Business World _ Print_Why Huawei is Betting on India for Its Future

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Thursday 03 Mar 2011

Raise The Red LanternWhy Huawei is betting on India for its future

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For Max Kaijun Yang, 2010, the year of the tiger by the Chinese calendar, turned out to be fiercer than hewould have liked. The 40-year-old CEO of Huawei India, a subsidiary of Shenzhen-headquartered telecom

equipment giant Huawei Technologies, found himself fire-fighting through most of the year. The bugbear of security concerns by the Indian government kept the company locked out of lucrative contracts in the country fornearly nine months. In May, for instance, state-owned telecom operator BSNL reportedly barred Huawei andChinese rival ZTE from bidding for its Rs 2,000-crore ($443-million) GSM contract in northern and easternIndia.

Though the government did not impose a formal ban, approvals for telecom equipment imports by Chinesevendors hit a roadblock starting early 2010.

Matters have since been resolved, but not before causing a serious dent to Huaweis fortunes in India. Thecompanys India revenues for 2010, say sources close to the company, stand at Rs 4,971 crore ($1.1 billion), adrastic plunge from the Rs 11,000 crore ($2.4 billion) it earned in 2009.

Yet Yang, who has been at the helm here for four years, is surprisinglyoptimistic about the future. India is not just a big market for us. It is also amajor resource centre for our global operations, he says in heavily-accentedEnglish, sitting in his Gurgaon headquarters.

And to drive home the point, Huawei has lined up a $2-billion investment war

chest for India over the next five years. The bulk of this will go into building a20-acre R&D (research and development) campus in Bangalores upscaleWhitefield suburb and a 30,000-sq. ft equipment factory at Sriperumbudur, onthe outskirts of Chennai.

By 2015, the company intends to have between 10,000 and 15,000 direct employees in India, including R&D,manufacturing and managed services.

Global AmbitionsThe $2-billion expansion initiative is being undertaken with the intention of leveraging India to power a larger

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global expansion strategy. The big goal is world domination. At present, Huawei trails Swedens Ericsson as theworlds second-largest telecom equipment maker by revenues. The company closed financial year 2010, endedDecember, with $28 billion in revenues (unaudited). This was just a few steps behind Ericssons $31.3 billion.Paris-based Alcatel-Lucent follows third at $21.3 billion revenues and Finlands Nokia Siemens Networkscomes in fourth at $17 billion. Incidentally, while Ericssons global revenues have dropped 1.6 per cent duringthis period, Huaweis have grown 28.4 per cent.

That makes the Chinese firms sudden transformation in India from quiet builder to aggressive expansionistinteresting. The companys rapid advance in India became visible in 2009 when it grew revenues 76 per cent totopple Ericsson as the second-largest equipment vendor here. But to beat Ericsson on the global stage, it mustfirst dominate the Indian market, which is currently led by Nokia. The reasons are not difficult to see.

The global telecom services market is currently led by wireless or mobile services. By2014, it is estimated that, wireless or mobile will account for 45 per cent of the $2.3-trillion global telecom services market, according to the KPMG India Telecom 2010report released in December. In 2010, India was the worlds second-largest market formobile services, accounting for 13 per cent of the global subscriber base, notes thereport. China accounted for 16 per cent.

The next few years will see Indian telecom operators battle it out for this market using3G and BWA (broadband wireless access) technologies as their primary tools forproviding high-end services. These technologies allow for more reliable voice services,faster Internet connectivity and data transfer on mobile phones, among other value-added services. However, this also means that telecom operators will have to upgradeexisting networks or even build new ones in some cases.

For telecom equipment makers such as Huawei, Nokia Siemens Networks and Ericsson, 3G and BWA rolloutsspell huge business opportunities in terms of contracts for new equipment. During May-December 2010, telecomoperators awarded 3G contracts worth about Rs 15,366 crore ($3.4 billion) for 68 circles, according to back-of-the-envelope industry calculations.

So far, Nokia Siemens Networks has bagged the lions share of the contracts a reported 30 per cent fromtelecom operators such as Bharti Airtel, Idea Cellular, Tata Teleservices and Vodafone. Huawei, despite thesetbacks in the past year, shored up contracts worth nearly Rs 3,000 crore in 17 circles, according to sourcesclose to the company. The first two contracts came in from Reliance Communications and Tata Teleservices inSeptember, soon after the company worked around the embargo on imports. Tata Teleservices has contracted it

to roll out 3G solutions in five circles under the managed services model, which involves outsourcing fieldoperation and support services to the Chinese company.

The India FactorSuccess in India is also critical for Huawei because it represents the companys first major frontier outside China.In the past decade, several Chinese companies, especially in the telecom and information technology sectors,have mounted serious initiatives to globalise. With most of the worlds manufacturing now done in China,homegrown companies are under pressure to look outwards in order to compete at home and overseas.




