Huawei Strategy Analysis
Threat to Entry China was facing a boom in the industry of telecom equipment, and the growth was continuing.
Discovering such great potential in China’s market size, foreign companies started to see advantages in entering China; however, their entry was restricted due to government policy. This ownership restriction by the Chinese government largely raises the entry barrier, forcing most foreign firms to set up joint ventures with local Chinese companies to enter the industry.
Should a firm decide against forming joint ventures, they would be completely barred from the Chinese market. Secondly, the industry involves a high level of capital investment for manufacturing, engineering, research and development, equipment, etc. This huge financial pressure prevents firms from entering the industry.
Therefore, the threat to entry is low. Supplier Power Suppliers of the telecom industry include raw material providers and equipment manufacturers. Suppliers’ power has been increasing over the years, due to the development of technology and the demand of the changing market.
In the early years between 1960 and 1980, since a large amount of suppliers existed in the industry with great specialization, the telecom manufacturers always needed to find a specific supplier for a certain part of production. However, as digital technology, the Internet, and networking advanced the pace of telecom services and the range of products demanded, the suppliers were required to be more diverse than ever.
To remain competitive, they had to produce this large range of products, causing smaller businesses to be integrated into larger, concentrated companies.
Therefore telecom manufacturers have many more options to choose from along the production line, and the suppliers hold less power. Rivalry The intensity of rivalry is medium. For one, the number of main competitors is large without significant differences in the market share held.
According to Table 2, Huawei possesses the leading position with a market share of 13. 5%, followed by ZTE and Ericsson both with 12%. Seven other major players, including Motorola, Nokia, Siemens, and others, also occupy a considerable market share ranging from 4% to 7%.
The competition is intense mong the players due to a large amount of major players with roughly equal size. Also, it is important to note that the exit barriers are high due to high level of capital investment in specialized assets for this high-tech production.
After investing numerous funds into R&D, human resources, and engineering technologies, no company would find it easy to exit the industry. However, a large market for telecom equipment had recently cropped up in China. In 2002, China became the largest telecom market, and it continued to grow at an annual compound rate of 10. percent between 2004 and 2008.
This rapid market growth lowered the intensity of rivalry, since companies did not need to fight for a limited market and could enjoy the increasing amount customers. As a result, the intensity of rivalry is medium. On the other hand, the nature of competition is based on price, due to high fixed cost and low marginal cost of telecom products. All the major players in this sector are public companies. They have the access to external capital market for funding.
The access to funding is critical to telecommunication equipment companies, as R&D requires large amount of capital investment.
Also, the products of the telecom industry are quite standardized, which leads to a low switching cost. Customers are price sensitive, merely caring which company provides the most economic services. As long as they are able to make phone calls or surf the Internet by their cell phones, they tend to choose the cheapest one. Therefore the companies have to compete by achieving economies of scale to price the products as low as possible.
As the nature of competition spells out a competitive scene especially as the market grows closer to maturity and intensity is offset by the high growth rate, rivalry is moderately high in the Chinese telecom industry. Buyer’s power The Chinese telecommunications industry had gone through some significant changes in the past decades which impacted the dynamic between the buyers and the telecommunication equipment suppliers.
The buyers fell into one or more of the five subsectors: optical transmission system, switch systems, access systems, data communications, and mobile communication.
Each sector is independent of one another with their own distribution channels and buyers, but in which, the mobile communications sector accounts for 29% of the whole telecom equipment industry. According to the historical data, China’s telecom industry had US$112 billion in business transactions in 2004, and phone users had increased to 390 million with fixed-line users increasing to 348 million. Although there is a huge volume of users in the Chinese market, they can’t directly purchase equipment from local telecommunications equipment companies such as Huawei.
They must purchase services from phone service providers; therefore, those service providers or “distribution channels” become the real buyers.
In China, the major buyers are big names, such as China Telecom, China Mobile, and China Unicom. These few buyers commanded a large majority of their markets and so wielded high power. In addition, the products or services required from telecom companies were fairly standardized across the whole industry. Buyers can be price sensitive and select the cheapest products being indifferent to brand.
