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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
A dissertation presented in part consideration for the degree of MA Finance and Investment
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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.
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.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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
25 Table 2: Hofstede’s Five Cultural Dimensions..... 44 Table 6: SWOT analysis of Huawei ............................................ 29 Table 3: Advantages and challenges for OEM/JV and Acquisition .......................... 50 Table 7: Huawei’s R&D location ............................................................................. 33 Table 4: Chinese Tax Benefits....................................................................... 2004.........................................................................................Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd............................. 40 Table 5: Orders by Division...................................... 2004........ 51 Table 8: R&D Cost Profile by OEM......................................................................................... 61 Wei Huang 5 2006 ................... LIST OF TABLES Table 1: Forces behind internationalisation by Chinese firms............................................................
Since Deng Xiaoping initiated a program of path-breaking economic reform in 1978. its core competences and its challenges in operating in developed markets. 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. China National Petroleum Corporation’s (CNPC) US$4. massive infrastructure spending and gradual market liberalisation. SAIC’s 50. Shanghai Automotive Industry Corporation (SAIC) and its sister company Nanjing Automobile’s acquisition of most of the assets of MG Rover in 2005. primarily through a combination of exports. At the same time. Lenovo’s recent purchase of the IBM Personal Computer Division.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. very limited research has been devoted to the internationalisation of Chinese firms (Child and Lu. 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. 2004). INTRODUCTION The 21st century has been described as China’s century. Wei Huang 6 2006 . Chinese companies will undoubtedly accelerate their global presence in line with China’s ascent as a major economic power. the author attempts to analyse Huawei’s corporate profile and its internationalisation strategies employed as a latecomer firm. whether active in China or not. 1. The key questions that the author attempts to answer are: to what extent Huawei not follow the traditional internationalisation theory.6 percent acquisition of Korea’s Ssangyong (SAIC. China has experienced the most phenomenal economic growth. culminating in China’s entry into the World Trade Organisation (WTO) in 2001. will benefit from this study by factoring the insights into the formulation of their business strategies. 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. foreign companies. However.2 billion acquisition of PetroKazakhstan.
In the literature review section. the Huawei case study will be analyzed from aspects of reasons of choosing this industry and this company. Wei Huang 7 2006 . the possible answers to the research questions will be discussed followed by the limitations and conclusion in chapter seven and eight respectively. In section five. this paper will start with presenting the traditional internationalisation theory. after briefing discussing the motivations that led companies to expand abroad. research questions and research methodologies will be presented respectively. Forces. In chapter six. which has been employed to explain the international expansion patterns of Western firms. challenges and most importantly strategies of internationalisation of Chinese firms will also be reviewed in this section. It will then discuss the rationale for Chinese internationalisation followed by the discussion of latecomer perspectives. its corporate profile and its internationalisation strategies employed as a latecomer firm.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. In section three and four.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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).
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
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).
2002). It has also be noted how they benefit from government support in this aspiration. 2003. 2004. Meyer and Lu. Chinese firms now face fierce competition from leading international brands. Differentiation is gained when the market perceives products to stand out from those of competitors in a way that customers approve. 2004). 2001). Having developed an international presence. 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 12 2006 . Nolan. However. while a cost advantage is a relatively important competitive factor for simple products and lower income markets. 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. Chinese firms need to build up new capabilities through investment or partnership abroad. 2005). in industries such as mobile phones.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. in order to compete in other higher value-adding markets. Chinese companies would be in a stronger position to compete against multinationals in their domestic market as well. 2005). 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. often by learning from partnerships with multinationals (Guthrie. 2001). This competition together with over capacity is driving profit margins down to wafer thin proportions (Fang. Many Chinese firms already enjoy a cost advantage due to their low wages and to the production improvements achieved in recent years. however. 2005). In order to do this. electronics and white goods. Government interference also continues in various forms and at different levels (Huang. Moreover. The presence of these domestic constraints and pressures adds to the attractiveness of producing for foreign markets. The high levels of competition in many of China’s domestic markets have also fostered cost effectiveness (Child and Rodrigues. Transaction costs are also raised by the continuing complexity and uncertainties in the way the Chinese legal system operates (Peerenboom. differentiation and brand advantages are also required. as Zhang (2003) points out.
qualities and functions performance as competing products. beverages. 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. the top three reasons including seeking new markets for growth. 2005 (n=25). IBM institute for business value and Fudan globalization survey. and intense competition in domestic market (See Figure 1). According to IBM’s 2005’s survey (primarily among 25 companies that China’s global leaders are likely to emerge). Often Chinese companies are going abroad to acquire advanced technology and R&D capabilities. the strengthening of differentiation and/or brand advantage features is an important driver for Huawei going abroad. with the reputation (and sometimes cachet) that it signifies. Chinese companies are motivated to expand globally for a range of reasons. Wei Huang 13 2006 .Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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. 2005. and mobile phones. such as those for automobiles. consumer electronics. which provide the means to develop a differentiation advantage. Some are acquiring or developing global brands as the basis for securing a brand advantage. is particularly important in consumer markets. household goods. clothing. Figure 1: Primary motivations for Chinese companies considering global expansion Source: Beebe et al. acquire advanced technology and management skills. Even before going abroad. Brand recognition. As will become apparent from the case study in this paper to be considered.
Similarly. First of all. Mathews (2002) argues that the category is of greatest interest in the context of high-technology industries. for these are the hardest to penetrate. e. According to Dore (1973). rather than replace. where cost advantages are minimal. (2) Resources: The LCF is initially resource-poor.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. lacking technology and market access. it is necessary to define what meant by latecomer firm (LCF). Hong Kong. 2.(3) Strategic intent: The LCF is focused on catch-up as its primary goal. and where strategies of linkage and leverage are all important. existing theorizing on the internationalisation of firms including that applied to developing country MNCs. 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. Child and Rodrigues (2005) suggest that China presents an opportunity to extend. the ‘late development’ thesis has classically been applied to nations. 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. which it can utilize to leverage a position in the industry of choice. South Korea. notably Taiwan. such as low costs. and Singapore.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. initially Japan and subsequently the emergent new economies of East Asia.g. which are knowledge-intensive. This following discussion will review Peng (2005). Wei Huang 14 2006 . Mathews (2002) and Child and Rodrigues’s (2005) work of further extending the traditional internationalisation theory. (4) Competitive position: The LCF has some initial competitive advantages. (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. According to Mathews (2002). primarily Western theories. 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.
Organizations attempt to acquire legitimacy and recognition by adopting structures and practices viewed as appropriate in their environment. particularly with respect to the processes whereby firms in this category can develop international competitive strengths. 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. both through ownership and through regulation (Peng. Child and Rodrigues (2005) argue that the process of internationalisation by Chinese firms appears to be significantly impacted by institutional factors. and learning. 1987.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. resource leverage. Developing and transition economies like China are typically characterized by an active governmental involvement in business. Child and Rodrigues. Mathews. these became less crucial as the firms moved into more sophisticated markets with higher value products. 1996). 2002. As Child and Rodrigues (2005) state that the ‘latecomer’ to global business deserves to be granted greater theoretical attention. The close ‘relational Wei Huang 15 2006 . This is not to deny the fundamental insight that firms have to possess competitive advantages. such as low labour costs. 2000). however. As many previous researchers (for example. 2005) emphasised that while such LCFs had some initial competitive advantages. Mathews’s (2002) research indicated that these LCFs overcome competitive disadvantages through linkage. 1991) is that organizations are under pressure to adapt to and be consistent with their institutional environment. in order to sustain a successful presence in international markets. It is. particularly ownership and internalization ones. The significance of the latecomer perspective lies in the way it directs attention to international investment as a means of addressing competitive disadvantages. DiMaggio and Powell. Institutional analysis and the role of government A common point of departure for most scholars (Scott. 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.
have benefited significantly from government support at critical stages in their development. This paradox suggests that. firms coming from a heavily institutionalized environment must negotiate Wei Huang 16 2006 . framework’ (Meyer and Scott. These “national champions” enjoy a range of benefits from the government including information sharing networks. 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. The Chinese government has played an important role in setting the trajectory for the country’s journey toward globalization. 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. This legacy can inhibit strategic action either through promoting a conservative attitude or through more direct constraints (Lewin et al. 2005). Haier and Lenovo. 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. 2005b). domestic tax breaks. 1983) enables Chinese firms to enjoy the supporting governmental agencies confidentially. For example.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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. 1999). On the other hand. low interest funding from state-owned banks and protection from the Chinese authorities (The Economist. 2001). Recognizing the over-dependence on export-led development. in order to internationalize successfully. it may indeed require direct or indirect governmental funding to make the purchases. 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. Huawei. 2004). Indeed. cheap land. If a late-coming disadvantaged firm is to acquire assets that enable it to compete in the world market.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 1977. Hence. 1975). based on ‘who you know’. including the tendency to rely on close personal relationships in business transacting (Chen and Chen. a liability of foreignness may still jeopardize the effectiveness of how they are put to use. and the extent to which it affects the performance of MNCs in foreign countries has attracted much research attention (Lou and Mezias 2002). This implies that even if the lack of tangible assets such as technology and branded products can be met through their purchase abroad. A similar preference may also characterize other societies that continue to rely heavily upon traditional foundations of trust. This stream of research finds its theoretical foundations in Hymer’s pioneering observation (Hymer 1976). 1996). institutional. Johanson and Wiedersheim-Paul. 2004) could thus prove a handicap for the management of overseas affiliates. Wei Huang 17 2006 . may be expected to increase the liability of foreignness faced by its firms as they seek to internationalize. Liabilities arise from their unfamiliarity with the foreign environment in which they operate. foreign firms would underperform their domestic counterparts. ways of combining the material support it may offer with a sufficient degree of strategic freedom. The liability associated with foreign operations. 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. 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. 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. It also often related to the concept of ‘psychic distance’. linguistic. rather than on legal and other formalized supports. China’s distinctive cultural and institutional legacy. suppliers and national governments and from the additional costs associated with running international operations. from discriminatory attitudes of customers. Furthermore. 2004). other things being equal. which concerns the cultural. Distinctive Chinese styles of management (Chen.
