Download - Case

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


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.


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


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


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


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.


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.


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).


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


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.


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).


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


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).


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.


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


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


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.


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


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


Wei Huang 20 2006

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).


Wei Huang 21 2006

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


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,


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.


Wei Huang 24 2006

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.


Wei Huang 25 2006

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


Wei Huang 26 2006

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.


Wei Huang 27 2006

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


Wei Huang 28 2006

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,


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.


Wei Huang 30 2006

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.


Wei Huang 31 2006

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


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).


Wei Huang 33 2006

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


Wei Huang 34 2006

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).


Wei Huang 35 2006

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.


Wei Huang 36 2006

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.


Wei Huang 37 2006

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


Wei Huang 38 2006

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)


Wei Huang 39 2006

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).


Wei Huang 40 2006

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


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


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.


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.


Wei Huang 44 2006

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


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


Wei Huang 46 2006

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.


Wei Huang 47 2006

Figure 19: Switching Figure 20: NGN

Figure 21: Integrated access network Figure 22: DSLAM


Wei Huang 48 2006

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


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)


Wei Huang 50 2006

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


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


Wei Huang 52 2006

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


Wei Huang 53 2006

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


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


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


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).


Wei Huang 57 2006

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).


Wei Huang 58 2006

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


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


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


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


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


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


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


Wei Huang 65 2006

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


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


Wei Huang 67 2006

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


Wei Huang 68 2006

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


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’


Wei Huang 70 2006

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).


Wei Huang 71 2006

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


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).


Wei Huang 73 2006

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.


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).


Wei Huang 75 2006

REFERENCES

Books and Journal articles:

Accenture, (2005a). Mergers and Acquisitions Trends and Strategies. Accenture, (2005b). China spreads its wings -Chinese companies go global.

Accenture, (2005c). Taming the Dragon -Mastering China's growth dynamics. Accenture, (2005d). A Pragmatic View of Managing Risk. Arete Research (2005). Huawei: the Monkey King? , 20 March 2005 Anand B. and Khanna, T. (2000). ‘Do firms learn to create value? The case of alliances’, Strategic Management Journal 21: 295–315.

Barkema, H. and Rian, D. (2005). ‘Exploitation and Exploration by Internationalizing

Companies’, working paper, School of Economics and Business Administration, Tilburg University. Barney, J. B. (1991). ‘Firm resources and sustained competitive advantage’. Journal of

Management, 17, 99–120. Bartlett C. A. and Ghoshal S. (2005). Transactional management, text, cases, and

readings in cross-border management

Beamish, P. W. and Iris B. (2003). Learning from IJVs: The unintended outcome. Long

Range Planning, 36(3): 285-303. Beebe A., Hew C., Yueqi F., Shi D., (2005). Going global, prospects and challenges for

Chinese companies on the world stage. IBM business consulting services. Beijing Review (2004a). Investing Abroad, August 2 2004 Beijing Review (2004b): http://www.bjreview.com.cn/200430/Business-200430 (A).htm. Beijing Review (2005), Culture Conflicts in Sino-Foreign Ventures, June 23 2005. Boisot, M. (2004). Notes on the internationalisation of Chinese firms. Unpublished paper, Open University of Catalonia, Barcelona, Spain. Boisot, M. and Child, J. (1996). ‘From fiefs to clans and network capitalism: Explaining China’s emerging economic order’. Administrative Science Quarterly, 41, 600–28. Buckley, P. J. and Casson, M. C. (1976). The Future of the Multinational Enterprise. London: Macmillan.


Wei Huang 76 2006

Buckley, P. J. and Ghauri, P. N. (1999). The Internationalisation of the Firm. London: Thomson Business Press. Business Week (2003). ‘Jumping the hurdles at Huawei’. December 22, 22–3. BusinessWeek (2005). The State’s Long Apron Strings, August 22-29 2005. Breschi, S., F. Lissoni and F. Malerba, (1998). Knowledge proximity and firm’s

technological diversification, mimeo, CESPRI, Universita L. Bocconi. Cai, K. G. (1999). ‘Outward foreign direct investment: A novel dimension of China’s integration into the regional and global economy’. China Quarterly, 160, 856–80. Cantwell, J. and C. Hodson (1991). Global R&D and UK competitiveness. Global Research Strategy and International Competitiveness. M. Casson Ed, Oxford and Cambridge: Basil Blackwell. Cantwell, J. and L. Piscitello, (1999). The emergence of corporate international networks for accumulation of dispersed technological competence, Management International

Review, 39 123—147. Caves, R. E. (1971). ‘International corporations: The industrial economics of foreign investment’. Economica, 38, 1–17. Chen, M. (2004). Asian Management Systems. London: Thomson, 2nd edition. Chen, X-P. and Chen, C. C. (2004). ‘On the intricacies of the Chinese guanxi: A process model of guanxi development’. Asia Pacific Journal of Management, 21, 305–24. Chen J. and Tong L. (2002). R&D internationalisation and the reformation of Chinese

S&T system.

