Innovation Blog

HuaWei – Case Study  –    “Created in China” Is Real, Imminent – and a Major Threat To Your Business [1]

By Shlomo Maital

Dec. 2/2009

 技 有限公司    Huawei Technologies Co. Ltd.

“Their (HuaWei’s)  technology is innovative, and their bid provided the lowest cost of ownership for us.  In our business, the lowest cost of ownership is key.”      – Morton K. Sorby,  head, business development,  Telenor

    A Personal Note: Two years ago, I helped lead a best-practices benchmarking trip to China, for 30 senior  Israeli high-tech managers doing a TIM executive program.   During our visit to a huge science park near Beijing, we heard the Director tell us:  “Today, Made in China.  Tomorrow:  Created in China.” 

     Loose translation:  Today China achieves phenomenal economic growth by low-cost manufacturing of products invented and designed in the West.   Tomorrow it will move up the economic ‘food chain’,  and invent and design its own products — and then make them, too.  Can you compete with that?  

     This strategy is a direct threat to the U.S., Europe and Israel, because if China replaces them in the food chain, they will by definition be below China — and the implications for economic growth, wellbeing and GDP per capita are sweeping.

     Do we see widespread awareness in the West of this strategic threat? Do we see national industrial policies designed by panels of experts to meet the challenge?  Or does the West continue to believe that China will remain where it is — a low-cost manufacturer. 

      HuaWei Technologies Co. Ltd., global producer of network solutions for telecoms,  is a concrete example of a major success of “Created in China”.    This is why I have written this brief case study narrative.   There are many more HuWei’s in China now gaining in strength and self-confidence.  You will doubtless soon meet them in the marketplace.  Are you ready?

     Basic Facts:   HuaWei was established 21 years ago, in 1988, by Ren Zhengfei, a former People’s Liberation Army officer.  He remains its CEO.  HuaWei began as an importer of PBX phone systems. It quickly began developing its own.  In 1993 it began selling its own digital telephone switch, beginning with rural areas in China and expanding into major cities.  HuaWei won its first overseas contract in 1996.  By 2004 its sales abroad exceeded its domestic sales.  In 2009 the World Intellectual Property Organization WIPO reported that   Huawei was ranked as the largest applicant under WIPO’s Patent Cooperation Treaty (PCT), with 1,737 applications published in 2008, replacing Philips Electronics.  In Dec. 2008 Business Week ranked HuaWei 3rd, after Apple and Google, in its World’s Most Influential Companies list.

   HuaWei is privately owned.  HuaWei marketing director Edward Zhou says the company is owned by its 87,502 employees.    The U.S. thinktank RAND Corp. claims HuaWei “maintains deep ties with the Chinese military”, as a customer, political patron and R&D partner.  HuaWei denies it.  Its headquarters are in Shenzhen.

   HuaWei’s revenues in 2008 (a bad year for network infrastructure companies) was $23.3 b., up 43 per cent from a year ago,  and generating $1.15 b. in net income (up from $957 m. in 2007).   Foreign sales account for three-quarters of its revenue, up from 43 per cent a year ago.  (See Figure).

    HuaWei supplies gear to China’s three largest operators — China Mobile, China Telecom, China Unicom — and has doubled its share of the $38 b. global mobile equipment market to 20 per cent in 3Q 2009, up from only 11 per cent a year earlier.  It thus replaced Nokia Siemens (19.5 per cent) but trails Ericsson (32 per cent).  

    HuaWei as Innovator:   HuaWei’s value proposition is based on “cost of ownership” i.e., the total lifetime cost of their equipment, rather than the price.  HuaWei is not always the lowest-priced competitor.  “Our focus has been on lowering the total cost of ownership for the network as a whole,”  Edward Zhou notes.  In an era when telecom’s ARPU (average revenue per user) is falling, cost of ownership is crucial.  For instance, HuaWei’s SingleRAN multipurpose wireless network that transmits in 2G, 3G and LTD (long term evolution) signals saves operators money, because they can buy a single grid rather than install separate ones for each technology.   HuaWei is apparently the first to deploy, on a large scale, the new 4G technology, LTE,  in base stations. 

     Another Personal Note:   My reliable inside sources at HuaWei tell me this:  HuaWei is regarded in China as its most prestigious high-tech global company.  HuaWei’s salaries for engineers are significantly higher than those paid by other Chinese high-tech firms, though they are still much lower than in the West.  So, Chinese engineers, when they graduate, compete fiercely for HuaWei jobs, both for prestige and for money.  What HuaWei demands in return?   Twenty hour (20) work days.  This is not an exaggeration.  Twenty hour workdays out of 24.  Four hours of sleep, etc.    Because HuaWei gets the very top talent among the hundreds of thousands of graduating Chinese engineers,  it has enormous innovative ability and enormous ability to scale up rapidly and deploy globally. 

     To prepare itself for global expansion, HuaWei engineered an enormous transformation of its business processes, using leading consultants.  They now employ best practices in management innovation, gleaned from top companies all over the world.

    And if this is not sufficient…..:    China’s second largest networking equipment firm is ZTE.  Its sales, too, rose 43 per cent in 3Q 2009, to $2.2 b. ($8.8 b. annual).    In our benchmarking trip, we visited ZTE, which is now supplying China’s mobile operators with its own home-grown 3G technology. We observed that  ZTE is no less dynamic and menacing, as a competitor, than HuaWei.   And both have become highly self-confident, following marketplace success.

     If you believe that China’s mobile market is the world’s fastest growing (rivaling India’s), and if your company is in the industry, you may eye that market enviously.  As you do, think about meeting HuaWei and ZTE head-on, in China or in Asia in general.   Think of meeting them in more stagnant markets in Europe.  Think of matching their scale, innovativeness, infinite bank credit and speed.  

     If you are happily not in the network infrastructure business, picture a version of HuaWei in your own industry.  If there is none right now, there will soon be.  Believe me.

     Valium, anyone? 

 

 

 

 

[1] This case study is based in part on material in www.huawei.com, and Kevin J. O’Brien, “Newcomer from China roils mobile network field”, New York Times, Nov. 30 2009, www.nyt.com.