In earlier phases of internationalisation from the Chinese Mainland. firms evidenced a preference to go to countries where Chinese social networks are present (Cai.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Deng. Li and Guisinger 1991. Previous research on developing country MNCs indicates a preference for expanding to foreign territories where it is possible to access ethnically-based social networks. However. and this appears to be very characteristic of overseas Chinese firms. to which Hymer (1976) referred. 1999. or from some superior perception of foreignness by local customers and suppliers. firms evidenced a preference to go to countries where Chinese social networks are present (Cai. as they each rely on only part of the factors determining the performance of foreign firms relative to their indigenous Wei Huang 18 2006 . the aspiring global player Huawei considered in this paper appear to be finding ways of overcoming any such limitations. 2004) seems to have been less evident among the larger recent internationalizing firms. These contradicting findings are both in line with theory. Furthermore. Deng. 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. Michel and Shaked 1986. Shaked 1986. Nachum 2003). Such findings are explained by the superior competitive advantages of foreign firms investing overseas (Hymer. and even in some cases local governments (Hymer. 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. though the extent to which they tap overseas Chinese communities in developed countries such as the USA needs to be clarified. 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. Oulton 2001.g. 2004). 1976). 1976).. the earlier phases of internationalisation from the Chinese Mainland. Professor Nachum (2003) argues that neither of them is complete. However. These superior advantages are transferred internally within the MNE and are used to compensate for the disadvantages of foreignness. 1999. there is a large body of research that shows that foreign firms tend to perform better than domestic firms (e. however. At the same time.
4 percent between 1970 and 2004 (Zha. while the United States has joined Hong Kong. and regard the outcome as the balance between them. counterparts.8 percent at purchasing power parity (Economist Intelligence. 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.9 percent at market exchange rates and 13. Average annual GDP growth was 9. or its managerial and organisational skills. 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. Taiwan. 2004) and second-largest at purchasing power parity (CIA. as well as by being part of a multinational network that enables it to connect to worldwide information flows. China is the fifth-largest economy in the world at market exchange rates (Global insight. 1 2 Development Research Centre of China’s State Council Based on the Chinese Government's official FDI figures. China has largely integrated into the global economy. 2005a). www. 2005) and is forecast to be 8 percent (see Figure 2) from 2005 to 20101.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. the capital availability from its parent. The Organization for Economic Cooperation and Development (OECD) recently announced that China has overtaken the United States as the biggest recipient of FDI. China’s share of world gross domestic product (GDP) stood at 3. 2004). and the superior advantages of MNE. China has become the world's preferred destination for foreign direct investment (FDI).gov. In 2004. 2.cn Wei Huang 19 2006 .5 Forces behind internationalisation of Chinese firms The macroeconomic imperative Since Deng Xiaoping initiated a program of path-breaking economic reform in 1978.fdi. attracting US$53 billion in 2003. Japan and South Korea in the top five sources of FDI into China2 (see Figure 3) (Accenture. 2004). Similarly. The actual competitive position of foreign firms vis-à-vis domestic ones is a balance between the additional costs associated with international activity and the disadvantages resulting from operating in a foreign country.
the Chinese currency has been revaluated (2. just as the strength of the yen encouraged a wave of Japanese foreign acquisitions in the 1980s (Rui and Yip. Figure 2: Projected GDP (US$ billion. by reducing the price of foreign assets.1 percent increased against the dollar. The reason is simple: the business cycle in China is not synchronized with that of the US.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. the revaluation of the Chinese yuan against the US dollar. and the previous fixed exchange rate management system limits the Chinese authorities’ ability to conduct independent monetary policy (Liang. 2003). While some have cash resources through achieving reasonable profits – for example. 2005a). market exchange rates) Figure 3: China FDI flows (US$ million) Source: Goldman Sachs. may accelerate the process of acquiring foreign assets. 2005 and it is no longer pegged against the dollar. 2006). 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. A Yuan revaluation is the most cost-effective way to maintain a stable macro environment conducive to growth. An increasing number of Chinese companies are undertaking international acquisitions. Wei Huang 20 2006 . 2005 Furthermore. see Figure 4) in July. 2003 Source: China Economic Quarterly (CEQ).
In addition to building economic relations with more countries. % 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. China’s outward investment has a dual purpose of building China’s political capital and influence around the world. for some time. 2005b). 2005b). 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. Figure 4: Chinese Yuan against US$. Microsoft and Wal-Mart. Figure 5: China’s currency basket: estimated weights*. The quest has begun to create Chinese companies on a par with global giants such as Coca-Cola. Iran and Zimbabwe (Accenture. Companies like Huawei and ZTE have used their experience in building China’s own Wei Huang 21 2006 . In particular. The Chinese government also has played an important role in setting the trajectory for the country’s journey toward globalization.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. As mentioned previously. business and political leaders have worked together to build strong relationships with developing countries (Accenture. 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. China’s chosen route to economic expansion has therefore been closely aligned with its strategy to strengthen its global political presence.
global operating models allow Chinese companies the flexibility to place business units wherever they afford the greatest comparative advantage. Because of the complexity of the Chinese market. Building a brand from scratch is a challenging task and China is only beginning to develop the skills required to do so. but few national ones able to compete in international markets. brand-buying is seen by many as a logical short cut (Accenture. With the rapid pace of globalization. China has been building alliances with other developing economies in political forums and multinational negotiations (Accenture. By associating themselves with a top brand name or product. In December 2004. China’s strategy is to build its presence overseas. markets to develop new ones in other emerging economies. As a result. 2005). 2004a). Their better understanding of emerging markets provides a stronger guarantee of success in their initial overseas expansion plans. 2005b). Some observers suggest that China may need another 5 to 10 years to nurture globallyrecognized brand names (Beijing Review. With foreign currency reserves amounting to roughly US$700 billion. Competitive flexibility In the face of increasing foreign competition. In particular. for example. before tackling developed economies. Meanwhile. 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.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 2005b). improving chances of a smoother entry into more developed western markets later on. there are many regional Chinese brands. 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. Wei Huang 22 2006 . 2005b). 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. state-supported Chinese companies can draw on a pool of ready capital for strategic acquisitions. Going global enables Chinese companies to gain access to technology and bring their operations in line with international standards. 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.
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.75 billion deal Lenovo. gaining significant international coverage (Accenture. With the world’s highest savings rate (see Figure 6). Lenovo’s purchase of IBM’s personal computer operations in December 2004 is the most often cited example of this strategy. funds and property (Beijing Review. 3 Wei Huang 23 2006 . it is a significant opportunity for financial services providers. Chinese companies can quickly raise their international profile as well as gaining instant access to new markets. 2005b). The ‘Iron Rice Bowl’ is a Chinese idiom referring to the system of guaranteed lifetime employment in state enterprises where the allocation of housing. 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. such as securities. 2002). However. While this will be a challenge for retailers and consumer-goods companies. As the relatively undeveloped financial services market matures.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. a company hardly known outside China. Chinese savers are beginning to diversify their savings across more sophisticated financial products. Figures from richer countries suggest that populations do not stop saving until accumulated wealth reaches 300 to 400 percent of GDP. 2004b). With this US$1. 2004). jobs and education was the exclusive responsibility of the state. suddenly became the world’s third-largest PC manufacturer after Dell and HP. bonds. accumulated Chinese household wealth over the past two decades has equated to approximately 140 percent of GDP (The Economist. As consumerism grows in China. indicating that China’s high saving tendency is unlikely to abate anytime soon. retailers are now hoping that households will soon loosen their purse strings.
Wei Huang 24 2006 . emphasis continues to be placed on value for money. Table 1 summarized the forces behind the internationalisation by Chinese firms. Global Competitiveness Report 2004-2005 Price and quality are the two main priorities that influence Chinese consumer choice. But attitudes are evolving as advertising and improving living standards foster greater brand awareness. Figure 6: National savings rates Source: World Economic Forum. through overseas expansion and greater focus on branding. are re-importing their global brands back into the Chinese market (Accenture. With the majority of the population in China still restricted by limited income and low exposure to products.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. This trend is reinforced by the emergence of Chinese multinationals who. 2005c).
As discussed earlier China has the distinct advantage of sheer size and rapid growth in its early stages of economic development. knowhow. 2005 Comparing with Japan and Korea It is worth to mention here that in many respects. in some cases. they are gradually acquiring the necessary technology and skills. who through overseas expansion and greater focus on branding. Table 1: Forces behind internationalisation by Chinese firms The macroeconomic imperative • • • Strong GDP growth From inward FDI to outward internationalisation Recent revaluation of Chinese currency • Strong governmental supports Strong governmental support for globalization. On the other hand. and brands • • • Competitive flexibility • • • • Hazard of relying on highly competitive domestic market. They are primarily focusing on nearby Asian countries. avoid trade barriers. but also investing in the United States and European Union to globalize their operations and. experimenting with their own branded products in foreign markets.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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 • • • Unique consumer dynamics 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. and in some cases. 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. all of them are making efforts to transition from low-cost manufacturers to providers of higher value-added products and services. • • Source: authors own research with reference to Child and Rodrigues. China’s globalization drive is similar to that of Japan in the 1980s and Korea in the 1990s. Furthermore. re-importing their global brands back into the Chinese market. Emergence of Chinese MNCs. when Japan and Korean opened its Wei Huang 25 2006 . On one hand. IBM research (2005) summarised the key similarities and differences. By doing this. there are major differences that make China’s globalization efforts unique.
