.S. production from $37 billion to $27 billion while doubling their China output, to $31 billion. That's likely to double again by 2007. "Gravitational Pull" China is even making its presence felt in the U.S. market for networking gear, a bastion of American comparative advantage. On Nov. 15, struggling 3Com Corp. (COMS ) in Marlborough, Mass., launched a data-communications switching system for corporate networks of 10,000 users or more. It claims twice the performance of Cisco Systems Inc.'s (CSCO ) comparable switch. At $183,000, 3Com's list price is 25% less. Its secret? 3Com is settling for lower margins and taking advantage of a 1,200-engineer joint venture with China telecom giant Huawei Technologies Co. This is the first high-end piece of networking gear sold by a U.S. company that is designed and manufactured in China. For the price of one U.S. engineer, the joint venture can throw four engineers into the task of making customized products for a client. Even if 3Com does not succeed, similar tie-ups are expected, which could drive down prices of high-end gear sold in the U.S. Says 3Com President Bruce Claflin: "We want to change the pricing structure of this industry." 3Com hopes this is the start of a whole line of networking gear designed and made in China for the global market. Without referring to China, Cisco CEO John T. Chambers says "we are starting to see a stream of good, very price-competitive competitors, particular from Asia." The next step for China is critical mass in core industries. Outside Beijing, Semiconductor Manufacturing International Corp. (SMI ) has just opened a chip plant fabricating 12-inch silicon wafers that experts say is just two generations behind Intel Corp. (INTC ) A foundry that makes chips on a contract basis, this plant won't compete directly with U.S. chipmakers. But with four more 12-inch wafer plants due by 2006 and many more fabs in the pipeline, the U.S. Semiconductor Industry Assn. warns that a "gravitational pull" could suck capital, people, and leading-edge research-and-development and design functions from the U.S.

Digital technologies aren't the only areas where the Chinese have huge ambitions. In the past decade, U.S. petrochemical makers have invested in little new capacity. But at a three-mile-long site in Nanjing, 12,000 workers are erecting a $2.7 billion network of pipes and towers for China's Sinopec (SNP ) and Germany's BASF (BF ) that by next year will be among the world's biggest, most modern complexes for ethylene, the basic ingredient in plastics. An even bigger complex is going up in Shanghai. "The Chinese understand everything that scale means," says Fluor Corp. (FLR ) Group President Robert McNamara, who lives part-time in Shanghai and whose company has design contracts at both complexes. "When they target an industry to dominate, they don't mitigate." Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s. Industries requiring huge R&D budgets and capital investment, such as aerospace, pharmaceuticals, and cars, still have strong bases in the U.S. "I don't see China becoming a major car exporter in the foreseeable future," says GM China (GM ) Chairman Philip F. Murtaugh. "There is no economic rationale." Murtaugh cites high production costs and quality issues at Chinese car plants, as well as just-in-time delivery needs in the West, as impediments. Burning Rubber Don't tell that to Miao Wei, president of Dongfeng Motor Corp. On Nov. 7, Dongfeng and Honda Motor Co. (HMC ) announced that their joint venture will invest $340 million to boost output of Honda CR-Vs and Civics fivefold, to 120,000, by early 2006. The plant aims to achieve world standards by employing Honda's flexible manufacturing system. "Honda will sell some of the Chinese-built cars in Europe," says Miao. Nissan Motor Co. (NSANY ) is also talking about exporting with Dongfeng. China's carmakers are developing the suppliers that one day could sustain exports. Auto-parts maker Wanxiang Group in Hangzhou started as a tiny township-owned farm-machinery shop in 1969. Now it's a $2.4 billion conglomerate that supplies the Chinese assembly plants of GM, Ford Motor (F ), Volkswagen, and others and also exports 30% of its output. In two years, China will drop the rule that its auto plants buy at least 40% of parts locally. Wanxiang is getting ready: It is opening a $42 million plant loaded with U.S. and European testing gear. And since 1995, Wanxiang has bought 10 U.S. auto-parts makers. "Our goal is to acquire technology, management, and most important, to get access to overseas markets," says Chairman Lu Guanqiu. Some U.S manufacturers hope China will run out of steam. This year, factories in Guangdong and Fujian faced serious labor shortages for the first time. Red-hot demand has meant skyrocketing costs for China's producers, most of which rely on imported goods such as steel, plastics, and components. Energy shortages have forced manufacturers to shut factories several times a week. In almost any industry one can think of, vicious price wars are biting into already razor-sharp margins. "There are so many small companies competing that they crowd out all profit," says Beijing University economist Zhang Weiying. Indeed, given the low emphasis on profits and the unsophisticated accounting of many Chinese companies, often their pricing isn't based on a full understanding of costs. Having gotten as far as they can on cheap production costs, Chinese manufacturers must develop their own technologies and innovative products to move ahead -- areas in which they've made slow progress so far. The juggernaut will slow, but only slightly. While salaries for top Chinese designers are rising fast, they are still a fifth to a tenth of those in Silicon Valley. If China's wages rise 8% annually for the next five years, says a Boston Consulting Group study, the average factory hand will still earn just $1.30 an hour by then. If China allowed the yuan to appreciate by around 10% in the next year, productivity gains would more than offset the higher costs, figures China expert Nicholas R. Lardy of the Institute for International Economics. "I don't think revaluation will have a significant impact," he says. And Chinese producers are hardly standing still. In a recent survey of Chinese and U.S. manufacturers by IndustryWeek and Cleveland-based Manufacturing Performance Institute, 54% of Chinese companies cited innovation as one of their top objectives, while only 26% of U.S. respondents did. Chinese companies spend more on worker training and enterprise-management software. And 91% of U.S. plants