China Daily (2005). Chinese Ambassador to Britain. China Mobile Bids to Take First

Global Step, March 5 2005. Child, J. and Lu, Y. (1996) Management issues in China. Vol. 2, New York: Routledge. Child, J. and Rodrigues S. B. (2005). ‘The internationalisation of Chinese firms’, Management and Organization Review 1(3): 381-410. Dawar, N., and Frost, T. (1999). ‘Competing with Giants: Survival Strategies for Local Companies in Emerging Markets’, Harvard Business Review, March-April. Deng, P. (2004). ‘Outward investment by Chinese MNCs: Motivations and implications’. Business Horizons, 47, 8–16.


Wei Huang 77 2006

DiMaggio, P. & Powell, W., (1991). The new institutionalism in organizational analysis. Chicago: University of Chicago Press. Dore, R. (1973). British Factory – Japanese Factory. London: Allen & Unwin. Dunning, J. H. (2001). ‘The eclectic (OLI) paradigm on international production: Past, present and future’. International Journal of the Economics of Business, 8, 173–90. Fang, P. (2002). The Refrigerator Industry in China and Strategies for Chinese

Companies. Unpublished MBA dissertation, University of Birmingham. Freeman, C., Soete, L., (1997). The economics of industrial innovation, Third edition. Pinter, London. Grant, M.R. (1996). ‘Toward a knowledge-based theory of the firm’, Strategic

Management Journal 17: 109–122. Grant Jeremy (2005). Chinese learn to talk contracts not contacts. Financial Times, March 12, 2005. Guthrie, D. (2005). ‘Organizational learning and productivity: State structure and foreign investment in the rise of the Chinese corporation’. Management and Organization Review, 1, 165–95. Hakanson, L., (1992). Locational determinants of foreign R&D in Swedish multinationals, In: Technology Management and International Business. Hamel, G. (1991). ‘Competition for competence and inter-partner learning within international strategic alliances’, Strategic Management Journal 12: 83–103. Hamel G. and Prahalad C. K., (1990). "The Core Competence of the Corporation", Harvard Business Review, vol. 68, no. 3, May-June 1990, pp 79-93. Harney Alexandra, (2005). From The challenger from China: why Huawei is making the telecoms world take notice, the Financial Times 11/Jan/2005 Hennert, J-F. (2001). ‘Theories of the multinational enterprise’. In Rugman, A. M. and Brewer, T. L. (Eds.), The Oxford Handbook of International Business (pp. 127–49). Oxford: Oxford University Press.

Hill, C., Hwang, P. and Kim W. C. (1990). ‘An Eclectic Theory of the Choice of International Entry Mode’, Strategic Management Journal, 11: 117-128.

Hitt, M. A., Ahlstrom, D., Dacin, M. T., Levitas, E. L. and Svobodina, L. (2004). ‘The institutional effects on strategic alliance partner selection in transition economies: China vs. Russia’. Organization Science, 15, 173–85.


Wei Huang 78 2006

Huang, Y. (2003). Selling China: Foreign Direct Investment during the Reform Era. Cambridge: Cambridge University Press.

Hymer, S. (1976). The International Operations of National Firms: A Study of Direct

Investment. Cambridge. Intelligence report, (2005). March, Escalating R&D, China’s state council wants

research and development expenditure as a proportion of GP to double by 2020

Johanson, J. and Vahlne, J. (1977). ‘The Internationalisation Process of the Firm: a Model of Knowledge Development and Increasing Foreign Market Commitment’, Journal of International Business Studies, 8(1): 23-32. Jonquieres De Guy (2005). Going global is always a risky business. Financial Times, 08, March, 2005. Johanson, J. and Wiedersheim-Paul, F. (1975). ‘The internationalisation of the firm. Four Swedish cases’. Journal of Management Studies, 12, 305–22. Kahal Sonia El (2001). “Business in the Asia Pacific -Texts and Cases”. Business in the Asia Pacific – Texts and Cases”p184. Oxford University Press. Kogut, B. (1988). ‘Joint ventures: Theoretical and empirical perspectives’, Strategic

Management Journal 9: 319–332.

