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By Yoon Sung-won
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| Cho Bum-coo, Cisco Korea president |
As far as business is concerned, the U.S.-based network equipment firm has enjoyed a dominant market status in Korea, including multiple conglomerates including Samsung, SK and KT as its clients.
When it comes to tax payments, however, it has been suspected of reducing them in dubious fashion ― its local distribution partners purchase equipment directly from Cisco's head office in the U.S. or other global supply channels, not from Cisco Korea.
As a result, the small partners, not Cisco, suffer heavy burdens from corporate taxes and value-added taxes, the sources said.
"Cisco has highly depended on local partners in distributing its network equipment in the Korean market, connecting them directly to its global supply channels," an industry source familiar with the matter said.
"In the process, the company registers its sales to a branch in an overseas country with a low tax rate."
It is not rare for multinational network equipment companies to involve local distribution partners to reduce or avoid taxes. The industry source pointed out, however, Cisco has gone too far.
"Cisco has provided 100 percent of its telecom network equipment in the Korean market through local partners," the source said. "There are other vendors which occasionally make local distribution partners directly deal with their headquarters. But none of them resort to such practices as much as Cisco does."
In comparison, Cisco Korea directly deals with its clients in services such as warranty repairs. The Korean subsidiary's sales from the service provision are subject to taxation in Korea, the source said.
Cisco Korea confirmed this. "All our products are sold through (local) channels in Korea. Some of our services are directly provided to clients through domestic subsidiary, Cisco Service Korea," a Cisco Korea spokeswoman said.
Cisco stopped releasing earnings reports here after its local subsidiary became a limited liability company in 2013. This has resulted in further lack of Cisco Korea's transparency here as limited liability companies don't have to disclose their balance sheets or income statements for external audit.
In 2012, the latest year when data on its business performances are available, Cisco Korea posted only 82.8 billion won in sales. But it is estimated to generate over 500 billion won in sales in the Korean market considering its dominant market presence in the network equipment sector for telecom services and datacenters.
Critics said Cisco's tax avoidance here is not technically illegal but it takes advantage of loopholes to transfer its tax burden to Korean distributors, which would be hard for them to refuse.
Cisco Korea has argued that its policy does not breach any law in Korea because it is paying taxes as the corporate value estimated by the National Tax Service.
Tall tasks ahead
Besides the tax and transparency issues, Cisco Korea President Cho Bum-coo is expected to be challenged by aggravating market competition.
Cho, 55, returned to Cisco Korea last August to face the difficult tasks of restructuring the company's business and laying off employees. According to the source, about 50 to 60 tech support employees left Cisco Korea last October. Before the layoffs, its payrolls are estimated to have been somewhere between 300 and 350 although the company has not disclosed details.
"It is believed that Cho returned to Cisco with restructuring as one of his major missions," the source said.
The layoffs came after Cisco headquarters decided to fire up to 5,500 employees, which is about 7 percent of its global workforce.
Cisco has said the restructuring was made to optimize the cost base in lower growth areas of its portfolio and further invest in key priority areas.
"We expect to reinvest all of the cost savings from these actions back into our businesses and will continue to aggressively invest for our areas of future growth," the company said.
The Cisco Korea spokeswoman said the global restructuring "also affected Korea." The Korean subsidiary refused to release the exact number of fired employees, adding that it was not 50.
Cho started his career at Accenture in 1989 as a business and technology consultant. He entered Cisco Korea in June 2009 to deal with the aftermath of the 2008 global financial crisis and fiercer competition with Hewlett-Packard and Juniper Networks. During his first term at Cisco, Cho ambitiously pushed for projects like establishing a smart city in Songdo, Incheon.
But Cho's drive to revitalize the company has been considered failure, leading to a performance slowdown in 2009 and 2010. Amid Cisco's continued slump worldwide, Cho left the company and moved to Samsung Electronics in November 2011.
Cisco maintains its solid leadership in selling network hardware equipment such as switches and routers in Korea and around the world. But it faces fiercer rivalry from vendors like Juniper Networks and Huawei.
Another industry source said, "Though Cisco still is the market leader, fiercer competition and stagnation in the network equipment market are making the company's dominance not as solid as in the past."
Particularly in Korea, the company has also been urged to target to revenue sources in the wake of the fifth-generation (5G) era.
"Compared to the past when mobile carriers made heavy investments to establish nationwide network infrastructure for long-term evolution (LTE) services, the 5G services are more about software-centric technologies," the source said. "To remain ahead of the pack, Cisco would have to shift its focus to software sales."
The company is responding to such challenges by diversifying its focal points to new growth engines such as cloud computing and cybersecurity. Cisco acquired multiple security companies to strengthen its cybersecurity business.
Cisco's global revenue proportion of switch and router sales is already less than 60 percent, according to the company.
