1.

The challenges that Huawei faced

The company’s biggest claim to fame may be the uproar that ensued when it attempted to
buy server technology firm 3Leaf Systems in the U.S. in 2011. Huawei ultimately abandoned the
acquisition after a U.S. government panel moved to block the deal on national security grounds.
Huawei officials have said those concerns were unfounded,and are now pushing ahead with
an ambitious plan to double the company’s revenue by expanding internationally as it advances
into the market for tablets and other consumer goods over the next decade.
So far, Huawei’s biggest handicap has been its lack of brand name recognition, especially
outside China. Huawei’s focus on consumer products is partly aimed at countering that problem,
notes Scott Sykes, Huawei’s vice president for international media affairs.
He says Huawei plans to expand the share of sales of consumer products as part of its total
revenue to 25% by 2018 from the current 20%. The company also plans to increase its enterprise
business, which sells equipment for use in corporate data centers in campus networks to 15% to
20% from the current 5%, while reducing its telecom equipment business revenue to 50% to 60%
from the current 75%. Despite the hurdles it faces in the U.S. market, Huawei is doing well.

 “M&A is challenging. Maybe one out of every 100 [mergers] is successful.”- Scott
Sykes
“We think for us, our company, our style, and what will work well with us is to grow organically
in the coming five years as we did in the last 26 years. Actually, in the next five to 10 years we
will not do any major M&A activities.” Regardless of how it grows, Huawei is expanding quickly
internationally. In 2012, revenue from outside China accounted for 66.7% of the firm’s total sales.
As it moves up the “value chain,” a shift from nuts and bolts telecom systems to higher margin
consumer products like smartphones and tablets could help Huawei make a “great leap” in terms
of brand recognition and profits, according to Benjamin Cavender, a principal and senior analyst
on the electronics sector at China Market Research Group, based in Shanghai.
Lagging behind
Despite Huawei’s aspirations in the smartphone market, the company lags way behind Apple
and Samsung, though in some quarters of the past year it ranked number three in sales — from a
start of zero sales in 2010. According to Sykes, the company’s smartphone sales jumped to 52
million units in 2013 from 32 million in 2012 and 20 million in 2011. “Our goal is to sell 80 million
smartphones this year,” he says. While Huawei’s ability to take on competitors such as Lenovo
and LG has been notable, the gap remains huge: Apply and Samsung are selling between 60 million
and 80 million smartphones in a single quarter, which is more than Huawei has sold yet in a year.
According to January figures from IDC, a U.S. IT research firm, Huawei maintained its number
three market share position in at 4.9%, up from 4% in. Samsung claimed a 31.3% share and Apple
had a 15.3% share, while LG and Lenovo controlled 4.8% and 4.5% of the market, respectively.
National Security or Protectionism?
 One way to counter this problem would be to bring in more foreign expertise, especially for
marketing, observers note. Although Huawei’s telecom equipment business is global, and about a
quarter of the company’s 140,000 employees are foreigners, the firm has no non-Chinese on its
board of directors or in other senior posts. “We are still new in terms of international expansion,
which began 16 years ago,” Sykes states.

 Huawei is “like a lot of other Chinese smartphone companies, trying to figure out how
to go from the cheap mass market to having premium products, too.”- Benjamin
Caventer
Not all analysts agree on the importance of having non-Chinese top executives. “I think Huawei
is a real global company because it has spent a lot of time and money on research and
development,” notes Ryoji Nakagawa, a professor at Ritsumeikan University in Kyoto.
They are one of top companies in terms of applied new patents. Most of Toyota’s board of
directors is Japanese and there are mostly Koreans with Samsung. If you say that you have to have
multinational top management to be a global company, Toyota and Samsung are not global
companies.
Huawei’s identity is something like a split personality, says Cavender. On the IT infrastructure
side, for companies building networks or storing data, people know Huawei, he notes. “But if you
are a consumer, you would not think of it as a global company, mainly because of what they are
doing with their consumer products, since they are much stronger in China than in other markets.”
Gaining a foothold in the all-important U.S. consumer goods market could help Huawei
surmount its difficulties with selling telecom equipment. “Once they are accepted more as a
consumer brand, it will be much more difficult for the U.S. Congress or anybody to say Huawei
should not be here, or they should not be doing this here or they cannot have this contract, because
people will look at them as being more like Sony, Samsung, Apple or another consumer electronics
company,” Cavender points out.
The company’s most damaging setback came in 2012, when a U.S. House Intelligence
Committee report encouraged U.S. companies not to partner with Huawei. Chairman Mike Rogers,
a Republican from Michigan, cited serious concerns about Huawei and ZTE, another telecom
equipment company based in southern China, and their alleged connections to the Chinese
government. Some U.S. lawmakers called Huawei a potential national security threat and
recommended that U.S. telecom carriers avoid using the Chinese firm’s equipment. “They are in
the communications industry. [Information technology] is always very sensitive, and [Huawei]
lacks transparency,” says Wharton management professor Marshall Meyer.
Huawei has made no secret that its founder and CEO, Ren Zhengfei, was a former People’s
Liberation Army (PLA) official. “He was a construction engineer with no military rank and he was
in the PLA for nine years, from 1978 to 1983,” explains Sykes. “The PLA disbanded the
engineering core, so he was laid off. He has never since had any connection with the PLA.” Given
the military service records of other prominent CEOs, Sykes notes that the concerns over Ren’s
background appear to be a “double standard.” Tomoo Marukawa, a professor at the Institute of
Social Sciences at Tokyo University, agrees. “I think that the U.S. uses the fact that CEO Ren had
military experience as a security concern is groundless. South Korea has a draft system, and if you
applied the same logic, all South Korean companies could have security issues,” adds Marukawa,
a Chinese industry and economics specialist.
Sykes says the issue with Huawei is more one of politics and fear of rising Chinese power. “We
are still present in the U.S. and we are available and willing to serve telecommunication companies
in the U.S.,” Sykes states. “We are present in 140 countries in the world and serve 500 telecom
operators. We have been in business for 26 years and there has never been a security issue of any
kind regarding our telecom equipment. The challenges we face about the network equipment
business in the U.S. is about trade protectionism and geopolitics. It is not about our equipment
because we have an impeccable track record.”
Bad Timing
Against the background of recent reports of U.S. National Security Agency (NSA) surveillance
through telecom networks around the globe, the Huawei issue appears overblown, experts and
analysts say.