Kutscher, M. and Baumile, I. (1997). ‘Three Plus One: Multidimensional Strategy of Internationalisation’, Management International Review, 37(2): 103-125. Kumar, N., (2001). Determinants of location of overseas R&D activity of multinational enterprise: the case of US and Japanese corporations. Research Policy, 30, 159—174. Lewin, A. Y., Long, C. P. and Carroll, T. N. (1999). ‘The convolution of new organizational forms’. Organization Science, 10, 535–50. Liang Hong (2003), Asian Wall Street Journal, November 6, 2003, Op-Ed Page Chinese

Renminbi: Whose Problem Is It?

Li C. and Cui H. (2004). “Report on Huawei’s Internationalisation.” IT Times Weekly. October 9, 2004. Li J. and Guisinger S. (1991). Comparative business failures of foreign-controlled firms in the United States. Journal of International Business Studies 22(2): 209-224

Lou Y. and Mezias J.M. (2002). The liability of foreignness. Journal of International

Management, Special issue, Vol. 8


Wei Huang 79 2006

Luo, Y. (2002). ‘Partnering with foreign businesses: perspectives from Chinese firms’, Journal of Business Research 55: 481– 493. Mascarenhas, B., Baveja, A., and Jamil, M. (1998) "Dynamics of Core Competencies in Leading Multinational Companies", California Management Review, vol 40, no. 4, pp. 117-132. Mathews J. A, (2002). Competitive Advantages of the Latecomer Firm: A Resource-Based Account of Industrial Catch-Up Strategies, Asia Pacific Journal of Management, 19, 467–488, 2002.

Melin, L. (1997). ‘Internationalisation as a Strategy Process’, in Vernon-Wortzel, H. and Wortzel, L., Strategic Management in a Global Economy, New York, NY: John Wiley and Sons. Meyer, M. W. and Lu, X. (2004). ‘Managing indefinite boundaries: The strategy and structure of a Chinese business firm’. Management and Organization Review, 1, 57–86. Meyer, J. W. and Scott, W. R. (1983). Organizational Environments: Ritual and

Rationality. Thousand Oaks, CA: Sage. Michel A. and Shaked I. (1986). Multinational corporations vs. domestic corporations: financial performance and characteristics. Journal of International Business Studies

17:89-100 Moingeon, B. and Edmonson, A, (1996). Organizational Learning and Competitive

Advantage. Thousand Oaks, CA: Sage. Nachum L. (2003). Forthcoming, Liability of foreignness in global competition? Financial service MNEs in the City of London. Strategic Management Journal Nolan, P. (2001). China and the Global Economy. Basingstoke, UK: Palgrave.

Norwell, W. Andrus, M. and Gogumalla N.V. (1995) ‘Factors Related to Internationalisation and the Level of Involvement in International Markets’, International

Journal of Management 12(1): 63-77. OECD (Organisation for Economic Co-operation and Development, 2003). 13th March, 2003, Review of the development and reform of the telecommunications sector in China. OECD (Organisation for Economic Co-operation and Development, 2004). Trends and

Recent Developments in Foreign Direct Investment, 2004 Ohmae, K., (1995). The end of the nation state. The rise of regional economics. Free economics, New York.


Wei Huang 80 2006

Oulton N. (2001). Why do foreign-owned firms in the UK have higher labour productivity? In N. Pain (Ed.), Inward Investment, Technological Change and Growth.

Palgrave, London, pp. 122- 157 Patel, P., Vega, M., (1999). Patterns of internationalisation of corporate technology: location vs. home country advantage, Research Policy 28, 145—155. Pearce, R., Singh, S., (1991). Globalising research and development. Macmillan, London Peerenboom, R. (2001). ‘Globalization, path dependency and the limits of law: Administrative law reform and the rule of law in the People’s Republic of China’. Berkeley Journal of International Law, 19, 161–264. Peng, M. W. (2000). Business Strategies in Transition Economies. Thousand Oaks, CA: Sage.

Peng, M. W. (2005). ‘Perspectives – from China strategy to global strategy’. Asia Pacific

Journal of Management, 22, 123–41. Rhoads C.and Buckman R., (2005). “Trial and Error: A Chinese Telecom Powerhouse

Stumbles on Road to the U.S.” The Wall Street Journal. July 28, 2005. Rui H. and Yip G. S. (2006). China’s foreign acquisitions challenge international

business theory and practice Safarian, A. E. (2003). ‘Internalization and the MNE: A note on the spread of ideas’. Journal of International Business Studies, 34, 116–24. Shaked I. (1986). Are multinational corporations safer? Journal of International

BusinessStudies, 17(1): 83-107 Scott, R. (1987). The adolescence of institutional theory. Administrative Science

Quarterly, 32: 493-511.

