China’s secret weapon
Despite ethical and other questions, Huawei is proving a mysterious force to be reckoned with.
January 24, 2005 Print Issue
If China is the “awakening dragon,” then Huawei Technologies, China’s largest telecom equipment company, could be its strongest hatchling. The company has gone from the largest seller of telecom equipment in the People’s Republic of China (PRC) to a giant in Southeast Asia, Africa, Latin America, Russia, and the Middle East.
And the man who leads the company is as much the story as the rise of Huawei. Ren Zhengfei, the president, founder, and some say the sole decision-maker of the company, has a reputation for skipping meetings with Chinese government ministers to focus on his company’s performance. Mr. Ren spends at least some of that saved time composing sweeping, metaphor-laden speeches. Some of his treatises are translated into English and posted on a section of Huawei’s web site dedicated to the continuing education of his 22,000 employees, sharing space with news stories from foreign media as well as odes to the simplicities and duties of life.
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Mr. Ren’s speeches, his drive to excel, the embrace of foreign concepts like customer service, and even the dedication to increasing employees’ English skills represent everything that industry watchers and competitors admire—or snub or fear—about Huawei. Still, Mr. Ren is considered a hero in the Chinese business world even as his company has been accused of intellectual property theft and corporate espionage.
Huawei manufactures products for a wide range of purposes, including voice- and data-switching platforms for communications service providers, optical networking systems, wireless products, corporate networking equipment, and network management and messaging software. Huawei is also expected to make inroads in the third-generation (3G) mobile phone network market. In all these endeavors, Huawei has forged partnerships with about 40 foreign companies, including 3Com, Motorola, and Siemens–these are unions that are strictly on the companies’ terms, which is a far cry from the “arranged marriages” the Chinese government once required between Chinese companies and multinationals wanting to do business in the PRC.
“Huawei aims to have a win-win situation even with companies that normally would be competitors,” says Hu Young, Huawei’s senior vice president of marketing. “We are open and cooperative.”
Rags to Switches
Huawei is a long way from 1988, when the company started out with just $2,000 in capital, selling low-tech routers and switches. It was only in the mid-1990s that Huawei’s offices in Shenzhen–in southern China, just across the harbor from Hong Kong–were small and shabby, and managers were eager for a British business contact to teach them English.
That tiny office is history. Today, Huawei has 50 branch offices and 22,000 employees. The company’s headquarters, still in Shenzhen, consists of more than half a dozen buildings on a 1.3-square-kilometer campus. Multinational-quality digs are financed in part from international earnings: Huawei’s sales in 2003 topped $3.8 billion, over $1 billion of that from overseas sales. The company expects international revenue for 2004 to reach $2 billion, and says that number will account for 40 percent of its total 2004 sales, which are expected to top $5 billion.
“In 2005, we want to achieve over $4 billion in sales from the international market, and $3 billion in the domestic market–not including sales [related to] 3G,” says Mr. Hu. “If China doesn’t issue 3G licenses in 2005, then it could be the first time our overseas sales would exceed domestic sales.”
“Chinese companies like Huawei are selling [on] price,” says Dave Carini, an analyst at Norson Telecom Consulting, a Beijing-based firm that tracks the telecom industry in China. “The quality isn’t the best, but it’s good, it works, and that’s good enough for countries that don’t have a lot of money.”
Huawei’s products cost about 70 percent of those produced by American powerhouse Cisco Systems, says Zhang Bing, who from the 1990s until recently was Cisco’s second-biggest distributor in China. If the 30 percent discount is not enticing enough, “they will go all-out to get the deal–offer a deeper discount or financing to the buyer,” says Mr. Zhang, now deputy general manager for Beijing-based software company Deya Tech. “Huawei will go to the bank and get a loan themselves, in order to finance the buyer.”
In 2004 Huawei landed its first major contracts in Europe, most notably a deal last month in the Netherlands. Valued at €200 million to €400 million, Huawei signed an agreement with Dutch mobile operator Telfort to roll out the country’s new UTMS network–the company’s first European contract for a 3G mobile network. Huawei now has a foothold in Western Europe, and just may be poised to conquer North America.
In fact, Huawei and FutureWei, its North American subsidiary, also announced last month that NTCH, which operates under the Clear Talk brand name, launched Huawei’s next-generation CDMA 1X system for some 358,000 points of presence (POPs) in California and Arizona–Huawei’s first commercial deployment in the United States.
It’s not the company’s first U.S. success. A year ago, Huawei and 3Com started their joint venture, Huawei-3Com, based in Hong Kong with principal offices in Hangzhou, China. In China and Japan, Huawei sells both its own and 3Com’s products, while 3Com has the rights to market the same products under the 3Com name in all other countries. Huawei owns 51 percent of the venture, negating 3Com’s membership in the American Chamber of Commerce-People’s Republic of China.
On Its Own
Huawei didn’t start out as the crown prince of the Middle Kingdom’s telecom industry. Its closest domestic competitors had the advantage of governmental roots.
“Datang, Green Dragon, and ZTE all came from government entities. For example, Datang came out of the postal service,” says Bob Chou, executive director of Asia Direct, an international company based in Beijing that offers consulting and analytical services for foreign companies looking to do business in China.
Huawei was neither an outgrowth nor a recipient of government attempts to develop “the Sony of China.” Instead it was an independent, entrepreneurial company that sought to seize the domestic market and slowly grow itself, pouring money into research and development (46 percent of its employees are currently involved in R&D, with centers all over the world, including Dallas and Beijing).