are more than a decade old, vs. 54% in China. Shanghai-based TV maker SVA Group, for example, has opened China's first plant to make flat panels, a venture with Japan's NEC (NIPNY ) Corp. That is enabling SVA to secure a U.S. beachhead by selling liquid-crystal display and plasma TV sets through channels such as the online sites of Costco Wholesale (COST ) and Target. Starting price: $1,600 -- 30% below similar models by Royal Philips Electronics (PHG ) and Panasonic (MC ). More innovation. Better goods. Lower prices. Newer plants. America will surely continue to benefit from China's expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? It's the question U.S. workers, execs, and policymakers urgently need to ask. By Pete Engardio and Dexter RobertsWith Brian Bremner in Beijing and bureau reports

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China: Golf, Sushi -- And Cheap Engineers - The Chinese port city of Dalian is becoming an outsourcing center for multinationals

Stroll along the aptly named Japanese First Street in downtown Dalian, and it's easy to forget you're in northeastern China. With its faux rice-paper lamps and shoji sliding doors, the street could easily pass for a tidy neighborhood in Tokyo. There are restaurants with names such as Fuji and Fukuhana, and signs on storefronts are all in Japanese. Kimono-clad women stand outside sushi bars and karaoke joints, beckoning salarymen to come inside. JCB credit cards -- or, even better, Japanese yen -- are accepted everywhere.

Why the Japanophilia? In part, it's history. Dalian -- the port city of Manchuria -- was occupied by the Japanese from 1905 to 1945. Although few recall those years of brutal colonial rule fondly, the worst memories of that era have faded, while a strong cultural affinity with Japan remains. There are an estimated 100,000 Japanese-speakers in Dalian, and with Tokyo just a three-hour flight away, Japanese tourists flock to Dalian on weekends to stroll the tree-lined streets, play golf at courses along the rocky coastline, and dine on bargain-priced seafood. "Most Japanese feel very welcome in Dalian," says Takashi Ota, a Tokyo-based senior manager at NEC Soft Ltd.

That friendly atmosphere attracts more than golfers and sushi fans. In recent years, Dalian has drawn dozens of Japanese multinationals looking to outsource their technology development and back-office operations. Hitachi, Matsushita, NEC (NIPNY ), NTT Data, and Sony (SNE ) have call centers or software development operations in Dalian. And it's not just the Japanese. Dell (DELL ), GE Capital (GE ), and IBM have set up customer-support offices in Dalian to serve their Japanese operations, while accenture (ACN ), BearingPoint (BE ), and Hewlett-Packard (HPQ ) are providing software to Japanese customers such as big telcos and industrial companies. The trend is in the early stages: Japanese outsourcing to Dalian reached $375 million in 2004. But that's double the level from 2002, according to city officials. "Dalian is becoming to Japan what Bangalore is to the U.S.," says Chen Ying Sheng, Managing Director of BearingPoint China Global Development Center.

