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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 1 2006
Internationalisation of Chinese firms: A case study of Huawei
Technologies Ltd.
By
Wei Huang
2006
A dissertation presented in part consideration for the degree of MA
Finance and Investment
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 2 2006
ACKNOWLEDGEMENTS I would like to express my appreciation to Bernard Leca from Nottingham University Business School, for his guidance, encouragement, support and feedback throughout the dissertation process. I would also like to thank my parents and my boyfriend Din, for their endless love and support.
ABSTRACT Since the 21st century Chinese firms have started at a grate pace of expanding their business abroad. This has aroused worldwide speculation and tension. By reporting on qualitative research conducted at Huawei Technologies Ltd., this paper analyses Huawei’s corporate profile and its internationalisation strategies employed as a latecomer firm. The key issues examined in this paper are: to what extent does Huawei not follow the traditional internationalisation theory, its core competences and its challenges in operating in developed markets.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 3 2006
CONTENT TABLE
ABSTRACT....................................................................................................................... 2
LIST OF FIGURES .......................................................................................................... 4
LIST OF TABLES............................................................................................................ 5
1. INTRODUCTION ........................................................................................................ 6
2. LITERATURE REVIEW ............................................................................................ 8
2.1 Motivations that led companies to expand abroad.................................................... 8
2.2 Traditional internationalisation theory...................................................................... 9
2.3 The rationale for Chinese internationalisation........................................................ 11
2.5 Forces behind internationalisation of Chinese firms .............................................. 19
2.6 Challenges for internalisation of Chinese firms...................................................... 26
2.7 Strategies employed by the latecomer firms........................................................... 30
3. RESEARCH QUESTIONS........................................................................................ 36
4. RESEARCH METHODOLOGIES........................................................................... 36
5. HUAWEI TECHNOLOGIES LTD. CASE STUDY ............................................... 37
5.1 Reasons of choosing telecommunication industry and Huawei ............................. 37
5.2 Huawei’s corporate analysis ................................................................................... 42
5.3 Competitive strategy analysis ................................................................................. 50
5.3.1 Internationalisation of R&D for long-term success ......................................... 50
5.3.2 Customer focus ................................................................................................ 55
5.3.3 Cross-culture management and project management ...................................... 57
5.3.4 Price cutting strategy to JV/partnership selling ............................................... 59
6. POSSIBEL ANSWERS TO RESEARCH QUESTIONS........................................ 65
7. RESEARCH LIMITATIONS.................................................................................... 73
8. CONCLUSIONS ......................................................................................................... 73
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 4 2006
LIST OF FIGURES
Figure 1: Primary motivations for Chinese companies considering global expansion..... 13 Figure 2: Projected GDP (US$ billion, market exchange rates)…………………………20 Figure 3: China FDI flows (US$ million)………………………………………………..20 Figure 4: Chinese Yuan against US$.................................................................................21 Figure 5: China’s currency basket: estimated weights*, % .............................................. 21 Figure 6: National savings rates........................................................................................ 24 Figure 7: The Development and Maintenance of Guanxi................................................. 30 Figure 8: Weighing the trade-offs of globalization market entry strategy........................ 31 Figure 9: R&D expenditure as a % of GDP……………………………………………...34 Figure 10: Proposed destinations for R&D expenditure among international companies 34 Figure 11: Determining Chinese industries and companies with globalization potential 37 Figure 12: Growth rates in the telecommunications sector compared to GDP 1981-2000........................................................................................................................................... 38 Figure 13: China-China-Foreign (CCF) joint venture model ........................................... 40 Figure 14: Huawei’s customized network solutions......................................................... 43 Figure 15: Orders ($5.6bn) by Region, 2004……………………………………….…....44 Figure 16: Huawei’s Human research structure………………………………………….45 Figure 17: Huawei’s Expansion Timeline ........................................................................ 45 Figure 18: Huawei’s worldwide offices............................................................................ 46 Figure 19: Switching…………………………………………………………………..…47 Figure 20: NGN ................................................................................................................ 47 Figure 21: Integrated accessnetwork……….....................................................................47 Figure 22: DSLAM........................................................................................................... 47 Figure 23: Optical network ............................................................................................... 48 Figure 24: Contract sales (USD in billions)...................................................................... 49 Figure 25: Huawei - Revenue by Geography (FY 2002 - FY 2004) ................................ 49 Figure 26: Huawei Patents ................................................................................................ 51 Figure 27: Huawei’s internationalisation of R&D: goals and strategies .......................... 52 Figure 28: Integrated R&D network of Huawei ............................................................... 55 Figure 29: Huawei teams up with world leading companies............................................ 58 Figure 30: Huawei’s joint labs & partners and JV............................................................ 63 Figure 31: Marconi share price ......................................................................................... 64
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 5 2006
LIST OF TABLES
Table 1: Forces behind internationalisation by Chinese firms.......................................... 25
Table 2: Hofstede’s Five Cultural Dimensions................................................................. 29
Table 3: Advantages and challenges for OEM/JV and Acquisition ................................. 33
Table 4: Chinese Tax Benefits .......................................................................................... 40
Table 5: Orders by Division, 2004.................................................................................... 44
Table 6: SWOT analysis of Huawei ................................................................................. 50
Table 7: Huawei’s R&D location ..................................................................................... 51
Table 8: R&D Cost Profile by OEM, 2004....................................................................... 61
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 6 2006
1. INTRODUCTION
The 21st century has been described as China’s century. Since Deng Xiaoping initiated a
program of path-breaking economic reform in 1978, China has experienced the most
phenomenal economic growth, primarily through a combination of exports, massive
infrastructure spending and gradual market liberalisation, culminating in China’s entry
into the World Trade Organisation (WTO) in 2001. Chinese companies will undoubtedly
accelerate their global presence in line with China’s ascent as a major economic power.
Lenovo’s recent purchase of the IBM Personal Computer Division; Shanghai Automotive
Industry Corporation (SAIC) and its sister company Nanjing Automobile’s acquisition of
most of the assets of MG Rover in 2005; SAIC’s 50.6 percent acquisition of Korea’s
Ssangyong (SAIC, 2004); China National Petroleum Corporation’s (CNPC) US$4.2
billion acquisition of PetroKazakhstan; Haier’s unsuccessful bid for Maytag in 2005 and
Huawei Technology’s unsuccessful bid to acquire Marconi highlight Chinese companies’
ambitions to expand globally by securing assets and capabilities that can enhance their
competitiveness.
However, very limited research has been devoted to the internationalisation of Chinese
firms (Child and Lu, 1996) and this compares unfavourably with the considerable amount
of studies of multinational companies (MNCs) in the developed countries. This paper will
review the previous work of internationalisation of Chinese firms then by using the case
study of Huawei Technologies Ltd, the author attempts to analyse Huawei’s corporate
profile and its internationalisation strategies employed as a latecomer firm. The key
questions that the author attempts to answer are: to what extent Huawei not follow the
traditional internationalisation theory, its core competences and its challenges in
operating in developed markets. The internationalizing of Huawei is of emerging interest
not only for its potential to extend current theorizing but also for the strategy lessons it
may offer to other developing countries. At the same time, foreign companies, whether
active in China or not, will benefit from this study by factoring the insights into the
formulation of their business strategies.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 7 2006
In the literature review section, after briefing discussing the motivations that led
companies to expand abroad, this paper will start with presenting the traditional
internationalisation theory, which has been employed to explain the international
expansion patterns of Western firms. It will then discuss the rationale for Chinese
internationalisation followed by the discussion of latecomer perspectives. Forces,
challenges and most importantly strategies of internationalisation of Chinese firms will
also be reviewed in this section. In section three and four, research questions and research
methodologies will be presented respectively. In section five, the Huawei case study will
be analyzed from aspects of reasons of choosing this industry and this company, its
corporate profile and its internationalisation strategies employed as a latecomer firm. In
chapter six, the possible answers to the research questions will be discussed followed by
the limitations and conclusion in chapter seven and eight respectively.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 8 2006
2. LITERATURE REVIEW
2.1 Motivations that led companies to expand abroad
Bartlett and Ghoshal (1992) summarised three main traditional driving forces behind the
overseas expansion of a vast majority of MNCs: (1) to secure key supplies, (2) market
seeking, and (3) access low-cost factors. Bartlett and Ghoshal (1992) emphasised 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.
The well-known product cycle theory developed by Vernon (1966) suggests that the
starting point for the internationalisation process is typically an innovation that a
company creates in its home country. The company goes overseas only when its products
had matured and to some extent lost local appeal. Exporting normally happened before
this overseas production. Although the product cycle theory provided a useful way to
describe much of the internationalisation of the post war decades, by the 1980s its
explanatory power was beginning to wane. As the international business environment
became increasingly complex and sophisticated, companies developed a much richer
rationale for their worldwide operations (Bartlett and Ghoshal, 1992).
The emerging motivations, discussed by Bartlett and Ghoshal (1992), were driven by a
set of economic, technological, and social developments that made internationalisation
essential of technological change. They conclude that those forces of increasing scale
economies, ballooning R&D investments, and shortening product life cycles transformed
many industries into global rather than national structures and made worldwide scope of
activities not a matter of choice but indeed an essential prerequisite for companies to
survive in those businesses. Furthermore, a company whose international strategy was
triggered by a technological or marketing advantage could enhance that advantage
through the scanning and learning potential inherent in this world wide network of
operations (Bartlett and Ghoshal, 1992).
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 9 2006
Motivation alone, however, is not enough for a company to become a multinational.
Bartlett and Ghoshal (1992) summarised three conditions must be met for the existence
of an MNC. 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.
2.2 Traditional internationalisation theory
The traditional internationalisation theory assumes that firms will internationalize on the
basis of a definable competitive advantage that allows them to secure enough return to
cover the additional costs and risks associated with operating abroad (Buckley and
Ghauri, 1999; Caves, 1971). Dunning’s (2001) eclectic model remains the most valid
explanation on producing overseas. The eclectic paradigm draws together elements of
previous theories to identify ownership, location and internalization (OLI) advantages
that motivate internationalisation, in other words, a firm will engage in international
production when three inter-related conditions (or OLI factors) are present: First, a firm
possesses certain ownership-specific advantages not possessed by competing firms of
other nationalities ownership advantages are firm-specific factors such as superior
proprietary resources or managerial capabilities that can be applied competitively in a
foreign country (Barney, 1991). Second, there must be location-specific factors that make
it more profitable for the firm to exploit its assets in overseas, rather than in domestic
locations; location advantages can account for decisions to invest in foreign countries
that offer superior market or production opportunities to those available elsewhere and/or
opportunities to secure valued inputs. Third, such advantages are most suitably exploited
by the firm itself rather than by selling or leasing them to other firms. In other words, the
firm internalizes the use of its ownership-specific advantages. Internalization advantages
accrue to firms that can reduce transaction costs by investing abroad so as to undertake
transformation or supporting processes more effectively than can be achieved through
market transactions (Buckley and Casson, 1976; Safarian, 2003). Internalization may
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 10 2006
offer clear efficiency advantages in the management of interdependencies concerning
know-how, reputation, the value chain, and marketing, and these advantages offer a
powerful explanation for the rise of the MNCs (Hennert, 2001).
However, the traditional motivations and internationalisation theory reviewed above has
derived primarily from research on large western enterprises, which can be presumed to
enjoy considerable domestic strengths before they internationalize. Similarly, the
traditional motivations that led companies to expand abroad were particularly strong for
some of the Western multinationals for example European MNCs as their relatively small
market is insufficient to support the volume intensive manufacturing processes (market
seeking), and US MNCs (Product Cycle Theory). Furthermore, the predominant
assumption in the traditional internationalisation theory has been that internationalisation
is motivated by a firm’s wish to exploit its existing ownership advantages. The
conventional view therefore focuses on the overseas possibilities for asset-exploitation.
Relevant studies on the internationalisation process include Hill et al. (1990), Norwell et
al. (1995), Kutscher and Baumile (1997) and Melin (1997). The best-known model in the
academic literature is Johanson and Vahlne (1977), which developed a theory about the
continuous incremental process that takes place in firms that enter foreign markets.
