Case Study Of HuaWeis Internationalization

This case study analyses and discusses the internationalization process of Huawei, a leading telecommunication equipment manufacturer in China. Our research aims to explore the special features of the internationalization of Chinese hi-tech firms through a case study and to identify the factors that affect Chinese hi-tech firms’ international entry mode decision. In this paper, several foreign market entry modes were discussed. Issues of why and how to take into account the factors of industrial characteristics, environmental factors, firm factors, and moderators for internationalization and how to employ different entry modes in different host markets are discussed and illustrated based on this case study. It is found that industrial characteristics and home country’s technological reputation affect to a great extent the internationalization path of the hi-tech firm studied. The research also shows that in terms of hi-tech enterprises’ internationalization, the factors such as international experience and firm size are not as important to traditional manufacturers as to hi-tech enterprises.

Company Background

It is worthwhile to look at the growth history of a company when we study a company. In this section, we will list some basic fact of HuaWei. The focus would be the company’s internationalization process, and the achievements it has reached.

HuaWei was established 23 years ago, in 1988, by Ren Zhengfei, a former People’s Liberation Army officer. The headquarters are in Shenzhen. Unlike other famous state owned Chinese companies, the company is privately owned. According to its marketing director, Edward Zhou, HuaWei is owned by its 87,502 employees.

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Initially HuaWei was just a small distributor of imported PBX products without any telecommunication knowledge. Five years later, in 1993, Huawei had achieved its primary threshold of knowledge accumulation on PBX and successfully made the first breakthrough in C&C08 digital telephone switch by effectively taking advantage of the technology diffusions from Shanghai Bell (the first Sino-foreign joint venture in China). It began selling its own digital telephone switch in rural areas of China. Huawei thereafter successfully monopolized Chinese rural market and small cities. Afterwards, with higher product quality and improved product development, Huawei started to compete with foreign enterprises in Chinese urban market. Not long after, HuaWei supplied gear to China’s three largest operators – China Mobile, China Telecom, China Unicom.

With regard to internationlization, HuaWei began its internationalization process at an early stage, compared to many other Chinese firms. The first step of internationalization in Huawei is providing customized design of ‘number portability service’ for Hutchison Telecoms, Hong Kong in 1996 (Li, C. & Cui 2004). After that, Huawei made a decision to enter international market. Russia and Southern America market are first selected. Huawei entered Russian market in 1996. It set up a joint venture of Beto-Huawei with Russian Beto Konzern and Russia Telecom to develop Russian market in 1997. However, Huawei did not get any order within four years.

After 2000, Huawei extended its target markets to other countries, including Southern Asia (Thailand, Singapore, and Malaysia), Middle East and Africa. Since 2001, the products of Huawei have been sold in West Europe market through the local famous agents. These countries include German, France, Spain and UK.

Huawei has now provided products and service for over 300 telecom carriers around the world. It has won the leading position in the global market in the areas of 3G, next generation network (NGN), switching, xDSL, optical network, and data communications.

With 75% of its contract sales coming from outside of China and overseas sales doubling each year, far exceeding its domestic sales, Huawei, indeed, is a successful player in the international market.

Business Envrionment Analysis

Business environment has a great impact on a company. Environmental factors are the substential influences that affect the frims’ internationalization. And it can be classified as the internal environment and the external environment. The internal environment, or firm factors, includes firm-specific advantage, corporate policies and firm size, experience and strategy. The external environment factors include demand/competition, socio-cultural conditions and political/economic conditions, and other variables moderators, such as host/home government policies. In this section, we will analyse the external and internal environment of HuaWei.

We apply SWOT to analyse the business environment of HuaWei. SWOT stands for strengths, weaknesses, opportunities, and threats. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). The result is illustrated in Table 2.

We also apply Porter’s Five Forces model to analyse the business environment. This model is developed by Michael E. Porter (1979). Since then, it has become a framework for the industry analysis and business strategy development. Elements in Porter’s five forces are discussed in detail below.

Buyer power: increasing demand

During the past twenty years, China, as well as the world, has gone through a rapid development in the telecommunication industry. This trend continues, with the emergence of 3G, wireless network, and NGN. Hence, the demand for telecommunication products and services is overwhelming.