Just as in Bangalore, cultural ties are important, but low costs seal the deal. Software engineers start at about $300 a month, about a tenth of what their Japanese counterparts might earn. What's more, land in Dalian is cheaper than in Beijing, Shanghai, and Guangzhou -- not to mention Tokyo or Osaka. All told, companies can cut costs in half on service jobs outsourced to China, BearingPoint estimates.

A skilled workforce is the second part of the equation. Dalian has roughly 26,000 experienced software engineers, and its 22 universities and technical institutes churn out 3,800 software engineering grads annually. An additional 8,600 students with reasonable Japanese-language skills hit the job market each year. "Dalian has really geared itself up to produce the kind of people with the right skills," says Luke J. Yang, practice leader for the financial institutions group at consulting firm A.T. Kearney Greater China (EDS ) in Shanghai.

Dalian's probusiness attitude helps, too. The local government offers generous incentives, including a two-year tax holiday on profits and an 80% reduction in value-added taxes. And Dalian has spruced up telecommunications and roads, and in 2000 opened the Dalian Software Park, now home to more than 50 foreign companies. The 3 sq.-kilometer facility houses the Neusoft Institute of Information Technology, a school focusing on IT skills and Japanese language. Accenture, HP, and Sony have set up centers to develop application software serving mainly clients and affiliates in Japan. GE Capital has 1,100 employees, 80% of them Japanese speakers, providing back-office support for more than 20 GE companies in Japan, including accounting services, customer-support call centers, and data processing for credit cards. Dell Inc.'s 400 call-center operators provide tech support and process orders from Japan and Korea.

TALENT COMPETITION

Dalian's success, though, could be its undoing. As more multinationals set up back-office support for their Japanese operations, good employees are increasingly getting poached. Furthermore, salaries are rising -- about 25% in the past year for some jobs. Japanese-speaking call-center operators today earn up to 40% more than entry-level software writers, the opposite of the situation in Bangalore and most other outsourcing centers. The labor market "is very cutthroat at the moment, and many vendors complain that as soon as they train someone, someone else steals them," says Dion Wiggins, vice-president at researcher Gartner Asia Pacific (IT ) in Hong Kong.

Despite the legions of Japanese-speaking grads, some companies warn that they already face a shortage of new hires. So BearingPoint has started recruiting Chinese living in Japan. And Dalian Hi-Think Computer Technology Co., a local software-outsourcing company with clients including Hitachi, NTT Data, and Nomura Research Institute, would like to expand beyond its current 1,700 employees but is having trouble finding the right people. "Software engineers and programmers are easy to recruit, but it's difficult to find project managers and leaders," says Zhang Limin, chief technology officer of Hi-Think.

Dalian, meanwhile, has a long way to go before closing the gap on Bangalore. India's outsourcers brought in some $17 billion in revenues last year. China's outsourcing revenues, by contrast, amounted to just $600 million last year, according to researcher IDC (IDC ). But that number is growing rapidly. Outsourcing to the mainland grew by 50% in 2004 and could reach $4.7 billion by 2009, IDC figures. And Japanese demand is bound to increase. "Because of the sharp drop in the birthrate, we have to think of another way to secure good engineers," says Ota of NEC Soft, which has 60 outsourcing operations in China. Dalian isn't Bangalore yet, but the hunger to create a new Bangalore is there.

By Frederik Balfour in Dalian, with Hiroko Tashiro in Tokyo

Copyright 2000-2004, by The McGraw-Hill Companies Inc. All rights reserved.

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Huawei: More Than A Local Hero The telecom gear maker aims to be a player in global innovation.

Xu Danhua, a 37-year-old engineer at China's premier tech company, stays plenty busy. As chief of the "pre-research" department of Huawei Technologies Co., Xu has his hands full developing products for the "digital home" -- all the gizmos and technologies that will soon link PCs, TVs, stereos, and other devices to the Internet and each other in living rooms, kitchens, and bedrooms. "I like to face the challenges of new technology," says Xu, a six-year veteran of the company. "Huawei is a company that very quickly takes on the trends of the industry."