overseas talent. China does not have a centralized government body driving China’s globalization efforts. 2005). but the journey to high performance will be long. Wei Huang 26 2006 . Although the government is encouraging “national champions” to globalize. market to foreign competition. legal institutions and often impoverished local government bodies lack the means to enforce the law or provide adequate protection and governance. At the same time. much greater emphasis has been given to industry restructuring as part of China’s gradual transition to a “socialist market economy. technologies and best practices provided by thousands of large foreign companies investing in China. unlike Japan and Korea’s carefully orchestrated industrial policies that nurtured global champions such as Samsung. Sony and Toyota. which will be discussed in detail in the later section. Economy and Politics Businesses have identified economic and financial risk areas in the Chinese business environment. 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.” (Beebe et al. 2005). 2. 2005d). Finally. which is much later than China. 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. 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. China’s course may be set. The banking system needs serious reform and the opening of financial markets to foreign banks brings wide-reaching risks. resulting in many problems in areas such as intellectual property rights (Accenture. this is particular the case for Huawei technologies.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.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
and massive institutional reform (Accenture. Chinese companies still face obstacles in the war for talent. China will need 75. 2005c). Chinese MNCs remain significantly poor in one crucial area: management. graduates are often ill-equipped to tackle workplace issues. On the other hand. domestic social and political change. Despite the Chinese government's apparent success in avoiding an economic hard landing in the short term. This situation will demand extraordinary skill from the government to continue the reform process whilst navigating between foreign interests. teamwork and leadership skills at university.000 high-tech workers to be trained between 2004 and 2006 – and companies Wei Huang 27 2006 . This will address the natural inclination of Chinese workers to work in an environment where there is a strong sense of belonging. Employers need to build clear career paths including opportunities for overseas training and subsidized advanced degrees. Chinese companies often lack managerial expertise and experience. there is a strategic push to nurture new talent in science and technology in China (Accenture.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Meanwhile. currently there are 5. 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.000 (BusinessWeek. 2005b). With limited attention paid to communication. Government investment is growing in this area – China has launched a program targeted at building managerial skills with 500. 2005). Attracting and retaining high-calibre employees remains a crucial and challenging task for sustaining long-term success for Chinese MNCs.000 executives with international experience in the next five years. as well as helping to avoid wage escalation and high attrition rates (Accenture. Retaining the best talent requires a long-term perspective. 2005d). NonChinese multinationals still enjoy advantages in terms of pay and prestige. businesses are still concerned that unstable elements in the country's economy may precipitate a hard-landing in the medium term.
2005b). 2005c). These differences will influence values and behaviour both in business and in the workplace. a valuable source of Chinese talent is the Chinese ‘returnees’ (those who have either gone abroad to work or study. 2005). Should they wish to use their own brands. They may have to align their firms with unfamiliar international standards. Culture China’s culture is unique. and a tolerance for uncertainty. Chinese companies have so far struggled to establish international brands. Julia Zhu. increasingly recognize that the development and retention of Chinese managerial talent will be critical to success (Accenture. Western-trained and educated on the one hand. priorities and mindsets to other companies. Wei Huang 28 2006 . a long-term time perspective. a strong emphasis on a collectivist society with the family as the core unit. knowledge and experience in dealing with newly enlarged transactional companies and managing global brands. culture. 2005c). Chinese companies face the hurdles of getting to grips with very different management styles. Chinese companies will also have to win over skeptical consumers. For example. says “US companies typically allocate spending in their budgets to research and marketing in China before they invest. in much the same way as western firms have had to spend large amounts of time first understanding and then selling to the Chinese. Marketing and Operation Chinese companies may well be hampered by a lack of adequate management skills. assistant vice president in the commercial marketing group of Citibank in Chicago. regulations and systems. this group has become greatly sought-after (Accenture. Chinese companies do not have this as part of their operation when considering investments in the US. creating risks for the unwary (Accenture. Furthermore. familiar with Chinese culture and values on the other. no Chinese company features in the Business Week Interbrand 100 Top Global Brands (Accenture. or were born overseas) looking to work in China. all of which will take time and patience. Table 2 illustrates some broad aspects of that culture: respect for hierarchy. as well as familiarizing themselves with western styles of corporate governance. This is something they have to learn” (Grant. Of the Chinese joint venture failures analyzed in a recent World Bank report. 2005c).Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
What happens is they demand a Chinese version of the agreement. They operate on relationships and trust. 2005). Chief among the problems they face is tackling a business culture based on contractual obligations in contrast to greater Chinese reliance on contacts. Table 2: Hofstede’s Five Cultural Dimensions Source: Professor Geert Hofstede: www. especially in the face of a still undeveloped (though improving) legal system.geert-hofstede. more than 85 percent of CEOs attributed their difficulties to differences in managerial styles and corporate culture (Beijing Review.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Wei Huang 29 2006 . 2005). “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. When establishing guanxi. a lawyer in Baker & McKenzie’s Chicago office says (Grant. whereas the westerners operate on contract. How many law firms have the capability of doing that?” as a Preston Torbert. or guanxi which still remains important. xinyong (trustworthiness) and the giving and saving of mianzi (face) are crucial (see Figure 7). 2005).com. Language difficulties also compound the problem. Chinese have relied too much on verbal assurances during negotiations (Grant.
Figure 7: The Development and Maintenance of Guanxi Source: Kahal El Sonia (2001). locally or abroad. Therefore. resource leverage. Enterprise can accelerate its acquisition of technological capabilities by linking up with other firms or institutions.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. acquire bits of new technology. and learning. but it is less successful in explaining how firms create such advantages in the first place. or new knowledge from consultants. Wei Huang 30 2006 . leveraging and learning. Strategically it makes a lot of difference what linking choice is made. and the various options for linking a developing firm to sources of technology and knowledge. starting with an in-depth analysis of key factors of competitiveness. or overcome incumbent advantages.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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. through formal or informal ties to obtain information. LCF builds its industrial capabilities through pursuing linking. 2. “Business in the Asia Pacific – Texts and Cases”. but this is also heavily constrained by enterprise competence and the options available. The dynamic capabilities of such firms are enhanced through repeated applications of linkage and leverage. as entry into different technologies involves different innovation and learning processes. His research results suggest that LCFs overcome the competitive disadvantages through linkage. purchase machinery. when the firms start with few resources.
Figure 8: Weighing the trade-offs of globalization market entry strategy Source: Beebe et al. ability to manage complexities. Most Chinese companies adopt a combination of investment options in certain countries and strategic alliances in others. 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 31 2006 . IBM Institute for Business Value analysis.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. These technologies are unlikely to be presented to the LCF in a discrete “chunk”. Market entry strategy There is no single ‘right’ market entry strategy for Chinese companies pursuing global expansion. 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’). financial resources and management capabilities (Beebe et al. they will have to be assembled from a variety of existing sources. 2005. there is continuum of investment options. 2005 M&A is a popular but difficult option. 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. rather. depending on the company’s tolerance for risk. As illustrated in Figure 8. ranging from simple exports to M&A that companies should consider when choosing the appropriate market entry strategy to globalize. 2005).
and do not improve efficiency in short term. 1988). Evidence suggests that the Chinese authorities have consistently favoured IJVs as a means of transferring technology and expertise to Chinese firms (Peng. 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. entering into a partnership with them through original equipment manufacturing (OEM) or licensing their technology. their rush overseas is risky but no necessarily misconceived. Huawei provides an example of how the joint venture route strengthened a Chinese company’s international competitive capabilities. 1991. The answer to the first is probably yes and to the second that nobody can know until they try. is a route chosen by many Chinese Mainland enterprises. 2005). Trying to buy. In fact. they will have learnt useful lessons from the experience (Jonquieres. a dedicated study (Beamish and Iris. 2000). rather than build. because learning takes time. Grant. and Kogut. and this will be discussed in detail in the later section of the dissertation. 2000. It is very much related to the concept of learning discussed previously. Wei Huang 32 2006 . Child and Rodrigues (2005) summarised the advantages and challenges for M&A and JV (See Table 3). And if all else fails. institutional problems. 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.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. on closer inspection. Hamel. However. 2006). 1996. better. 2003) to explore whether IJVs are motivated by a learning imperative suggests that production-based IJVs are not typically motivated by learning outcomes. such as state intervention and state ownership. 2005b). increase cost. But nevertheless. given some of the unique challenges they face when expanding beyond their borders (Accenture. Indeed. Anand & Khanna. are possible causes leading to failure of foreign acquisitions (Rui and Yip. Forming international joint ventures (IJVs) with foreign enterprises. there may be reason to think that the prospects for Chinese companies are less favourable than most. 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. Moreover.
1999). 1997. Freeman and Soete. and take them as complementary source of special technology (Zander. 2) tracking and monitoring dynamic development of foreign technology. 2005 Internationalisation of Research & Development (R&D) Nowadays. providing technical assistance for manufacturing department abroad. R&D internationalisation has been an effective method for Chinese firms to enhance their competitive status and improve their technological capabilities. so reducing the liability of foreignness Opportunity to build sound reputation as basis for international branding. but also establish technology centres based on local technology and resource advantages to improve technological capabilities. 1995. Cantwell and Piscitello. Table 3: Advantages and challenges for OEM/JV and Acquisition Route IJV • • • • Advantages Capitalizes on low cost production in China Requires less and lower-risk investment Opportunity to learn international technology. 1997). MNCs take internationalisation of R&D not only as the way to improve their competitiveness based on local market conditions. 1998.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. which creates a very suitable environment for R&D internationalisation. which is an Wei Huang 33 2006 . and Eastern Asia-Pacific region (Ohmae. Hostile reaction by foreign partner when launching own brand and turning into a competitor M&A • • • • • • Risk of over over-paying Need to acquire strong rather than failing assets Faces high liability of foreignness: problem of managing acquired Source: Child and Rodrigues. In addition. Breschi et al. with the development of internationalisation of R&D. China is right in this area. practices and standards. Some authors contend that R&D activities has been centralized in the triagonal area — Europe. Patel and Vega (1999) summarized three kinds of incentive to international technology innovation: 1) improving products. Chinese firms start international R&D very recently. Fast route to securing technology and/or international brand Denies access to competitors Prospect of effecting a turnaround of a poorly performing acquired company Challenges • • Danger of dominance by foreign partner. 3) To innovate core products and key technologies outside home country. process and materials for foreign market(s). especially if it retains rights over brands and technology. America.
