Beijing, July 20, 2015 – China is now the world’s second largest economy, and Chinese network equipment makers are seizing the opportunity brought by the huge domestic market to close the gap with their foreign rivals. Domestic makers accounted for 52.3% of the network equipment market in the first quarter of this year, and their combined market share is expected to exceed 70% when H3C is restructured into a Chinese network equipment vendor. Under the national strategy of nurturing indigenous network equipment makers to avert potential security risks posed by foreign products, domestic vendors like Huawei, Ruijie and ZTE will embrace increased sales.

Within this dynamic environment, IDC is keeping a close eye on the networking equipment markets. Switch sales in the enterprise market and telecom operator market recorded the first-ever year-on-year decline in the first quarter of the year after several years of rapid growth, while enterprise WLAN sales logged strong growth in the period. According to IDC’s “China Network Equipment Market Tracker,Q1 2015”, the market of China’s enterprise network equipment was USD1.02 billion in the first quarter of 2015, down 34.0% from the previous quarter and 0.8% from a year ago. Among which, L2/3 switch market contracted by 11.6% year on year, router market expanded by 17.3%, while WLAN market shrank by 2.7%.

Chart: China Market Size of Enterprise Network Equipment, 2014Q1-2015Q1 Description: 数据来源：IDC《2015年第一季度中国网络设备市场跟踪报告》 Tags: Source: IDC “China Network Equipment Market Tracker,Q1 2015” Author: IDC charts powered by iCharts

The market for various network products shrank from the prior quarter, due to seasonal factors. Compared with Q1 2014, routers have registered robust sales growth in the telecom operator market, and enterprise WLAN sales also jumped, but the market for other network products has contracted. Sales are expected to grow in the second quarter to match a year ago as corporate buyers execute their purchase plans.

The switch market headed for the first quarterly contraction after several years of explosive growth. Switch demand has slipped as some industries have largely completed construction of network infrastructure and telecom operators are replacing copper cable with fiber.

Demand for routers from corporate customers has also started to dwindle as EtherNet/IP technology becomes widely adopted, also by enterprise broadband access provided by Telecom operators, and as routers are no longer essential for Internet access and more and more devices that provide similar functions to routers (multi-interface, multi-protocol conversion; NAT, etc.) are available in the market. However, router demand from telecom operators has maintained robust growth, largely thanks to the national strategy of expanding broadband Internet access across the country and the rapid development of mobile Internet and high-definition video services. These factors prompt telecom operators to increase the bandwidth of backbone networks and metropolitan area networks.

Following a steep decline in WLAN investment by telecom operators, that segment of the market is expected to contract further. This downward trend is unlikely to be reversed until operators find more viable business models. On the contrary, enterprise WLAN market has been driven by strong demand from sectors like transportation, education and hospitality. A rapid pace of expansion is expected as Internet giants are foraying into the WLAN market to gain an upper hand in the race to dominate mobile Internet access services.

According to Steven Hu, Research Manager of IDC China, “Customers are shifting their focus from network hardware to software and services. After the basic network infrastructure has been constructed, the question is how to improve it. A better-functioning network infrastructure and improved applications will drive business innovation and growth. Demand for Internet services will vary by segment. Catering to customers’ diverse demands will be crucial to network equipment vendors. SDN/NFV will gradually be adopted by telecom operators and data centers. This is a revolutionary era, and both equipment vendors and users must plan for ongoing changes in the market.”