Outgoing Strategy of Chinese Firms in Telecom Equipment Industry:  the Case of Huawei

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Contents. I. Introduction II. Outgoing of Telecom equipment makers in ChinaIII. Outgoing of HuaweiIV.Analysis and DiscussionV. Conclusion and Implications. I. Introduction. Background Boom of Chinese firms' outgoing - China is not just a magnet for FDI, but it is increasingly also a s

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Outgoing Strategy of Chinese Firms in Telecom Equipment Industry: the Case of Huawei

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1. Outgoing Strategy of Chinese Firms in Telecom Equipment Industry: the Case of Huawei Xiyou He Associate Professor School of Economics Fudan University, Shanghai April 19, 2007

2. Contents I. Introduction II. Outgoing of Telecom equipment makers in China III. Outgoing of Huawei IV.Analysis and Discussion V. Conclusion and Implications

3. I. Introduction Background Boom of Chinese firms’ outgoing - China is not just a magnet for FDI, but it is increasingly also a source of FDI (UNCAD, 2003). - After WTO access, outgoing of the Chinese firms emerged as a worldwide hot issue.

4. Questions: Why do Chinese firms internationalise with so remarkable step? How did these late comers achieve outstanding performance? Purpose: to analyze key factors to the typical Chinesefirms’ global performance and strategy in typical industry.

5. Method and scope: - Survey and Case study - Case of telecom equipment industry, focusing on Huawei. ? Huawei has been seen as one of the China's most dynamic and ambitious companies and one of a handful, alongside Haier in white goods, Lenovo in PC, TCL in TV and Baosteel in steel, whose names are starting to be heard around the world.

6. Dynamic Approaches on FDI ? Internationalization approach on MNCs (Johanson & Vahlne, 1977; 1990; Davidson, 1980) ? Sequential entry approach on FDI (Kugut, 1983; Chang, 1995) ?Subsidiary development school on subsidiary management (Birkinshaw & Hood, 1997; 1998a; Egelhoff, et al., 1998), ? Dynamic capabilities view of the firm (Grant, 1996; Pisano, 1994;Teece et al., 1997)

7. Conceptual Framework of Dynamic Capabilities in International Expansion ? An integrated approach articulating a dynamic capability perspective on int’l expansion (Luo, 2000b). ? dynamic capability: a MNC’s ability to create, deploy, and upgrade organizationally embedded and return-generating resources in pursuit of sustained competitive advantages in the global marketplace. ? dynamic capabilities require a strong base of established capabilities or resources (capability possession) as well as the ability to efficiently deploy these resources (capability deployment) and to continuously create bundles of new resources and knowledge (capability upgrading).

8. ? Capability possession - concerns a firm's established distinctive resources. - distinctive resources include strategic & organizational capabilities. - Strategic capabilities include technological & operational attributes. Managerial skills & international experience are two major elements of organizational capability. ? Capability deployment - involves both quantity & quality-based resource commitment & allocation. - realized effectively through aligning with environmental dynamics, configuring with organizational dynamics, capability transfer across borders. ? Capability upgrading - organizational learning during int’l expansion is a primary vehicle. - must translating learning into critical competence. - the process of this translation involves three stages: knowledge acquisition, knowledge sharing & knowledge utilization.

10. II. Outgoing of Chinese Firms in Telecom Equipment Industry

13. III. Outgoing of Huawei 3.1 Huawei Technology ? established in 1988 ? headquartered at Shenzhen, China ? CEO: Ren Zhengfei ? Specialized in fixed network, mobile network, optical network, data communications, and value-added services.

14. 3.2 Global rising and performance ? one of the leaders in switching, next generation network (NGN), integrated access network, DSLAM, and intelligent network. ? serves over 90 countries, as well as 22 of the world's top 50 operators. ? Contracted sales reached USD5.58 billion in 2004. ? Ratio of the overseas sales to the total sales was 40% in 2004, 50% in 2005 and will be over 70% in 2007 or 2008.

25. ? Successful experience in domestic market 1) Strategy: finding market niches in segmented markets ? Developing rural market by customer relationship’s cultivation ? Entering private network market by low pricing ? Entering city level market by comparative advantage Compared with foreign product, the price of Huawei’s C&C08 was lower, and compared with other indigenous products, such as HJD-04, the quality of Huawei’s C&C08 was higher.

26. 2) Process of catch-up in market share Before 1992 the Chinese market share in switches was dominated mainly by imported products. From 1993 to 1997 the switches market had being controlled by Sino-foreign JVs. After 1998 the indigenous firms became the main suppliers of switches. ? Huawei gradually became China’s largest makers of telecom equipment. Its main products, such as switches, IN (Intelligent Network), WLL (Wireless Local Loop), STP (Signaling Transfer Points), has possessed absolute advantage in Chinese domestic market.

32. Phase 2 : 1999-2001 made Huawei well known ? Marketing promotion purpose: let customers recognizes both of China and Huawei tools: two roads and two brochures Eastern Silk Road invite guests to visit China Beijing?Shanghai ? Shenzhen ? Hongkong or reverse Telecom experts, executives of telecom operators including the minister of Telecom in Russia. Eastern Expressway for European in 2004 Focusing on buyers’ understanding on products through testing and experiment.

33. two brochures Huawei in China and Global Huawei photos of beautiful scene, accident architecture and Huawei products are well printed to show products application home and abroad. post brochures abroad to make it more known tried to attend most of all telecom expos ? Huawei invited 1500 clients to attend the exhibition held in Hongkong in 2002.

