Huawei Project Report

FH Joanneum University of Applied Sciences Asian Business and Management: China 2011 Internationalization of Chinese

Firms- A Case Study on Huawei A research paper about internationalization of Huawei Telecommunications Danish Abbas Huang Zizhen Syed Hussain Danish Tian Yuan Lilian

The Traditional Internationalization theory

Generally, there have been a lot of theories about the firms going international and the multinational corporations developing. The traditional internationalization theories are applied to explain the international expansion for the western firms. According to Bartlett and Ghoshals` study in 1992, there are three main traditional driving forces behind the overseas expansion of a vast majority of MNCs: 1. To secure key supplies 2. Market seeking

3. Access low-cost factors This theory emphasized that the motivation of market seeking was particularly strong in companies that had some intrinsic advantage, typically related to their technology or their brand recognition that gave them some competitive advantage in offshore markets. Originally, a company would go overseas only when its products had matured and to some extent lost local appeal, and thus exporting happened before overseas production. However, with the fast development of world economy, the international business environment became increasingly complex and sophisticated. The emerging motivations driven by a set of economic, technical and social developments made internationalization change, resulting in the increasing of scale economy, ballooning of R&D investments and the shortening of product life cycle. Furthermore, there are three conditions which are required for the company to go international and survive globalization. ➢ First,

some

foreign

countries

must

offer

certain

location

specific

advantages so as to provide requisite motivation for the company to invest there.

➢ Second, the company must have some strategic competencies to counteract the disadvantages of its relative unfamiliarity of foreign markets. ➢

Third, it must also have some organizational capabilities so as to get better returns from leveraging its strategic strengths internally rather than through external market mechanisms such as contracts or licenses.

Except for the motivation, the traditional internationalization theory assumes that firms would go international on the basis of a definable competitive advantage which would ensure them to secure enough return to cover the additional costs and risks of going overseas. Refer to Dunning’s (2001) eclectic model, ownership, location

and

internationalization

(OLI)

advantages

that

motivate

internationalization, which means, a firm would go international when the OLI factors are present. On the other side, the overseas possibilities for asset-exploitation acts as another key factor in the internationalization drive.

Forces behind Internationalization of Chinese firms

The established theory above would argue that Chinese firms should start with gradual organic expansion into contiguous markets. Nevertheless, the Chinese companies, although possessing ownership-specific advantages in aspects such as lower cost, seem not to have advantages of original invention, higher productivity, market power, technology and brand. Therefore, it seems that internationalization among Chinese companies have the primary purpose of obtaining these missing advantages in order to quickly access foreign market or reinforce home market positions. However, according to the specific situation in China, there are four basic forces behind the internationalization of Chinese firms.

Challenges for internationalization of Chinese firms

China’s course may be set, but the journey to high performance will be long. Basically, there are five main challenges elaborated in the case.

Economy & Policies The immature of the banking system, the morbidity of the law system, the lack of the intellectual property rights protection and the inadequate of government governance, etc are the particular problems in China need to be solved.

Human Capital The large of amount of needs for the talents both in management and technical area and Chinese companies face obstacles in the war for talent would lead to a short of talents to meet the need of the companies.

Marketing & Operations Chinese

companies

may

well

be

hampered by

a lack

of

adequate

management skills, knowledge and experience in dealing with newly enlarged transactional companies and managing global brands.

Culture The basic characteristics of Chinese culture would be the respect for hierarchy; a strong emphasis on a collectivist society with the family as the core unit; a long-term time perspective; and a tolerance for uncertainty. These lead to the hurdles of getting to grips, with very different management styles, culture, priorities and mindsets for the Chinese companies. Especially guanxi, xinyong (trustworthiness) and the giving and saving of mianzi (face) are crucial in the business operation in China.

Introduction to the Case – Huawei Technologies

We have talked a lot about the internationalization of Chinese firms, the reason of Chinese firms to go international and the challenges they are facing with. Now let’s have a look at the company that we are going to discuss, Huawei Technologies Co. Ltd., one of the largest and fastest growing telecommunications equipment manufacturers in China. Huawei has risen to become one of the most competitive companies in the domestic and global market. Many

industries

are

growing

rapidly

in

China.

Why

do

we

choose

telecommunication and why do we choose Huawei Technologies? Telecommunication was really a less developed industry before 1978, which was identified as one of the four major obstacles to modernization. At that time, China had a telephone switching capacity of only 1.75 million sets, the telephone penetration rate was a mere 0.18 percent and all the long-distance and most inner city calls had to be manually connected. Furthermore, prior to 1978, the Chinese telecommunications industry was a government-controlled monopoly. With the construction of the basic telecommunication network, the production of telecommunications equipment and the provision of telecommunication services being centralized within the Ministry of Posts and Telecommunications. However, the telecommunication sector in China was rising quickly in the next 20 years, which is mainly because of a large amount of investment form Chinese government into this field and the nearly aggressive development policy. The industry has been able to expand at a staggering average annual growth rate of 44 percent, far above the GDP growth rate for the same period.