That's just the kind of endorsement Huawei execs -- and China's leaders -- like to hear as they seek to leap into the big leagues of global innovation. Like other Chinese electronics outfits, privately held Huawei made its name as a low-cost manufacturer of equipment first developed elsewhere. With the bulk of their sales in China, Huawei, PC maker Lenovo, appliance producer Haier, TV manufacturer TCL, and others have prospered by selling products with relatively simple technology while capitalizing on close ties with local officials to give them a home-field advantage over foreign rivals.

But with competition at home picking up now that China is a member of the World Trade Organization, many Chinese companies are looking to be more than just local heroes. Huawei, for one, is eager to shed its "me-too" image and recently settled a 2003 lawsuit filed by Cisco Systems Inc. (CSCO ) alleging patent and copyright infringement. Now, Huawei aims to move far beyond its Chinese roots by selling sophisticated gear to customers worldwide and tapping talent in Europe, India, and the U.S. "Huawei is a global company with global markets in mind," says Li Xiaotao, the company's 36-year-old head of research and development.

Li and his colleagues are attempting to create something the world hasn't seen before: a developing-world multinational that is broadly based, research-intensive, and able to stand up to the best in the business. And Huawei's leaders want it all. Rather than sticking to one segment of the vast world of telecoms, the company's engineers are designing their own semiconductors, developing next-generation networking equipment for telecom operators, and creating new third-generation (3G) mobile phones for consumers.

Huawei's global innovation drive dovetails nicely with the government's goals. Beijing is keen to make China a leader in technology to reduce manufacturers' reliance on foreigners for key components, and to narrow the gap with Taiwan, Japan, Europe, and the U.S. China's leaders figure the local heroes can take advantage of the country's large home market and talented engineers to help set the standards for emerging technologies such as 3G, the digital home, and the next-generation Internet. "[The Chinese] want to become more influential," says Charles Yen, managing partner at Deloitte Touche Tohmatsu in Beijing.

A-LIST PARTNERS

So far, Huawei has made the biggest global splash. It's a market leader in DSL equipment, used for high-speed Net connections, as well as next-generation networks, which let telecom operators send voice, data, and multimedia messages over the Internet. Huawei has A-list partners, including Intel (INTC ), Microsoft (MSFT ), and Qualcomm. Overseas sales doubled last year, to $1 billion, while total revenues increased 41%, to $3.8 billion. That's peanuts for Sony or Microsoft, but it puts Huawei in the top league of Chinese tech companies. And Huawei this year is likely to spend $500 million on R&D. Again, that's small by international standards, but it's more than 10% of revenues -- a hefty commitment for a Chinese company and enough to pay for more than 10,000 engineers. Huawei "is

becoming a powerhouse because it is investing in its own technologies," says Albert Lin, an analyst at American Technology Research Inc. in San Francisco.

All those engineers are staying busy. A big chunk of R&D money is being used to develop equipment for an upgraded version of the Net called Internet protocol version 6 (IPV6). Beijing is heavily pushing IPv6, an initiative that could help China catch up with the U.S., which has dominated Net development so far. Another project is a partnership with Siemens (SI ) to devise phones and gear for a Chinese-developed 3G standard called TD-SCDMA, which Beijing hopes will sell big in China and abroad. And Huawei is a world leader in next-generation networks, along with Alcatel (ALA ), Nortel (NT ), and ZTE.

Now, Huawei is making its innovation effort a global push. China has long envied India's software services, so Huawei has sought to tap the engineering talent that has made India so successful. A few years ago, the company started recruiting engineers from India, and today 100 of them work at its headquarters in Shenzhen, the boomtown adjacent to Hong Kong. At the same time, Huawei understands it's more efficient to hire Indians in India than to bring them to China. So in 1999, it opened a development center in Bangalore, where 700 researchers now work. By the end of next year, it hopes to expand the Bangalore operation to 2,500 engineers. The company also has smaller labs in the U.S. and Europe.