34. Performance in phase 2 Customers withdrew their ideological obstacles of cooperation with Huawei. ? Huawei stepped into int’l market slowly. - Staffs settled down in host countries - More overseas offices were established. overseas revenue in 2001: ver USD 300 million. emerging markets, such as Russia, Thailand, HK, Singapore, India, Pakistan, Indonesia, Malaysia, Brazil, Egypt, Saudi Arabia, Nigeria, Kenya, Zimbabwe and Bulgaria, have become Huawei's major target markets and sales bases for expansion.

35. Expansion in Brazil scouted contracts from the rival “When we first saw the Chinese here, we did not believe they were prepared to provide good equipment.” - Sidonio Maia, head of network planning for Tele Norte Leste Participacoes SA, or Telemar, Brazil's largest telecom company. Huawei executives arrived in Brazil in 1999 and for two years gave frequent presentations and insisted Mr. Maia and other executives visit Huawei’s headquarter in China. Then in 2001, Telemar was impressed enough to give Huawei a try, awarding it a contract to provide Internet equipment for home-use. Today, Huawei provides 60% of such equipment for Brazilian company. This business used to be handled solely by Alcatel. Huawei is now on the short list of vendors to build Telemar’s new Internet-protocol backbone, a project central to how the company functions.

40. Global marketing network By 2004, 8 regional headquarters and 55 branch offices abroad 3-level customer service system: HQ, regional, local

41. 3.4 Robust R&D for global competitiveness improvement China-based cost-effective R&D is one of Huawei’s advantages. The company spares no investment in R&D. Even in the IT recession period, Huawei has been investing over 10% of its revenue into R&D.

42. Innovation Mechanism Transformation translating real demands into telecom technologies and solutions. transformed technology-driven ? customer requirements-driven products supplier ? total solutions supplier

43. Cooperation with MNCs for technological innovation Modes: joint venture or strategic alliance cooperated with TI, Motorola, Qualcomm, IBM, Infineon(to develop the 3G mobile phone platform), Intel, Agere, ADI, ALTERA, SUN, Microsoft, Oracle and NEC. ? cooperation speeds up Huawei’s response to the market, and helps the company draw up advanced technologies and management experience from a global perspective.

44. 3 joint ventures: Huawei 3Com, Shanghai COSMOBIC Technology and TD-SCDMA. Huawei 3Com - found on 17 November 2003 in Hangzhou China, where Huawei contributed low-end data communication technologies(51% shareholding) and 3Com contributed USD165 million (49% shareholding). - an enterprise networking company, which offers enterprises of all sizes and public sector organizations worldwide a full portfolio of IP-based networking solutions, including enterprise routers, switches, security, SOHO products, Voice/Video products and wireless LAN. ? As a result, Huawei set up and consummated the distribution system, and gained a rapid growth of the data communication service, which was forecast to increase by 100% in 2004. The joint venture enhanced Huawei's brand reputation in the world, accumulated experience for capital operation of the company, cultivated personnel, and initiated a new international cooperation pattern for the company.

45. Outward FDI for knowledge seeking: 4 R&D centers

46. Performance of Innovation gained independent IPRs in many fields and consolidated position - By 2004, Huawei has applied for 6500 patents, of which 1400 patents have been granted, and has participated with over 60 international standardization organizations such as ITU-T, ITU-R, ITU-D, IEEE SA, IETF and 3GPP, and became members of the ITU-T, ITU-R and ITU-D. - took part in national standardization work, and assumed some positions in national standardization organizations, e.g., UMTS/TD-SCDMA group leader, 3G interconnection & interworking test team leader - took charge of formulating national industrial standards such as UMTS Pilot Network Series Regulations and NGN Framework Regulations.

47.  transformed management system since 1997 - IBM, the Hay Group, Towers Perrin, PwC, and FhG served Huawei to transform management systems on corporate, human resources, employee stock option plan, finance and quality control.

48. 4.1 Government deregulation and promotion on outgoing “outgoing” strategy issued in 2000 Chinese TNCs promotion strategy at 3rd conference of CCP’s 16th congress in 2003. ? overseas expansion increased an increasing number of Chinese firms are now among the largest TNCs from developing countries, in terms of foreign assets. In 1994, only seven Chinese enterprises were among the top 50 TNCs from developing economies and only one of them had foreign assets above USD2 billion. By 2001, 12 Chinese TNCs had made it into the top 50 with as many as six boasting foreign assets of above USD2 billion.

49. ? in particular to secure the supply of resources to meet the growing demand at home and transferring matured technologies in which Chinese firms have a comparative advantage (e.g. electronics, textile and garment processing industries). SMEs outgoing also encouraged Provincial government,such as Guangdong and Shanghai have also actively encouraged outgoing

50. Massive growth in home country went abroad for market and technology. Exporting to FDI on production for market expansion overseas R&D centers for knowledge seeking.

51. Strategic factors: Lower price - came from low cost for domestic R&D and production Competitive technology - came from multi robust on R&D FDI on knowledge seeking strategic alliance and JVs with leading players. learned from Japanese mistakes in the 1980s Managerial factors: Experience duplicating for international marketing Management system transformation  

52. V. Conclusion Major findings: two key factors to Huawei’s global performance lower price: Increasing competition in telecom service market press operators prefer to more cheaper products. competitive technology: Origins: Robust R&D - knowledge seeking through outward FDI - strategic alliance and joint ventures with leading players.

53. Future study In-depth study on Huawei’s expansion and technological innovation process and strategy Comparison between Chinese companies and companies from advanced countries Comparison between Huawei and other Chinese companies

54. Thank you for your attention!

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