2005). The State Council’s aim is to raise R&D spending to US$113 billion per year within 15 years. compared with 3. compared to 64 percent for the U. the domestic and international markets are getting more and more integration.7 percent for the United States and 1.4 percent of GDP. The amount of China’s R&D expenditure coming from the private sector is growing. As of 2003. Figure 10 shows the proposed destinations for R&D expenditure among international companies and China is on top of it. which are starting to compete with national brands on the international stage. China’s R&D spending was 60 percent financed by business. like many other China firms.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. effective way to leverage technological level and corporate competences. Figure 9: R&D expenditure as a % of GDP among international companies Figure 10: Proposed destinations for R&D expenditure Source: Intelligent report. up from approximately US$25 billion now. Wei Huang 34 2006 . How to meet the requirements of international competition by effective technological innovation is a very urgent challenge facing Chinese enterprises. has opened domestic R&D facilities.S. However. Most of the recent increases in China’s R&D spending have come from larger firms. Large Chinese firms have tried to enhance their technical capabilities by internationalized R&D activities.2 percent for Japan (2004). Huawei spends 10 percent of sales revenue on R&D and. With the Chinese entry into WTO. 2. 2005 China’s R&D expenditure currently stands at 1. Chinese enterprises have not begun to expand R&D abroad until 1990s.4 percent for India (see Figure 9). and 74 percent for Japan (Intelligent report. because of the limited capabilities and the situation of the country.
and everlasting open-door policies create the prerequisites for the free flow of knowledge.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. which promotes the technology connections between Chinese companies and international MNCs. Second. which need to absorb advanced technological knowledge abroad to enhance the corporate technological capabilities. becoming MNC is the way which many Chinese enterprises want to take. Fourth. Chen and Tong (2002) summarised four reasons for the Chinese R&D internationalisation: First. with Chinese entry WTO. the concept of Made-in-China via advanced manufacturing base has been accepted by Chinese firms. and MNC will expand technological activities to other countries inevitably for many kinds of reasons. Third. transitions from acquisition & development to R&D based growth makes enterprises more technology-intensified. the knowledge needed by Chinese enterprise becomes more and more globalized. Wei Huang 35 2006 .
3. less research on the other way round. library research for literature review is also an important part for attaining better understanding on strategic theories related to companies’ strategic expansion.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. This is because limitations of time restriction cannot guarantee primary research covering every relevant issue of Chinese companies’ expansion strategies. Additionally. This is due to the unavoidable difficulties of attaining primary data from Huawei. Apart from the data collection. qualitative data and information are primarily employed. Finally. books. archival records and interviews are either analyzed or synthesized to help to answer those research questions. company website. Wei Huang 36 2006 . however. RESEARCH METHODOLOGIES The analytical technique employed to examine these research questions is mainly secondary research or “document research”. Therefore. especially in highly confidential strategic issues. published journal articles. Basingstoke for three months so personal observations and experience will also be added wherever possible. company’s publications. the author has been working at Huawei HQ in EU. 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. for this case study. RESEARCH QUESTIONS Recent research are mainly based on developed countries’ companies entering into emerging market like China.
IBM institute for Business value China analysis. over 15 percent of revenues from either exports of foreign operations or a strong global vision (Beebe et al. Lenovo.1 Reasons of choosing telecommunication industry and Huawei This section will use Beebe et al (2005)’s ‘three filters approach’. This narrowed the final list of 60 companies. 5.” China enterprise confederation & China enterprise directors association. industry characteristics and company characteristics. relatively well known players such as Huawei.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. export intensity and government support’. to explain why telecommunication industry and Huawei have been chosen for this particular paper (see Figure 11). 2005. including telecommunication industry and this narrowed the list to 124 companies (Beebe et al. HUAWEI TECHNOLOGIES LTD. such as a leading market position in China. TCL. CASE STUDY 5. CNOOC. only 290 companies met the first filter of “annual revenues over US$1 billion”. “China top 500 enterprises. 2005). A total of 12 industries met the second filter criterion. Hairer. Figure 11: Determining Chinese industries and companies with globalization potential Source: Beebe et al. Among china’s top 500 enterprises. degree industry concentration. 2005 Wei Huang 37 2006 . Most Chinese companies remain small by global standards. The final filter identified among the 124 companies those that met additional criteria. The second filter identified Chinese industries with strong globalization potential based on criteria such as ‘industry size as a percentage of GDP. 2005). company size. SAIC and Baostell. CNPC.
the production of telecommunications equipment and the provision of telecommunication services being centralised within the (then) Ministry of Posts and Telecommunications (OECD. far above the GDP growth rate for the same period (Figure 12). the telephone penetration rate was a mere 0. 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 38 2006 . 2003). since the beginning of the 1980s. the telecommunications sector was identified as one of the four major obstacles to modernisation. The industry has been able to expand at a staggering average annual growth rate of 44 percent. 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”. Furthermore. When China began its reform process in 1978.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. the Chinese telecommunications industry was a government-controlled monopoly. China had a telephony switching capacity of only 1. 2003). A recent report on the Chinese IT sector points to China as the next technology super-power (OECD. At that time. with the construction of the basic telecommunication network.18 percent. and all long-distance and most inner city calls had to be manually connected. However. prior to 1978. the Chinese government has boosted the development of the telecommunications sectors through the use of an aggressive development policy.75 million sets.
and tax breaks or other subsidies gives Huawei the opportunity to enter developed markets with aggressive pricing. Last year. the Chinese government launched its ‘Go Global’ policy. The OEM/Joint venture route has long enjoyed official support when directed toward genuine capability enhancement. Chinese government policies also promote internationalisation. the Chinese government also increased tax rebates for high-tech exports (which Huawei qualifies for) from 13 percent to 17 percent. this is no different from EU or US regional assistance and grants. This policy signifies the determination of the government to promote outward FDI in the context of huge inflows of foreign exchange. 2005). Again.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Wei Huang 39 2006 . It has also been suspected that high-tech Chinese companies like Huawei pays little or no taxes in China. (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. Shenzhen (Huawei's HQ). The combined effect of structurally lower R&D. 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. is well known for offering attractive tax credits for qualifying R&D projects (see Table 4). In 1999. as local governments aim to foster local high-tech champions. 2005c). Western vendors aiming to match Huawei's prices must accept a hefty margin penalty (Arete research. encouraging strong Chinese enterprises to invest more overseas in order to improve their competitiveness and secure an international business presence. Hitt et al.
First Five Years’ Profit New Enterprises. The lack of availability of domestic funding forced some of them to turn to foreign capital. Years Five to Ten Source: Arete research. Dev. Table 4: Chinese Tax Benefits Tax Rate Normal Tax Rate Economic & Tech. Zones (ETDZs) Shanghai Pudong New Area Special Economic Zones (ex. Pudong) Hi-Tech Parks/Zones New Enterprises.5% 15% Nil Half Normal Rate Figure 13: China-China-Foreign (CCF) joint venture model Chinese enterprise Foreign investor Joint investment agreement Joint venture Construction and service agreement Chinese firms Technology Cooperation Agreement Project task group Customers Source: adopted from OECD 2003. However. At the time of early establishment in the 1990s. 2005 33% 15% 15% 15% Nil 7. First Two Years’ Profit New Enterprises. foreign direct investment in the Chinese telecommunications service sector was prohibited according to Article 4 of the Enforcement Ordinance of the Foreign Wei Huang 40 2006 . Years Three to Five Others Qualifying High-Tech Enterprises New Enterprises. Chinese telecommunication companies found it very difficult to raise the funds required to build its telecommunications network.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.
firms like China Unicom formulated the China-China-Foreign (CCF) joint venture model (see Figure 13). More than other Chinese companies with international ambitions. China’s membership in the WTO has profound and far-reaching effects for the Chinese economy. Furthermore. the research group.9 percent between 2004 and 2008. according to BDA China. 2003).8bn to $45bn (Harney. in searching for ways to circumvent the regulations prohibiting foreign direct investment and attract foreign capital. The construction of 3G networks has triggered demand for sophisticated telecoms equipment. This method involves establishing joint ventures between foreign companies and Chinese enterprises and making investment contracts with China Unicom. The major impacts of China’s accession to the WTO on the Chinese telecommunication industry will change the structure of foreign investment. China. According to Gartner. and participation in business management was possible only through indirect methods such as separate agreements on technology co-operation. By 1998. 2003). However. It ranked among the top five vendors in China’s Ministry of information industry’s phase two tests Wei Huang 41 2006 . Joint ventures with foreign companies are prohibited from owning and operating telecommunications networks. 2005). earmarking more than a third of its R&D spending for the technology over the last couple of years. with its huge and rapidly growing economy and more than 320m mobile phone subscribers. Huwei’s success as a global company hinges on its performance at home. 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. both infrastructure and handsets (Harney. China’s telecoms equipment markets should grow at a compound annual rate of 10. At the heart of this battle is the launch of third generation (3G) mobile phone services. Huawei’s success in global markets starts at home.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. from $29. Capital Enterprise Law. has become an important battleground for the world’s telecommunications infrastructure suppliers. Upon joining the WTO. over 40 foreign companies such as France Telecom had established joint ventures with Chinese companies under the CCF model (OECD. Huawei has invested heavily in 3G. 2005). a Beijing based telecoms consultancy.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Guangdong. However. as a private company. Having considered these limitations. Huawei in the telecommunication industry has been chosen for this case study. Ltd. It is the single biggest opportunity that any vendor has potentials in global provider has to be in China” (Light reading. So if you add to that the fact as well China is also the world trade organization. xDSL. If you look at the matrix broadband. The company was established in Shenzhen. 2005). challenges etc. 5. value-added services (e. Huawei has risen to become one of the most competitive companies in the domestic and global market. plus authors’ own interest in the company. core competencies. optical network and data communications products). is one of the largest and fastest growing telecommunications equipment manufacturers in China. network products (e. CDN/ SAN and wireless data) as well as mobile and fixed terminals (see Figure 14).. China in 1988 by Ren Zhenfei.g. time restriction cannot guarantee primary research covering every relevant issue of Chinese companies’ expansion strategies. for 3G technology. Wei Huang 42 2006 . a former People’s Liberation Army Officer.g.2 Huawei’s corporate analysis Product portfolio Huawei (pronounced “hua-way”) Technologies Co. 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. intelligent network. therefore. Huawei's product portfolio comprises wireless products. Graham Finnie. 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. senior analyst from Heavy Reading said: “There are twice mobile phone users in China than there are in the US. NGN.