“They’re very proud of not having to rely on government contracts,” says Beijing telecom expert Yuzhu Xiong, a China consultant for Internet media and marketing for U.S. securities firm Piper Jaffray.
For its track record, Huawei has become one of China’s darlings. “We believe the government encourages ‘heroes;’ that is, encourages Chinese companies to become leaders in any industry,” says Mr. Carini. Regarding Huawei, he says, “China’s never had companies at this
[multinational] level before.”
Bad Business?
However, Huawei does receive preferential loans from the government. “There’s also a strong sense that Huawei is getting all sorts of other support that’s hard to pin down–‘illegal ways,’ people whisper, though to us, that’s going overboard,” says Mr. Carini. “I think Huawei gets an inordinate amount of attention in the Western press. There are few industries in China that have produced truly competitive companies that can be a threat to the global biggies.”
“As far as things like taxation, Huawei gets government support, but it’s not borne of it,” adds Mr. Chou.
The Huawei threat may be exaggerated. True, the company has wrestled away contracts that many say would have gone to Cisco. But Mr. Carini paints the situation as inevitable: “Cisco almost monopolized a market sector, which is why people are a little panicky about Huawei. But in time, more competitors will emerge.”
At press time, telecom insiders in China were speculating that Cisco was about to lose another big contract to Huawei. Cisco, though, has had more than market competition to complain about. A year ago, it filed an intellectual property lawsuit at the U.S. federal level against Huawei. Cisco claimed Huawei stole its technology. Huawei, which said that rogue employees acted on their own regarding the products in question, agreed to stop selling the products and to change its command line interface, user manuals, help screens, and portions of its source code. In return, Cisco dropped its lawsuit last July.
But Huawei was in a negative spotlight again in the summer of 2004, this time for alleged spying at the Supercomm trade show in Chicago. A Huawei employee was accused of photographing a competitor’s circuit board, as well as deliberately obscuring his name and affiliation. The employee, who was on his first-ever trip out of China, said the name mix-ups were a mistake due to the Chinese tradition of putting surnames first, and said he didn’t know he couldn’t take pictures of products.
“Huawei respects other companies’ intellectual property rights, while protecting our own,” claims Mr. Hu.
Others interviewed disagreed over whether or not the latest scandal would hurt the company. “It doesn’t strike me as typical of Huawei,” says Ori Elraviv, director of marketing for Asia Direct. “Huawei has been working too hard on getting its brand name recognized, advertising all over the place and trying to become globally known.”
But Norson’s Mr. Carini says the report “gives Huawei’s competitors clear evidence [to themselves] that the company is engaging in unethical business practices. It may hurt Huawei in certain developed markets, but that is offset by the company’s willingness to do business with just about anyone–Saddam in Iraq, Taliban-era Afghanistan, et cetera.”
Huawei’s espionage-related setbacks may not be all that provocative. Concrete concerns are more mundane; for example, the company’s structure and management may have to change dramatically.
“Huawei is more like one guy’s company,” says Mr. Yuzhu. Even though the company is technically owned by its employees, many believe Mr. Ren makes all the decisions. That model could hurt Huawei’s hopes of becoming a public company. “When you have so many shareholders, it’s not enough to say, ‘This is how the boss wants it,’” says Mr. Chou.
IPO Rumors
Experts have speculated about a possible IPO for Huawei over the last two years, but now few believe it will happen in the immediate future. “It’s the question of if they want to open their books to inspection,” says Mr. Chou.
“They love to trumpet how much they made [on a deal], but they don’t like to say how much they spent,” says Mr. Carini, surmising that Huawei’s profit margins are narrow and that some deals probably cost the company money in the short term. But management and convoluted agreements aren’t Huawei-specific flaws. They’re just part of how business has traditionally been done in China.
Huawei’s global savvy is without question. Besides the international offices and R&D centers and its 20 million clients worldwide, Huawei has dedicated resources to the education of its work force. It’s onsite and online Huawei University offers courses on management and customer service, as well as English lessons. Because of its international aspirations, Mr. Hu says, Mr. Ren believes it will soon be necessary to conduct high-level meetings in English, and current job postings on Huawei’s web site require native-level English skills.
Huawei’s partnerships, joint ventures, and other agreements with scores of foreign companies include not only giants like Siemens and 3Com but also up-and-comers like the Canadian software company Zi Corporation, which licenses its mobile phone text input technology to Huawei.
Alas, Huawei has also reaped more bitter fruits of international-level success. Like Microsoft, the company has seen talented employees decide to go off and become successful themselves. Li Yinan, a former Huawei star, left the company about four years ago to found Harbour Networks, a telecom equipment vendor that began with venture capital funding from Warburg-Pincus. “Originally, Harbour was going to be a distributor for Huawei,” says Piper Jaffray’s Mr. Yuzhu. “They became a competitor instead.”
Mr. Ren seems keen to hang on to his best and brightest, and to improve their performance in all aspects of business, by appealing to traditional Chinese values of personal and professional duty and civic pride. “We should love our motherland and people, and be accountable for one’s work because of our responsibility [to] support our family,” he said in a treatise dated last summer. “Our stricter requirements on [the] management team could help raise the ethics of average employees.”
Noting expected changes in China’s telecom market, Mr. Ren concludes: “We are undergoing a transition from fast growth to steady growth. The fierce competition ahead requires us to agree on the same vision and objectives, [and be] willing to be led by Huawei culture and the management team. Victory is ours, and we will surely make it.”
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