The next step is to raise Huawei's international profile. The company is encouraging its engineers to contribute more to organizations such as the International Telecommunications Union that establish standards for new technology. This year, Huawei will submit some 200 proposals on standards to such groups, up from just 17 in 2001. And it's pushing engineers to apply for more patents. Last year, the company's worldwide patent applications grew by a third, to 1,590. Overall, Huawei has received hundreds of patents, but just a handful come from the all-important U.S. To crank up the pace of innovation, the company designates employees who come up with patentable ideas as "Huawei Innovators" -- and gives them a medal and cash awards of as much as $1,200.

FOLLOWERS?

That might not seem like much to an engineer in San Jose or Stockholm, but in Shenzhen it goes a long way. Thanks to China's low costs, R&D chief Li boasts that Huawei gets more bang for its R&D buck than foreign rivals do. The starting salary for a Huawei engineer is about $6,600 a year, and its top performers earn up to about $22,000, compared with the $180,000 they might earn in the West. "In North America and Europe, where they have one engineer, in China we can hire 5 or 8 or 10," he says. Many of Huawei's researchers live in a complex of 3,000 apartments adjacent to the company's 320-acre campus -- which makes it easy for them to stay focused. And Huawei's engineers are a talented bunch, says Lawrence B. Prior III, who until September served as CEO of LightPointe Communications Inc., a San Diego manufacturer of optical wireless equipment, in which both Huawei and Cisco own a stake. Huawei is "full of technical overachievers," Prior says.

One of those overachievers is Teresa He. She's the head of r&d for asics, semiconductors that are tailored for specific tasks in devices such as Huawei routers and switches. In the mid-1990s, Huawei could barely afford the basics to do the work. Without enough equipment to go around, He had to make time-sharing deals with colleagues to use key testing gear that went for the extravagant sum of $60,000. "You could use the machines for only two or three hours, and then you had to give way to the next person," she recalls. No longer. When He needed a $3 million machine for testing Ethernet switches recently, she had no problem getting the cash.

Not everyone is convinced that Huawei or other Chinese companies have what it takes to make the leap to the top ranks of global innovators. "They are a very strong, capable company," says Hong Lu, CEO of UTStarcom in Alameda, Calif., one of Huawei's biggest competitors in China. But, Lu says, "they are followers, not innovators. In the past, they have always done things that others have already

done." And while Huawei and its compatriots have made progress in R&D, some say the real innovation will come from foreign companies opening their own research facilities on the mainland. On Sept. 10, Motorola (MOT ) said it would spend about $90 million on an R&D center in Beijing. A few days earlier, Lucent Technologies (LU ) announced plans to invest $70 million in an R&D center for its 3G cellular unit in the eastern city of Nanjing. "The Chinese haven't created a culture of innovation," says Dave McCurdy, president of the Electronics Industry Alliance, a lobbying group for the U.S. electronics industry. "Foreign-owned enterprises in China will be the centers of innovation."

R&D chief Li counters that the foreign investment actually helps Huawei. The competition, he says, raises the overall level of available talent. "The usual practice in the past was to recruit people from universities and then train them to be good engineers," says Li. Now, Huawei can raid other companies for talent, he says. That trend cuts two ways, though. With more competition, salaries are going up. Nonetheless, Huawei is betting that those newcomers, combined with its current stable of engineers, will propel it into the ranks of the global innovation elite.

By Bruce Einhorn

With Manjeet Kripalani in Bangalore and Jack Ewing in Frankfurt

Copyright 2000-2004, by The McGraw-Hill Companies Inc. All rights reserved.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 17, 2003

3COM CORPORATION (Exact name of registrant as specified in its charter)

Delaware

0-12867

94-2605794 (State or other jurisdiction of

incorporation)

(Commission File Number)

(IRS Employer Identification No.)

350 Campus Drive Marlborough, Massachusetts

01752

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (508) 323-5000

(Former name or former address, if changed since last report)

Item 5. Other Events

On November 17, 2003, 3Com Corporation issued a press release announcing that all of the necessary government approvals for the formation of a joint venture with Huawei Technologies, Co., Ltd. have been secured and that all of the agreements establishing the joint venture have been signed by the parties. The press release is filed as an exhibit to this current report and is incorporated herein by reference. Item 7. Financial Statements and Exhibits

(c) Exhibits

The following exhibit is filed herewith:

99.1 Text of Press Release, dated November 17, 2003, titled “Huawei-3Com Joint Venture Begins Operations: Companies Secure Remaining Chinese Government Approvals for Joint Venture”