However, the internationalisation process for successful companies seems to have
changed over the last two decades, with interesting implications for theory. Companies
now can make larger steps and still be successful (Barkema and Rian, 2005). Huawei is
one of the successful stories to this point, which will be demonstrated in the later section
of this paper. Therefore, it has been argued that, compared to the initial competitive
advantage, the “classical” incremental internationalisation process is probably less
important now (Yip et al., 2000). The established theory above would argue that Chinese
firms should start with gradual organic expansion into contiguous markets (Barkema and
Rian, 2005). However, as in the later section of the paper, research has shown evidence
that this is not exactly the case for Chinese companies.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 11 2006
2.3 The rationale for Chinese internationalisation
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 (Child and Rodrigues, 2005). Therefore,
internationalisation among Chinese companies seem to have the primary purpose of
obtaining these missing advantages in order to quickly access foreign market or reinforce
home market positions. It also seems that the Chinese companies apparently recognize
the need of knowledge seeking as the recent global R&D activities aim for, and the need
of upgrading their knowledge creating capabilities abroad. Nolan (2001) has argued that
the competitive capability of China’s large firms after two decades of reform is still
painfully weak in relation to the global giants. He points to factors such as their weakness
in R&D, their limited marketing capability, their lack of brand development, and the
administrative constraints that government agencies continue to impose on them. Nolan
(2001) also argues that the international expansion, which an increasing number of
Chinese enterprises are now undertaking, may signify a determined attempt to escape the
limitations of their domestic situation and, in order to achieve this, to remedy their main
competitive weaknesses.
Similarly, Boisot (2004) has argued that, in contrast to the assumptions of traditional
internationalisation theory, many Chinese firms will not be moving abroad to exploit a
competitive advantage that was developed in the domestic market, but to avoid a number
of competitive disadvantages incurred by operating exclusively in the domestic market.
He lists a range of disadvantageous domestic conditions: regional protectionism that
limits the opportunities otherwise offered by a large domestic market to exploit
economies of scale; limited access to capital that prevents investment in plants of optimal
scale; lack of developed intellectual property rights that limits access to state-of-the-art
technologies; under provision of training and education that limits access to skilled
human resources; poor local infrastructure that increases transport costs; and regional
markets that are fragmented by provincial and municipal protectionism (see also Zhang,
2005).
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 12 2006
Moreover, in industries such as mobile phones, electronics and white goods, Chinese
firms now face fierce competition from leading international brands. This competition
together with over capacity is driving profit margins down to wafer thin proportions
(Fang, 2002). Government interference also continues in various forms and at different
levels (Huang, 2003; Meyer and Lu, 2004; Nolan, 2001). Transaction costs are also
raised by the continuing complexity and uncertainties in the way the Chinese legal
system operates (Peerenboom, 2001). The presence of these domestic constraints and
pressures adds to the attractiveness of producing for foreign markets. In order to do this,
however, Chinese firms need to build up new capabilities through investment or
partnership abroad.
Building up Chinese companies’ strength abroad offers the prospect of providing needed
assets much faster and also of increasing the firms’ bargaining power against local
stakeholders who are constantly acting to reduce their profitability (Boisot, 2004).
Having developed an international presence, Chinese companies would be in a stronger
position to compete against multinationals in their domestic market as well. It has been
seen that the motives for the foreign investment undertaken by some of China’s most
dynamic firms are consistent with the view that they regard internationalisation as the
means to better equip themselves to gain competitive strength (Child and Rodrigues,
2005). It has also be noted how they benefit from government support in this aspiration.
Many Chinese firms already enjoy a cost advantage due to their low wages and to the
production improvements achieved in recent years, often by learning from partnerships
with multinationals (Guthrie, 2005). The high levels of competition in many of China’s
domestic markets have also fostered cost effectiveness (Child and Rodrigues, 2005).
However, as Zhang (2003) points out, while a cost advantage is a relatively important
competitive factor for simple products and lower income markets, in order to compete in
other higher value-adding markets, differentiation and brand advantages are also required.
Differentiation is gained when the market perceives products to stand out from those of
competitors in a way that customers approve. A brand advantage is gained when
customers are willing to pay a higher price for a product even though it has the same
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 13 2006
qualities and functions performance as competing products. Differentiation may be
sufficient to compete internationally in industrial markets such as automotive components
where customers are able to judge the substantive quality and performance of a product
through their professional knowledge. Brand recognition, with the reputation (and
sometimes cachet) that it signifies, is particularly important in consumer markets, such as
those for automobiles, beverages, clothing, consumer electronics, household goods, and
mobile phones. As will become apparent from the case study in this paper to be
considered, the strengthening of differentiation and/or brand advantage features is an
important driver for Huawei going abroad. Often Chinese companies are going abroad to
acquire advanced technology and R&D capabilities, which provide the means to develop
a differentiation advantage. Some are acquiring or developing global brands as the basis
for securing a brand advantage. Even before going abroad, some have used long-term
contracts or partnerships with leading foreign companies as a means to learn about
international production and quality standards as a preparation for internationalisation.
According to IBM’s 2005’s survey (primarily among 25 companies that China’s global
leaders are likely to emerge), Chinese companies are motivated to expand globally for a
range of reasons, the top three reasons including seeking new markets for growth, acquire
advanced technology and management skills, and intense competition in domestic market
(See Figure 1).
Figure 1: Primary motivations for Chinese companies considering global expansion
Source: Beebe et al, 2005. IBM institute for business value and Fudan globalization survey, 2005 (n=25).
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 14 2006
2.4 The latecomer perspective
Peng (2005) and Mathews (2002) have argued that China does not require theories that
are specific to itself and that would differ substantially from mainstream, primarily
Western theories. Similarly, Child and Rodrigues (2005) suggest that China presents an
opportunity to extend, rather than replace, existing theorizing on the internationalisation
of firms including that applied to developing country MNCs. This following discussion
will review Peng (2005), Mathews (2002) and Child and Rodrigues’s (2005) work of
further extending the traditional internationalisation theory. Two primary areas in which
this opportunity arises concern the latecomer perspective and catch-up strategies —
institutional analysis with reference to the role of government and the liability of
foreignness.
First of all, it is necessary to define what meant by latecomer firm (LCF). According to
Mathews (2002), the latecomer firm is one which meets the following four conditions: (1)
Industry entry: The LCF is a late entrant to an industry, not by choice but by historical
necessity; (2) Resources: The LCF is initially resource-poor, e.g. lacking technology and
market access;(3) Strategic intent: The LCF is focused on catch-up as its primary goal; (4)
Competitive position: The LCF has some initial competitive advantages, such as low
costs, which it can utilize to leverage a position in the industry of choice. Mathews (2002)
argues that the category is of greatest interest in the context of high-technology industries,
which are knowledge-intensive, for these are the hardest to penetrate, where cost
advantages are minimal, and where strategies of linkage and leverage are all important.
According to Dore (1973), the ‘late development’ thesis has classically been applied to
nations, initially Japan and subsequently the emergent new economies of East Asia,
notably Taiwan, South Korea, Hong Kong, and Singapore. Chinese company Huawei
also qualifies to join this category and the above conditions are all met as follows: (1)
Huawei entered the telecommunication industry in 1988, (2) initially lacking in
technology and market access (3) Primary goal is to become the world’s leading
telecommunication firm (4) Low cost is one of Huawei’s competitive advantages.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 15 2006
As many previous researchers (for example, Mathews, 2002, Child and Rodrigues, 2005)
emphasised that while such LCFs had some initial competitive advantages, such as low
labour costs, these became less crucial as the firms moved into more sophisticated
markets with higher value products. The significance of the latecomer perspective lies in
the way it directs attention to international investment as a means of addressing
competitive disadvantages. Mathews’s (2002) research indicated that these LCFs
overcome competitive disadvantages through linkage, resource leverage, and learning. It
is worth to note here that the internationalisation process of Chinese firms lends support
to the view that their capacity for organizational learning should not be underestimated
and that is one of the most important of all competitive advantages (Moingeon and
Edmonson, 1996).
As Child and Rodrigues (2005) state that the ‘latecomer’ to global business deserves to
be granted greater theoretical attention, particularly with respect to the processes whereby
firms in this category can develop international competitive strengths. This is not to deny
the fundamental insight that firms have to possess competitive advantages, particularly
ownership and internalization ones, in order to sustain a successful presence in
international markets. It is, however, to argue that greater attention needs to be given to
the ways in which initially disadvantaged firms from countries like China can acquire the
necessary assets to offset these disadvantages through a close association with foreign
MNCs or obtaining them abroad.
Institutional analysis and the role of government
A common point of departure for most scholars (Scott, 1987; DiMaggio and Powell,
1991) is that organizations are under pressure to adapt to and be consistent with their
institutional environment. Organizations attempt to acquire legitimacy and recognition by
adopting structures and practices viewed as appropriate in their environment. Child and
Rodrigues (2005) argue that the process of internationalisation by Chinese firms appears
to be significantly impacted by institutional factors. Developing and transition economies
like China are typically characterized by an active governmental involvement in business,
both through ownership and through regulation (Peng, 2000). The close ‘relational
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 16 2006
framework’ (Meyer and Scott, 1983) enables Chinese firms to enjoy the supporting
governmental agencies confidentially.
The Chinese government has played an important role in setting the trajectory for the
country’s journey toward globalization. Recognizing the over-dependence on export-led
development, the Chinese government initiated a “go-out” policy in 2002 — a plan to
create between 30 and 50 “national champions” from the most promising or strategic
state-owned enterprises in China by 2010. These “national champions” enjoy a range of
benefits from the government including information sharing networks, domestic tax
breaks, cheap land, low interest funding from state-owned banks and protection from the
Chinese authorities (The Economist, 2005b). If a late-coming disadvantaged firm is to
acquire assets that enable it to compete in the world market, it may indeed require direct
or indirect governmental funding to make the purchases. Indeed, the government’s
sponsorship and funding support are a key factor that may make possible the frequent
acquisitions initiated by the China-based enterprises as a “normal” mode of entering and
penetrating a host economy (Warner et al, 2004). For example, Huawei, Haier and
Lenovo, have benefited significantly from government support at critical stages in their
development. The case of China strongly suggests that international business theory
needs to take fuller account of the potential relevance of domestic institutional factors in
developing and transitional countries (Child and Rodrigues, 2005).
On the other hand, the very firms that might be expected to internationalize with the
advantage of support from national governments could be weakened by the way they
remain beholden to administrative approval and bear a legacy of institutional dependence.
This legacy can inhibit strategic action either through promoting a conservative attitude
or through more direct constraints (Lewin et al, 1999). Thus there have been instances in
which Chinese governmental authorities have removed leaders of state-owned enterprises
who demonstrated the kind of entrepreneurial initiative on which internationalisation
depends (Nolan, 2001). This paradox suggests that, in order to internationalize
successfully, firms coming from a heavily institutionalized environment must negotiate
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 17 2006
ways of combining the material support it may offer with a sufficient degree of strategic
freedom.
Liability of foreignness
Zaheer (1995) defines the liability of foreignness is the costs of doing business abroad
that result in a competitive disadvantage for a MNC subunit. It also often related to the
concept of ‘psychic distance’, which concerns the cultural, linguistic, institutional,
developmental level and other dimensions of difference between a firm’s country of
origin and other countries to which it may internationalize (Johanson and Vahlne, 1977;
Johanson and Wiedersheim-Paul, 1975). China’s distinctive cultural and institutional
legacy, including the tendency to rely on close personal relationships in business
transacting (Chen and Chen, 2004), may be expected to increase the liability of
foreignness faced by its firms as they seek to internationalize. This implies that even if
the lack of tangible assets such as technology and branded products can be met through
their purchase abroad, a liability of foreignness may still jeopardize the effectiveness of
how they are put to use. Distinctive Chinese styles of management (Chen, 2004) could
thus prove a handicap for the management of overseas affiliates.
The liability associated with foreign operations, and the extent to which it affects the
performance of MNCs in foreign countries has attracted much research attention (Lou
and Mezias 2002). This stream of research finds its theoretical foundations in Hymer’s
pioneering observation (Hymer 1976). Liabilities arise from their unfamiliarity with the
foreign environment in which they operate, from discriminatory attitudes of customers,
suppliers and national governments and from the additional costs associated with running
international operations. Hence, other things being equal, foreign firms would
underperform their domestic counterparts. Furthermore, it has been argued that the
Chinese have a cultural preference for transacting in less codified regimes typified by
beliefs and clan networks rather than by the codified formality and impersonality of
bureaucracies or markets (Boisot and Child, 1996). A similar preference may also
characterize other societies that continue to rely heavily upon traditional foundations of
trust, based on ‘who you know’, rather than on legal and other formalized supports.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 18 2006
Previous research on developing country MNCs indicates a preference for expanding to
foreign territories where it is possible to access ethnically-based social networks, and this
appears to be very characteristic of overseas Chinese firms. In earlier phases of
internationalisation from the Chinese Mainland, firms evidenced a preference to go to
countries where Chinese social networks are present (Cai, 1999; Deng, 2004).
