By CHRISTINE CHANG, AMY CHENG, SUSAN KIM, JOHANNA KUHN-OSIUS, JESUS REYES and DANIEL TURGEL
A version of this article was originally published by Knowledge at Wharton
As one of China's fledging multinational companies and a major force in the international telecommunications equipment industry, Huawei Technologies is rewriting the rules of competition in a global industry. Moreover, it is the first non-state-owned Chinese company to successfully expand its operations internationally, and it has become a model for other Chinese companies and a source of national pride.
In less than a decade, Huawei has penetrated almost every market around the world, investing heavily in its business and technology product lines, which includes fixed networks, mobile networks, data communications, optical networks, software and services, and terminals.
Huawei segments the telecom equipment industry into three major categories: Internet switches, fixed line networks and wireless networks. "Huawei is currently the No. 3 global company in wireless networks and No. 2 in fixed line and switches," says founder and CEO Ren Zhengfei. "But Huawei's goal is to become number one in all three segments." Its competitors include both well-known European and American companies, such as Alcatel-Lucent, Cisco Systems, Nokia Siemens Networks and Ericsson Telephone Co., as well as lower-cost Chinese competitors such as ZTE Corp.
In 1988, Ren, a former People's Liberation Army (PLA) officer, founded the company as a third-party reseller of telecom devices in Shenzhen, China. Five years later, Huawei achieved its first breakthrough when it launched its C&C08 digital telephone switch, which had the largest switching capacity in China at the time. By initially deploying in small cities and rural areas, the company gradually gained market share and made its way into the mainstream market.
After winning its first overseas contract in 1996 with Hong Kong's Hutchison-Whampoa, Huawei expanded to Russia and Africa. In Africa, Huawei began operations in 1998, starting in Kenya, and has now become the largest CDMA product provider in the region.
As a follower of Mao's thought, Ren has drawn much inspiration from the PLA's military strategy -- reflected in Huawei's business strategy, organization and corporate culture. For example, Huawei has relied on a well-known Maoist strategy of first focusing on seizing the countryside, then encircling and conquering cities. Huawei followed this strategy, achieving its first breakthrough in 1993 when it aggressively marketed its digital telephone switches in smaller towns before expanding all over China. Later, Huawei utilized this same strategy by first targeting the underserved markets of Russia and Africa before moving into Europe.
Military culture is also epitomized in Huawei's rigidly hierarchical organization, where emphasis is placed on hierarchical management rather than on individual employees, who are viewed as easily replaceable foot soldiers.
Huawei's strong identity, however, has not prevented the company from adopting Western tactics. From 1998 to 2003, the company hired IBM for management consulting services, modeling itself after the American company. Ren prioritized R&D and supply chain management by adopting IBM's Integrated Product Development (IPD) and Integrated Supply Chain (ISC). After discovering Huawei's return on investment in R&D was one-sixth that of IBM, Ren stipulated mastery of IBM's IPD methodology. Furthermore, Huawei adopted ISC since supply-chain performance was far below potential. Adopting ISC entailed winning over suppliers and partners, many of whom had little appetite for Western management practices.
Nowhere is Huawei's presence and strategy more evident than in Africa, a continent it entered for the first time in 1998, where it successfully dispelled the "made in China" image of low cost and low quality. Beginning in the 1990s, Huawei shifted its role from a manufacturer to that a complete solutions provider. Today, Huawei creates some of the most sophisticated telecommunications equipment in the world and, according to the company, is "not making it cheaper -- it's making it better." Armed with its combination of a corporate culture marked by Communist roots and leading Western business practices, Huawei has executed a strategy composed of superior pricing, customer service and brand awareness to penetrate and dominate the African market, one in which few multinationals have been successful. Huawei has established a reputation as the preferred low-cost, yet high-quality mobile network builder. Its sales in Africa had topped $2 billion across 40 countries by 2006.
Another factor behind its African success is its attention to superior customer service. In 2000-2001, Huawei faced a confluence of challenges: IT investment dried up, profit margins shrank and the market faced oversupply, leading profit growth to evaporate. IBM consultants stressed increasing profits through better supply-chain management, stronger R&D and more integrated corporate structure. However, Huawei was also learning a key strength of IBM: unparalleled service. Unmatched attention and commitment to service eventually came to dominate the firm's global strategy.
Huawei is asserting its brand potential in Africa by means of smart marketing strategies and "going green," including optional use or solar and wind energy. It actively promotes its GSM base stations as among the most eco-friendly in the business, claiming that it cuts energy usage by 47 percent compared to regular towers. By the end of 2007, Huawei reported that it had deployed more than 100,000 green base stations, which saved 570 million kilowatt-hours, or 170,000 tons of coal.
Huawei Technologies has built a world-class enterprise, reaped tremendous profits in Africa over the last 10 years and is contributing to growth in Africa. In China, domestic media have heralded Huawei's success as a model for other Chinese companies trying to transform themselves from domestic entities into global players.
Huawei has already profitably penetrated the European market, winning major contracts and servicing prominent clients such as Vodafone and Telefonica. As Huawei leads the way for homegrown Chinese corporations, the challenges its leaders face going forward include maintaining its growth and transferring the lessons learned in Africa to Europe and North and South America, all of which represent both enormous profit potential and new strategic challenges.
Christine Chang, Amy Cheng, Susan Kim, Johanna Kuhn-Osius, Jesus Reyes and Daniel Turgel are members of the Lauder Class of 2010.