2014 is likely going to be dominated by trends that begin with the letter “C.” Chilly Economy, China, Cisco, Cloud, and Campus Transition come to mind. Let’s examine a few of them briefly as we look at 2014 – a year where revenue growth in the Ethernet Switch market will be challenged.
Chilly Economy – Economic growth forecasts throughout the world, especially those in emerging markets have been revised and have grown. One of the underpinnings of growth in 2014 was the expectation that emerging markets would significantly outperform the United States and help drive the switching market. Given the now bearish view of some emerging markets contracting, we believe we can no longer count on emerging markets, outside of China, for incremental growth in 2014.
China – China is now the number two market for servers, still a distant second from the United States, but now ahead of Japan. China has a list of home-grown server vendors; more common vendors such as Huawei and Lenovo, but also less well-known vendors such as Inspur and Sugan make up an ever increasing percentage of server sales. This list also includes the contract manufacturers like Foxconn. The NSA scandal likely accelerated a trend that we would have probably seen anyway and 2014 will be the year it shows up in force. Cloud and Enterprise deployments in China will likely be sourced by China-based companies working with local vendors.
Cisco – Cisco guided revenue significantly lower during its fiscal 1Q14 earnings call. Looking at just Ethernet Switching, this is likely driven by three factors:
1) The product transition that is about to begin towards the Nexus 9300 and 9500 (Insieme).
2) The sudden stall in emerging markets.
3) A public admittance that doing business in China will be more challenging than ever.
It is important to mention that China and the growth of local vendors in China were noted by all the major server vendors in at least one conversation since this summer. I think it is safe to say, even without Snowden and the NSA, that China was shifting awards in Ethernet switching towards Chinese-based vendors in 2014.
Cloud – A favorite topic for many reasons, not least of which being that it is the biggest megatrend, but two things will shift in 2014 that will cause folks to notice:
- First, the Cloud today is dominated by US based companies. The top 4 mega Clouds (Amazon, Facebook, Google, and Microsoft) are all US-based. Arguments can be made on the top ten, but it’s a safe bet to say the next two mega Cloud providers will come from China.
- Second, the amount of servers in the Enterprise is in decline, and this will be noticeable when comparing 2014 vs. 2013. Customers may be using a SaaS service, outsourced cloud, or hybrid cloud, but the shift towards the Cloud is becoming more powerful. Not to mention the Cloud providers themselves are becoming more powerful, whether as a result of pricing, or the move towards white box. The move to the Cloud and more powerful customers are both market-changing events.
So, while there are other trends going on, like a campus shift around BYOD and the server migration to 10 Gbps, we believe the four “C” mega trends above these have material impact on what the Ethernet Switch market will look like in 2014. And not to play further on the letter “C,” but 2014 is a year of “change” because of the above mentioned trends – many of which are outside the control of the switching vendor community.