At the same time, however, there is a large body of research that shows that foreign firms
tend to perform better than domestic firms (e.g., Shaked 1986, Michel and Shaked 1986,
Li and Guisinger 1991, Oulton 2001, Nachum 2003). Such findings are explained by the
superior competitive advantages of foreign firms investing overseas (Hymer, 1976).
These superior advantages are transferred internally within the MNE and are used to
compensate for the disadvantages of foreignness. There are also the suggestions that
under certain circumstances foreign firms may enjoy some advantages of foreignness,
stemming from their access to resources not available in the host country in which they
invest, or from some superior perception of foreignness by local customers and suppliers,
and even in some cases local governments (Hymer, 1976). However, such advantages are
particularly notable when firms of a more advanced country invest in a less advanced one
— as the case of US firms investing overseas, to which Hymer (1976) referred.
Furthermore, the earlier phases of internationalisation from the Chinese Mainland, firms
evidenced a preference to go to countries where Chinese social networks are present (Cai,
1999; Deng, 2004) seems to have been less evident among the larger recent
internationalizing firms, though the extent to which they tap overseas Chinese
communities in developed countries such as the USA needs to be clarified. Thus while
embedded Chinese culture could be a factor limiting the willingness of firms to
internationalize to countries where they cannot plug into ethnic and other familiar social
networks, the aspiring global player Huawei considered in this paper appear to be finding
ways of overcoming any such limitations.
These contradicting findings are both in line with theory. However, Professor Nachum
(2003) argues that neither of them is complete, as they each rely on only part of the
factors determining the performance of foreign firms relative to their indigenous
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 19 2006
counterparts. The actual competitive position of foreign firms vis-à-vis domestic ones is a
balance between the additional costs associated with international activity and the
disadvantages resulting from operating in a foreign country, and the superior advantages
of MNE. Similarly, Zaheer and Mosakowski (1997) suggest that foreign firms might be
able to partially compensate for their lack of local information networks through factors
such as the scale, the capital availability from its parent, or its managerial and
organisational skills, as well as by being part of a multinational network that enables it to
connect to worldwide information flows. It is argued that an adequate view of the
performance of MNCs in foreign countries has to consider both the additional costs and
the superior advantages, and regard the outcome as the balance between them.
2.5 Forces behind internationalisation of Chinese firms
The macroeconomic imperative
Since Deng Xiaoping initiated a program of path-breaking economic reform in 1978,
China has largely integrated into the global economy. China is the fifth-largest economy
in the world at market exchange rates (Global insight, 2004) and second-largest at
purchasing power parity (CIA, 2004); In 2004, China’s share of world gross domestic
product (GDP) stood at 3.9 percent at market exchange rates and 13.8 percent at
purchasing power parity (Economist Intelligence, 2004); Average annual GDP growth
was 9.4 percent between 1970 and 2004 (Zha, 2005) and is forecast to be 8 percent (see
Figure 2) from 2005 to 20101. China has become the world's preferred destination for
foreign direct investment (FDI). The Organization for Economic Cooperation and
Development (OECD) recently announced that China has overtaken the United States as
the biggest recipient of FDI, attracting US$53 billion in 2003, while the United States has
joined Hong Kong, Taiwan, Japan and South Korea in the top five sources of FDI into
China2 (see Figure 3) (Accenture, 2005a).
1 Development Research Centre of China’s State Council 2 Based on the Chinese Government's official FDI figures, www.fdi.gov.cn
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Figure 2: Projected GDP (US$ billion, market exchange rates) Figure 3: China FDI flows (US$ million)
Source: Goldman Sachs, 2003 Source: China Economic Quarterly (CEQ), 2005
Furthermore, the Chinese currency has been revaluated (2.1 percent increased against the
dollar, see Figure 4) in July, 2005 and it is no longer pegged against the dollar, but
announced it would have a different policy called “managed floating exchange-rate
regime” which is to manage Yuan against a basket of 11 currencies as shown in Figure 5
(The Economist, 2005a). A Yuan revaluation is the most cost-effective way to maintain a
stable macro environment conducive to growth. The reason is simple: the business cycle
in China is not synchronized with that of the US, and the previous fixed exchange rate
management system limits the Chinese authorities’ ability to conduct independent
monetary policy (Liang, 2003). An increasing number of Chinese companies are
undertaking international acquisitions. While some have cash resources through
achieving reasonable profits – for example, the revaluation of the Chinese yuan against
the US dollar, by reducing the price of foreign assets, may accelerate the process of
acquiring foreign assets, just as the strength of the yen encouraged a wave of Japanese
foreign acquisitions in the 1980s (Rui and Yip, 2006).
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Figure 4: Chinese Yuan against US$. Figure 5: China’s currency basket: estimated weights*, %
Source: Thomson DataStream Source: Morgan Stanley *Weighted average of trade and FDI
Strong governmental supports
China’s global political and economic aspirations are an important factor driving
expansion abroad. In addition to building economic relations with more countries,
China’s outward investment has a dual purpose of building China’s political capital and
influence around the world. China’s chosen route to economic expansion has therefore
been closely aligned with its strategy to strengthen its global political presence. In
particular, for some time, business and political leaders have worked together to build
strong relationships with developing countries (Accenture, 2005b). Importantly, Chinese
companies often face fewer political constraints compared with their western counterparts
when it comes to investment destinations. China has been one of the few countries
investing in what are widely seen in the west as less reliable economies such as Sudan,
Iran and Zimbabwe (Accenture, 2005b).
The Chinese government also has played an important role in setting the trajectory for the
country’s journey toward globalization. As mentioned previously, the “go-out” policy
reinforces the government’s efforts to support the rapid development of technological
skills and know-how, as well as building new markets and global brands that will
underpin further economic growth at home. The quest has begun to create Chinese
companies on a par with global giants such as Coca-Cola, Microsoft and Wal-Mart.
Companies like Huawei and ZTE have used their experience in building China’s own
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Wei Huang 22 2006
markets to develop new ones in other 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. Meanwhile, China has been building
alliances with other developing economies in political forums and multinational
negotiations (Accenture, 2005b). With foreign currency reserves amounting to roughly
US$700 billion, state-supported Chinese companies can draw on a pool of ready capital
for strategic acquisitions. In December 2004, for example, the China Development Bank
(one of the most active banks in financing companies investing abroad) issued a low-cost
US$10 billion loan to Huawei to promote its international operations (China Daily, 2005).
Competitive flexibility
In the face of increasing foreign competition, China’s strategy is to build its presence
overseas. Going global enables Chinese companies to gain access to technology and
bring their operations in line with international standards. In particular, global operating
models allow Chinese companies the flexibility to place business units wherever they
afford the greatest comparative advantage. Nanjing Automotive’s recent purchase of
Rover is an example in which the company plans to move the bulk of its production to
China while keeping R&D facilities in the United Kingdom (Accenture, 2005b).
Nanjing Automotive also has gained the use of the Rover brands – access to brands has
been a crucial factor in many recent deals involving Chinese companies. Because of the
complexity of the Chinese market, there are many regional Chinese brands, but few
national ones able to compete in international markets. Building a brand from scratch is a
challenging task and China is only beginning to develop the skills required to do so.
Some observers suggest that China may need another 5 to 10 years to nurture globally-
recognized brand names (Beijing Review, 2004a). With the rapid pace of globalization,
Chinese companies are finding they do not have the time cushions once enjoyed by their
Japanese and Korean counterparts as they pursued a more gradual organic development
10 to 20 years ago. As a result, brand-buying is seen by many as a logical short cut
(Accenture, 2005b). By associating themselves with a top brand name or product,
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Wei Huang 23 2006
Chinese companies can quickly raise their international profile as well as gaining instant
access to new markets. Lenovo’s purchase of IBM’s personal computer operations in
December 2004 is the most often cited example of this strategy. With this US$1.75
billion deal Lenovo, a company hardly known outside China, suddenly became the
world’s third-largest PC manufacturer after Dell and HP, gaining significant international
coverage (Accenture, 2005b).
Unique consumer dynamics
China’s annual savings rate has averaged 40 percent over the past few decades compared
to the world average of 22 percent (The Economist, 2002). With the world’s highest
savings rate (see Figure 6), accumulated Chinese household wealth over the past two
decades has equated to approximately 140 percent of GDP (The Economist, 2004). As
consumerism grows in China, retailers are now hoping that households will soon loosen
their purse strings. However, recent reforms have broken the ‘iron rice bowl’3 and have
left the population needing to make provisions for services and benefits that were once
guaranteed to them by the state. Figures from richer countries suggest that populations do
not stop saving until accumulated wealth reaches 300 to 400 percent of GDP, indicating
that China’s high saving tendency is unlikely to abate anytime soon. While this will be a
challenge for retailers and consumer-goods companies, it is a significant opportunity for
financial services providers. As the relatively undeveloped financial services market
matures, Chinese savers are beginning to diversify their savings across more
sophisticated financial products, such as securities, bonds, funds and property (Beijing
Review, 2004b).
3 The ‘Iron Rice Bowl’ is a Chinese idiom referring to the system of guaranteed lifetime employment in
state enterprises where the allocation of housing, jobs and education was the exclusive responsibility of the state.
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Figure 6: National savings rates
Source: World Economic Forum, Global Competitiveness Report 2004-2005
Price and quality are the two main priorities that influence Chinese consumer choice.
With the majority of the population in China still restricted by limited income and low
exposure to products, emphasis continues to be placed on value for money. But attitudes
are evolving as advertising and improving living standards foster greater brand awareness.
This trend is reinforced by the emergence of Chinese multinationals who, through
overseas expansion and greater focus on branding, are re-importing their global brands
back into the Chinese market (Accenture, 2005c). Table 1 summarized the forces behind
the internationalisation by Chinese firms.
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Table 1: Forces behind internationalisation by Chinese firms
Source: authors own research with reference to Child and Rodrigues, 2005
Comparing with Japan and Korea
It is worth to mention here that in many respects, China’s globalization drive is similar to
that of Japan in the 1980s and Korea in the 1990s. IBM research (2005) summarised the
key similarities and differences. On one hand, all of them are making efforts to transition
from low-cost manufacturers to providers of higher value-added products and services.
By doing this, they are gradually acquiring the necessary technology and skills, and in
some cases, experimenting with their own branded products in foreign markets. They are
primarily focusing on nearby Asian countries, but also investing in the United States and
European Union to globalize their operations and, in some cases, avoid trade barriers. On
the other hand, there are major differences that make China’s globalization efforts unique.
As discussed earlier China has the distinct advantage of sheer size and rapid growth in its
early stages of economic development. Furthermore, when Japan and Korean opened its
The macroeconomic imperative
Strong governmental supports
Competitive flexibility Unique consumer dynamics
• Strong governmental support for globalization, especially financial backing and tolerance of domestic moves (such as M&A) that build corporate strength
• Face fewer political constraints compared with their western counterparts
• Access to state-supported scientific and technical research
• Willingness of foreign firms to sell or share international-standard technology, know-how, and brands
• Hazard of relying on highly competitive domestic market, with low margins
• Opportunities to export based on domestic cost advantages
• Associate with top brand name or product to raise company’s international profile
• Potential to complement domestic cost advantages with differentiation advantages acquired abroad
• Need to secure and develop advanced technology and internationally recognized brands
• The world’s highest annual savings rate
• Recent reforms have broken the ‘iron rice bowl’
• Attitudes are evolving as advertising and improving living standards foster greater brand awareness.
• Emergence of Chinese MNCs, who through overseas expansion and greater focus on branding, re-importing their global brands back into the Chinese market.
• Strong GDP growth
• From inward FDI to outward internationalisation
• Recent revaluation of Chinese currency
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market to foreign competition, which is much later than China, they both adopted
protectionist policies to allow their companies to develop scale and experience before
competing head-on with foreign companies in their home markets. While China’s WTO
entry has meant not only increased foreign competition in many industries in China but
also it has helped Chinese companies gain access to global management concepts,
overseas talent, technologies and best practices provided by thousands of large foreign
companies investing in China. Finally, unlike Japan and Korea’s carefully orchestrated
industrial policies that nurtured global champions such as Samsung, Sony and Toyota,
China does not have a centralized government body driving China’s globalization efforts.