while wireless infrastructure has a weak domestic position. Unlike Western vendors where nearly all the order book is turns business. The company does not break down net sales. net sales were $3. Wei Huang 43 2006 . International sales are rising in the mix (42 percent of 2004 orders). notably wireless infrastructure (see Table 5). The obvious conclusion is that Huawei's wireline divisions still depend heavily on China. but stripping out wireless infrastructure (the leading export product) leaves domestic orders at 70 percent of the total.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. All Huawei's forecasts are referred to as "sales" but are in fact orders.6bn in 2004. Figure 15 shows Huawei's regional breakdown. Huawei's sales typically lag orders by a year. 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.9bn. While Huawei's orders reached $5. nor can these figures be verified in any published accounts.
sales and customer services — 38 percent. Wei Huang 44 2006 .Europe W.Europe Source: Arete Research. 2004 7% 8% 3% 2% 1% China Asian Pacific S. which shows a typical dumbbell-shape enterprise (see Figure 16).Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.E. 2004 Source: Arete research. Table 5: Orders by Division.6bn) by Region. Marketing. 2005 * Software & Services Figure 15: Orders ($5. 2005 Human resource structure For human resource structure. Africa M.Africa CIS 9% 12% 58% Latin America E. supply chain — 8 percent and administration — 6 percent in 30000 employees by the end of 2004 year./N. proportion of Huawei human resource is: R&D — 48 percent.
As stated in Huawei’s 2004 annual report “Everyday. Portugal. Figure 16: Huawei’s Human research structure 8% 6% 48% R&D Marketing. Sales & Customer Serv ice Supply Chain 38% Administration Source: Huawei website International expansion Huawei began to consider international expansion in 1996 and initially expanded in the developing countries like Russia and Africa. Shenzhen. nearly 1 billion people all over the world are communicating through Huawei’s products and solutions”. Figure 18 shows the location of Huawei’s worldwide offices. China and expanded quickly domestically. Spain. Thailand. like the USA and the UK (See Figure 17) After many years of expansion. UK. including the US. Germany.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Russia. It also entered into N. France. It then further expands its business in the developed countries. America and Asian Pacific market in 2001 Huawei established in 1998. Huawei's technology is being used by 300 operators across 90 countries. initially was in developing countries like Russia and Africa Huawei further enters into European market in 2000 and expanded quickly. Figure 17: Huawei’s Expansion Timeline Huawei started expanding abroad since 1996. 1988 1996 2000 0 Source: Author’s own research Wei Huang 45 2006 . Singapore and Egypt. Brazil.
More than 20 precommercial exchanges have been set up globally for Huawei’s 3G products. by Dittberner. The integrated access products ranked No. 24. Figure 22). Figure 20). Figure 23).1 in global market.5 percent of port shipment (by Dittberner.3 in global market (9 percent. Figure 19). Wei Huang 46 2006 . accounting for 32 percent of the total shipment in global market (by dittberner. and Malaysia.1 in global market in three consecutive years. 2 in global market (18.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.9 percent 3Q2004. Furthermore. and have been put into commercial application in UAE. Huawei’s NGN ranked No. Figure 21). Hong Kong.3 in global market (14 percent 3Q2004. 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. Huawei’s 3G products have entered the front line of the global market. The DSLAM ranked No. the optical network ranked No. by Infonetics. by RHK. Mauritius. The shipment quantity of Huawei’s switches ranked No.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 19: Switching Figure 20: NGN Figure 21: Integrated access network Figure 22: DSLAM Wei Huang 47 2006 .
the company's total contract sales increased by 46. Ren's background helped the company win military contracts during the early. It is worth to mention here that Huawei has come a long way from its beginnings in 1988. This increase in revenue was mainly due Wei Huang 48 2006 . Figure 24 shows the financial highlights of the company.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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. In financial year 2005 (year-end December). the company.2bn as compared to US$5. used a contact in the Chinese government to obtain some rudimentary telecom gear.95 percent to US$8. received a $10 billion line of credit from the China Development Bank. lean years. Huawei's expansion is fuelled in part by cheap loans from the Chinese government.58bn in financial year 2004. In 2004. which is owned by its employees. when founder Ren Zhengfei. While an initial public offering is under consideration. and an additional $600 million from the official Export-Import Bank of China for its international expansion (Rhoads and Buckman. Mr. according to former Huawei executives. Huawei relies on cash reserves and bank loans to fund its growth. 2005). a former officer in China's People's Liberation Army.
Figure 25 depicts the company's revenue contribution by geography.FY 2004) Wei Huang 49 2006 . to the expansion of company's overseas business.Revenue by Geography (FY 2002 .Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 24: Contract sales (USD in billions) Source: Huawei 2004 annual report Figure 25: Huawei .
which shows that Huawei’s software development process management and quality control have reached the highest level ( see Table 7). Huawei spare no investment in R&D. As mentioned in the previous section. Weakness. India Research Institute.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Shanghai and Nanjing.3. even in the IT recession period. 48 percent of 30. From its inception. Sweden. Opportunity and Thread of Huawei. SWOT analysis To summarise. Huawei invested over 10 percent of its revenue into R&D.3 Competitive strategy analysis 5.1 Internationalisation of R&D for long-term success China-based cost-effective R&D is one of Huawei’s competitive advantages of expanding abroad. Russia. Shanghai Research Institute and Nanjing Research Institute have all passed CMM5 certification. Huawei’s Central Software Department. Table 6: SWOT analysis of Huawei 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 Thread • • Competition from other lowcost counties Perception of china • • Opportunity Entry into the WTO Collaboration with European companies 5. Huawei implements the strategy of global synchronous R&D. they have institutes in Beijing. Huawei’s R&D achievements with Intellectual property rights provide innovative and customized network solutions for telecom carriers around the world. Huawei has set up R&D organizations in Dallas and Silicon Valley in the US. Stockholms-kontoret. and Moscow. Table 6 presents the Strength. Banglore. In China. India. for human resource structure. Through multi-cultural teamwork.000 Huawei employees are from Wei Huang 50 2006 .
China Nanjing.1 of investing R&D in China enterprises (Huawei website). Russia Shenzhen. India Moscow. ratio of Huawei R&D expenditure to sale revenue is 10-13 percent in recent years and its R&D expenditure has reached 4. GW. Radio technologies and RAN algorithm Dallas. and for finance resource structure. terminal. service platform RAN. which makes Huawei No. Huawei has 1900 authorized patents and has participating with over 70 international standardization organizations including ITU and 3GPP (See Figure 26).5 billion RMB by the end of 2004 year. which shows a typical dumbbell-shape enterprise. China Shanghai. Sweden Base Station architecture and system design. 2006 Wei Huang 51 2006 . R&D department by the end of 2004. ASIC chipset Packet CN.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Developing R&D results with independent intellectual property rights and investing heavily into standards and patents. Terminal BOSS. by March 2006. China ASIC technologies and CDMA algorithm Software technology/ platform Algorithm and RF CN. Table 7: Huawei’s R&D location Stockholm. China Beijing. USA Bangalore. 3G services Source: Huawei 2004 Annual Report Figure 26: Huawei Patents Source: Huawei’s corporate presentation.
2002).Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. As a new entrant of communication equipment manufacturing. Although technical development and cooperation become more and more international. 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. As a result. its global R&D system has its unique characteristics (Chen and Tong. By means of internationalisation of R&D. Huawei as a latecomer has many disadvantages. Figure 27: Huawei’s internationalisation of R&D: goals and strategies Huawei’s internalisation of R&D Monitoring updated technology Seeking innovation resources Approaching market 3 strategic goals World technology centre World innovation centre Subsidiaries abroad US and Sweden India and US Russia 3-stage developing strategy R&D alliance Domestic R&D Overseas R&D unit Source: Author’s research with reference to Chen and Tong (2002) Wei Huang 52 2006 . Contrast to MNCs. In the course of internationalisation of R&D. Chen and Tong (2002) listed three specific strategic goals of Huawei’s international R&D activities (see Figure 27). Huawei had a definite strategy which aims at adopting the updated research results of communication equipment manufacturing broadly. compare with those leading communication equipment manufacturers such as Siemens. 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. learning from successful enterprises and establishing a core technology system based on R&D independently and collaboration with other organizations openly.