 “It is still a challenge to become a major consumer brand. It may take years, but do

not underestimate Huawei.”–Duncan Clark

“The NSA case weakened the case against Huawei somewhat,” Clark notes. “I do not think
it is a network infrastructure company we need to worry about, but it’s more about the network
operators. I think it is harder to make a case for a global conspiracy about Huawei.”
If anything, attention should be focused on Internet companies or telephone or satellite operators,
he adds. “That is where you tap. For me it would be like complaining to the pipe maker about
water pressure.”
According to Cavender, firms like Huawei — whether or not they had ties with the government
or the PLA — “get dragged into [politics] because they are high profile tech companies.” Huawei’s
decision to locate its U.S. headquarters next to an American naval base was poorly considered,
though, he says. “It is more like a timing and perception issue. The timing was bad because China
and the U.S. were already having a back-and-forth about other topics, so they were kind caught in
the middle.”
Even if the security issues are disregarded, though, Huawei faces other challenges in selling
to the U.S. The company’s Chinese share-ownership program, available to the 74,000 Chinese
nationals employed at Huawei, could be viewed as an unfair trade advantage in that it helps keep
wage costs low, says Meyer. “Why are their costs so low and their prices so competitive?” he asks.
“They borrow money from the China Development Bank and other Chinese banks, but they borrow
from the CDB heavily. The combination of the two gives them access to low-cost funds and their
cash cost of operations is well below those of their competitors.”
 Huawei officials contest that view, saying the firm’s wage regime and borrowing conditions
differ little from other major companies. Huawei’s share options program is in addition to wages
and bonuses, which are competitive, notes Sykes. Employees have to buy the shares, he adds. As
for financing, 25 of the 35 banks Huawei works with are located outside of China, and the company
also funnels profit back into research and development. “We take normal commercial loans from
the biggest banks in the world, on normal payment terms and at the normal Libor rate,” Sykes
states. “We also take loans from Chinese banks but they are normal loans at normal rates; nothing
special, no advantage.”
While it struggles to expand its business in the U.S., Huawei is bound to continue growing
quickly both in emerging markets and developed countries, Cavender says. In the developing
world, telecom networks remain a big seller, while Huawei will keep trying to sell network
solutions in Western Europe. Still, the company will also be pushing hard on the consumer side,
he says. “What we are going to see is a lot more aggressive product iterations. Whereas in the past
they did four or five new phones a year, they might increase that amount and have a faster
development cycle and focus on more premium products as well,” Cavender notes. “That is where
you will see a big push for consumer products in some of Asian counties, such as India, Vietnam,
Cambodia and Laos, and the U.S., Europe and the Middle East. That is where we are going to see
the big growth. It is possible to see 30% to 40% growth on the consumer side per year.”
To achieve that, though, Huawei needs to work on its marketing, Cavender says. “Both Apple
and Samsung can put together a very nice-looking package. They understand how to market to
consumers and they are able to develop not just hardware but also software.” Huawei’s experience
in China, where consumers are less focused on software because they often only use pirated
applications, puts the firm at a disadvantage in competing in that area, he adds. A bigger challenge
will be in achieving the sort of catchy, alluring designs that a company like Apple has cultivated
over many years.
Will Huawei be able to create dominant design products, which would change the existing concept
of the product?
2. Key products