Huawei Technologies goes global

By Chris Hall

     One of the fascinating questions we can ask about China’s rapidly developing economy is its ability to project an international presence, through corporate entities that can compete with global technology leaders such as those of the US and Japan. A case in point is Huawei Technologies, a communications equipment specialist based in the SEZ or Special Economic Zone of Shenzhen, just north of Hong Kong, in Guangdong Province.
     Huawei used to be something of a family secret, a name well known inside China, but not much beyond its borders. That’s changing fast. Today, Huawei has established a firm footing in European communications markets and is now about to compete in North America.
     Eurotrade recently had the opportunity to speak with Ross Gan, global head of Corporate Communications, about the Huawei phenomenon, the company’s rapid rise and its prospects for the future.

Q: How is Huawei positioned, both as a leader in the networking and telecommunications equipment industry in China and as a global player in the communications industry? What are its best strengths and technology focus?

Customer-centric
     A: Huawei’s position is that of an international telecommunications provider with one of the broadest product lines in the industry. We offer everything from network solutions all the way down to end-user terminals. In relation to our strengths and technology focus, one of our key differences is that Huawei adopts a very customer-centric approach to innovation. We make it a point to fully understand the requirements of our customers, and our customer base primarily consists of international operators. And over the next five years, we have adopted an all-IP approach to many of the solutions we are offering to our customers.
     In terms of the various solutions on offer, for both network conversions and industry development, what we see is that the operators are looking for a company, such as Huawei, that can provide a more holistic approach to their network challenges. We are one of the few players with a very broad offering, and I’m using the word “holistic” in that sense.
     That is one of our key differentiators, and I think that if you were to speak to people in the industry, you would find that because we are also based in China, we have a cost-structure advantage. On average, we allocate 10% of our revenues to R&D, and we pulled in US$16 billion in 2007, in contract sales, so you’re looking at some US1.0 billion spent in China on R&D. But in addition, there’s an amplification effect, which means that our R&D spend, in real terms, is closer to five times that amount. Your actual real spend goes a much longer way in China than it would in Western Europe or the US.
     Audited revenues in 2006 amounted to US$8.6 billion. The figures for 2007 have yet to be audited.

Q: If you had US$16 billion in contract orders in 2007, where does that position you, financially, vis a vis other players in communications equipment?

A: Well, in the last 18 to 24 months there has been quite a bit of consolidation in the sector. There’s been the merger of Alcatel-Lucent, for example, as well as the new joint venture partnership between Nokia and Siemens, so even though Huawei has seen fast growth, I think that if you look at actual size, Huawei is only half that of the industry leaders. There’s still a lot of room for Huawei to grow.

Q: And there size refers to...?

A: How much business they did, and how much business we do. Given the consolidation in the industry, we’re pretty much half the size of the major players.

Q: So a company such as Juniper or Cisco might be pulling in somewhere around US$30 billion, annually?

A: Yes, Cisco’s revenues might be around US$25 ~ US$30. Alcatel-Lucent would probably be around US$20 plus, and the same for Ericsson.

Q: How would you differentiate, qualitatively, between Huawei and companies such as ZTE, Cisco and Juniper? ZTE might be a particularly interesting comparison.

A: Well, I think Huawei and ZTE are two very different companies. Huawei is 100% owned by its employees. It’s a private company. ZTE, on the other hand, originated quite differently, and in terms of size, Huawei is significantly larger. But I think that a lot of observers like to put both companies toe to toe, simply because they’re both from mainland China. But as far as Huawei is concerned, we tend to look more towards the international companies. We benchmark ourselves against companies that are big on the international stage, and I mentioned two or three of those names earlier.
     Huawei also gets referenced, quite frequently, in the same context as Cisco, but if you actually look at our customer base and focus, they are to a large extent quite different. Cisco has a very large enterprise segment. Huawei is primarily focused on service providers, providers of network services to end users. In China, that could be China Mobile or China Telecom or China Netcom. In Hong Kong it could be PCCW or Hutchison.

Rapid growth
Q: My understanding is that Huawei started out in PABX products, in 1988, and by 1992 had produced its first switch. Since then there has clearly been rapid growth. (I believe the company now has 68,000 employees.) What has driven the Huawei phenomenon?

A: I think this is a very good question, and the number of employees, by the way, is now 70,000. Many people try to analyze our fast growth in terms of things we may have done that are different and special, but I think we need to take a step back and look at China and the development of its telecommunications industry. I think that a lot of the macro-economic reforms that took place in the 1980s have driven the growth of the industry overall. And Huawei’s success during that period stemmed from our original focus, which was on the rural market. The telecoms market in China has of course been deregulated for some time, and there is open market competition.
     From that point of view, our adversaries on the international scene are in many ways old friends. When they first entered China, they focused primarily on the metropolitan areas, while Huawei’s focus was rural. Then about 10 years ago, Huawei decided it wanted to pursue an internationalization strategy, and it leveraged its experience in doing business and deploying systems in the rural environment, within the emerging markets. I believe our first contract was with Hutchison, in Hong Kong, in 1997.

Q: The question of macro-economic reforms within China is extremely interesting. Can you point to one or two specifics?

A: I think that if you look at the tele-density, for China, I think that in 1995, it was probably around 1%, but by 2005~2006, it was in the region of 50~60%. And given a population of 1.3 billion, if you look at the market opportunities available in the mid-90s, they were limited. I’ve learned from discussion with some of our older employees that if you wanted to get a fixed line to your office or your home, in the early 1990s, you had to pay the equivalent of US$4,000 and then wait eight months. That’s the kind of environment in which everyone operated, back then. China was a country open for services and networks.

Q: So these were reforms that encouraged a market dynamic?

A: Yes. I think the fact that we were and continue to be headquartered in Shenzhen, which was one of the first SEZs or Special Economic Zones, is illustrative of that. And both the Provincial Government and the Government of Shenzhen pursued policies that encouraged investment in high tech industries.

Q: I would assume that for Huawei to have had this extraordinarily rapid growth, there must have been one or two factors we can point to, such as investment and qualified R&D employees. Would you care to say anything about those?