Huawei starts to establish R&D units abroad. America is the first objective for Huawei to choose locations to establish R&D Units abroad. conditions in different countries. America is the modern science and technology centre of the world. At the second stage. monitor updated technology from host countries and competitors. to establish technology information monitoring units. Its main business focuses on domestic market. Second. Huawei set up technological alliances with famous foreign companies to improve its R&D ability by learning in the course of cooperating with them. 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. The three strategic goals are: First. 2002). and improve technological innovation efficiency. Huawei has established its American (Silicon Wei Huang 53 2006 . 1992 and Pearce and Singh. 2002). Huawei chooses rationally the location of its R&D Units abroad (Table 7).Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. To achieve the established strategic objective of internationalisation of R&D. Third. 1991). in order to trace the new development of communication technology in the world and approach the technological excellence centres of the world. utilize R&D human resources and R&D environments. so its very important for R&D activities of the type of basic research to approach the excellence centres (Cantwell and Hadson. to approach knowledge excellence centres of the world. Hakanson. to respond to the differentiated demands of customers and local manufacturing. in the context of which Huawei must compete with domestic enterprises and subsidiaries of MNCs in China (Chen and Tong. So. and adopt local technological innovation spillover as supplements of special technology. Huawei defines the three-stage developing strategy: At the first stage. 1991. 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. and Silicon Valley is the famous high-tech base of the world. cut down R&D cost. and realize localization of technology to support local manufacturing subsidiaries effectively.
aiming at leading Russian communication market and localization of technologies. Valley) subsidiaries and Dallas R&D unit. “the Silicon Valley” in India in June 1999(Chen and Tong. the differences of market conditions and customer demands are very significant in different areas. India has the best CMM environment of the world. Currently. In this integrated R&D network (see Figure 28). decision-making is centralized as well as Wei Huang 54 2006 . Huawei realizes integrated model of technological innovation. which aim at tracing the development of research of optic products and other communication products. International business has become the main objective in Huawei business strategy. Sweden is the research centre of GSM and WCDMA in Europe. At the third stage. Huawei starts to establish overseas R&D units aiming at specific overseas market. so Huawei establishes R&D unit in Sweden to follow the developing trends of GSM. Huawei establishes an R&D unit in Bangalore. Hence. At the present time. with the advancement of internationalisation of market. Therefore. Global R&D network of Huawei consists of technology alliances. Huawei starts to focus on international market.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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. Furthermore. it is an obviously successful case that Huawei establishes an R&D unit in Russia. and to do research on mobile communication technology. 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. which is characterized by high standardization. With this R&D network. overseas R&D units and domestic R&D organizations in different regions. 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. Huawei finds that even within communication equipment industry. 2001). with constant improvement of technology and gradual extension of domestic market. the internationalisation of R&D of Huawei is developing to a diversification and globalization stage. 2002). In order to expend overseas market effectively. WCDMA in Europe. As to the type of resource-seeking R&D activities.
personnel and information flow between R&D units freely (Chen and Tong. This gives Huawei comprehensive and in depth insight into the most rapidly developing and most complex telecom network market in the world. its quality of processes is paramount to ensure streamlining consistent production quality of products and software. At the same time. 2002). gain precedence in new product development and identify opportunities in potential markets (Huawei Annual report. decentralized.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. “We are constantly reviewing our processes in order to deliver the Wei Huang 55 2006 . which covers more than 300 local centres around the country. and to provide fast and relevant personalized services. In Huawei’s line of business.3. This service network is the foundation for Huawei to better understand the future customer requirements and competitive trends of the market. resources.2 Customer focus By focusing on the customer requirements and applying customized solutions to help customers become more competitive. 2005). It helps Huawei to formulate the solutions that meet customer requirements. Resources are decentralized in light of strategic objective of firms and the importance of R&D subsidiaries in total R&D system. Huawei has set up the biggest service network in China. It also helps Huawei to provide timely and excellent services and set up unique service advantages. Figure 28: Integrated R&D network of Huawei R&D alliance Headquarters Overseas R&D unit Domestic R&D unit Source: Chen and Tong (2002) 5. Huawei has consolidated its pacesetter position in the Chinese market and enhanced its market innovation capability. All R&D units depend on each other and specialize in integrative R&D projects.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. president of Huawei’s European business. set up a relatively consummate integrated service platform and developed professional engineering maintenance and training capabilities. the company outsourcers hardware installation and some services to local partners. By reinforcing the value evaluation system measured by responsibility results and an excellent incentive mechanism. vice-president for Europe. “The most difficult part is the service. Huawei has tried to hire locally. mainly Shanghai and Beijing”. In France. we would have recruitment activities in cities. It says sales and project managers are also recruited locally. We have built a responsive and flexible organization that focuses on our customer’s needs through providing continued innovation and customized solutions. This further accomplishes long-term win-win situations with customers. New York. 2005). Huawei has also developed differentiated service advantages in the international markets.” says Patrick Wen. “But now we do this in Paris. although on a recent visit to Huawei’s office just outside Paris most of the staff appeared to be Chinese. “Before.” says Mr. so we get a lot of local engineers” (Harney. Huawei ensures customer satisfaction through a series of streamlined organization structures and normative operation process. the Director of Business Process Management emphasising some of Huawei’s core values (Lindoe. 2005). says Edward Deng. best value to our customers. 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. every year. which often dispatched executives from their head offices when they started expanding overseas. London. standing closely with their customers. Canada and Australia”. Xing Xianjie. Huawei has developed the customer oriented high-performance corporate culture and enhanced their core competitive edge (Huawei Annual Report. Unlike Japanese companies. 2005). “The business development is not so difficult. Huawei adheres to the “customer first” and “good faith” service cultures. As a result. all Huawei’s objectives are driven by customer requirements. Wei Huang 56 2006 . Huawei has built up a professional service team characterized by dedication and service consciousness.
3800 professional service personnel. He continues: “We need to adapt to be a truly global corporation. over 480 service partners. Huawei has been teaming up with world-leading companies. 5. in order to pursue a long-term win-win relationship with customers. Huawei epitomises the drive for growth that characterises China’s expanding economy and technological advances. Gallup for the years 2000-2004 in China. 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.” says Mr. For example. Since established in 1988. IBM has contributed to their integrated product development and supply chain. cross cultural management is now high on the agenda of Chinese high-tech firm like Huawei.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. they respond” (Harney. Xing Xianjie. In many ways. “Few other Chinese companies have experience in being so open to new markets and establishing a presence globally. and 44 authorized certified training centres. Customers describe Huawei eagerness to tailor technologies to their specific needs. “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.3 Cross-culture management and project management With a constant growth of staff overseas. Wei Huang 57 2006 . Huawei phased in fee-based service and professional services to lower the service costs. 2005). that attention to detail pays off. In a customer satisfaction poll conducted by the third party consultant. this is no easy task. Meanwhile. Spreading learning and best practices throughout such a vast operation across the globe certainly demands good management systems and practices (see Figure 29). over 7000 certified engineers in partnership. However. the Director of Business Process Management. Huawei is ranked first in customer satisfaction. Service marketing has become a new area for growth and opportunity for Huawei. PricewaterhouseCoopers (PwC) to their financial management system and the Hay Group on human resources.3. The accumulated service sale proceeds were USD700 million. 2005). to incorporate international best practices. “They list what you tell them and afterwards.
as it incorporates employee turnover rates and employee satisfaction indexes from various geographic areas. The assessment criteria were two standardised frameworks for enterprise risk management. the main objectives of the program were to: “set-up consistent project management competence. 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. Since 1996 DNV has certified Huawei’s management systems. qualification standards and procedures. and establish channels for external cooperation to Wei Huang 58 2006 . This demonstrates the effectiveness of the HR function in overseas operations and gives valuable input regarding cross culture management. 2005). requirements from British Telecom (a major customer of Huawei’s) as well as Huawei's internal risk management requirements. With constant growth of overseas projects. Human resources functions are part of the assessment. According to Project Management Institute (PMI)(2006).Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. 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. develop organically 100 Huawei project managers with Project Management Professional (PMP) certification. and a training platform to help project managers improve their project management knowledge and performance. in 2002 Huawei established an integrated mechanism to train and develop project managers and strengthen project management practices and processes.
the French operator and internet service provider. R&D. Through its commitment to this training programme. Huawei remains dedicated to continuous improvement in its project management standards. had already selected the companies from which it wanted to solicit bids to build a broadband internet network when a Wei Huang 59 2006 . Price has been one of its most useful tools. at the project level. and reduced risk and operation cost. it began to arrange coaching sessions to advance the competence level of all project managers. to develop and direct the program. improve project management knowledge and performance at an organizational level”. 2005). and information technology to ensure each facet of the business was considered and employee interests did not conflict (PMI. Huawei has also offered powerful incentives to clinch contracts. Staff was chosen from each of Huawei’s departments: marketing and sales. 2006). To accomplish these objectives. which doubled its original already high goal. In 2001 Neuf Telecom. Huawei is expecting improved on-time delivery and productivity. In addition to ongoing project management certification training and testing. and at business level a better performance with integration of project management results (PMI. when the first encountered Huawei in countries such as Laos and Cambodia three years ago.3. Largely because the group relies on a pool of engineers in China. increased customer satisfaction. Huawei set up a Business Re-engineering Project Management Office. where salaries are a fraction of those in more developed countries. Bert Norberg.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. its prices “were below walk-away price for us” (Harney. With this comprehensive project management system. recalls that. 5. customer service. Huawei has to date granted PMP certification to more than 200 project managers. which is made up of more than 20 staff members with extensive experience in project application and management. its prices can be 30 percent lower than those established suppliers. executive vicepresident for sales and marketing at Ericsson. employee retention. 2006). Huawei has used aggressive tactics to win contracts.4 Price cutting strategy to JV/partnership selling As a newcomer battling against the perception that Chinese companies produce cheap and unreliable goods.
