Analysis of Huawei and its Core Competencies

Huawei Technologies was founded in 1998 by Ren Zhengfei who is a former People’s Liberation Army officer and telecom engineer. It was incorporated as a private enterprise which manufactures telecommunications equipments for domestic Chinese companies at a much lower price than its international competitors. And since the beginning, Zhengfei’s vision was to build innovation capability into the company. However, contrary to the China’s policy of “exchanging market for technology,” Zhengfei is convinced that having a joint venture with foreign companies would only cause the Chinese to lose their domestic market and not enable them to acquire foreign technologies.

In performing an internal analysis, it is important to have a ‘global mind-set’, which is the ability to analyse the internal environment in ways that are independent on the assumptions of a single country, culture, or context. In addition, the business’s portfolio of resources and the bundles of heterogeneous resources and capabilities have to be analysed so that they are be leveraged on if need to.

Business Fundamentals

Accounting

Huawei Technologies had annual revenue of US$6.7 billion and a net profit of US$470 million in 2005. This is an increase from annual revenue of US$5.8 billion and a net profit of US$470 million in 2004.

Huawei’s net profits in 2002 and 2003 were US$110 million and US$380 million respectively, and it had a net profit margin of 4% in 2002, 10% in 2003 and 8% in 2004. No doubt, Huawei’s net profit margin drop by 2% in 2004, Huawei is still generating profit.

Finance

There are short-term financing and long-term financing options available. Huawei’s financial support from the state-owned Chinese Development Bank in the form of a US$10 billion facility and US$600 million from the Export-Import Bank of China are both forms of long-term financing.

Risk Management

There are three major types of business risks; price risk, credit risk and pure risk.

As Huawei has markets overseas, there is bound to be some price risk involved when there is any fluctuation in foreign exchange rates as their receivables and payments are transacted in foreign currencies. Hence, Huawei can use hedging to manage its price risks.

In addition, pure risk is assume to be present in virtually any industry and there are four types of pure risk that affect business; damage to assets, legal liability, workers’ injury and employee benefits.

Organisation Design

Huawei practice departmentalization as its workforce is spilt into departments such as Research & Development (R&D) and production. It is also a mechanistic structure as there is high specialization and centralization.

Human Resource Management

Since its beginning, Huawei had been emphasizing on building a strong R&D team and it had been recruiting employees of high caliber with exceptionally high salary by Chinese standard.

Operations and Supply Chain Management

The success of most businesses is their ability to identify the customers’ needs and to come up with products that fulfills the necessary requirements. These products will then have to be produced at economically viable costs.

As Huawei manufactures and ships its products both locally and overseas. Thus, it is vital that Huawei monitors its operations and supply chain management to ensure that its products remain profitable and that bullwhip effect be controlled.

Product Development

Huawei has the foresight to invest and develop in new technologies in the industry which gives it a quantum leap in the market from its competitors.

Resources, Capabilities, and Core Competencies

Resources, capabilities and core competencies form the basis of competitive advantage. Resources create organizational capabilities when group together and in turn, capabilities result in the core competencies of a firm, and these are the foundation of competitive advantage.

Tangible Resources

Financial Resources

As previously mentioned, Huawei has the financial support from the state-owned Chinese Development Bank and the Export-Import Bank of China. With their financial support, Huawei received a US10 billion facility for its international expansion over five years and US$600 million respectively.

Organisational Resources

Huawei has departments such as R&D, production and marketing which form up the basic organization structure of the company. Huawei also integrates its marketing employees into its main R&D team so that the customers’ needs can be better communicated to the R&D headquarters responsively.

Physical Resources

Huawei has research centres located in China and overseas. For example, it has a 21 storey research center at its headquarters in Shenzhen and six other research laboratories in Beijing, Shanghai, Nanjing, Huangzhou, Xi’an and Chengdu; a software development centre in Bangalore (India) and research facilities in Moscow (Russia), Stockholm (Sweden) and the Silicon Valley in California.

Technological Resources

Huawei had a large number of patents under its name. It had more than 8,000 patent applications by late 2004, with 800 of them applied in more than 20 countries, including the United States and Europe. In fact, in 2004 alone, Huawei had more than 2,000 patent applications which put it on par with its international rivals in the same industry.

