Huawei Technologies: A Chinese Trail Blazer in AfricaPublished: April 20, 2009 in Knowledge@Wharton
Walk into a bookstore in Beijing and you will find shelves filled with books about Huawei Technologies. As one of China's fledging multinational companies and a major force in the international telecommunications equipment industry, Huawei is rewriting the rules of competition in a global industry. Moreover, it is the first non-state-owned Chinese company to successfully expand its operations internationally, some observers say, and it has become a model for other Chinese companies and a source of national pride.
Despite the challenges facing the global economy and the telecommunications industry, Huawei achieved contract sales of $16 billion, representing a 45% year-over-year increase, with approximately 72% of its revenues coming from international markets. In less than a decade, Huawei has penetrated almost every market around the world, investing heavily in its business and technology product lines, which includes fixed networks, mobile networks, data communications, optical networks, software and services, and terminals.
According to an industry insider, Huawei segments the telecom equipment industry into three major categories: Internet switches, fixed line networks and wireless networks. "Huawei is currently the number three global company in wireless networks and number two in fixed line and switches," says founder and CEO Ren Zhenfei. "But Huawei's goal is to become number one in all three segments." Its competitors include both well-known European and American companies, such as Alcatel-Lucent, Cisco Systems, Nokia Siemens Networks and Ericsson Telephone Co., as well as lower-cost Chinese competitors such as ZTE Corp.
Huawei currently serves 270 operators in about 100 countries, including 35 of the world's top 50 telecommunications companies. As of March 2007, Huawei had more than 83,000 employees worldwide, of whom 43% are engaged in R&D. The company reports that it dedicates at least 10% of its revenues to R&D and is now the fourth largest patent applicant worldwide, with more than 20,000 applications filed by 2007. Last year, Huawei won 45% of all new Universal Mobile Telecommunications System and High Speed Packet Access contracts, making it the top supplier in this area. Huawei is also now one of the top three suppliers in the global GSM market; by the end of 2007, it had shipped base stations with total capacity of 700,000 carrier frequencies, serving more than 300 million GSM users worldwide. (GSM is currently the most popular second-generation standard for mobile phones.)
It is hard to understand Huawei's success without considering its humble origins and distinctive corporate culture. In 1988, Ren, a former People's Liberation Army (PLA) officer, founded the company as a third-party reseller of telecom devices in Shenzhen, China. Five years later, Huawei achieved its first breakthrough when it launched its C&C08 digital telephone switch, which had the largest switching capacity in China at the time. By initially deploying in small cities and rural areas, the company gradually gained market share and made its way into the mainstream market. From 1996 to 1998, Huawei experienced exponential growth, coinciding with the boom in China's telecommunications industry. After winning its first overseas contract in 1996 with Hong Kong's Hutchison-Whampoa, Huawei expanded to Russia and Africa. In Africa, Huawei began operations in 1998, starting in Kenya, and has now become the largest CDMA product provider in the region. During the same year, Huawei hired IBM consultants to gain expertise in management strategies in a concerted effort to learn industry best practices.
First, the Countryside
As a follower of Mao's thought, Ren has drawn much inspiration from the PLA's military strategy -- reflected in Huawei's business strategy, organization and corporate culture. For example, Huawei has relied on a well-known Maoist strategy of first focusing on seizing the countryside, then encircling and conquering cities. Huawei followed this strategy, achieving its first breakthrough in 1993 when it aggressively marketed its digital telephone switches in smaller towns before expanding all over China. Later, Huawei utilized this same strategy by first targeting the underserved markets of Russia and Africa before moving into Europe.
Military culture is also epitomized in Huawei's rigidly hierarchical organization, where emphasis is placed on hierarchical management rather than on individual employees, who are viewed as easily replaceable foot soldiers. Like that of many other East Asian firms, Huawei's corporate culture relies heavily on rhetoric and propaganda. The introductory article of Huawei's basic law reads: "Love for our homeland, fellow citizens, work and life is the source of our cohesion; responsibility, creativity, respect and solidarity represent our company's quintessential culture."
Other aspects of Huawei's culture are characteristically Chinese. Resilience and hard work, qualities valued in traditional Chinese culture, are emphasized at Huawei as a way to gain competitive advantage. Another classic East Asian trait, putting the group before the individual, can also be seen. Huawei expects its employees to place their personal lives second in order to serve their company loyally. Its approach to business, referred to as "the way of the wolf," is characterized by reliance on instinct, extreme resilience and employees' willingness to cooperate and sacrifice themselves for the sake of the pack.
Huawei's strong identity, however, has not prevented the company from adopting Western tactics. In the mid 1990s, most Huawei managers were sanguine about the prospects of the firm. However, Ren was aware that Huawei had severe growth limitations, mainly due to the lack of organizational expertise and the absence of a viable long-term strategy. He set out to change the company into a solutions provider. By 2000, when the communications industry slowdown was noticeable, Huawei was already in the midst of a restructuring process that gave the firm its competitive edge against local rivals.
According to an industry insider, "Ren recognized that the best way to overcome Huawei's limitations was to learn from leading Western companies." Thus, from 1998 to 2003, the company hired IBM for management consulting services, modeling itself after the American company. Under IBM's guidance, Huawei significantly transformed its management and product development structure. Ren prioritized R&D and supply chain management by adopting IBM's Integrated Product Development (IPD) and Integrated Supply Chain (ISC). After discovering Huawei's return on investment in R&D was one-sixth that of IBM, Ren stipulated mastery of IBM's IPD methodology. Furthermore, Huawei adopted ISC since supply-chain performance was far below potential. According to The World of Huawei, Huawei's on-time delivery rate in 1999 was only 50%, compared with 94% for competitors; annual inventory turnover was 3.6%, compared with 9.4% for competitors. Adopting ISC entailed winning over suppliers and partners, many of whom had little appetite for Western management practices.