The Chinese government also launched a series of measures to promote the internationalization and encourage the indusrty that are critical to the national economy. In 1999, they launched ‘Go Global’ policy, encouraging strong Chinese enterprises to invest more overseas in order to improve their competitiveness and secure an international business presence. There are also some preferencial policies like tax exemptions, which accelerate the growth of telecom sector.

HUAWEI

The company was established in Shenzhen, Guangdong, China in 1988 by Ren Zhenfei, a former People’s Liberation Army Officer, as a private company. Huawei's product portfolio comprises wireless products; network products (e.g. NGN, xDSL, optical network and data communications products); value-added services (e.g. intelligent network, CDN/ SAN and wireless data) as well as mobile and fixed terminals. Before we start with Huawei’s strategy analysis, we would like to elaborate why we chose Huawei for this research? Rapid growth and preferencial governmental policies are the reasons for choosing telecommunication; and we used the ‘Three Filters Approach’ to choose a company for conducting this research. The three filters used, were as follows:

•

Company size was the first criteria for the selection process. Annual revenues over US$1 billion were the minimum requirement, and only 290 out of top 500 Chinese firms cleared this filter.

•

Industry Characteristics were the second important aspect of this selection. This second filter identified Chinese industries with strong globalization potential, which was based on different criteria such as ‘industry size as a percentage of GDP, degree of industry concentration, export intensity and government support’. A total of 12 industries met the second filter criterion, including telecommunication industry and this narrowed the list down to 124 Chinese companies to choose from.

•

Company Characteristics were the last thing to check. The selected company ought to have high sales percentages in Exports and a Strong Global Vision.

So, following the above mentioned criterion, Huawei was chosen to conduct the further research.

International Expansion

Huawei began to consider international expansion in 1996 and initially expanded in the developing countries like Russia and Africa. After the successful launch in these countries, it then further expands its business in the developed countries,

like the USA and the UK.

By now, after many years of expansion around the globe, Huawei's technology is being used by 300 operators across 90 countries, including the US, Portugal, Germany, France, UK, Spain, Russia, Brazil, Thailand, Singapore and Egypt.

Research Questions

All the recent research going around the educational circles are mainly based on developed countries’ companies entering into emerging market in general and China in particular. However, less research is being conducted on the other way round. Therefore, this case study has been conducted on a Chinese firm ‘Huawei’, which has internationalized successfully over the past few years. This case also defines some key research questions about Huawei and other Chinese Companies intending to enter the international market. The research questions are as follows:

1. To what extent does Huawei not follow traditional internationalization theories? 2. Why does Huawei not follow traditional internationalization theories? 3. What are Huawei’s core competences? 4. What are the challenges for Huawei operating in the developed markets?

To find the answers to these research questions, we will have a thorough analysis of Huawei’s Internationalization Strategy.

Huawei – International Competitive Strategy Analysis The strategy used for internationalization by Huawei had following important components: ➢ Internationalization of R&D for long-term success ➢ 2- Customer focus

➢ 3- Cross-culture management and project management ➢ 4-Price cutting strategy ➢ 5- JV/partnership

1. Internationalization of R&D for long-term success China-based cost-effective Research and Development is one of Huawei’s competitive advantages of expanding abroad. Huawei, from its inception, even in the IT recession period, invested over 10 percent of its revenue into R&D. Huawei has set up R&D organizations in Dallas and Silicon Valley (USA), Banglore (India), Stockholms-kontoret (Sweden) and Moscow (Russia). In China, they have institutes in Beijing, Shanghai and Nanjing. Furthermore, through multi-cultural teamwork, Huawei implements the strategy of global synchronous R&D. Huawei’s Central Software Department, India Research Institute, Shanghai Research Institute and Nanjing Research Institute have all passed CMM5 certification, which shows that Huawei’s software development process management and quality control have reached the highest level. Huawei’s R&D achievements with Intellectual property rights provide innovative and customized network solutions for telecom carriers around the world. For human resource structure, 48 percent of Huawei employees were from R&D department by the end of 2004, which shows a typical dumbbell-shape enterprise; and for finance resource structure, ratio of Huawei R&D expenditure to sale revenue is 13-15 percent in recent years and its R&D expenditure has reached 4.5 billion RMB, which makes Huawei No.1 of investing R&D in China enterprises.