Barrier to entry: Booming global trade

With China’s entry to the WTO, trading between China and the world is booming. For example, China’s exports reached US$760 billion in 2005, with high-technology products such as telecommunications equipment, computer and electronic components accounting for 43 percent of total exports. On the other hand, globalization worldwide has made trading among countries grow tremendously.

Rivalry: Foreign investment in China

Foreign hi-tech companies, such as Cisco System, Siemens, and Motorola, have invested a staggering amount of money in China. Ironically, much of this can be attributed to China’s entry into the WTO, which offers unprecedented access for foreign companies in many industries. Consequently, it is driving HuaWei overseas to build capabilities that can help to compete more effectively against domestic and foreign competitors in China.

Supplier power: Chinese investments abroad.

By comparison, China’s outward direct investment and cross-border M&A is tiny by global standards. However, this may change in the near future. In fact, the Chinese government is a strong supporter for domestic firms to go abroad.

Substitutes: HuaWei’s reputation

Through years of hard work, HuaWei has established its brand name as a low-cost but high quality telecom provider. HuaWei’s value proposition is based on “cost of ownership” i.e., the total lifetime cost of ownership for the network as a whole. In an era when telecom’s ARPU (average revenue per user) is falling, cost of ownership is crucial, which makes HuaWei a high possible substitute for other telecom companies.

Motives for going global

Considering the external and internal environment HuaWei is facing, in this section, we are going to identify and discuss HuaWei’s motive to go internationally. Previous researches have examine this issue from different perspectives. For example, Bartlett and Ghoshal (2000) summarised three main traditional driving forces behind the overseas expansion of a vast majority of multinational corporations: (1) to secure key supplies, (2) market seeking, and (3) access low-cost factors. Bartlett and Ghoshal (2000) emphasised that the motivation of market seeking was particularly strong in companies. On the other hand, 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. Still, others (Barney, 1991) suggest that factors above are not enough for a company to become a multinational. Other conditions such as government support, must be met for the company to go global.

Based on these theory, we study HuaWei’s motivation to expand globally and identify a range of reasons, including tapping new growth markets, securing natural resources, acquiring advanced technologies and management skills, avoiding intensive domestic competition, improving productivity, receiving overseas funding, and etc. In Figure 1, we illustrate these factors by their importance to the company. And three most important factors are discussed in detail in the following.

Seeking new markets for growth

Seeking new markets for growth was the key reason for HuaWei to expand globally. In aggregate, the majority of profits in China disproportionately flow to highly regulated, highly concentrated industries such as oil and gas, mining and real estate that are primarily controlled by state-owned companies. In contrast, the telecommunication sector is hindered by overcapacity and facing intense profit pressures. As a result, HuaWei is naturally looking abroad for new markets with less competition and higher profit potential.

Acquiring advanced technologies and management skills

Innovation is on the top of CEOs’minds as the only way to survive and grow in an increasingly competitive world, as highlighted in the IBM Global CEO study (2006).

However, many Chinese manufacturers still compete on low-cost labor and aggressive pricing, rather than on innovative, branded products and services with higher profit margins. To such an aspect, HuaWei is going abroad to acquire advanced technology and R&D capabilities, which provide the means to develop a differentiation advantage. Having been a licensee of intellectual property right for a long period of time, HuaWei is trying to transform itself as a creator of its own technologies and patents. The purposes are to escape from status that its R&D are dominated by patent of multinational corporations overseas .

Avoiding intensive domestic competition

HuaWei goes global to avoid a number of competitive disadvantages incurred by operating exclusively in the domestic market. These disadvantageous domestic conditions include : 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 (Zhang, 2009).

Government supports for going global

The government is becoming more supportive of Chinese companies expanding globally. Over the past five years, various government agencies such as the National Development and Reform Commission (NRDC), the Ministry of Finance, the Ministry of Commerce and the State Administration of Foreign Exchange (SAFE) have all developed policies encouraging Chinese companies to expand overseas.