Intangible Resources

Human Resources

Since establishment, Huawei had focused its resources to build itself a strong R&D team. Starting off with 500 R&D staffs and 200 production staffs, Huawei had a workforce of 24,000 employees by late 2005 with 48% of them engaging in R&D works.

In addition, the education level of the company’s employees was higher than the average worker in China. More than 85% of its workforce had a bachelors or higher degree, and about 60% had a master’s or PhD.

Innovation Resources

Huawei undertook joint R&D laboratories with foreign companies such as IBM, Microsoft, Texas Instruments, Intel, e.g., focusing on different telecom techniques. These joint development efforts were used to complement Huawei’s innovation capabilities.

Reputational Resources

Huawei has a large customer base in China with the major telecom companies being its customer. In addition, Huawei is one of the major suppliers for equipments for the China Telecom’s ChinaNet Next Carrying Network, known as CN2, which is the core network for the country’s next-generation business and consumers services.

Capabilities

Capabilities exist when there are resources on hand that have been deliberately integrated to achieve specific tasks.

Huawei had a strong team of R&D staff which comprises of 48% of its total employees. In addition, Huawei recruits employees of high caliber, with more than 85% of its employees having at least a bachelors degree and 60% having a master’s or PhD. Thus, Huawei is able to come out with innovate products, hence holding an exceptionally high number of patents by Chinese standard.

In addition, coming from a military background, Ren Zhengfei’s connection with the Chinese military helps create a guanxi network which is extremely helpful to Huawei.

Being based in China, Huawei is able to manufacture and offer products at a lower price (typically 30% lower than those of established suppliers).

Core Competencies

Core competencies are capabilities that are a source of competitive advantage for a company over its rivals.

Huawei’s first competence is its R&D. Because of the inexpensive labour force in China, Huawei had an advantage over its international competitors. In addition, Huawei integrates its marketing people into its R&D team, thus the needs of telephone companies and service providers could be communicated through the marketers to the R&D department in the shortest time.

Another core competence which Huawei had is its close relationship with the Chinese military. This close relationship enables Huawei to create a guanxi network which few other competitors could rival and which helps Huawei to secure big contract orders in its initial years and huge financial loans from the state banks.

A third core competence is Huawei’s products low price as compare to its competitors.

In summary, Huawei would need to maintain these core competencies in the long run to have a sustainable competitive advantage.

Value Chain Analysis

Using the value chain analysis, we will analyse which are Huawei’s operations’ segments that create value and those that do not. It is essential to understand these issues, as a business will only earns above-average returns when the value created is greater than the costs incurred to create that value.

Primary activities

Huawei’s primary activities are marketing and sales, inbound logistics, outbound logistics and operations.

Support activities

Huawei’s support activities are firm infrastructure, human resource management, service, technological development and procurement.

Activities which are not of competitive advantages to Huawei can be outsourced to external vendors so that resources can be put to better use within the company.

SWOT Analysis – Strengths and Weaknesses

Strengths

Huawei have a strong R&D team and high caliber employees which gives it an edge over its competitors.

Being based in China, Huawei is able to manufacture and offer products at a lower price (typically 30% lower than those of established suppliers).

In addition, with a low-cost workforce, Huawei spends less in R&D but achieve comparable results with foreign technology companies who spend more.

Ren Zhengfei’s connection with the Chinese military enables Huawei to have the support from the Chinese government which is essential to working in China.

Weaknesses

Being a Chinese company, Huawei will be view in a different light compared to other companies from other countries. In general, the perception was that Chinese vendors were mainly relying on western engineering methods and were turning the higher margins and complex products into standard commodities. Thus, Huawei would have to move beyond this to be view as a serious global competitor.

Huawei’s lawsuit with Cisco gives rise to the issue that Huawei has infringed Cisco’s patents and copyrights by copying its user interface, user manuals and source codes which inevitably affects Huawei’s reputation in the United States.

Key Success Factors

Huawei is able to be successful as in general the Chinese market is a closed industry and foreign companies would need to joint ventures with local Chinese companies in order to enter the market, which will involve large equity investments.

In addition, being a home-grown company, the Chinese will prefer to buy their products from Huawei, thus giving it an advantage in such a big emerging market. Furthermore, with Ren Zhengfei’s connection to the Chinese military, it would have an unfair advantage over other companies.

Secondly, since the onset, Huawei had focus on employing high caliber employees to form a huge R&D team. Together with joint R&D with other leading foreign companies, this has enables Huawei to come up with innovative products.