In contrast to other MNCs, the goal of Huawei’s Internationalization strategy of R&D is to drive internationalization of manufacturing and marketing of the company by internationalizing its R&D activities. Moreover, in terms of internationalization of R&D, there are three specific strategic goals of Huawei’s international R&D activities. 1- Establish technology information monitoring units and monitor updated

technology and spillover around the technological centers of the world, like USA and Sweden. 2- Approach knowledge excellence centers of the world to utilize R&D human

resources and R&D environments in those countries for cutting down R&D costs and to improve the efficiency of technological innovation. 3- Respond

to

the

differentiated

demands

of

customers

and

local

manufacturing conditions in different countries. And realize localization of technology to support local manufacturing subsidiaries effectively. To achieve the established strategic objective of internationalization of R&D, Huawei has defined a three-stage developing strategy: At the first stage, Huawei set up technological alliances with famous foreign companies to improve its R&D ability by learning in the course of cooperating with them. At the second stage, in order to trace the new development of communication technology in the world and approach the technological excellence centers of the world, Huawei starts to establish R&D units abroad. Huawei rationally chooses the location of its R&D Units abroad. America is the modern science and technology centre of the world and Silicon Valley is the famous high-tech base of the world. So, America is the first objective for Huawei to choose locations to establish R&D Units abroad. Sweden is the research centre of GSM and in Europe, so Huawei establishes R&D unit in Sweden to follow the developing trends of GSM in Europe, and to do research on mobile communication technology. At the

third stage, with constant improvement of technology and gradual extension of domestic market, Huawei starts to focus on international market. Following this strategy, international business has become the main objective in Huawei business model.

2- Customer focus By focusing on the customer requirements and applying customized solutions to help

customers

become

more

competitive,

Huawei

has

consolidated

its

pacesetter position in the Chinese market and enhanced its market innovation capability. Huawei has set up the biggest service network in China, This gives Huawei comprehensive and in depth insight into the most rapidly developing and most complex telecom network market in the world. It also helps Huawei to provide timely and excellent services and set up unique service advantages. This service network is the foundation for Huawei to better understand the future customer requirements and competitive trends of the market, and to provide fast and relevant personalized services. It helps Huawei to formulate the solutions that meet customer requirements, gain precedence in new product development and identify opportunities in potential markets Huawei adheres to the “customer first” and “good faith” service cultures, standing closely with their customers. This further accomplishes long-term winwin situations with customers. Huawei has also developed differentiated service advantages in the international markets. Huawei has done all of this simply by strengthening the value outlook of “Serving our customers is the only reason Huawei exists” and enhancing customer service consciousness in the minds of their staff. In a customer satisfaction poll conducted by Gallup for the years 20002004 in China, Huawei was ranked first in customer satisfaction. “Good Quality service” has become one of Huawei’s advantages in a severely competitive market.

Moreover, unlike Japanese companies, which often dispatched executives from their head offices when they started expanding overseas, Huawei has tried to hire locally with international expansion.

3- Cross-culture management and project management “We need to adapt to be a truly global corporation. Among our initiatives is to set up a strategic management system that helps us efficiently deal with culture shock and localization of our services”, said Mr. Xing Xianjie, the Director of Business Process Management at Huawei. With constant growth of overseas projects, in 2002 Huawei established an integrated mechanism to train and develop project managers and also to strengthen project management practices and processes.

4-Price cutting strategy As a newcomer, battling against the perception that Chinese companies produce cheap and unreliable goods, Huawei has used aggressive tactics to win contracts. Price has been one of its most useful tools. Prices are lower largely because the group relies on a pool of engineers in China, where salaries are a fraction of those in more developed countries. This is the reason for its prices being 30 percent lower than other established suppliers. Huawei has also offered powerful incentives to clinch contracts. In 2001 Neuf Telecom, the French operator and internet service provider, had already selected the companies from which it wanted to solicit bids to build a broadband internet network when a Huawei executive called to ask if his company might also compete the contract. “We were interested, but they were in China. We wondered what their capability to develop something here in France is?” recalls Michel Paulin, Neuf’s chief executive. Huawei’s executives came back with an unbeatable offer: they would build part of the network and run it for three months

to allow Neuf’s engineers to test it — for free. It took Huawei less than three months to build the network, at a cost. Mr Paulin estimates, of several million Euros. The Chinese company won the contract and saved Neuf 10-20 percent of what it might have paid otherwise.

5- Joint Ventures and International Partnerships In today’s business environment, it is a trend for industry peers to develop together through cooperation. Huawei is staging the open-door cooperation on a larger scale. On one hand, they are building more stable partnerships with customers and suppliers, reinforcing strategic cooperation with international and domestic mainstream operators, building up their position in key markets across the globe, strengthening partnerships with key suppliers, and improving the response time and service advantages of the supply chain. On the other hand, Huawei is specifically building up multi-level cooperation with peers, to jointly establish a future-oriented, coexistent win-win and secure development pattern. In the past few years Huawei has initiated multi-level cooperation in many fields such as technology, production and marketing to co-exist. Some of these joint labs and partners are depicted below.