Senior officials have reaffirmed the government’s commitment to support globalization by offering various types of support, including new policies and services to coordinate overseas investments and manage risks. Financial institutions such as the Bank of China, China Development Bank are offering favorable financing in the form of credit lines and low-interest loans to Chinese companies expanding abroad. For example, HuaWei has received a US$10 billion line of credit from the China Development Bank to help fund its global expansion efforts (BDA report, 2005). Furthermore, it is also indirect beneficiary of Chinese foreign aid programs to African and other developing countries.

Sideward Crawl Strategy

This section is going to discuss the location decision in HuaWei’s internationlization process. In fact, deciding which market to enter is always an important strategic issue in the company’s international expansion.

Today, Huawei’s global market is divided into eight different zones (see Table 3), with its global R&D centers located in Bangalore (India); Moscow (Russia); Stockholm, (Sweden); the Silicon Valley, California (USA); and Dallas, Texas (USA), in addition to those in China. However, when we study the company’s expansion history, we find that Huawei avoided developed countries market and first went to developing countries surrounding them. In developing countries, HuaWei can apply its low-cost, non-brand product sold in domestic market, as these countries favor the same product as China. Compared to other Chinese company’s “leap-frogging strategy” (Lazonik & William, 2004), Such targeting market in developing countries first is similar to crab, which walks sideward and go very far away without noticing anyone. Therefoer, we may name Huawei’s strategy in location decision as “Sideward Crawl Strategy”, which is demonstrated during HuaWei’s internationalization process in Table 4.

Market Entry Strategy

In section 5, we have discussed HuaWei’s location decision in expansion, namely the Sideward Crawl Strategy. When HuaWei expanded to different markets, it applied different market entry strategies as well. In fact, the success of Huawei’s internationalization process depends largely on the appropriate market entry mode choice and market strategies employed.

Market entry strategy, simply put, is the planned method of delivering goods or services to a target market and distributing them there. There are a variety of ways in which organisations can enter foreign markets, such as exporting, joint venture, licensing, merge & acquisition, greenfield investment and etc. Driscoll (1995) introduced a comprehensive foreign market entry decision framework. In his definition, the contractual entry modes include a variety of arrangements such as licensing and franchising. The investment entry mode includes merge & acquisitions, joint venture and greenfield investment.

Buckley & Casson (2007) further analysed the different alternatives of market entry by foreign firms and the factors that influence entry strategy choice. Their approach serves as guidence for complex analysis and, depending on the magnitude of the different cost components, one strategy may be preferred to other alternatives.

Their study emphasized that there is a diverse range of influences bearing on a firm’s desire for certain entry strategy choice and that there is no optimal foreign market entry modes under all conditions. Therefore, it needs to consider the characteristics of modes, the firm factors, environmental factors and other factors when it chooses entry mode.

In the following, we are going to study the market entry strategy of HuaWei in different markets and the rationale behind these strategies based on the theory mentioned above.

Joint Venture in Russian Market

In 1996, as a breakthrough, Huawei began its international business at Russia. It set up a joint venture of Beto-Huawei with Russian Beto Konzern and Russia Telecom to develop Russian market in 1997. As a new player in international market, Huawei’s development in Russian market is very hard at the first stage. Huawei spent four years on waiting and studying before they got the first order. At the initial stage of internationalization, Huawei’s market selection strategy is targeting the markets that have weak telecommunication infrastructure but have great developing potentiality. Based on the features of telecommunication products, the host market’s social and cultural conditions were considered. First, because of the network effect (Katz & Shapiro 1994) and telecommunication products related to information security, Huawei first chose those host markets which have good relationship with home country. Then, based on its own advantages of technological research and development (R&D), Huawei chose the joint venture as the first foreign market modes.

Export Entry Mode in South America, Asia and Africa

In the fist stage of Huawei’s internationalization, South America is also selected as a target market. However, Huawei employs export method as the entry mode. The influence factors are the issues of geographical distance and local market conditions. From 2000 onwards, Huawei started to enter Asia, Mid-east and North Africa market, in this area, where Huawei also use export method to entry this market. Huawei sent out many of sales and service engineers from home country to setup branches and service centers in these countries. The selection is based upon the characteristic of export entry mode: High flexibility, low resource commitment and low dissemination risk.