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Huaweis India FootprintAll the big telecom operators in India use

Huaweis equipment

Employees: More than 6,000 (2,000 in R&D)

Huawei was among the first to move beyond China in the late 1990s. India was the first and critical steppingstone to gaining international experience, says Justin Chen, chief operating officer of Huawei Technologies(India), the Chinese players R&D subsidiary in Bangalore. Since 1998, when 100 Chinese engineers camedown to Bangalore to set up the R&D centre and kick off the India campaign, the company has steadily laid thefoundations for its largest operation outside China. The R&D centre now employs over 2,000 people and doescore-product development work for global customers. Apart from cornering market share here, Huawei clearlysees India as its second-most important base for intellectual property resources outside China.

Having a quasi-Indian face will certainly help it better penetrate developedmarkets such as Europe and the US. Success in the worlds third-largestmarket for mobile services has eluded Huawei so far, largely because of the USgovernments traditional paranoia of Chinese companies. Mature telecommarkets such as the US are moving beyond 3G to LTE (long-term evolution)networks or 4G, which are essentially built on all-IP (Internet protocol)architectures and help reduce overall network costs, among other benefits.

Huawei has been busy shoring up LTE patents to get a headstart. The company owns 8 per cent of essentialpatents related to LTE standards globally, slightly ahead of Ericsson which owns 7 per cent, according to a May2010-study by London-based telecom research firm Informa Telecoms & Media. US-based wireless technologycompany InterDigital is the market leader with 21 per cent. In three years, Huawei believes it can upstageincumbents such as Ericsson and Nokia in the global market for next-generation telecom networks on the back of its technology lead.

To achieve that goal, it will need two things. One, it will need to establish itself as the market leader in India,which will inevitably become the worlds second-largest 4G market by then. Two, it will have to marshal its low-cost R&D resources in China and India to retain its edge and cost efficiencies.

The past couple of years have seen Huawei register spectacular growth in India. Much of this growth has comefrom contract wins in the Rs 43,000-crore wireless infrastructure market, where it is now the third-largest vendorafter Ericsson and Nokia Siemens Network. Today, every time a call is made in India, chances are that 90 percent of the time a Huawei network is being used, says Lester Herbert, executive director for marketing andstrategy at Huawei India.

In A Price-Sensitive MarketThe company currently has relationships with all Top 10 telecom operators in the country, including Bharti Airtel,Reliance Communications, Idea Cellular, Vodafone and Tata Teleservices. The primary tool that the company

has put to use to penetrate the price-sensitive Indian market is its cost advantage. Being headquartered in Chinagives it access to the worlds cheapest manufacturing resources. This allows it to offer lower prices than itsEuropean rivals. This has been used effectively in emerging markets to beat incumbents, says a 2010 report onHuawei and ZTE by US-based research firm Gerson Lehrman Group (GLG).

India is the toughest telecom market in theworld, says Huaweis Yang. The countrysmobile market has among the lowest Arpus(average revenues per user) globally. In 2009,Arpus stood at $5, the second-lowest after




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Investments: $2 billion ($300 million in R&D)Key customers: Bharti Airtel, Vodafone,Tata Teleservices,

Reliance Communications, MTNL, Idea Cellular

Big Picture

Indias telecom equipment market is poisedto grow manifold

By 2015, India will need Rs 35,000-50,000 croreworth of telecom equipment3G network roll-outs will constitute bulk of telecom equipment contract orders; mobileand broadband will lead demandIndia had 636 million mobile subscribers tillJune 2010, or 13 per cent of the globalsubscriber base

Source: Indian Telecom 2010 Report, KPMG

Indonesia, according to the KPMG IndiaTelecom Report 2010. China, by comparison,was at $10, while Japan was the highest at $54.This makes Indian telecom operators extremelycost-sensitive, and much of the onus of bringingdown the cost of operations falls on equipmentvendors.

In a typical telecom set-up, the overall cost is splitinto two parts. The initial capital expenditurerequired for setting up the network infrastructureconstitutes just 20 per cent of the cost. Operatingcosts, which imply day-to-day maintenance andupgrades, account for the balance. As Indiasmobile subscriber base grows at an average rateof 15-17 million new customers per month,operators are under constant pressure to invest inupgrading infrastructure.

Research And DevelopWhile low manufacturing costs are a clear

advantage, R&D plays an equally important role in keeping Huawei cost competitive. The company spends 10per cent of its revenues per year on R&D, and most of this is done in China, where engineers cost one-fifth of those in Europe or the US, home to Huaweis rivals.

After they have built a reputation as a serious competitor, they begin to win customers with technology. They

are not copycats, but devotees to new standards and products, says Lin Sun, telecom consultant with GLG, in a2010 report. According to telecom industry analysts, one of Huaweis biggest strengths is its faster response tonew technologies. About 43 per cent of its overall workforce of 100,000 is engaged in R&D. Incidentally, rivalEricsson is also a big R&D spender. The Swedish player reportedly spent 13 per cent its revenues on R&D in2009. However, unlike many of its developed peers, Huawei claims it is able to learn faster because itoutsources core product development to all its 17 global R&D centres.