2bn on R&D in 2003. Huawei spent $0.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Neuf’s chief executive. next generation technology now. for cheap. but they were in China. 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. “We were interested. 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. 2005). 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. the numbers Wei Huang 60 2006 . The Chinese company won the contract and saved Neuf 10-20 percent of what it might have paid. “In some ways. for free” (Harney. Although Huawei devotes about 10 percent of its sales to R&D on par with its rivals. this is partly because of Chinese vendors with lower prices in the market. It took Huawei less than three months to build the network.000 R&D staff versus 15. Okay.” Says Tina Tian.000 for Alcatel and 9. the company’s smaller size and lower costs mean it still spends less. but nevertheless. Huawei is the first company that says to the operators. Beijing based principal analyst for telecoms at Gartner. a research group (Harney. Huawei executive called to ask if his company might also compete the contract. of several million euros. In 2004. a telecoms consultancy. which 12 percent of net sales. Ross O’Brien. Ms Tian estimates that Alcatel spent $1. Hong Kong based managing director of Intercedent Asia. Mr Paulin estimates.000 for Lucent (see Table 8). 2005). at a cost. it is expected that Huawei to have the industry's largest R&D headcount by 2006. argues that Huawei’s strategy offers telecoms operators a way to save money when they are having to give customers ever more complex services. 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.5 billion on R&D. Huawei spent $385m (Harney. This may look small but headcount levels are in line with peers: 12. We wondered what their capability to develop something here in France is?” recalls Michel Paulin. 2005).8bn and Siemens $2. Given its sales growth. the whole integration process at the multinational vendors to lower their costs and make their price more competitive. “The whole reorganization.
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 61 2006 . set up to support the Telfort deal. Sceptics fairly note a R&D quality gap with leading Original equipment manufactures (OEMs) but this is clearly closing. Douglas Black. 2004 Source: Arete research. a company spokesman. says Huawei can pay its senior engineers a quarter of the going rate in the developed world. As it becomes more active within standards-setting bodies. a consultancy. Table 8: R&D Cost Profile by OEM. 2005 * Nortel R&D for 20'03 Richard Lee. for example. vice president of marketing. With regards to the low cost advantage. speak volumes for Huawei's ability to throw resources at product development. Mr Lee responds that. 2005).Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. is how sustainable that advantage will prove to be as Huawei moves into international markets. so far. The next aim is to develop a robust Intellectual Property Rights (IPR) portfolio. 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. will have to pay developed-world wages.000 employees worldwide are non-Chinese. so the firm will continue to have a cost advantage for several years. 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. says Jason Chapman of Gartner. only 3. its IPR position should strengthen (Arete Research. and junior engineers just an eighth.400 of Huawei's 24. Its regional affiliate in the Netherlands. The question.
Huawei is specifically building up multi-level cooperation with peers. strengthening partnerships with key suppliers. Huawei provides an example of how the joint venture route strengthened a Chinese company’s international competitive capabilities. 2005). It is about the whole life of the capital and operating costs over a ten years period. 2005). It is also important to listen to what Huawei’s customer’s view on this low cost advantage. and improving the response time and service advantages of the supply chain. and we believe they can meet our commitments” … “It is not about buying a grey box dumped on the exchange floor anymore. So we have build up an experience of their capability. it is a trend for industry peers to develop together through cooperation. those are very important for them. reviewed extensively so far.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. We are very proud of what we accomplished with BT. On the other hand. We put very clear criteria for decision. they are building more stable partnerships with customers and suppliers. Winning was up for anybody who could meet those criteria and we choose those that did the best job” (Light Reading. to jointly establish a future-oriented. building up their position in key markets across the globe. Huawei is staging the open-door cooperation on a larger scale. and we are already developing their kit in a number of our networks. says during an interview with Light Reading: “we have been working with Huawei for two or three years now. On one hand. 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. So we looked at every vendor who was capable. JV/Partnerships In today’s business environment. They are a good quality company like all the other vendors here. 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. 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. CEO of BT wholesales. reinforcing strategic cooperation with international and domestic mainstream operators. 2005). coexistent win-win and secure development pattern (Huawei Annual Report. Paul Reynolds. In Wei Huang 62 2006 .” (Light reading.
production and marketing to co-exist. Sun. Intel. and NEC. Huawei sets up digit signal disposal laboratory with TI (Texas Instruments) and makes common efforts in developing DSP products. IBM. 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. they have overcome risks together and faced the IT winter together. IBM. In addition. they established and consummated the distribution system. and then realize its internationalisation of technology research and cooperation by cooperating with them in technology and market widely. which was forecast to increase by 100 percent in 2004. Huawei launched the bid Wei Huang 63 2006 . friendly. Motorola. Additionally. Motorola. (See Figure 30 for example). and gained rapid growth in data communication services. For example. the past few years Huawei has initiated multi-level cooperation in many fields such as technology. Huawei-Lucent joined laboratory will devote to the research in microelectronics and optics. they contributed low-end data communication technologies (51 percent shareholding) to incorporate a joint venture with 3Com (who contributed USD165 million. they have founded a joint venture with Siemens to focus on the research and sales of TDSCDMA and also cooperated with Infineon to develop the 3G mobile phone platform. Also. Intel. Marconi. Lucent.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Agere. they have cooperated with TI. and SUN in order to establish long-term. Huawei has set up many R&D laboratories respectively with the first-class companies such as TI. accounting for a 49 percent shareholding). Microsystem. open and double-win relationship with them. ALTERA. As a result.
Huawei has not made significant achievements in the two most advanced telecommunication regions in the world – North American and Europe.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. the UK’s last remaining telecommunication equipment provider who are in severe financial difficulties (BusinessWeek. First. which had accumulated for more than a century. 2006). and embedded in global telecom giants that had very high R&D spending for many decades. Marconi generates about 25 percent of its work in the UK from BT. Its share price dropped from over 500p to just over 200p after releasing the news (see Figure 31). of £600 million in 2005 to acquire Marconi. 2005). The JV became even more important when Huawei was selected as one of the suppliers of BT’s 21st (Rui and Yip. Marconi possessed the world class technology that Huawei sought. It is worth to remind that it is extremely difficult for a company as young as Huawei to learn and obtain telecom technology. Despite its ambitions. and it has been warned that losing out on the BT deal was likely to have "a jobs impact". Acquiring Marconi would have been the most vital step to accomplish that ambition. 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. Figure 31: Marconi share price Source: Bloomberg Wei Huang 64 2006 .
2002). especially at the high end. however. Second. and so on. Although Huawei does have competitive advantages in cost. Child and Rodrigues. There is an obvious but difficult question as to why there is such difference. In other words. POSSIBEL ANSWERS TO RESEARCH QUESTIONS From the above case study evidence some possible answers to the research questions can now be derived.2006). are inconsistent with what the traditional internationalisation theory suggests that Chinese Wei Huang 65 2006 . it is difficult to understand Huawei’s behaviour of expanding abroad. firms evidenced a preference to go to countries where Chinese social networks are present (Cai. brands. Huawei has used their experience in building China’s own markets to develop new ones in other emerging economies. 1999. First. Huawei has been consistent with what traditional international theory suggests. 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. nor pursue the same objectives. Rui and Yip. it does not possess obvious competitive advantages for foreign markets.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. which seemed to not have possessed the prerequisites of internationalisation. The findings. improving chances of a smoother entry into more developed western markets later on. 2004. in earlier phases of internationalisation from the Chinese Mainland. before tackling developed economies. R&D and marketing in the Chinese markets. 2005. So in this perspective. Their better understanding of emerging markets provides a stronger guarantee of success in their initial overseas expansion plans. and technology from foreign partners (Luo. this paper has shown evidence that Huawei does not fit well the traditional motivations of MNCs expanding abroad to leverage their competitive advantages. 6. Chinese firms seek strategic competence including markets. the classical OLI model seems not to be valid in Huawei’s case. Furthermore. Deng. 2004). RQ1: To what extent does Huawei not follow internationalisation theories and why? Based on the traditional internationalisation theory.
i.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. However. And finally. although low cost has helped Huawei to expand abroad at the initial stage and it is Wei Huang 66 2006 . The author’s personal view is that these contradiction results are deriving from different case studies. et al. 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. has three taints: it makes a contribution to perceived customer benefits. as the findings reviewed that. 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. the first Huawei’s competence is R&D. firms should start with gradual organic expansion into contiguous markets (Barkema and Rian. Instead. the cooperation is difficult because the interests between Chinese and foreign partners are so different. and it can be leveraged to a wide variety of markets. IJV/partnerships. In Huawei’s case. It might seem like low cost would be the number one core competence. More interestingly. As an example Hamel and Prahala (1990) gave Honda's expertise in engines. knowing a firm’s core competences is important for developing its strategy (Mascarenhas. it has been claimed that Volvo’s core competence is safety. To take an example from the automotive industry. majority of Huawei’s entry mode into developed markets has been ‘inward internationalisation’. 1998). The previous analyse of Huawei’s competitive strategies are critical to evaluate and identify its core competences and more importantly. 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. Second. From author’s view. RQ2: What are Huawei’s core competences? A ‘core competence’ as articulated by Hamel and Prahalad (1990). with the former is the case of Nanjing Automobile and the latter is the case for Huawei.e. 2005). the author tends to believe that both possibilities exist for the answer. IJVs will never build Chinese brands. Due to the various backgrounds of the cases. it is difficult for competitors to imitate.