Although the government is encouraging “national champions” to globalize, much
greater emphasis has been given to industry restructuring as part of China’s gradual
transition to a “socialist market economy.” (Beebe et al, 2005). These and other
differences suggest that Chinese companies will face a much more challenging
environment than their Japanese and Korean peers did during their early stages of
development and some of the major challenges are discussed below.
2.6 Challenges for internalisation of Chinese firms
The World Bank recently reported that one-third of Chinese enterprises had lost money
on their foreign investments and that 65 percent of their joint-ventures had failed (Beijing
Review, 2005). China’s course may be set, but the journey to high performance will be
long.
Economy and Politics
Businesses have identified economic and financial risk areas in the Chinese business
environment. The banking system needs serious reform and the opening of financial
markets to foreign banks brings wide-reaching risks. At the same time, legal institutions
and often impoverished local government bodies lack the means to enforce the law or
provide adequate protection and governance, resulting in many problems in areas such as
intellectual property rights (Accenture, 2005d), this is particular the case for Huawei
technologies, which will be discussed in detail in the later section.
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Despite the Chinese government's apparent success in avoiding an economic hard landing
in the short term, businesses are still concerned that unstable elements in the country's
economy may precipitate a hard-landing in the medium term. This situation will demand
extraordinary skill from the government to continue the reform process whilst navigating
between foreign interests, domestic social and political change, and massive institutional
reform (Accenture, 2005d).
Human Capital
Achieving high performance for Chinese companies going global will depend critically
on building a local talent multiplier system – human resource processes that identify
talent develop leaders and motivate the workforce. Chinese companies often lack
managerial expertise and experience. China will need 75,000 executives with
international experience in the next five years, currently there are 5,000 (BusinessWeek,
2005). Meanwhile, Chinese companies still face obstacles in the war for talent. Non-
Chinese multinationals still enjoy advantages in terms of pay and prestige. On the other
hand, there is a strategic push to nurture new talent in science and technology in China
(Accenture, 2005b).
Attracting and retaining high-calibre employees remains a crucial and challenging task
for sustaining long-term success for Chinese MNCs. Retaining the best talent requires a
long-term perspective. Employers need to build clear career paths including opportunities
for overseas training and subsidized advanced degrees. This will address the natural
inclination of Chinese workers to work in an environment where there is a strong sense of
belonging, as well as helping to avoid wage escalation and high attrition rates (Accenture,
2005c).
Chinese MNCs remain significantly poor in one crucial area: management. With limited
attention paid to communication, teamwork and leadership skills at university, graduates
are often ill-equipped to tackle workplace issues. Government investment is growing in
this area – China has launched a program targeted at building managerial skills with
500,000 high-tech workers to be trained between 2004 and 2006 – and companies
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increasingly recognize that the development and retention of Chinese managerial talent
will be critical to success (Accenture, 2005c). Furthermore, a valuable source of Chinese
talent is the Chinese ‘returnees’ (those who have either gone abroad to work or study, or
were born overseas) looking to work in China. Western-trained and educated on the one
hand, familiar with Chinese culture and values on the other, this group has become
greatly sought-after (Accenture, 2005c).
Marketing and Operation
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. Chinese companies have so far struggled to establish
international brands. For example, no Chinese company features in the Business Week
Interbrand 100 Top Global Brands (Accenture, 2005b). Should they wish to use their own
brands, Chinese companies will also have to win over skeptical consumers, in much the
same way as western firms have had to spend large amounts of time first understanding
and then selling to the Chinese. Julia Zhu, assistant vice president in the commercial
marketing group of Citibank in Chicago, says “US companies typically allocate spending
in their budgets to research and marketing in China before they invest. Chinese
companies do not have this as part of their operation when considering investments in the
US. This is something they have to learn” (Grant, 2005). They may have to align their
firms with unfamiliar international standards, regulations and systems, as well as
familiarizing themselves with western styles of corporate governance, all of which will
take time and patience.
Culture
China’s culture is unique. Table 2 illustrates some broad aspects of that culture: 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 differences will
influence values and behaviour both in business and in the workplace, creating risks for
the unwary (Accenture, 2005c). Chinese companies face the hurdles of getting to grips
with very different management styles, culture, priorities and mindsets to other
companies. Of the Chinese joint venture failures analyzed in a recent World Bank report,
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Wei Huang 29 2006
more than 85 percent of CEOs attributed their difficulties to differences in managerial
styles and corporate culture (Beijing Review, 2005).
Chief among the problems they face is tackling a business culture based on contractual
obligations in contrast to greater Chinese reliance on contacts, or guanxi which still
remains important, especially in the face of a still undeveloped (though improving) legal
system. When establishing guanxi, xinyong (trustworthiness) and the giving and saving of
mianzi (face) are crucial (see Figure 7). They operate on relationships and trust, whereas
the westerners operate on contract. Chinese have relied too much on verbal assurances
during negotiations (Grant, 2005). Language difficulties also compound the problem.
“You have quite senior people on the Chinese side but they do not know English well
enough to be able to negotiate an M&A agreement. What happens is they demand a
Chinese version of the agreement. How many law firms have the capability of doing
that?” as a Preston Torbert, a lawyer in Baker & McKenzie’s Chicago office says (Grant,
2005).
Table 2: Hofstede’s Five Cultural Dimensions
Source: Professor Geert Hofstede: www.geert-hofstede.com.
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Figure 7: The Development and Maintenance of Guanxi
Source: Kahal El Sonia (2001), “Business in the Asia Pacific – Texts and Cases”.
2.7 Strategies employed by the latecomer firms
Dynamics of leverage and learning
Literature suggested that the resource-based view of the firm provides a satisfactory
account of how firms go about sustaining their existing competitive advantages, but it is
less successful in explaining how firms create such advantages in the first place, or
overcome incumbent advantages, when the firms start with few resources. Mathews
(2002) utilizes the case of latecomer firms from the Asia-Pacific region breaking into
knowledge-intensive industries to illustrate the issues involved and the resource-targeting
strategies utilized. His research results suggest that LCFs overcome the competitive
disadvantages through linkage, resource leverage, and learning. The dynamic capabilities
of such firms are enhanced through repeated applications of linkage and leverage.
Enterprise can accelerate its acquisition of technological capabilities by linking up with
other firms or institutions, locally or abroad, through formal or informal ties to obtain
information, purchase machinery, acquire bits of new technology, or new knowledge
from consultants. Strategically it makes a lot of difference what linking choice is made,
as entry into different technologies involves different innovation and learning processes,
but this is also heavily constrained by enterprise competence and the options available.
Therefore, LCF builds its industrial capabilities through pursuing linking, leveraging and
learning, starting with an in-depth analysis of key factors of competitiveness, and the
various options for linking a developing firm to sources of technology and knowledge.
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Mathews (2002) further suggests that the LCF is not concerned to generate “new
knowledge” but to adapt existing technologies as fast as possible for its own catch-up
endeavours. These technologies are unlikely to be presented to the LCF in a discrete
“chunk”; rather, they will have to be assembled from a variety of existing sources.
Market entry strategy
There is no single ‘right’ market entry strategy for Chinese companies pursuing global
expansion. As illustrated in Figure 8, there is continuum of investment options, ranging
from simple exports to M&A that companies should consider when choosing the
appropriate market entry strategy to globalize. Most Chinese companies adopt a
combination of investment options in certain countries and strategic alliances in others,
depending on the company’s tolerance for risk, ability to manage complexities, financial
resources and management capabilities (Beebe et al, 2005). Child and Rodrigues (2005)
suggest that Chinese firms generally in favour of the entry strategy mode of M&A route
(or termed as ‘outward internationalisation’) and/or partnership/joint venturing (or termed
as ‘inward internationalisation’).
Figure 8: Weighing the trade-offs of globalization market entry strategy
Source: Beebe et al, 2005, IBM Institute for Business Value analysis, 2005
M&A is a popular but difficult option. Only a small proportion of M&A deals succeed in
creating value and there is little reason to believe that Chinese companies will do any
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Wei Huang 32 2006
better. In fact, on closer inspection, there may be reason to think that the prospects for
Chinese companies are less favourable than most, given some of the unique challenges
they face when expanding beyond their borders (Accenture, 2005b). Trying to buy, rather
than build, them is hardly a novel strategy: many western companies do the same but the
big questions are whether Chinese companies are paying too much and whether they can
manage their acquisitions effectively. The answer to the first is probably yes and to the
second that nobody can know until they try. Moreover, institutional problems, such as
state intervention and state ownership, are possible causes leading to failure of foreign
acquisitions (Rui and Yip, 2006). But nevertheless, their rush overseas is risky but no
necessarily misconceived. And if all else fails, they will have learnt useful lessons from
the experience (Jonquieres, 2005).
Forming international joint ventures (IJVs) with foreign enterprises, entering into a
partnership with them through original equipment manufacturing (OEM) or licensing
their technology, is a route chosen by many Chinese Mainland enterprises. Evidence
suggests that the Chinese authorities have consistently favoured IJVs as a means of
transferring technology and expertise to Chinese firms (Peng, 2000). It is very much
related to the concept of learning discussed previously. As in mainstream literatures IJVs
have been suggested as a vehicle to provide opportunities for each partner to gain access
to existing knowledge and develop new knowledge (e.g. Anand & Khanna, 2000; Grant,
1996; Hamel, 1991; and Kogut, 1988). However, a dedicated study (Beamish and Iris,
2003) to explore whether IJVs are motivated by a learning imperative suggests that
production-based IJVs are not typically motivated by learning outcomes, because
learning takes time, increase cost, and do not improve efficiency in short term. Indeed,
the hand of government policy can be seen here in that a willingness to provide Chinese
firms with access to technology has often been a condition of permitting foreign firms to
establish in China. Huawei provides an example of how the joint venture route
strengthened a Chinese company’s international competitive capabilities, and this will be
discussed in detail in the later section of the dissertation. Child and Rodrigues (2005)
summarised the advantages and challenges for M&A and JV (See Table 3).
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Table 3: Advantages and challenges for OEM/JV and Acquisition
Source: Child and Rodrigues, 2005
Internationalisation of Research & Development (R&D)
Nowadays, R&D internationalisation has been an effective method for Chinese firms to
enhance their competitive status and improve their technological capabilities. In addition,
with the development of internationalisation of R&D, MNCs take internationalisation of
R&D not only as the way to improve their competitiveness based on local market
conditions, but also establish technology centres based on local technology and resource
advantages to improve technological capabilities, and take them as complementary
source of special technology (Zander, 1997; Breschi et al, 1998; Cantwell and Piscitello,
1999). Patel and Vega (1999) summarized three kinds of incentive to international
technology innovation: 1) improving products, process and materials for foreign
market(s), providing technical assistance for manufacturing department abroad; 2)
tracking and monitoring dynamic development of foreign technology; 3) To innovate
core products and key technologies outside home country.
Some authors contend that R&D activities has been centralized in the triagonal area —
Europe, America, and Eastern Asia-Pacific region (Ohmae, 1995; Freeman and Soete,
1997). China is right in this area, which creates a very suitable environment for R&D
internationalisation. Chinese firms start international R&D very recently, which is an
Route Advantages Challenges
IJV • Capitalizes on low cost production in China
• Requires less and lower-risk investment
• Opportunity to learn international technology, practices and standards, so reducing the liability of foreignness
• Opportunity to build sound reputation as basis for international branding.
• Danger of dominance by foreign partner, especially if it retains rights over brands and technology.
• Hostile reaction by foreign partner when launching own brand and turning into a competitor
M&A • Fast route to securing technology and/or international brand
• Denies access to competitors
• Prospect of effecting a turnaround of a poorly performing acquired company
• Risk of over over-paying
• Need to acquire strong rather than failing assets
• Faces high liability of foreignness: problem of managing acquired
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effective way to leverage technological level and corporate competences. With the
Chinese entry into WTO, the domestic and international markets are getting more and
more integration. How to meet the requirements of international competition by effective
technological innovation is a very urgent challenge facing Chinese enterprises. Large
Chinese firms have tried to enhance their technical capabilities by internationalized R&D
activities. However, because of the limited capabilities and the situation of the country,
Chinese enterprises have not begun to expand R&D abroad until 1990s.