The Bangalore centre, for instance, does development and support work for about 50 telecom protocols digital message formats that allow different telecom devices to talk to each other. The firms global clients inChina, Europe and West Asia use the protocols. The centre, which has 250 approved patents, is credited with

pioneering the mobile softswitch (software that routes telephone calls usually using the Internet, instead of aphysical switchboard).

A 100-member team at the Bangalore centre is in the throes of innovating for the companys latest thrust area devices, notably cellphones. This team developed several applications on the companys recently launchedAndroid-based smartphone, Huawei Ideos.

Incidentally, mobile phones is one area that will increasingly see Huawei move away from its traditional B2B(business-to-business) strategy and go to consumers directly. It launched 20 handset variants here in October as




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part of the direct retail push. The business- to-business market for handsets, where they are bundled withoperator services, virtually does not exist in India currently.

Having a large R&D base in India gives Huawei several advantages over its European competitors. Being inBangalore means ready access to the countrys best software engineering talent, which is a critical input to itsproduct development work. Over the years, it has integrated Indian engineers skills in software productengineering and systems integration with its core-product development cycle. The combination of Chinese and

Indian engineers, among the lowest cost in the world, gives it a unique cost advantage.

The Bangalore centre is also responsible for changing the way Huawei is doing product development today inseveral areas. A few years ago, the team started using Agile, a group of software development methodologiesthat breaks down the product development process from concept to delivery into several separate and smallertimeframes. Huawei was able to tap into Agile when the concept started gaining ground in Bangalore around2004. With Agile, customer feedback is sought at each stage, which makes the process of developing theproduct faster and more efficient. You can get to market faster and avoid wastage. This works especially wellfor products where the customers requirement may change frequently, says Virendra Gupta, who headsengineering and collaborative research and development for Huawei in India. Agile is now widely used by IndianIT firms such as Infosys Technologies and Wipro as well as multinationals such as SAP.

Chen, who has been at the helm of the R&D operations for two years, however, thinks one of the moreimportant contributions that Bangalore makes to the parent is in terms of changing the way Huawei worksglobally. We have been the first point of localisation for the company, and many of our processes are now beingrolled out across the organisation, he says.

By localisation, Chen implies that the Chinese company has nottried to force-feed its processes and practices on the Indian

organisation. The R&D capabilities will be significantly beefedup when the new campus is ready. The centres 2,000 people,of whom 98 per cent are Indian, currently work out of sevenfloors of a five-star hotel in mid-town Bangalore. With the newcampus, the firms R&D headcount is expected to increase to5,000 by 2015. By then, out of the $2-billion kitty, $600million (about Rs 2,800 crore) would have been invested inR&D alone.

Manufacturing Success

In the next few years, however, aside of the significantinvestments in R&D, what will, probably, hold Huawei in better stead in India will be the manufacturing unit inChennai. The decision to build a manufacturing facility in Chennai, despite having more cost-effective facilities inChina, signifies two things. One, it now has the critical mass in terms of revenues that justifies moving some of themanufacturing from China to India. It had to make financial sense to manufacture in India. This facility will helpus to get to market faster, says A. Sethuraman, executive director at Huawei India (Gurgaon). The totalinvestment in the factory is pegged at $500 million (about Rs 2,300 crore). Though it will initially cater exclusivelyto the Indian market, exports to other emerging markets are part of the long-term plan.

Two, a manufacturing facility is also a strategic decision that will enable the company to score some much-




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needed brownie points with the Indian government. While the bulk of the equipment needed in India will still beimported from China, a local manufacturing unit will help ease some of the concerns with imports. It will also helpHuawei hedge against situations such as the one it faced last April with the embargo on imports.

However, as Huawei pushes forward in India and attempts to become a more visible entity, it will also have todeal with new challenges, chief among which is a reported succession-related crisis at its headquarters. Thecompanys 67-year-old founder and CEO, Ren Zhengfei, is said to be keen to have his son Ren Ping take over

as CEO at some point. Unconfirmed news reports in November said a clutch of Huawei senior executives wereon their way out in the wake of this development. Incidentally, Zhengfei owns just 1.4 per cent of Huawei, whileemployees own the remainder through a trade union. Succession issues are probably the last thing that theChinese telecom equipment giant needs just when it is poised to action the most critical phase of its globalisationbid.

Fortunately for Max Yang, 2011 is the year of the rabbit, the symbol of endurance by the Chinese calendar.After a particularly difficult year, he will need it to keep Huawei India at the top of its game.

snigdha(dot)sengupta(at)abp(dot)in

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Business World _ Print_Why Huawei is Betting on India for Its Future