In this sense, big name buyers could have low switching costs, being able to obtain almost identical products to satisfy their users. The increasing demand would further give big name distributors more bargaining power.
Because the dotcom bubble burst in 200, the overheated Chinese telecom industry was experiencing difficulties accessing capital. The financial pressure and adverse economic environment pushed back incumbents to reposition themselves, develop a variety of services, and beg big name distributors to purchase their products.
In general, buyers have high bargaining power in Chinese telecom industry. Substitutes In the telecommunications industry, there are really not many substitute products by strict definition. The equipment manufactured by different technology standards makes the substituting even harder because different countries have different standards. For example, the 3G technology in the Chinese telecom equipment industry has the TD-SCDMA standard, Europe has the WCDMA standard, and the Americas use CDMA2000.
Because buyers from one particular region would not able to access the different standard mode, the substitutes are pretty low. In addition, people love telecommunication products. Computers, mobile phones, and other electronic products are necessities in people’s lives. Customers will not find a suitable substitute for the telecom products and services they currently use, especially as the rest of society is using the same technology. Switching costs, if a substitute were found, would be high because of this network effect.
In conclusion, the threat of substitutes is very low in the Chinese telecom equipment industry.
In conclusion, the Chinese telecommunications industry is moderately attractive because of the high buyer’s power, intensive rivalry, but low supplier’s power, low threat of entry, and low threat of substitutes. PETS analysis: Political Factors: China has a foreign ownership restriction policy, so for most foreign companies, they must pursue a joint venture with a local company to enter the Chinese market.
The Chinese government aids domestic companies with subsidies to promote growth and help these companies develop their competitiveness. Political restrictions could be a negative factor if foreign investors want to start business in China since it must find the best fit entry mode, which can only be joint ventures if they want to reap profits. Economic factors: China has a huge and rapidly growing market. In the 1980s, China’s GDP is 9.
5%, which surpassed the United States’ GDP growth rate, becoming one of the fastest growing countries.
The high-technology industry has an especially high growth rate. It achieved double-digit growth with an annual growth rate of 34. 9%. The Chinese market grew at a compound annual rate of 10. 9% between 2004 and 2008, moving from $30 billion to $40 billion.
Having the fast growing economy coupled with the large population makes China very attractive for future foreign investors. Social factors: China has the largest population in the world, and the population is increasing each year since 1949.
We can use the telecommunications industry as an example. In 2005, there were more than 738 million users and growing. By 2010 China’s 3G users will reach 200 million. Because of the huge population, demand for products is on a much larger scale than in other countries.
Technological factors: Before 1990s, foreign telecom companies were far more advanced in technology than Chinese companies, but soon after 1990, China realized the problem and strengthened the education system to turn out many first-rate professionals.
Due to these advances, China found itself carrying a large labor force of specialized professionals looking for R;D work. The fast-developing technological environment could be either positive or negative for foreign investors. Investors could take advantage of the cheap yet highly skilled and qualified labor, but could also be struggle to compete with Chinese experts because the highly skilled labor is cheap. With this PETS analysis, it is concluded that the Chinese market is moderately good for future investment, but could be especially attractive market for telecom industry.
Internal Analysis Huawei is very successful in the Chinese telecommunications industry because of several internal strengths that they leverage. Their firm has valuable strengths in both their primary and support activities. Huawei’s might resides in its operations, after service sales, and marketing and sales for primary activities. Firm infrastructure, human resource management, and technological innovation accounts for its strengths in its support activities. Huawei found immense strength in its operations.
Their relatively low pay compared to their foreign competitors resulted in low cost manufacturing.
This meant they could enter the market offering some products up to 40% cheaper than competitors. Their inexpensive and highly qualified workforce helped Huawei deliver customized and innovative solutions to global companies seeking to reduce their capital expenditures. Huawei had a strong after – sales service. They had a host of customer support and training centers that helped facilitate after service sales for their customers.
Part of this was their integration of marketing people into the R&D teams.