Possible Answers to the Research Questions

From the above discussion about the case, some possible answers to the research questions can now be derived.

To

what

extent

does

Huawei

not

follow

internationalization

theories and why? Based on the traditional internationalization theory, it is difficult to understand Huawei’s behavior of expanding abroad, which seemed to not have possessed the prerequisites of internationalization, nor pursue the same objectives. In other words, the classical OLI model seems not to be valid in Huawei’s case. First, this paper has shown evidence that Huawei does not fit well the traditional motivations of MNCs expanding abroad to leverage their competitive advantages. Although Huawei does have competitive advantages in cost, R&D and marketing in the Chinese markets, and so on, it does not possess obvious competitive advantages for foreign markets, especially at the high end. The case study findings are consistent with previous research which claims that Chinese firms go overseas not to leverage core competence but to overcome domestic weaknesses and fierce competition. Second, in earlier phases of internationalization from the Chinese Mainland, firms evidenced a preference to go to countries where Chinese social networks were present (Cai, 1999; Deng, 2004). However, Huawei has used their experience in building own markets to develop new networks in emerging economies, before tackling developed economies. Their better understanding of emerging markets provides a stronger guarantee of success in their initial overseas expansion plans, improving chances of a smoother entry into more developed western markets later on. So in this perspective, Huawei has been consistent with what traditional international theory suggests. The findings, however, are inconsistent with what the traditional internationalization theory suggests that Chinese firms should start

with gradual organic expansion into contiguous markets (Barkema and Rian, 2005).

What are Huawei’s core competences? A ‘core competence’ has three taints: it makes a contribution to perceived customer benefits; it is difficult for competitors to imitate; and it can be leveraged to a wide variety of markets. Hamel and Prahalad (1990) Huawei’s first competence is R&D. It might seem like low cost would be the number one core competence. However, as the findings reviewed that, although low cost has helped Huawei to expand abroad at the initial stage and it is certainly one of Huawei’s competitive advantages and is likely to be one in the future, in the context of today’s high technology industries, which are knowledgeintensive, the cost advantages are minimal (Mathews, 2002). Instead, strategies of linkage and leverage are important, and these can be obtained from Huawei’s internationalized R&D, which, as has been analyzed in the early section, Huawei has done very well. Superior technological know-how gives Huawei a lever to enter foreign markets and compete with local firms that may better understand the local context. Huawei's reputation as a low cost vendor is only the visible part of the iceberg. Below the waterline, the company has high technical standards. The second Huawei’s core competence is customer service and support, which strengthens Huawei’s telecommunication equipment as reliable products. The third Huawei’s core competence is its close external relationships. Huawei has had close relationships with Chinese banks. This close relationship with major Chinese banks provided Huawei with sufficient, low-cost financing for its customers, enabling the firm to make international sales to many countries. Huawei’s international competitors based in other countries may not have this

close relationship with their banks and cannot exercise such a financial advantage.

What are the challenges for Huawei operating in developed markets? Human resources and Cultural Huawei is struggling to develop a senior management team with the skills necessary to operate effectively on a global scale — such as familiarity with foreign markets, foreign languages skills and experience managing global operations. Building global brands Many Chinese companies consider brand ownership critical to their success overseas but they may not fully appreciate the sustained investment required for brand building and management. Global companies such as Coca-Cola, Nike and Philips invest heavily in their brands, as suggested by their high ranking among the 2005 Inter brand list of the top 100 global brands. It is striking that no Chinese companies are mentioned in the list. So, Huawei has been unable to build its brand. Regulation risk The Ministry of Commerce (MOC) has revealed that some Chinese enterprises including Huawei often pay more attention to the brand, market and purchasing

price, but lack understanding of the complicated local laws and regulations, expensive labor costs and strict labor regulations, as well as other exorbitant costs. Project management Although Huawei has recognized that project management was critical to sustainable development, the total number of projects and employees assigned directly to projects presented planning and logistical challenges, which are more crucial to Huawei as its overseas business had expanded to five continents and was a key revenue and profit driver, making cross-country and cross-cultural project management a new challenge. The Huawei management team began to search for a uniform and standardized project management system to fit these new situations. As the company’s business scale was expanding, Huawei also experienced a transition period from that of a manufacturer to a comprehensive telecommunications solution provider, which required more sophisticated project management. Huawei is also faced with internal challenges. In addition, customers are requiring effective and explicit end-to-end project management and requesting project managers with professional certification. Specifically, these

customers

request

that

project

managers

receive

PMI’s

Project

Management Professional certification, which had already adopted by Huawei’s key international competitors. Low cost strategy Huawei's successful formula winning business in other countries with low prices has not worked as well in U.S. market marked by long-term ties between phone companies and their equipment suppliers. Moreover, in mature markets, like Europe and the U.S. where vendors and clients have longstanding ties, leadingedge technology is just as important as a good price.