Figure 9: R&D expenditure as a % of GDP Figure 10: Proposed destinations for R&D expenditure among international companies
Source: Intelligent report, 2005
China’s R&D expenditure currently stands at 1.4 percent of GDP, compared with 3.2
percent for Japan (2004), 2.7 percent for the United States and 1.4 percent for India (see
Figure 9). Figure 10 shows the proposed destinations for R&D expenditure among
international companies and China is on top of it. The State Council’s aim is to raise
R&D spending to US$113 billion per year within 15 years, up from approximately
US$25 billion now. Most of the recent increases in China’s R&D spending have come
from larger firms, which are starting to compete with national brands on the international
stage. Huawei spends 10 percent of sales revenue on R&D and, like many other China
firms, has opened domestic R&D facilities. The amount of China’s R&D expenditure
coming from the private sector is growing. As of 2003, China’s R&D spending was 60
percent financed by business, compared to 64 percent for the U.S. and 74 percent for
Japan (Intelligent report, 2005).
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Chen and Tong (2002) summarised four reasons for the Chinese R&D
internationalisation: First, with Chinese entry WTO, the knowledge needed by Chinese
enterprise becomes more and more globalized, and everlasting open-door policies create
the prerequisites for the free flow of knowledge. Second, the concept of Made-in-China
via advanced manufacturing base has been accepted by Chinese firms, which promotes
the technology connections between Chinese companies and international MNCs. Third,
transitions from acquisition & development to R&D based growth makes enterprises
more technology-intensified, which need to absorb advanced technological knowledge
abroad to enhance the corporate technological capabilities. Fourth, becoming MNC is the
way which many Chinese enterprises want to take, and MNC will expand technological
activities to other countries inevitably for many kinds of reasons.
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3. RESEARCH QUESTIONS
Recent research are mainly based on developed countries’ companies entering into
emerging market like China, however, less research on the other way round. The previous
discussion has identified several key research questions for this case study:
Research question 1: To what extent does Huawei not follow internationalisation theories
and why?
Research question 2: What are Huawei’s core competences?
Research question 3: What are the challenges for Huawei operating in the developed
markets?
4. RESEARCH METHODOLOGIES
The analytical technique employed to examine these research questions is mainly
secondary research or “document research”. This is due to the unavoidable difficulties of
attaining primary data from Huawei, especially in highly confidential strategic issues.
Additionally, for this case study, qualitative data and information are primarily employed.
This is because limitations of time restriction cannot guarantee primary research covering
every relevant issue of Chinese companies’ expansion strategies. Therefore, company’s
publications, company website, published journal articles, books, archival records and
interviews are either analyzed or synthesized to help to answer those research questions.
Apart from the data collection, library research for literature review is also an important
part for attaining better understanding on strategic theories related to companies’ strategic
expansion. Finally, the author has been working at Huawei HQ in EU, Basingstoke for
three months so personal observations and experience will also be added wherever
possible.
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5. HUAWEI TECHNOLOGIES LTD. CASE STUDY
5.1 Reasons of choosing telecommunication industry and Huawei
This section will use Beebe et al (2005)’s ‘three filters approach’, company size, industry
characteristics and company characteristics, to explain why telecommunication industry
and Huawei have been chosen for this particular paper (see Figure 11). Most Chinese
companies remain small by global standards. Among china’s top 500 enterprises, only
290 companies met the first filter of “annual revenues over US$1 billion”. The second
filter identified Chinese industries with strong globalization potential based on criteria
such as ‘industry size as a percentage of GDP, degree 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 to 124 companies (Beebe
et al, 2005). The final filter identified among the 124 companies those that met additional
criteria, such as a leading market position in China, over 15 percent of revenues from
either exports of foreign operations or a strong global vision (Beebe et al, 2005). This
narrowed the final list of 60 companies, relatively well known players such as Huawei,
CNPC, CNOOC, Hairer, TCL, Lenovo, SAIC and Baostell.
Figure 11: Determining Chinese industries and companies with globalization potential
Source: Beebe et al, 2005. “China top 500 enterprises,” China enterprise confederation & China enterprise directors
association, IBM institute for Business value China analysis, 2005
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When China began its reform process in 1978, the telecommunications sector was
identified as one of the four major obstacles to modernisation. At that time, China had a
telephony switching capacity of only 1.75 million sets, the telephone penetration rate was
a mere 0.18 percent, and all 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 centralised within the (then) Ministry of Posts and
Telecommunications (OECD, 2003).
However, since the beginning of the 1980s, the Chinese government has boosted the
development of the telecommunications sectors through the use of an 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 (Figure 12).
One prominent government official once proudly announced that China now numbers
among “the world’s few telecommunication giants and ranks second world-wide in terms
of telecommunication network size and number of subscribers”. A recent report on the
Chinese IT sector points to China as the next technology super-power (OECD, 2003).
Huawei has grown in tandem with China’s market since its founding in 1988.
Figure 12: Growth rates in the telecommunications sector compared to GDP 1981-2000
Source: Wang (2001)
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Chinese government policies also promote internationalisation. The OEM/Joint venture
route has long enjoyed official support when directed toward genuine capability
enhancement. Hitt et al. (2004) present evidence that the institutional context created by
the Chinese government is conducive to Chinese firms seeking to improve their
competitiveness through long-term alliances with foreign firms that possess unique
capabilities. In 1999, the Chinese government launched its ‘Go Global’ policy,
encouraging strong Chinese enterprises to invest more overseas in order to improve their
competitiveness and secure an international business presence. This policy signifies the
determination of the government to promote outward FDI in the context of huge inflows
of foreign exchange. One of the most important ways it sponsors overseas expansion is
through the provision of low interest loans to fund the purchase of foreign companies
from sources it controls such as China’s state banks (The Economist, 2005c).
It has also been suspected that high-tech Chinese companies like Huawei pays little or no
taxes in China, as local governments aim to foster local high-tech champions. Again, this
is no different from EU or US regional assistance and grants. Shenzhen (Huawei's HQ),
is well known for offering attractive tax credits for qualifying R&D projects (see Table 4).
Last year, the Chinese government also increased tax rebates for high-tech exports
(which Huawei qualifies for) from 13 percent to 17 percent. The combined effect of
structurally lower R&D, and tax breaks or other subsidies gives Huawei the opportunity
to enter developed markets with aggressive pricing; Western vendors aiming to match
Huawei's prices must accept a hefty margin penalty (Arete research, 2005).
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Table 4: Chinese Tax Benefits
Tax Rate
Normal Tax Rate 33%
Economic & Tech. Dev. Zones (ETDZs) 15%
Shanghai Pudong New Area 15%
Special Economic Zones (ex. Pudong) 15%
Hi-Tech Parks/Zones
New Enterprises, First Two Years’ Profit Nil
New Enterprises, Years Three to Five 7.5%
Others 15%
Qualifying High-Tech Enterprises
New Enterprises, First Five Years’ Profit Nil
New Enterprises, Years Five to Ten Half Normal Rate
Source: Arete research, 2005
Figure 13: China-China-Foreign (CCF) joint venture model
Source: adopted from OECD 2003.
At the time of early establishment in the 1990s, Chinese telecommunication companies
found it very difficult to raise the funds required to build its telecommunications network.
The lack of availability of domestic funding forced some of them to turn to foreign
capital. However, foreign direct investment in the Chinese telecommunications service
sector was prohibited according to Article 4 of the Enforcement Ordinance of the Foreign
Chinese enterprise Foreign investor
Joint venture
Chinese firms
Customers
Project task group
Joint investment agreement
Construction and service agreement
Technology Cooperation Agreement
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Wei Huang 41 2006
Capital Enterprise Law. However, in searching for ways to circumvent the regulations
prohibiting foreign direct investment and attract foreign capital, firms like China Unicom
formulated the China-China-Foreign (CCF) joint venture model (see Figure 13). This
method involves establishing joint ventures between foreign companies and Chinese
enterprises and making investment contracts with China Unicom. Joint ventures with
foreign companies are prohibited from owning and operating telecommunications
networks, and participation in business management was possible only through indirect
methods such as separate agreements on technology co-operation. By 1998, over
40 foreign companies such as France Telecom had established joint ventures with
Chinese companies under the CCF model (OECD, 2003).
Furthermore, China’s membership in the WTO has profound and far-reaching effects for
the Chinese economy. The major impacts of China’s accession to the WTO on the
Chinese telecommunication industry will change the structure of foreign investment.
Upon joining the WTO, China allowed contracts equity joint ventures to grant up to 25
percent of foreign ownership in Chinese mobile telecommunication companies upon its
joining the WTO and will permit up to 49 percent ownership by 2004 in this sector
(OECD, 2003).
Huawei’s success in global markets starts at home. More than other Chinese companies
with international ambitions, Huwei’s success as a global company hinges on its
performance at home. China, with its huge and rapidly growing economy and more than
320m mobile phone subscribers, has become an important battleground for the world’s
telecommunications infrastructure suppliers. According to Gartner, the research group,
China’s telecoms equipment markets should grow at a compound annual rate of 10.9
percent between 2004 and 2008, from $29.8bn to $45bn (Harney, 2005). At the heart of
this battle is the launch of third generation (3G) mobile phone services. The construction
of 3G networks has triggered demand for sophisticated telecoms equipment, both
infrastructure and handsets (Harney, 2005). Huawei has invested heavily in 3G,
earmarking more than a third of its R&D spending for the technology over the last couple
of years, according to BDA China, a Beijing based telecoms consultancy. It ranked
among the top five vendors in China’s Ministry of information industry’s phase two tests
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Wei Huang 42 2006
for 3G technology. Graham Finnie, senior analyst from Heavy Reading said: “There are
twice mobile phone users in China than there are in the US. If you look at the matrix
broadband, in broadband there are 42 million homes in China that have broadband
connections that are more than any other countries in the world and it grows over 20
percent to 2004. So if you add to that the fact as well China is also the world trade
organization. It is the single biggest opportunity that any vendor has potentials in global
provider has to be in China” (Light reading, 2005).
A more advanced primary research (both qualitative and quantitative) on multiple
companies within various industries would offer more insight evidence and results of
Chinese companies’ expansion strategies, core competencies, challenges etc. However,
time restriction cannot guarantee primary research covering every relevant issue of
Chinese companies’ expansion strategies. Having considered these limitations, plus
authors’ own interest in the company, therefore, Huawei in the telecommunication
industry has been chosen for this case study.
5.2 Huawei’s corporate analysis
Product portfolio
Huawei (pronounced “hua-way”) Technologies Co., Ltd. is one of the largest and fastest
growing telecommunications equipment manufacturers in China. 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 (see Figure 14). Huawei has
risen to become one of the most competitive companies in the domestic and global
market.
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Wei Huang 43 2006
Figure 14: Huawei’s customized network solutions
Source: Huawei corporate presentation
Huawei is determined to grab orders and it clear focuses on a few end markets, notably
wireless infrastructure (see Table 5). While Huawei's orders reached $5.6bn in 2004, net
sales were $3.9bn. Unlike Western vendors where nearly all the order book is turns
business, Huawei's sales typically lag orders by a year. The company does not break
down net sales, nor can these figures be verified in any published accounts. All Huawei's
forecasts are referred to as "sales" but are in fact orders. Figure 15 shows Huawei's
regional breakdown. International sales are rising in the mix (42 percent of 2004 orders),
but stripping out wireless infrastructure (the leading export product) leaves domestic
orders at 70 percent of the total. The obvious conclusion is that Huawei's wireline
divisions still depend heavily on China, while wireless infrastructure has a weak domestic
position.
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Table 5: Orders by Division, 2004
Source: Arete research, 2005 * Software & Services
58%
12%
9%
8%
7% 3% 2% 1%China
Asian Pacific
S. Africa
M.E./N.Africa
CIS
Latin America
E.Europe
W.Europe
Human resource structure
For human resource structure, proportion of Huawei human resource is: R&D — 48
percent; Marketing, sales and customer services — 38 percent; supply chain — 8 percent
and administration — 6 percent in 30000 employees by the end of 2004 year, which
shows a typical dumbbell-shape enterprise (see Figure 16).