Huawei has a reliable customer service and support competence in providing telecommunication services through its global network to different customers worldwide. certainly one of Huawei’s competitive advantages and is likely to be one in the future. Instead. As discussed previously. not just its initial purchase price. Huawei's reputation as a lowcost vendor is only the visible part of the iceberg. which are knowledge-intensive. and these can be obtained from Huawei’s internationalized R&D. especially for multi-million equipments that Huawei provides to its various countries and companies. which. Huawei has done very well. A report based on a survey of over 100 telecoms operators worldwide. 2005d). incumbent western firms should be "very scared" of Huawei (The Economist. The second Huawei’s core competence is customer service and support. 2002). 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 had close relationships with Chinese banks. a market-research firm. This close relationship with major Chinese banks provided Huawei with sufficient. strategies of linkage and leverage are important. low-cost financing for its customers. carried out by Heavy Reading. the company has high technical standards (The Economist. The report calls Huawei's ascendancy "astounding" and says it has already surpassed several incumbent vendors in perceived market leadership. The third Huawei’s core competence is its close external relationships.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. enabling the firm to make international sales to many Wei Huang 67 2006 . in the context of today’s high technology industries. As a result. the cost advantages are minimal (Mathews. 2005d). which strengthens Huawei’s telecommunication equipment as reliable products. as has been analyzed in the early section. Superior technological know-how gives Huawei a lever to enter foreign markets and compete with local firms that may better understand the local context. Below the waterline. found that Huawei ranked fourth in service and support. And reliability is important because customers increasingly consider the total cost of product over its life.
and majority of them have none overseas management experience before. Second. It takes time for these Chinese senior managers to first of all be familiars with the way that Western people work. Another example. the business environment. countries. In the meantime. et al. Huawei’s international competitors based in other countries may not have this close relationship with their banks and cannot exercise such a financial advantage. 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. Conference calls need to be held twice as one for Chinese employees and one for non-Chinese. the language and culture. foreign languages skills and experience managing global operations. Administration. they come after the meeting to have a ‘private conversion’ with the western manger. majority of the senior managers are from China. Supply Chain staff from China. it is not practical to send massive of R&D. where there are many misunderstandings between western clients/managers and the Chinese managers due to the English language. for example. where the western Huawei managers ask during the meeting for people’s comments few spoke up. there were several occasions. Having considered these obstacles. Overall. Huawei needs to be having more multiple competences. Huawei has not yet been well recognized Wei Huang 68 2006 . staff turnover were high at least in the office that the author worked in. Instead.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. During the three months of author’s summer job at Huawei’s EU HQ in Basingstoke. if they recruit locally. 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. 1998). 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. There were several reasons for this. business meeting is extremely difficult and inefficient. Moreover. First. Huawei needs to maintain these core competences in the long term which will offer the company sustainable competitive advantages.
" acknowledges Lin Haibo. Chad Reynolds. some managers. "There are a lot of words in Texas that are completely different from the English that we learned in China. for the Chinese part. Global companies such as Coca-Cola. He says his employers worried about theft of product documents. Third. Huawei's former head of human resources for North America. China. consulting professional human resource companies and running recruitment assessment centres. hesitant to delegate. comparatively. 2005). Nike and Philips invest heavily in their brands. 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. Huawei spent more money in advertising its job vacancies on agencies. Huawei lost several bids in Yemen and Laos. among the UK top university graduates. an executive in charge of Huawei's research and engineering in North America (Rhoads and Buckman. It takes significant time and investment to create a global brand.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. He was never given a security pass and was accompanied by security personnel wherever he went (Rhoads and Buckman. who were recruited from HQ in China. 2005). says when he visited the headquarters in China he was forbidden from carrying his briefcase into any of the main meeting rooms. from author’s personal observations. With the headquarters in Shenzhen. In 1999. Huawei employees struggled with understanding the Texas accent and some expressions. It is striking that no Chinese companies are mentioned in the list (Robert et al. as suggested by their high ranking among the 2005 BusinessWeek/Interbrand list of the top 100 global brands. As a result of this. Huawei initiated a ‘New Silk Road Tour’ Wei Huang 69 2006 . High turnover of staff is obviously not helping the efficiency of management abroad and delaying the operation of business. In the USA. local executives have trouble adapting to the local culture. 2005). In response. tend to use Huawei as their career ladder to gain overseas working experience then leave. due in part to customers’ perception of Huawei as a new and untested company from China.
The Futurewei name appears on its booths at trade shows. and ride the coattails of the mother ship. called it "high-way" and "how-way. business." among other variations. the company opted for its initial idea. Mr. the co-founder of Dallas advertising firm AvreaFoster. However.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. It decided on Futurewei as a working name. conferences and road shows (Li and Cui. Huawei executives realized that Americans had trouble pronouncing the company's name (Hwa-way). what is Huawei and what is Futurewei. launch. rather than the Futurewei name. Huawei's businessdevelopment director for North America and one of the first Huawei executives in the U.. The company has done little to promote the new name. after several months." Potential customers. From a global marketing point of view.S. 2004). Huawei also faced some obstacles. Huawei decided to come up with another name for the U. And then. subsidiary. Avrea says his firm offered 30 possible names for Huawei's U. to test it and provide alternatives. “because all decision-making was handled by company headquarters in China. While Americans could more easily pronounce the new name. according to Douglas Black. Shortly after the U. Avrea (Rhoads and Buckman.S. and even some of Huawei's own American employees." says Bai Yi.S. and then contacted Darren Avrea. For example. In Europe and the U. Huawei heavily promoted its products and solutions through media campaigns. brochures and other materials (Rhoads and Buckman. "We have to explain to customers. it has struggled to build brand recognition in the U. we never understood why not stay with the Huawei name in the U. the company now had two names. magazines have used the Huawei name. Futurewei. The company's new landlord in Plano kept calling it "hoo-way. 2005).S. and what the relationship is. and that can take two minutes." says Mr.S. the Huawei spokesman for North America. rapid economic development and Huawei’s proven track record with Chinese telecommunications operators. The project became frustrating. 2005). What few advertisements have appeared in U. program whereby Huawei hosted potential overseas customers on tours of China to provide them with a first hand appreciation for China’s technology capabilities.S. Wei Huang 70 2006 .S.S.
2005). making cross-country and cross-cultural project management a new challenge. which required more Wei Huang 71 2006 . Just as the bad publicity from the Cisco suit was fading. Regulation risk The Ministry of Commerce (MOC. Authorities found a list in the employee's clothing of names of other telecom companies. the total number of projects and employees assigned directly to projects (14. Huawei stumbled again. Texas. Huawei later fired the employee. The Huawei management team began to search for a uniform and standardized project management system to fit these new situations. Cisco sued Huawei in a U. (Rhoads and Buckman. a Huawei employee was caught taking pictures after hours of the insides of some high-end equipment from Fujitsu Ltd. explaining the company had not used his photos and that it was his first time in the U. Huawei has been dogged by suspicions of cutting corners on intellectual-property rights. but lack understanding of the complicated local laws and regulations. according to the complaint. to make it easier for customers to switch to the cheaper Huawei versions. Cisco later agreed to drop the lawsuit after Huawei removed the router products from the market and then altered them. expensive labour costs and strict labour regulations. Huawei even used the same model numbers. In June 2004. market and purchasing price. at a trade show in Chicago. the company laid off about a half-dozen salespeople.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.000 plus) presented planning and logistical challenges. alleging the Chinese company copied its router code. according to the suit. including bugs in Cisco's code.S. Project management Although Huawei recognized that project management was critical to sustainable development. Due to the subsequent decline in sales. and alienated some job applicants by pumping them for detailed technical information. which are more crucial to Huawei as its overseas business had expanded to five continents and was a key revenue and profit driver. Huawei also experienced a transition period from that of a manufacturer to a comprehensive telecommunications solution provider.S. 2005) has revealed that some Chinese enterprises often pay more attention to the brand. as well as other exorbitant costs. Huawei did not admit guilt in the settlement. As the company’s business scale was expanding. district court in Marshall. In January 2003.
these customers request that project managers receive PMI’s Project Management Professional certification. where vendors and clients have longstanding ties. In mature markets. Wei Huang 72 2006 . In the developing world. 2006)." says Albert Lin.S.S. the company has won business with prices 25 percent or more below those of Western bidders. Ultimately. small and unreliable. Chinese firms like Huawei "will learn and invest. an analyst in the San Francisco office of American Technology Research (Rhoads and Buckman. in the 1970s. 2005). In addition.S. just as Japan and South Korea did before them. sophisticated project management. market marked by long-term ties between phone companies and their equipment suppliers. like Europe and the U. first entered the U. Specifically. When Japan's Toyota Motor Corp. leading-edge technology is just as important as a good price.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Low cost strategy Huawei's successful formula winning business in other countries with low prices has not worked as well in a U. Huawei is also faced with internal challenges. Huawei can look to Japan for an encouraging case history. customers are requiring effective and explicit end-to-end project management and requesting project managers with professional certification. it had a poor dealer network and cars seen as cheap. which had already adopted by Huawei’s key international competitors (PMI. where Huawei has enjoyed the bulk of its success outside of China.
Huawei’s core competences and its challenges have been identified. 2004. But nevertheless. Cross cultural management. After analyzing Huawei’s competitive strategies in internationalisation of R&D. and technology from foreign partners (Luo. Customer services. 7. this case study has some limitations. CONCLUSIONS Huawei is perhaps the most outstanding example of a Chinese company that has rapidly established itself in overseas markets. the findings are only derived from one case study due to time restriction. 2002). From author’s view. as mentioned in the research methodology section. which are important for developing Huawei’s strategy. customer service and support and close external relationships are Huawei’s core competences. First. 2005. brands. low cost and JV/partnership selling. Huawei is not a public listed company and therefore there is very limited public information about the company’s finance.Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. it is based on secondary data.2006). 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. core competencies. they are consistent with previous research which claims that Chinese firms go overseas not to leverage core competence but to overcome domestic weaknesses (Boisot. In terms of entry mode. Rui and Yip. Child and Rodrigues. R&D. in Huawei’s case. and strategies other than the information from Huawei’s own website and journal articles for this research case study. Wei Huang 73 2006 . The case of Huawei has challenged the traditional internationalisation theory. Furthermore. 8. cost of expansion. RESEARCH LIMITATIONS Inevitably. 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. The findings suggest that Huawei does not fit well the traditional motivations of MNCs expanding abroad to leverage their competitive advantages. Chinese firms seek strategic competence including markets. challenges etc. Second.
Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. findings shows that Huawei is much inferior to its foreign rivals in various aspects. and in order to compete with the likes of Huawei. Huawei needs to overcome a myriad of challenges such as human resources and cultural. branding. Huawei has to become more like a western firm. Wei Huang 74 2006 . regulation etc. As it advances into western markets. but nevertheless. It is almost a miracle that Huawei is able to compete with global telecom giants in many products. Therefore. The gap is narrowing” (The Economist. 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. western firms have to become more Chinese. those differences will diminish in the coming years. 2005d).
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