While working with Huawei, IBM was completing its own strategic change from a hardware vendor to an IT solutions provider. Ren drew from IBM's experience, also realizing that the future of Huawei was not in manufacturing what others invented, but in creating excellence in both research and service. This strategy, which may be conventional for leading Western firms, is unusual in China. Although Huawei management possessed vision before hiring IBM, it was through the experience, insight and methodologies gained from working with IBM that Huawei managed to adopt new management practices and become a global player.
Nowhere is Huawei's presence and strategy more evident than in Africa, a continent it entered for the first time in 1998, where it successfully dispelled the "made in China" image of low cost and low quality. Beginning in the 1990s, Huawei shifted its role from a manufacturer to that a complete solutions provider. Today, Huawei creates some of the most sophisticated telecommunications equipment in the world and, according to the company, is "not making it cheaper -- it's making it better." Armed with its combination of a corporate culture marked by Communist roots and leading Western business practices, Huawei has executed a strategy composed of superior pricing, customer service and brand awareness to penetrate and dominate the African market, one in which few multinationals have been successful. Huawei has established a reputation as the preferred low-cost, yet high-quality mobile network builder. Its sales in Africa had topped $2 billion across 40 countries by 2006.
According to the former head of Huawei's operations in West Africa, Wilson Yang, Huawei's profit margins in Africa can be up to 10 times greater than those it realizes in China. Huawei manages to achieve tremendous margins while still pricing itself only 5%-15% lower than its major international competitors, Ericsson and Nokia. Furthermore, Huawei is cautious not to price itself too low so that it will not be seen as yet another low-cost Chinese provider. In contrast, Huawei's main Chinese competitor in Africa, ZTE, consistently prices 30%-40% below European competitors and, consequently, its products are perceived as being of inferior quality.
Huawei's pricing methodology can also be traced back to its experience with IBM, a company that helped Huawei learn the importance of turning R&D into cash and of approaching product development from both technical and business angles to ensure investment returns. This represented the transition for Huawei from a low-cost volume competitor to a value-added leading enterprise.
Learning from the Master
Another factor behind its African success is its attention to superior customer service. In 2000-2001, Huawei faced a confluence of challenges: IT investment dried up, profit margins shrank and the market faced oversupply, leading profit growth to evaporate. IBM consultants stressed increasing profits through better supply-chain management, stronger R&D and more integrated corporate structure. However, Huawei was also learning a key strength of IBM: unparalleled service. Ren appreciated the value of this concept under looming adversity. Unmatched attention and commitment to service eventually came to dominate the firm's global strategy.
Indeed, superior service was a distinguishing feature of Huawei's business model in Africa and its core competitive advantage. Yang explains how this aspect of Huawei's business model ultimately led to global growth: "Three years into its Africa experiment, Huawei still had only 20 employees on the ground and very few contracts. However, our existing clients noticed the unparalleled responsiveness of management and personnel. We brought a Chinese attitude to both work ethic and relationship building in Africa. The result was that clients soon realized they could rely on Huawei 24 hours a day, seven days a week. We emphasized close relationships to foster that reliability and soon began to realize collateral benefits. All of a sudden, our reputation for superior service and higher quality gained us introductions to decision makers in new markets, faster network building and advanced notification of competitive bids. This enhanced Huawei's ability to price safely below the competition."
Huawei is also using its business in Africa as a training ground for establishing itself as a global brand through three distinct channels: policy, local investment and marketing. Huawei leverages its resources and products to connect with developmental policy throughout Africa. . In May 2007, at a forum held in conjunction with the 2007 annual meeting of the African Development Bank Group (ADBG), Huawei set out a vision for Africa that is centered on "'bridging the digital divide and enriching the lives of Africans." Huawei prides itself on giving back to the African community; one of the ways it does this is through donating educational communications equipment to schools.
Huawei has begun to establish regional training centers in African countries such as Nigeria, Kenya, Egypt, Tunisia, Angola and Guinea. By August 2004, Huawei had invested more than $10 million dollars into its Nigerian training center. Recently, Huawei opened a new training facility in South Africa, its fifth training center on the continent. There is a sixth center currently being built in Angola. The company now provides training for up to 2,000 people annually. Such local investments by Huawei help bolster the local economy with job creation and localized management while improving the company's image in the eyes of local consumers, businesses and potential partners.
Huawei is asserting its brand potential in Africa by means of smart marketing strategies and "going green," including optional use or solar and wind energy. It actively promotes its GSM base stations as among the most eco-friendly in the business, claiming that it cuts energy usage by 47% compared to regular towers. By the end of 2007, Huawei reported that it had deployed more than 100,000 green base stations, which saved 570 million kilowatt-hours, or 170,000 tons of coal.
Huawei Technologies has built a world-class enterprise, reaped tremendous profits in Africa over the last 10 years and is contributing to growth in Africa. In China, domestic media have heralded Huawei's success as a model for other Chinese companies trying to transform themselves from domestic entities into global players. Huawei has already profitably penetrated the European market, winning major contracts and servicing prominent clients such as Vodafone and Telefónica. As Huawei leads the way for home-grown Chinese corporations, the challenges its leaders face going forward include maintaining its growth and transferring the lessons learned in Africa to Europe and North and South America, all of which represent both enormous profit potential and new strategic challenges.
This article was written by Christine Chang, Amy Cheng, Susan Kim, Johanna Kuhn-Osius, Jesús Reyes and Daniel Turgel, members of the Lauder Class of 2010.