Figure 15: Orders ($5.6bn) by Region, 2004
Source: Arete Research, 2005
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
Wei Huang 45 2006
48%
38%
8% 6% R&D
Marketing, Sales & Customer
Service
Supply Chain
Administration
International expansion
Huawei began to consider international expansion in 1996 and initially expanded in the
developing countries like Russia and Africa. It then further expands its business in the
developed countries, like the USA and the UK (See Figure 17) After many years of
expansion, 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. Figure 18 shows the location of Huawei’s worldwide offices. As
stated in Huawei’s 2004 annual report “Everyday, nearly 1 billion people all over the
world are communicating through Huawei’s products and solutions”.
Figure 17: Huawei’s Expansion Timeline
Source: Author’s own research
1988 1996 2000
0
Huawei established in 1998, Shenzhen, China and expanded quickly domestically.
Huawei started expanding abroad since 1996, initially was in developing countries like Russia and Africa
Huawei further enters into European market in 2000 and expanded quickly. It also entered into N. America and Asian Pacific market in 2001
Figure 16: Huawei’s Human research structure
Source: Huawei website
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Figure 18: Huawei’s worldwide offices
Source: Huawei’s website
Market shares
Huawei has continuously elevated its brand positioning in the industry across the globe.
The shipment quantity of Huawei’s switches ranked No.1 in global market in three
consecutive years, accounting for 32 percent of the total shipment in global market (by
dittberner, Figure 19); Huawei’s NGN ranked No.1 in global market, 24.5 percent of port
shipment (by Dittberner, Figure 20); The integrated access products ranked No.3 in
global market (14 percent 3Q2004, by Infonetics, Figure 21). The DSLAM ranked No. 2
in global market (18.9 percent 3Q2004, by Dittberner, Figure 22); the optical network
ranked No.3 in global market (9 percent, by RHK, Figure 23). Furthermore, Huawei’s 3G
products have entered the front line of the global market, and have been put into
commercial application in UAE, Hong Kong, Mauritius, and Malaysia. More than 20 pre-
commercial exchanges have been set up globally for Huawei’s 3G products.
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Figure 19: Switching Figure 20: NGN
Figure 21: Integrated access network Figure 22: DSLAM
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Figure 23: Optical network
Source: The above figures are adopted from Huawei corporate presentation
Financial overview
Still, continued expansion overseas — for Huawei as for other Chinese high-tech
companies — will require not only innovation but also financial resources. It is difficult
to measure the cost of Huawei’s expansion because the company is not public listed.
While an initial public offering is under consideration. Huawei relies on cash reserves
and bank loans to fund its growth. It is worth to mention here that Huawei has come a
long way from its beginnings in 1988, when founder Ren Zhengfei, a former officer in
China's People's Liberation Army, used a contact in the Chinese government to obtain
some rudimentary telecom gear. Mr. Ren's background helped the company win military
contracts during the early, lean years, according to former Huawei executives. Huawei's
expansion is fuelled in part by cheap loans from the Chinese government. In 2004, the
company, which is owned by its employees, received a $10 billion line of credit from the
China Development Bank, and an additional $600 million from the official Export-Import
Bank of China for its international expansion (Rhoads and Buckman, 2005).
Figure 24 shows the financial highlights of the company. In financial year 2005 (year-end
December), the company's total contract sales increased by 46.95 percent to US$8.2bn as
compared to US$5.58bn in financial year 2004. This increase in revenue was mainly due
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Wei Huang 49 2006
to the expansion of company's overseas business. Figure 25 depicts the company's
revenue contribution by geography.
Figure 24: Contract sales (USD in billions)
Source: Huawei 2004 annual report
Figure 25: Huawei - Revenue by Geography (FY 2002 - FY 2004)
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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SWOT analysis
To summarise, Table 6 presents the Strength, Weakness, Opportunity and Thread of
Huawei.
Table 6: SWOT analysis of Huawei
5.3 Competitive strategy analysis
5.3.1 Internationalisation of R&D for long-term success
China-based cost-effective R&D is one of Huawei’s competitive advantages of
expanding abroad. Huawei spare no investment in R&D. From its inception, even in the
IT recession period, Huawei invested over 10 percent of its revenue into R&D. Huawei
has set up R&D organizations in Dallas and Silicon Valley in the US, Banglore, India,
Stockholms-kontoret, Sweden, and Moscow, Russia. In China, they have institutes in
Beijing, Shanghai and Nanjing. 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 ( see Table 7). Huawei’s
R&D achievements with Intellectual property rights provide innovative and customized
network solutions for telecom carriers around the world. As mentioned in the previous
section, for human resource structure, 48 percent of 30,000 Huawei employees are from
Thread • Competition from other low-
cost counties
• Perception of china
Opportunity • Entry into the WTO
• Collaboration with European companies
Strength • Strong manufacturing
capabilities
• Government: stability and support
• Low cost
• R&D
• Service and support
Weakness • International management
skills
• Experience and quality
• Property rights
• Human resource
• Branding
• Cultural
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Wei Huang 51 2006
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
10-13 percent in recent years and its R&D expenditure has reached 4.5 billion RMB by
the end of 2004 year, which makes Huawei No.1 of investing R&D in China enterprises
(Huawei website). Developing R&D results with independent intellectual property rights
and investing heavily into standards and patents, by March 2006, Huawei has 1900
authorized patents and has participating with over 70 international standardization
organizations including ITU and 3GPP (See Figure 26).
Table 7: Huawei’s R&D location
Stockholm, Sweden
Base Station architecture and system design,
Radio technologies and RAN algorithm
Dallas, USA ASIC technologies and CDMA algorithm
Bangalore, India Software technology/ platform
Moscow, Russia Algorithm and RF
Shenzhen, China CN, service platform
Shanghai, China RAN, terminal, ASIC chipset
Beijing, China Packet CN, GW, Terminal
Nanjing, China BOSS, 3G services
Source: Huawei 2004 Annual Report
Figure 26: Huawei Patents
Source: Huawei’s corporate presentation, 2006
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Although technical development and cooperation become more and more international,
compare with those leading communication equipment manufacturers such as Siemens,
Huawei as a latecomer has many disadvantages. As a result, its global R&D system has
its unique characteristics (Chen and Tong, 2002). Contrast to MNCs, The goal of
Huawei’s internationalisation strategy of R&D is to drive internationalisation of
manufacturing and marketing of the whole enterprise by internationalizing R&D
activities. As a new entrant of communication equipment manufacturing, Huawei’s
internationalisation strategy of R&D drives the development of total business of company
with fast development of technological capabilities through learning valuable experiences
from other well established MNCs. In the course of internationalisation of R&D, Huawei
had a definite strategy which aims at adopting the updated research results of
communication equipment manufacturing broadly, learning from successful enterprises
and establishing a core technology system based on R&D independently and
collaboration with other organizations openly. By means of internationalisation of R&D,
Chen and Tong (2002) listed three specific strategic goals of Huawei’s international R&D
activities (see Figure 27).
Figure 27: Huawei’s internationalisation of R&D: goals and strategies
Source: Author’s research with reference to Chen and Tong (2002)
Huawei’s internalisation of
R&D
Monitoring updated technology
Seeking innovation resources
Approaching market
World technology centre World innovation centre Subsidiaries abroad
India and US US and Sweden Russia
3 strategic goals
3-stage developing strategy
R&D alliance
Domestic R&D Overseas R&D unit
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The three strategic goals are: First, to establish technology information monitoring units,
monitor updated technology from host countries and competitors, and adopt local
technological innovation spillover as supplements of special technology. Second, to
approach knowledge excellence centres of the world, utilize R&D human resources and
R&D environments, cut down R&D cost, and improve technological innovation
efficiency. Third, to 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 internationalisation of R&D, Huawei defines the 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 centres of the world,
Huawei starts to establish R&D units abroad. Its main business focuses on domestic
market, in the context of which Huawei must compete with domestic enterprises and
subsidiaries of MNCs in China (Chen and Tong, 2002).
The distribution of technological tracing R&D activities associates positively with the
total distribution of global technological innovation activities, and basic research R&D
activities need to work together with local universities and institutes abroad, so its very
important for R&D activities of the type of basic research to approach the excellence
centres (Cantwell and Hadson, 1991, Hakanson, 1992 and Pearce and Singh, 1991). The
objective of establishing R&D units abroad is to make it convenient for the company to
trace the new development of communication technology in the world and approach the
technological excellence centres of the world so as to adopt foreign R&D spillovers
(Chen and Tong, 2002).
Huawei chooses rationally the location of its R&D Units abroad (Table 7). 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. Huawei has established its American (Silicon
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Wei Huang 54 2006
Valley) subsidiaries and Dallas R&D unit, which aim at tracing the development of
research of optic products and other communication products. Sweden is the research
centre of GSM and WCDMA in Europe, so Huawei establishes R&D unit in Sweden to
follow the developing trends of GSM, WCDMA in Europe, and to do research on mobile
communication technology. As to the type of resource-seeking R&D activities, the
location selection of R&D units abroad was decided by the supply of technological
persons with ability and the conditions of technical facility in host country. At the present
time, CMMC capability Maturity Model for Software is the most popular and practical
criterion of software production process in the world and is an authentication criterion of
the maturation of software enterprise. India has the best CMM environment of the world.
Therefore, Huawei establishes an R&D unit in Bangalore, “the Silicon Valley” in India in
June 1999(Chen and Tong, 2002).
At the third stage, with constant improvement of technology and gradual extension of
domestic market, Huawei starts to focus on international market. International business
has become the main objective in Huawei business strategy. Furthermore, with the
advancement of internationalisation of market, Huawei finds that even within
communication equipment industry, which is characterized by high standardization, the
differences of market conditions and customer demands are very significant in different
areas. In order to expend overseas market effectively, Huawei starts to establish overseas
R&D units aiming at specific overseas market. It is very important to adapt to conditions
of specific market and approach current manufacturing subsidiaries and consumers for
manufacture supporting or market driven R&D activities that aim mainly at adjusting and
improving technologies transferred from parent company (Kumar, 2001). Hence, it is an
obviously successful case that Huawei establishes an R&D unit in Russia, aiming at
leading Russian communication market and localization of technologies. Currently, the
internationalisation of R&D of Huawei is developing to a diversification and
globalization stage. Global R&D network of Huawei consists of technology alliances,
overseas R&D units and domestic R&D organizations in different regions. With this
R&D network, Huawei realizes integrated model of technological innovation. In this
integrated R&D network (see Figure 28), decision-making is centralized as well as
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Wei Huang 55 2006
decentralized. Resources are decentralized in light of strategic objective of firms and the
importance of R&D subsidiaries in total R&D system. All R&D units depend on each
other and specialize in integrative R&D projects. At the same time, resources, personnel
and information flow between R&D units freely (Chen and Tong, 2002).
Figure 28: Integrated R&D network of Huawei
Source: Chen and Tong (2002)
5.3.2 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, which covers more than 300 local centres around the
country. 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 Annual report, 2005). In Huawei’s line of business, its quality
of processes is paramount to ensure streamlining consistent production quality of
products and software. “We are constantly reviewing our processes in order to deliver the
Headquarters
R&D alliance
Overseas R&D unit
Domestic R&D unit
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Wei Huang 56 2006
best value to our customers. We have built a responsive and flexible organization that
focuses on our customer’s needs through providing continued innovation and customized
solutions,” says Mr. Xing Xianjie, the Director of Business Process Management
emphasising some of Huawei’s core values (Lindoe, 2005).
Huawei adheres to the “customer first” and “good faith” service cultures, standing closely
with their customers. This further accomplishes long-term win-win situations with
customers. Huawei has built up a professional service team characterized by dedication
and service consciousness, set up a relatively consummate integrated service platform
and developed professional engineering maintenance and training capabilities. 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. By reinforcing the value evaluation system measured by
responsibility results and an excellent incentive mechanism, all Huawei’s objectives are
driven by customer requirements. Huawei ensures customer satisfaction through a series
of streamlined organization structures and normative operation process. As a result,
Huawei has developed the customer oriented high-performance corporate culture and
enhanced their core competitive edge (Huawei Annual Report, 2005).
