“THE crisis, decline and even bankruptcy of Huawei are to come. We are in spring, but winter is very close. Don’t forget that the Titanic set sail in the atmosphere of hurrah.” Few bosses would be as alarmist as Ren Zhengfei, but he spoke those words in 2000 at the height of the technology bubble. He rightly feared it would pop and that it might destroy the firm he founded. Yet Huawei quickly bounced back and in 2010 became the world’s second-biggest maker of telecoms equipment, with annual sales of $28 billion—not far behind the leader, Ericsson, with $30 billion in sales. This year, Huawei, which employs 110,000 people, may overtake the Swedish champion.
For Mr Ren there is still a long way to go. Within the next ten years Huawei wants to become not only a technology leader but also a $100 billion company playing in the same league as Western IT giants such as Cisco, HP and IBM.
Whether China’s brightest technology star makes this transition has wider implications. It will be a test of how far Chinese companies are prepared to play the Western game to become global brands. It will also reveal how willing the West is to let a big Chinese player in—and for Huawei that is a particular problem.
Ask a politician in Washington, DC, about Huawei and the chances are that he will respond with a description of a sinister organisation: a company that is supposedly run like a military operation, which does not respect others’ intellectual property and whose products are heavily subsidised by cheap loans from the China Development Bank. And, worst of all, Mr Ren once served in the People’s Liberation Army (PLA).
Despite much investment and lobbying in America, the idea that Huawei is a PLA front and that Chinese spooks use its gear to listen in and even remotely control things continues to dog the company. As a result, Huawei remains confined to the periphery of America’s telecoms market. Last November, when Sprint Nextel, America’s third-largest mobile carrier, considered awarding a multi-billion-dollar contract to Huawei, the American firm’s boss is said to have received a call from Washington, DC, and eventually opted for another vendor. In February the American government even forced Huawei to undo a minor deal: the $2m purchase of patents from 3Leaf, a bankrupt Silicon Valley start-up.
Huawei’s sprawling campus in Shenzhen, across the border from Hong Kong, presents a rather different image. The multi-storey glass buildings could be in Silicon Valley. Tired faces in the lifts suggest long working hours, although the bedrolls next to desks are used for a nap during the lunch break rather than for nights at the office. At the campus’s centre sits “the tower of ten thousand engineers”, whose efforts can be admired in Huawei’s glitzy exhibition centre. The firm pioneered the SingleRAN, a base station for mobile networks programmable for different wireless standards. It was also the first to make easy-to-use dongles that plug into laptops to connect to the internet wirelessly.
But in contrast to Silicon Valley, laptops are nowhere to be seen in Huawei’s huge canteen. Leaving the office with a computer involves tiresome security procedures—in case it somehow finds its way to the firm’s crosstown Chinese rival, ZTE, which Huawei recently sued over patent and trademark violations. In fact, Huawei has as much intellectual property to protect as any Western technology giant, says Song Liuping, the firm’s chief legal officer. By the end of 2010 it had been awarded nearly 18,000 patents, including 3,000 overseas ones.
Other suspicions about Huawei are more difficult to quieten. In an open letter to the American government after the failed 3Leaf deal, Ken Hu, Huawei’s deputy chairman, confirmed that some customers do benefit from loans from Chinese banks, but he gave little detail. Huawei has tried to allay fears about security by setting up outfits that allow customers and governments to examine its equipment. The approach has not worked well in America, but seems to be accepted in Britain, where the firm in November opened a “Cyber Security Evaluation Centre” to openly test equipment to show it meets security standards.
I did it Huawei
Still, Huawei can feel a bit like a corporate version of the Chinese Communist Party. Mr Ren is a charismatic leader. He was born in 1944, his parents were teachers and he studied civil engineering before joining the PLA. In 1987, after the PLA disbanded its engineers corps, Mr Ren started Huawei with 21,000 yuan (then $4,400) of his own money. He first imported telephone switches from Hong Kong, then decided to build his own products and spend on average 10% of revenues on R&D.
Mr Ren’s mission is to help China develop its own telecoms technology (Huawei means both “China can” and “splendid act”). To achieve this, he has taken more than one page from Chairman Mao, says Liu Shengjun, deputy director of the China Europe International Business School in Shanghai. “Using the countryside to encircle and finally capture the cities”, is one of Mr Ren’s business strategies. Finding it tough to sell to carriers in China’s big coastal cities, where state-owned equipment makers and foreign vendors reigned supreme, Huawei first went for the provinces. Offering technically advanced but cheaper equipment, and deploying armies of salespeople, the firm quickly managed to persuade local operators to buy its products. It then moved on from there.
The firm repeated the trick abroad. In Europe, for instance, the Russian government was the first customer. Contracts in eastern Europe followed, with cash-strapped operators welcoming a firm that charged at least 25% less than competitors. And the mobile miracle in Africa might not have happened so quickly without Huawei’s cheap and robust equipment.
Another tactic Mr Ren copied from Mao is ideological education. In the early years, he had employees sing revolutionary songs. Even today, the thousands of new recruits hired every year undergo a six-month course that includes two weeks of cultural induction on the Shenzhen campus and an internship on the ground, for instance helping to set up base stations. This is when new Huaweians are supposed to acquire the “wolf spirit” which is said to drive the firm on.
Yet in more than one way, Huawei differs from other Chinese firms. It avoids speculative investments in property and the stockmarket. It puts customers first and develops new products in co-operation with network operators (although it sometimes also makes offers that turn out too good to be true). And Mr Ren does not hesitate to ask foreign experts for help. After a trip to America in the late 1990s, he decided better management systems were needed and ever since has spent up to 3% of revenues buying advice from Western companies like IBM.
In Europe Huawei has now clearly reached the cities. In May the firm won its first order for mobile network equipment in Britain from Everything Everywhere, a joint venture of Orange and T-Mobile. Richard Windsor of Nomura, an investment bank, predicts the market for wireless networks will become essentially a game of two players: a technology leader, Ericsson, and a cost leader, Huawei. “Operators need a cost leader to keep Ericsson honest,” says Mr Windsor.