Contractual Entry Modes in North America, West Europe and Other Countries

After 2001, Huawei’s products start to be sold in West Europe and North America. In these developed countries, Huawei applied a variety of contractual modes to entry these market. These methods include franchising, co-research, co-production (OEM) and Co-sales (help each other to sale products in each own markets). For example, in European market, Huawei co-operate with Marconi in product development and marketing. Marconi helps Huawei to sell products in Europe using their channels. At the same time, Huawei helps selling Marconi’s product in China and Asia markets.

Early to 2002, Huawei has cooperated with Motorola in Mobile network infrastructure area using the OEM method. To develop the market of data communication in North American and other international markets, Huawei set up joint venture: Huawei-3Com with 3com, the main player in data communication market. In this method, Huawei takes the advantage of R&D ability and the 3Com’s international market resource. Table 4 shows Huawei’s alliances in the telecommunication industry. More of HuaWei’s joint venture in the telecommunication industry is illustrated in Table 7 below.

Numerous data have proved HuaWei’s success on its market selection and market entry strategy. For example, after getting the first order in Russia in 2000, the business of Huawei in Russian market grows up quickly. In 2003, Huawei got the sale volumn of more than USD 0.3 billion in Russian and the surrounding markets. In the market of broadband products, Huawei occupied more than 50% of the market. Up till now, Huawei has become the Chinese company with the biggest investment in Russia (Wu, 2004). And in 2008 (a bad year for network infrastructure companies), Huawei’s revenue rose 36% to $17 billion and generated $1.15 billion in net income (up from $957 m. in 2007), showing a much better performance than most of its Western rivals including Ericsson, Alcatel-Lucent, Motorola, Nortel Networks (Nortel asked for bankruptcy protection in 2009) and Cisco, which was amid the global economic turmoil. Among these revenues, foreign sales account for three-quarters, up from 43 per cent a year ago (the Wall Street Journal, 2008).

Not only does HuaWei gain a large profit from internationalization, but its innovation capabilities are greatly strengthen during the process. In 2009 the World Intellectual Property Organization WIPO reported that Huawei was ranked as the largest applicant under WIPO’s Patent Cooperation Treaty (PCT), with 1,737 applications published in 2008, replacing Philips Electronics. We collected patent data from SIPO, USPTO, and EPO, as the performance in USPTO and EPO can represent Huawei’s innovative power in developed regions; and patents in SIPO either in English or Chinese can reflect Huawei’s competitive capability of innovation performance within China’s domestic market. The data are shown in figure 2 below.

Not surprising that Business Week magazine ranked HuaWei 3rd, after Apple and Google, in its World’s Most Influential Companies list, acknowledging its playing a major role in the world of business and being capable of shaping the corporate landscape for years to come.

Conclusion

Huawei is among the few Chinese companies which go successfully in internationalization. The case study of HuaWei in this report provides an insight into the internationaliztion process, as well as the strategies, implemented by HuaWei in the communications equipment industry.

The analysis of this paper shows that industry structure/characteristics play an important role in hi-tech firms’ foreign market entry mode decision. Compared with traditional manufacture enterprises, Hi-tech enterprises tend to take firm factors as less important in choosing their entry mode.As shown in this paper, the internationalization of hi-tech firms from developing countries is harder than those companies from developed countries. For technological firms in developing countries, home countries’ technological level and reputation influence the firms’ internationalization significantly. To avoid this negative influence, Huawei had to enter the developing countries’ market first before it enters developed countries’ market. As a strategy, many hi-tech firms choose to set up the R&D department or register subsidiary companies in developed countries to develop an international market share.

Recommendation

HuaWei set up a role model for most Chinese firms in the internationalization process. However, HuaWei’s story is not perfect. It has experienced lawsuit with Cisco Systems in 2003, under suspect that Huawei infringed Cisco’s patent, which ended with compromise Huawei withdrew all the products sold in the US market. But HuaWei learnt from its lessons. It is now one of only two telecommunication equipment company (the another one is ZTE, also based in Shenzhen city, Guangdong Province) from developing countries that actively files patent.

Even though it is hard to say the success path of Huawei is applicable to all other companies in developing countries, at least, we can say company can go into market which can’t afford high-cost equipments that is provided by European and US companies by taking sideward-crawling Crab strategy. And It is hoped that more and more Chinese firms will follow HuaWei’s path and begin to have their places in the world market.