Unlike Japanese companies, which often dispatched executives from their head offices
when they started expanding overseas, Huawei has tried to hire locally. “Before, every
year, we would have recruitment activities in cities, mainly Shanghai and Beijing”, says
Edward Deng, president of Huawei’s European business. “But now we do this in Paris,
London, New York, Canada and Australia”. In France, the company outsourcers
hardware installation and some services to local partners. It says sales and project
managers are also recruited locally, although on a recent visit to Huawei’s office just
outside Paris most of the staff appeared to be Chinese. “The business development is not
so difficult,” says Patrick Wen, vice-president for Europe. “The most difficult part is the
service, so we get a lot of local engineers” (Harney, 2005).
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In a customer satisfaction poll conducted by the third party consultant, Gallup for the
years 2000-2004 in China, Huawei is ranked first in customer satisfaction, that attention
to detail pays off. “Good Quality service” has become one of Huawei’s advantages in a
severely competitive market: Huawei has set up 80 service offices across the globe so far,
3800 professional service personnel, over 480 service partners, over 7000 certified
engineers in partnership, and 44 authorized certified training centres. Meanwhile, in order
to pursue a long-term win-win relationship with customers, Huawei phased in fee-based
service and professional services to lower the service costs. Service marketing has
become a new area for growth and opportunity for Huawei. The accumulated service sale
proceeds were USD700 million. Customers describe Huawei eagerness to tailor
technologies to their specific needs. “They list what you tell them and afterwards, they
respond” (Harney, 2005).
5.3.3 Cross-culture management and project management
With a constant growth of staff overseas, cross cultural management is now high on the
agenda of Chinese high-tech firm like Huawei. In many ways, Huawei epitomises the
drive for growth that characterises China’s expanding economy and technological
advances. “Few other Chinese companies have experience in being so open to new
markets and establishing a presence globally,” says Mr. Xing Xianjie, the Director of
Business Process Management. He continues: “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 localisation of our services” (Lindoe, 2005).
However, this is no easy task. Since established in 1988, Huawei has been teaming up
with world-leading companies, to incorporate international best practices. For example,
IBM has contributed to their integrated product development and supply chain,
PricewaterhouseCoopers (PwC) to their financial management system and the Hay Group
on human resources. Spreading learning and best practices throughout such a vast
operation across the globe certainly demands good management systems and practices
(see Figure 29).
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Figure 29: Huawei teams up with world leading companies
Source: Huawei’s corporate presentation
DNV recently carried out an assessment to evaluate the maturity levels of Huawei's risk
management system. The assessment criteria were two standardised frameworks for
enterprise risk management, requirements from British Telecom (a major customer of
Huawei’s) as well as Huawei's internal risk management requirements. Human resources
functions are part of the assessment, as it incorporates employee turnover rates and
employee satisfaction indexes from various geographic areas. This demonstrates the
effectiveness of the HR function in overseas operations and gives valuable input
regarding cross culture management. Since 1996 DNV has certified Huawei’s
management systems, first to the quality standard ISO 9001 and then to environmental
standards and the information security standard BS 7799 as well as standards particular to
the ICT industry (Lindoe, 2005).
With constant growth of overseas projects, in 2002 Huawei established an integrated
mechanism to train and develop project managers and strengthen project management
practices and processes. According to Project Management Institute (PMI)(2006), the
main objectives of the program were to: “set-up consistent project management
competence, qualification standards and procedures, and a training platform to help
project managers improve their project management knowledge and performance;
develop organically 100 Huawei project managers with Project Management
Professional (PMP) certification; and establish channels for external cooperation to
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Wei Huang 59 2006
improve project management knowledge and performance at an organizational level”. To
accomplish these objectives, Huawei set up a Business Re-engineering Project
Management Office, which is made up of more than 20 staff members with extensive
experience in project application and management, to develop and direct the program.
Staff was chosen from each of Huawei’s departments: marketing and sales, R&D,
customer service, and information technology to ensure each facet of the business was
considered and employee interests did not conflict (PMI, 2006).
Through its commitment to this training programme, Huawei has to date granted PMP
certification to more than 200 project managers, which doubled its original already high
goal. Huawei remains dedicated to continuous improvement in its project management
standards. In addition to ongoing project management certification training and testing, it
began to arrange coaching sessions to advance the competence level of all project
managers. With this comprehensive project management system, at the project level,
Huawei is expecting improved on-time delivery and productivity, increased customer
satisfaction, employee retention, and reduced risk and operation cost; and at business
level a better performance with integration of project management results (PMI, 2006).
5.3.4 Price cutting strategy to JV/partnership selling
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. Largely because the group relies on a pool of engineers in
China, where salaries are a fraction of those in more developed countries, its prices can
be 30 percent lower than those established suppliers. Bert Norberg, executive vice-
president for sales and marketing at Ericsson, recalls that, when the first encountered
Huawei in countries such as Laos and Cambodia three years ago, its prices “were below
walk-away price for us” (Harney, 2005).
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
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Wei Huang 60 2006
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. “The whole reorganization, the whole integration process at the
multinational vendors to lower their costs and make their price more competitive, this is
partly because of Chinese vendors with lower prices in the market.” Says Tina Tian,
Beijing based principal analyst for telecoms at Gartner, a research group (Harney, 2005).
Ross O’Brien, Hong Kong based managing director of Intercedent Asia, a telecoms
consultancy, argues that Huawei’s strategy offers telecoms operators a way to save
money when they are having to give customers ever more complex services. “In some
ways, Huawei lifts the veil on the future of what technology infrastructure holds: the stuff
gets more and more sophisticated but the services offered by telecoms operators get
cheaper and cheaper. Huawei is the first company that says to the operators. Okay, next
generation technology now, for cheap, for free” (Harney, 2005).
Although Huawei devotes about 10 percent of its sales to R&D on par with its rivals, the
company’s smaller size and lower costs mean it still spends less. Ms Tian estimates that
Alcatel spent $1.8bn and Siemens $2.2bn on R&D in 2003. Huawei spent $385m
(Harney, 2005). In 2004, Huawei spent $0.5 billion on R&D, which 12 percent of net
sales. This may look small but headcount levels are in line with peers: 12,000 R&D staff
versus 15,000 for Alcatel and 9,000 for Lucent (see Table 8). Given its sales growth, it is
expected that Huawei to have the industry's largest R&D headcount by 2006. What is
particularly startling is the low annual R&D cost per head Huawei enjoys — $42k is less
than a quarter of Ericsson's equivalent cost. It has been recognised that this is not an
"apples to apples" comparison given different accounting treatment for R&D and
Ericsson's use of sub-contractors in developed markets, but nevertheless, the numbers
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Wei Huang 61 2006
speak volumes for Huawei's ability to throw resources at product development. Sceptics
fairly note a R&D quality gap with leading Original equipment manufactures (OEMs) but
this is clearly closing. The next aim is to develop a robust Intellectual
Property Rights (IPR) portfolio. As it becomes more active within standards-setting
bodies, its IPR position should strengthen (Arete Research, 2005).
Table 8: R&D Cost Profile by OEM, 2004
Source: Arete research, 2005 * Nortel R&D for 20'03
Richard Lee, a company spokesman, says Huawei can pay its senior engineers a quarter
of the going rate in the developed world, and junior engineers just an eighth. The
question, says Jason Chapman of Gartner, a consultancy, is how sustainable that
advantage will prove to be as Huawei moves into international markets. Its regional
affiliate in the Netherlands, set up to support the Telfort deal, for example, will have to
pay developed-world wages. Mr Lee responds that, so far, only 3,400 of Huawei's 24,000
employees worldwide are non-Chinese, so the firm will continue to have a cost advantage
for several years.
With regards to the low cost advantage, Douglas Black, vice president of marketing,
Huawei North America says during an interview with light reading: “Pricing is not the
most important thing what we find in targeting in our potential clients. What they are
really looking for is the ability to supporting our products that we sell so that we look
very much at our supportive infrastructure. They of course look at our technology — can
the technology provide the services and functions the need today and in the future? So
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Wei Huang 62 2006
those are very important for them. Of course at the end of the day they want it to be
competitive but this is not the first thing that we usually looked at. We are very proud of
what we accomplished with BT. We are a primary vendor selected in the 21CNW and we
believe we have been under evaluated under BT for two and half years, which means we
were looked at, tested, reviewed extensively so far. We have now arrived at in the market
place as a quality vendor and a recognized vendor and specifically they will be using us
as the access network and transports so we are very proud of the opportunities that we
had with BT.” (Light reading, 2005).
It is also important to listen to what Huawei’s customer’s view on this low cost advantage.
Paul Reynolds, CEO of BT wholesales, says during an interview with Light Reading:
“we have been working with Huawei for two or three years now, and we are already
developing their kit in a number of our networks. So we have build up an experience of
their capability. They are a good quality company like all the other vendors here, and we
believe they can meet our commitments” … “It is not about buying a grey box dumped on
the exchange floor anymore. It is about the whole life of the capital and operating costs
over a ten years period. So we looked at every vendor who was capable. We put very
clear criteria for decision. Winning was up for anybody who could meet those criteria
and we choose those that did the best job” (Light Reading, 2005).
JV/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 (Huawei Annual Report, 2005). Huawei provides an example of how the joint
venture route strengthened a Chinese company’s international competitive capabilities. In
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Wei Huang 63 2006
the past few years Huawei has initiated multi-level cooperation in many fields such as
technology, production and marketing to co-exist, they have overcome risks together and
faced the IT winter together. In addition, they contributed low-end data communication
technologies (51 percent shareholding) to incorporate a joint venture with 3Com (who
contributed USD165 million, accounting for a 49 percent shareholding). As a result, they
established and consummated the distribution system, and gained rapid growth in data
communication services, which was forecast to increase by 100 percent in 2004. Also,
they have founded a joint venture with Siemens to focus on the research and sales of TD-
SCDMA and also cooperated with Infineon to develop the 3G mobile phone platform.
Additionally, they have cooperated with TI, Motorola, Agere, Intel, IBM, Sun,
Microsystem, Marconi, and NEC. Huawei has set up many R&D laboratories
respectively with the first-class companies such as TI, Motorola, IBM, Intel, Lucent,
ALTERA, and SUN in order to establish long-term, friendly, open and double-win
relationship with them, and then realize its internationalisation of technology research
and cooperation by cooperating with them in technology and market widely. For
example, Huawei sets up digit signal disposal laboratory with TI (Texas Instruments) and
makes common efforts in developing DSP products. Huawei-Lucent joined laboratory
will devote to the research in microelectronics and optics. (See Figure 30 for example).
Figure 30: Huawei’s joint labs & partners and JV
Source: Huawei’s website
Huawei is now seriously challenging the global market position of multinationals such as
Cisco Systems in the field of network equipment and Marconi. Huawei launched the bid
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Wei Huang 64 2006
of £600 million in 2005 to acquire Marconi, the UK’s last remaining telecommunication
equipment provider who are in severe financial difficulties (BusinessWeek, 2005).
Marconi generates about 25 percent of its work in the UK from BT, and it has been
warned that losing out on the BT deal was likely to have "a jobs impact". Its share price
dropped from over 500p to just over 200p after releasing the news (see Figure 31). It is
worth to remind that it is extremely difficult for a company as young as Huawei to learn
and obtain telecom technology, which had accumulated for more than a century, and
embedded in global telecom giants that had very high R&D spending for many decades.
Despite its ambitions, Huawei has not made significant achievements in the two most
advanced telecommunication regions in the world – North American and Europe.
Acquiring Marconi would have been the most vital step to accomplish that ambition. First,
Marconi possessed the world class technology that Huawei sought. Cisco and Marconi as
well as other western JV partners could have assisted Huawei to access developed
markets by providing both its long-held knowledge of local markets and its relationships
with local giant carriers such as BT. The JV became even more important when Huawei
was selected as one of the suppliers of BT’s 21st (Rui and Yip, 2006).
Figure 31: Marconi share price
Source: Bloomberg
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6. POSSIBEL ANSWERS TO RESEARCH QUESTIONS
From the above case study evidence some possible answers to the research questions can
now be derived.
RQ1: To what extent does Huawei not follow internationalisation theories and why?
Based on the traditional internationalisation theory, it is difficult to understand Huawei’s
behaviour of expanding abroad, which seemed to not have possessed the prerequisites of
internationalisation, nor pursue the same objectives. In other words, the classical OLI
model seems not to be valid in Huawei’s case. There is an obvious but difficult question
as to why there is such difference.
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 (Boisot, 2004; Child and Rodrigues,
2005; Rui and Yip,2006). Furthermore, Chinese firms seek strategic competence
including markets, brands, and technology from foreign partners (Luo, 2002).