2

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

3COM CORPORATION Date: November 19, 2003 By: /s/ Mark Slaven

Mark Slaven

Executive Vice President, Finance and Chief Financial Officer

3

Exhibit 99.1

Huawei-3Com Joint Venture Begins Operations

Companies Secure Remaining Chinese Government Approvals for Joint Venture

MARLBOROUGH, Mass.—(BUSINESS WIRE)—Nov. 17, 2003—3Com Corporation (Nasdaq: COMS - News) and Huawei Technologies Co. (Shenzhen, China) today announced that all government approvals have been secured and the agreements establishing the joint venture have been signed by the parties. Domiciled in Hong Kong with principal operations in Hangzhou, China, and sales offices throughout China and Japan, Huawei-3Com Co., Ltd., will deliver enterprise networking solutions including routers and LAN switches. 3Com has the rights to market and support the Huawei-3Com products under the 3Com brand in all countries except China and Japan. In China and Japan, Huawei-3Com will sell products sourced internally as well as from 3Com. Huawei is contributing to Huawei-3Com its enterprise networking business assets, including LAN switches and routers, engineering and sales/marketing resources and personnel, and licenses to its related intellectual property. 3Com is contributing $160 million in cash, assets related to its operations in China and Japan, and licenses to certain intellectual property. In two years, 3Com has the right to acquire a majority ownership interest in Huawei-3Com. “By leveraging the enormous capabilities of our new joint venture, 3Com intends to fundamentally change the playing field in the enterprise networking industry,” said Bruce Claflin, 3Com president and chief executive officer, and Huawei-3Com chairman. “3Com now has one of the broadest lines of networking products in the world, including a full suite of voice and data solutions, for both wired and wireless environments. Backed by 3Com’s global service, these solutions excel in quality, capability and value.” “3Com is the right partner at the right moment in the global enterprise networking marketplace,” said Ren Zhengfei, president and chief executive officer of Huawei and chief executive officer of Huawei-3Com. “The growth potential in enterprise networking in the Chinese and Japanese markets is enormous, and the more mature markets of Europe and the Americas are ripe for competitive solutions that excel at performance and value.” Outside China and Japan, 3Com will leverage its world-class distribution channel partners to extend the reach of the Huawei-3Com products. 3Com will provide resellers access to its broadened line of voice and data networking products, ranging from entry-level switches to high-end routers with both wired and wireless access, all at attractive margins.

As Huawei-3Com begins operations, there will be approximately 1,500 employees based in China derived primarily from Huawei but with additional resources from 3Com as well as newly hired employees. About 3Com 3Com is a tier-one provider of innovative, practical and high-value voice and data networking products, services and solutions for enterprises of all sizes and public sector organizations. For further information, please visit www.3com.com, or the press site www.3com.com/pressbox. About Huawei Technologies Incorporated in 1988 and headquartered in Shenzhen, China, Huawei Technologies (http://www.huawei.com) specializes in the research and development (R&D), production and marketing of telecommunications equipment, providing customized network solutions for telecom carriers in fixed, mobile, optical network and data communications network. Sales in 2002 were 2.7 billion US dollars and are expected to reach 3.5 billion US dollars in 2003. Huawei products have been put into wide applications in over 40 countries including Germany, France, UK, Russia, Brazil, Singapore and Thailand. 3Com and the 3Com logo are registered trademarks of 3Com Corporation. All other company and product names may be trademarks of their respective holders. The foregoing press release contains forward-looking statements under the federal securities laws about the joint venture between 3Com and Huawei, including statements concerning delivery and reach of products, prospects and growth potential for the enterprise networking industry and recovery and maturation of the IT market. These forward looking statements are subject to significant risks and uncertainties, and actual results may differ materially from those described in such statements as a result of a number of factors. In particular, the enterprise networking industry may not develop as anticipated and the IT market may not recover as quickly as expected or at all. Investors are also encouraged to read the “Risk Factors” section of 3Com’s Annual Report on Form 10-K for the year ended May 30, 2003, and 3Com’s Quarterly Report on Form 10-Q for the quarter ended August 29, 2003, which are on file with the Securities and Exchange Commission.