The Economist (2002). To get rich is glorious, 17 January 2002. The Economist (2004). A billion three, but not for me, 18 May 2004.

The Economist (2005a). Patching the basket, 29 September 2005 | HONG KONG. The Economist (2005b). The struggle of the champions, 6 January 2005. The Economist (2005c). ‘The dragon tucks in’. 2 July, 2005. The Economist (2005d). ‘See Huawei run telecoms equipment’, 5 March 2005 Vol 374 iss 846 pg70


Wei Huang 81 2006

Vernon, R. (1966), “International investment and international trade in the product cycle,” Quarterly Journal of Economics, May 1996, 80, 190-207. Wang W., (2001), China’s Integration with the World Economy: Repercussion of China’s

Accession to the WTO, International Workshop Proceedings, August 2001. Warner, M., Ng, S-H. and Xu, X. (2004). ‘“Late development” experience and the evolution of transactional firms in the People’s Republic of China’. Asia Pacific Business

Review, 10, 324–45. Xing, W. X. (2005) ‘Globalization and Catch-up in the Chinese Telecommunications

Industry: The Case of Huawei’ Unpublished PhD Dissertation, Jesus College, University of Cambridge. Yip, G.S., Gomez J.B., and Monti, J. (2000). ‘Role of the Internationalisation Process in the Performance of Newly Internationalizing Firms,’ Journal of International Marketing, 8(3): 10 - 35. Zaheer, S. (1995). ‘Overcoming the liability of foreignness’. Academy of Management

Journal, 38, 341–63. Zaheer, S. and Mosakowski, E. (1997). 'The Dynamics of the Liability of Foreignness: A Global Study of Survival in Financial Services', Strategic Management Journal, 18(6): 439-464. Zander, I., 1997. How do you mean “global”? An empirical investigation of innovation network in the multinational corporation, Research Policy 28, 195—213

Zha P., (2005). 16th Chinese Economic Association (CEA) Annual Conference, March 2005. Zhang, J. (2005). ‘China’s corporate cost advantage is a myth’. Financial Times, April 29, 19. Zhang, W. (2003). ‘Brand value and strategy’. Working Paper Guanghua School of Management, Peking University, China. Websites:

CIA World Factbook: www.cia.gov/cia/publications/factbook/ (2004 figures). Last accessed on 17 July, 2006. Economist Intelligence Unit ViewsWire: www.viewswire.com, 2004. Last accessed on 01 August, 2006.


Wei Huang 82 2006

Global Insight: www.globalinsight.com (annual real GDP figures in 2004). Last accessed on 18 July, 2006. Huawei website: www.huawei.com. Last accessed on 20 August, 2006. Huawei’s corporate presentation: http://www.oecd.org/dataoecd/61/22/36929850.pdf. Last accessed on 03 July, 2006. Light reading (2005), China Opportunity & Thread, online video at http://www.lightreading.com/document.asp?doc_id=60359. Last accessed on 4 June 2006. Lindoe J. K. N.(2005), Managing rapid international growth: http://www.dnv.com/publications/dnv_forum/by_subject/certification/Managingrapidinternationalgrowth.asp#. Last accessed on 17 June 2006. Professor Geert Hofstede: www.geert-hofstede.com. Last accessed on 17 May 2006. Project Management Institute (PMI), Case study: Huawei technologies: Chinese telecom

giant establishes competitive edge. http://www.pmi.org/prod/groups/public/documents/info/ap_case-huawei.asp Last accessed on the 7th August, 2006.

MOC, Ministry of Commerce (2005) ‘Retrospect of China’s Foreign Trade during the Tenth Five Year Plan’, [www document] http://gcs.mofcom.gov.cn/aarticle Last accessed on 25 February 2006.

Robert B., Kiley D., et al. “Special Report: The Best Global Brands.” BusinessWeek/Interbrand. August 1, 2005. http://www.businessweek.com/magazine/ content/05_31/b3945098.htm. Last assessed on 03 July 2006. SAIC: “SAIC: driving growth with Ssangyong.” October 29, 2004. www.justauto.com. Last assessed on 29 October 2004.

Download - Case

Top Related