Cost cutting takes Redback to Mexico, Malaysia

Redback Networks is starting to shift its manufacturing operations to Mexico and Malaysia this quarter to lower costs as the edge router vendor competes in a market the chief executive officer calls “brutal.”

Redback currently does all its manufacturing in San Jose, Calif. But this quarter the company began a process to move manufacturing of its high-volume line cards to a plant in Quadalajara, Mexico (nicknamed the Mexican Silicon Valley). Redback will also transfer some manufacturing of its systems to a site in Panang, Malaysia, from which Redback will serve the entire Asian market.

Redback typically competes against larger vendors Cisco Systems and Juniper Networks, but it is also challenging Huawei Technologies on its own home turf. And Huawei’s reputation for low prices could make Redback’s need to shrink its cost structure all the more pressing.

“We’re in a head-to-head battle with Huawei in China,” Redback CEO Kevin DeNuccio said at an investor conference Thursday.

Asia contributes only about half as much of Redback’s revenue as the U.S. or Europe. Nearly 20% of Redback’s revenue in the third quarter (and the first three quarters of this year combined) came from Asia. Redback has sold its gear in two of China’s three’s provinces. And this week the vendor announced having won a contract to supply the second phase of a large carrier deployment by Guangdong Telecom.

However, Huawei and China aren’t the only reason for Redback to compress its cost structure.

“Price pressure in the market has not changed in any way,” DeNuccio said. “There’s always a deal or two where people have an I-will-not-lose-this-deal-regardless-of-price kind of attitude. We’re winning [contracts to build] the future network that will run all services. Two major competitors like Cisco and Juniper aren’t going to let us just walk away with the market. But at this point, we have a significant technology advantage that makes us the low-risk choice. So we can continue to sell on technology, and we can be competitive because our cost structure is improving and extremely competitive.”