Second, in earlier phases of internationalisation from the Chinese Mainland, firms
evidenced a preference to go to countries where Chinese social networks are present (Cai,
1999; Deng, 2004). Huawei has used their experience in building China’s own markets to
develop new ones in other 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 internationalisation theory suggests that Chinese
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Wei Huang 66 2006
firms should start with gradual organic expansion into contiguous markets (Barkema and
Rian, 2005). Instead, majority of Huawei’s entry mode into developed markets has been
‘inward internationalisation’, i.e. IJV/partnerships. More interestingly, the findings are
also inconsistent with Rui and Yip’s (2006) conclusion that Chinese firms prefer the
entry mode of M&A over IJV/Partnership as they argue that first the foreign partners of
IJVs have been reluctant to give away or transfer core technologies. Second, the
cooperation is difficult because the interests between Chinese and foreign partners are so
different. And finally, IJVs will never build Chinese brands. In Huawei’s case, the
findings have shown that the company prefers IJV/partnerships over M&A because IJV
offer an effective path towards securing the technological basis for a differentiation
advantage. The author’s personal view is that these contradiction results are deriving
from different case studies, with the former is the case of Nanjing Automobile and the
latter is the case for Huawei. Due to the various backgrounds of the cases, the author
tends to believe that both possibilities exist for the answer.
RQ2: What are Huawei’s core competences?
A ‘core competence’ as articulated by Hamel and Prahalad (1990), 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. As an example Hamel and
Prahala (1990) gave Honda's expertise in engines. Honda was able to exploit this core
competence to develop a variety of quality products from lawn mowers and snow
blowers to trucks and automobiles. To take an example from the automotive industry, it
has been claimed that Volvo’s core competence is safety. The previous analyse of
Huawei’s competitive strategies are critical to evaluate and identify its core competences
and more importantly, knowing a firm’s core competences is important for developing its
strategy (Mascarenhas, et al, 1998).
From author’s view, the first Huawei’s 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
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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 knowledge-intensive, 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 Economist, 2005d).
The second Huawei’s core competence is customer service and support, which
strengthens Huawei’s telecommunication equipment as reliable products. And reliability
is important because customers increasingly consider the total cost of product over its life,
not just its initial purchase price, especially for multi-million equipments that Huawei
provides to its various countries and companies. As Mascarenhas et al (1998) argues that
being able to offer a reliable process is valued by customers since international
transactions are subject to great uncertainties and disruptions because of communication
and cultural differences. Huawei has a reliable customer service and support competence
in providing telecommunication services through its global network to different
customers worldwide. A report based on a survey of over 100 telecoms operators
worldwide, carried out by Heavy Reading, a market-research firm, found that Huawei
ranked fourth in service and support. The report calls Huawei's ascendancy "astounding"
and says it has already surpassed several incumbent vendors in perceived market
leadership. As a result, incumbent western firms should be "very scared" of Huawei (The
Economist, 2005d).
The third Huawei’s core competence is its close external relationships. As discussed
previously, 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
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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.
Overall, Huawei needs to maintain these core competences in the long term which will
offer the company sustainable competitive advantages. In the meantime, Huawei needs to
be having more multiple competences, which can make it that much more difficult for its
competitors to imitate and it also increases the adaptability of the firm and should
promote long term survival (Mascarenhas, et al, 1998).
RQ3: 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. During the three months of
author’s summer job at Huawei’s EU HQ in Basingstoke, majority of the senior managers
are from China, and majority of them have none overseas management experience before.
It takes time for these Chinese senior managers to first of all be familiars with the way
that Western people work, the business environment, the language and culture. Having
considered these obstacles, for example, business meeting is extremely difficult and
inefficient, where there are many misunderstandings between western clients/managers
and the Chinese managers due to the English language. Conference calls need to be held
twice as one for Chinese employees and one for non-Chinese. Another example, there
were several occasions, where the western Huawei managers ask during the meeting for
people’s comments few spoke up. Instead, they come after the meeting to have a ‘private
conversion’ with the western manger. Moreover, staff turnover were high at least in the
office that the author worked in. There were several reasons for this. First, it is not
practical to send massive of R&D, Administration, Supply Chain staff from China, it is
not only costly but also getting massive of people going abroad on a working permit visa
does not help the original Huawei’s idea of localizing the operation and management of
regional office. Second, if they recruit locally, Huawei has not yet been well recognized
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Wei Huang 69 2006
among the UK top university graduates. As a result of this, comparatively, Huawei spent
more money in advertising its job vacancies on agencies, consulting professional human
resource companies and running recruitment assessment centres. Third, from author’s
personal observations, some managers, who were recruited from HQ in China, tend to use
Huawei as their career ladder to gain overseas working experience then leave. High
turnover of staff is obviously not helping the efficiency of management abroad and
delaying the operation of business.
In the USA, for the Chinese part, Huawei employees struggled with understanding the
Texas accent and some expressions. "There are a lot of words in Texas that are
completely different from the English that we learned in China," acknowledges Lin Haibo,
an executive in charge of Huawei's research and engineering in North America (Rhoads
and Buckman, 2005). With the headquarters in Shenzhen, China, hesitant to delegate,
local executives have trouble adapting to the local culture. Chad Reynolds, Huawei's
former head of human resources for North America, says when he visited the
headquarters in China he was forbidden from carrying his briefcase into any of the main
meeting rooms. He says his employers worried about theft of product documents. He was
never given a security pass and was accompanied by security personnel wherever he went
(Rhoads and Buckman, 2005).
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
BusinessWeek/Interbrand list of the top 100 global brands. It is striking that no Chinese
companies are mentioned in the list (Robert et al, 2005).
It takes significant time and investment to create a global brand. In 1999, Huawei lost
several bids in Yemen and Laos, due in part to customers’ perception of Huawei as a new
and untested company from China. In response, Huawei initiated a ‘New Silk Road Tour’
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program whereby Huawei hosted potential overseas customers on tours of China to
provide them with a first hand appreciation for China’s technology capabilities, rapid
economic development and Huawei’s proven track record with Chinese
telecommunications operators. In Europe and the U.S., Huawei heavily promoted its
products and solutions through media campaigns, conferences and road shows (Li and
Cui, 2004). However, Huawei also faced some obstacles. For example, it has struggled to
build brand recognition in the U.S. Shortly after the U.S. launch, Huawei executives
realized that Americans had trouble pronouncing the company's name (Hwa-way). The
company's new landlord in Plano kept calling it "hoo-way." Potential customers, and
even some of Huawei's own American employees, called it "high-way" and "how-way,"
among other variations. Huawei decided to come up with another name for the U.S.
subsidiary. It decided on Futurewei as a working name, and then contacted Darren Avrea,
the co-founder of Dallas advertising firm AvreaFoster, to test it and provide alternatives.
Mr. Avrea says his firm offered 30 possible names for Huawei's U.S. business. The
project became frustrating, “because all decision-making was handled by company
headquarters in China. And then, after several months, the company opted for its initial
idea, Futurewei. From a global marketing point of view, we never understood why not
stay with the Huawei name in the U.S. and ride the coattails of the mother ship," says Mr.
Avrea (Rhoads and Buckman, 2005).
While Americans could more easily pronounce the new name, the company now had two
names. "We have to explain to customers, what is Huawei and what is Futurewei, and
what the relationship is, and that can take two minutes," says Bai Yi, Huawei's business-
development director for North America and one of the first Huawei executives in the
U.S. The company has done little to promote the new name. What few advertisements
have appeared in U.S. magazines have used the Huawei name, rather than the Futurewei
name, according to Douglas Black, the Huawei spokesman for North America. The
Futurewei name appears on its booths at trade shows, brochures and other materials
(Rhoads and Buckman, 2005).
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Regulation risk
The Ministry of Commerce (MOC, 2005) has revealed that some Chinese enterprises
often pay more attention to the brand, market and purchasing price, but lack
understanding of the complicated local laws and regulations, expensive labour costs and
strict labour regulations, as well as other exorbitant costs. Huawei has been dogged by
suspicions of cutting corners on intellectual-property rights, and alienated some job
applicants by pumping them for detailed technical information. In January 2003, Cisco
sued Huawei in a U.S. district court in Marshall, Texas, alleging the Chinese company
copied its router code, including bugs in Cisco's code, according to the complaint.
Huawei even used the same model numbers, to make it easier for customers to switch to
the cheaper Huawei versions, according to the suit. Cisco later agreed to drop the lawsuit
after Huawei removed the router products from the market and then altered them. Huawei
did not admit guilt in the settlement. Due to the subsequent decline in sales, the company
laid off about a half-dozen salespeople. Just as the bad publicity from the Cisco suit was
fading, Huawei stumbled again. In June 2004, at a trade show in Chicago, a Huawei
employee was caught taking pictures after hours of the insides of some high-end
equipment from Fujitsu Ltd. Authorities found a list in the employee's clothing of names
of other telecom companies. Huawei later fired the employee, explaining the company
had not used his photos and that it was his first time in the U.S. (Rhoads and Buckman,
2005).
Project management
Although Huawei recognized that project management was critical to sustainable
development, the total number of projects and employees assigned directly to projects
(14,000 plus) 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
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Wei Huang 72 2006
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 (PMI,
2006).
Low cost strategy
Huawei's successful formula winning business in other countries with low prices has not
worked as well in a U.S. market marked by long-term ties between phone companies and
their equipment suppliers. In the developing world, where Huawei has enjoyed the bulk
of its success outside of China, the company has won business with prices 25 percent or
more below those of Western bidders. In mature markets, like Europe and the U.S. where
vendors and clients have longstanding ties, leading-edge technology is just as important
as a good price. Huawei can look to Japan for an encouraging case history. When Japan's
Toyota Motor Corp. first entered the U.S. in the 1970s, it had a poor dealer network and
cars seen as cheap, small and unreliable. Ultimately, Chinese firms like Huawei "will
learn and invest, just as Japan and South Korea did before them," says Albert Lin, an
analyst in the San Francisco office of American Technology Research (Rhoads and
Buckman, 2005).
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7. RESEARCH LIMITATIONS
Inevitably, this case study has some limitations. First, as mentioned in the research
methodology section, it is based on secondary data. Huawei is not a public listed
company and therefore there is very limited public information about the company’s
finance, cost of expansion, and strategies other than the information from Huawei’s own
website and journal articles for this research case study. Second, the findings are only
derived from one case study due to time restriction. A more advanced primary research
(both qualitative and quantitative) on multiple companies within various industries would
offer more insight evidence and results of Chinese companies’ expansion strategies, core
competencies, challenges etc.
8. CONCLUSIONS
Huawei is perhaps the most outstanding example of a Chinese company that has rapidly
established itself in overseas markets. The case of Huawei has challenged the traditional
internationalisation theory. The findings suggest that Huawei does not fit well the
traditional motivations of MNCs expanding abroad to leverage their competitive
advantages. But nevertheless, they are consistent with previous research which claims
that Chinese firms go overseas not to leverage core competence but to overcome
domestic weaknesses (Boisot, 2004; Child and Rodrigues, 2005; Rui and Yip,2006).
Furthermore, Chinese firms seek strategic competence including markets, brands, and
technology from foreign partners (Luo, 2002). In terms of entry mode, in Huawei’s case,
the findings have shown that the company prefers IJV/partnerships (inward
internationalisation) over M&A (outward internationalisation) because IJV offer an
effective path towards securing the technological basis for a differentiation advantage.
After analyzing Huawei’s competitive strategies in internationalisation of R&D,
Customer services, Cross cultural management, low cost and JV/partnership selling,
Huawei’s core competences and its challenges have been identified. From author’s view,
R&D, customer service and support and close external relationships are Huawei’s core
competences, which are important for developing Huawei’s strategy.
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Wei Huang 74 2006
It is almost a miracle that Huawei is able to compete with global telecom giants in many
products, but nevertheless, findings shows that Huawei is much inferior to its foreign
rivals in various aspects. Therefore, Huawei needs to overcome a myriad of challenges
such as human resources and cultural, branding, regulation etc. The author would like to
finish the paper by a quote in the Economist: “The upshot is that although Huawei is very
different from its foreign rivals today, those differences will diminish in the coming years.
As it advances into western markets, Huawei has to become more like a western firm;
and in order to compete with the likes of Huawei, western firms have to become more
Chinese. The gap is narrowing” (The Economist, 2005d).
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