This was done so that they could communicate service providers and telephone company’s concerns and questions with ease. This makes sure the issues are communicated to the right people and in a timely manner. In addition, their marketing team was strong in their campaigns. Huawei was known for its low pricing, but there was concern that they would be seen as cheap since the “Made in China” label comes with a stigma. They did not want their low pricing to be attributed to low quality as well.
To combat this, they started a campaign to promote their reliability and product quality.
They claimed that their networks could withstand “Siberian winters and Saharan summers”. This campaign can be deemed a success because in 2005 they were ranked number eight of 100 telecom operators. Huawei’s infrastructure was one that was expansive and covered the domestic territory as well as land abroad. They had fifty-five regional offices world-wide, eight regional headquarters, and world-scale research institutes in key locations. They made sure to integrate key strategic ideas.
They had experts study western ideas of product development, supply chain integration, human resource management, financial management and quality control.
Huawei knew in order to be successful on the global platform, they must strive to execute excellence in all of these areas. Their human resource management was extremely impressive. The education level of employees was outstanding: of 24,000 employees more than 85% had a bachelors degree or higher. About 60% of these employees had a master’s degree or Ph. D. Huawei’s founder, Zhengfei, developed a militaristic culture within the organization.
He promoted intense training and stressed to his employees that they should learn the behavior of a wolf, since it has “keen smell, aggressive and hunt in packs”. He made the marketing arm focus on “organizational aggressiveness”. Zhengfei was known for promoting patriotism throughout the organization. He established a national recruitment system that paid top dollar for the best employees. The abnormally high salary was complemented with housing and other benefits.
This allowed Huawei to attract and maintain the best and brightest employees.
By far, Huawei’s strongest internal attribute was its research and development. They had low cost engineering, highly skilled R;D teams and the firm as a whole was focused on their technological developments. They had a twenty-one story building located next to their headquarters that was purely devoted to R;D. In 2005, their firm had grown to 24,000 employees, 48% of which were involved in research and development in some form.
They had a policy of investing no less than 10% of revenues into R;D compared to the 15% by foreign competition.
Despite this lower investment, they still had a winning formula that allowed them to surpass all other domestic telecom companies and resulted in close to 90% of the domestic mobile network market. In 2004 alone, Huawei had 8000 patent applications, 800 of which were applied for in more than 20 countries and territories including the US and Europe. As part of their R;D efforts they partnered with foreign companies like Texas Instruments, Motorola, IBM, Intel, Sun Microsystems and Microsoft to focus on various telecommunication technologies. They viewed these partnerships as a complementary approach to innovation.
Huawei wanted the knowledge, but thought that utilizing joint venture with foreign companies would just give those companies more of an in-road to China than a sharing of technological advancement and proprietary knowledge. They said cooperating with foreign telecom companies would be ineffective because those companies are not going to share propriety knowledge with a Chinese company over which they have no management. Although they tend to veer away from joint venture, they do engage in them when they deem it absolutely necessary and beneficial.
Huawei’s high caliber of people combined with R&D spending made them a powerhouse. Additionally, Zhengfei, was an ex-People’s Liberation officer. This was leveraged with guanxi network that was unmatched by competitors. This was a major concern in the western world. Huawei received financial support from the state owned Chinese Development Bank in the form of a 10 billion dollar facility for Huawei’s expansion and an additional 600 million dollars from the official Export-Import Bank of China. Early on, Huawei received large contract orders from the military to which it attributed much of its success.
Zhengfei did not speak much to the relationships, but did give credit to “favorable industry policies” from which his company benefited. In conclusion, while we recognize the many strengths of Huawei, we still feel there are weaknesses that they must be vigilant of and continue to improve. We believe that they should continue to improve the quality of their product. They must always be wary of the “Made in China” stigma that is attached to their company. Continued improvement on quality will accelerate China’s success in the global telecommunications industry.
Also, we feel that they should continue to improve training of their managers.
In an effort to go global, they should diversify how they train managers. Not all countries and workers will be receptive to this militaristic culture that they have created in China. This could be part of the reason they did not find success in the United States. They should continue to hire consultants to study western business ideas and place an emphasis on Western and other worldly management practices. This will make them more flexible and more successful on a global platform.