EXHIBIT INDEX 99.1

Text of Press Release, dated November 17, 2003, titled “Huawei-3Com Joint Venture Begins Operations: Companies Secure Remaining Chinese Government Approvals for Joint Venture”

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 20, 2004

3COM CORPORATION (Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction

of incorporation)

0-12867 (Commission File Number)

94-2605794 (IRS Employer

Identification No.)

350 Campus Drive Marlborough, Massachusetts

01752 (Address of Principal Executive Offices)

(Zip Code)

Registrant's telephone number, including area code: (508) 323-5000

(Former name or former address, if changed since last report)

ITEM 9 Regulation FD Disclosure

On Monday, July 19, 2004, Bruce Claflin, President and Chief Executive Officer of 3Com Corporation (the "Company"), addressed an event hosted by Morgan Stanley. In response to questions, Mr. Claflin made the following statements:

•

Without setting a specific timeframe, it is possible for the Company to achieve revenue of $2 billion, assuming the Company executes on its business objectives; the Company decides to, and successfully closes on, its acquisition of a controlling interest in the Huawei-3Com Co., Ltd. (the "JVCo"), the Company consolidates results for the JVCo and the JVCo continues to rapidly grow revenues; the market for enterprise networking products continues to improve; and the Company consummates acquisitions that significantly increase its revenue.

• We continue to expect that revenue for the JVCo in the 2004 calendar year will be approximately $250 million.

• While the potential revenue from the sale of products sourced from the JVCo is difficult to predict, a best case revenue scenario from those products could exceed $100 million annually in fiscal 2006 dependent on the introduction of new products, successful channel development and market acceptance of the new products. However, this projection is not the most likely case, is not given as guidance and should not be used to model the Company's future financial performance.

• Provided the Company continues on the path to more solid financial ground, it is becoming more likely that we will pursue acquisitions to accelerate our growth potential. The areas of most interest to the Company are in small technology companies that round out our technology portfolio and Layer 4-7 switching.

This information included on this Current Report on Form 8-K contains forward-looking statements within the meaning of the federal securities laws including statements regarding the following: the Company's future revenue; achievement of the Company's business objectives; acquiring a controlling interest in the Company's joint venture with Huawei Technologies, consolidating the joint venture's results of operations with the Company's and growth in the joint venture's revenues; improvements in the market for enterprise networking products; future acquisitions that increase the Company's revenues; revenues for the Company's joint venture with Huawei Technologies in calendar year 2004; potential revenue from products that the Company sources from its joint venture with Huawei Technologies; introduction of new products by the Company's joint venture with Huawei Technologies and market acceptance of those products; successful channel development by the the Company's joint venture with Huawei Technologies; the Company's financial situation; and the possible acquisition of small technology companies and a company that offers Layer 4-7 products and solutions. The statements reflect responses to questions presented to the Company's Chief Executive Officer that included a number of assumptions and qualifications and should not be considered guidance regarding the Company's future financial performance. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially, including the following: possible fluctuations in the demand for our products and in economic conditions affecting the markets for our products; our ability to successfully manage costs and expenses; possible delays or inability to collect accounts receivable; continued or increased reductions in capital spending in the technology and networking sectors; technological changes and trends in the networking sector; possible development or marketing delays relating to our product offerings or the product offerings of the joint venture with Huawei Technologies; our ability to plan and forecast channel and company inventory; possible defects in our product offerings or the product offerings of the joint venture with Huawei Technologies; the introduction of new products by competitors or entry of new competitors into the markets for our products or the markets for the products of the joint venture with Huawei Technologies; expected volatility in our stock price; and the possibility of legal disputes. A detailed discussion of other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in 3Com's most recent filings with the Securities and Exchange Commission, including 3Com's Annual Report on Form 10-K for the fiscal year ended May 30, 2003

and Quarterly Report on Form 10-Q for the period ended February 27, 2004. 3Com undertakes no obligation to update forward-looking statements included herein and does not intend to provide long term guidance regarding its financial performance and results of operations.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

3COM CORPORATION Date: July 20, 2004

By:

/s/ BRUCE L. CLAFLIN

Bruce L. Claflin President and Chief Executive Officer

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ITEM 9 Regulation FD Disclosure SIGNATURE