Friday, January 10, 2014

How the leading Chinese Telecommunications Companies acquire innovation capability

By EKPUNOBI Victor, UWHUMVAKPOR Uvie Larry, and CHIMEZIE Clifford C.

How did Huawei, ZTE, and all the other well-known telecomms companies achieve what they did?  We will consider the companies along four dimensions: company aspiration, marketing, innovation, and management. 
Introduction: ABOUT HUAWEI
Huawei is a Chinese multinational networking and telecommunications equipment and services company headquartered in Shenzhen, Guangdong. It is the largest telecommunications equipment maker in the world, having overtaken Ericsson in 2012.
Huawei was founded in 1988 by ex-military officer Ren Zhengfei and formed as a private company owned by its employees. Its core missions are building telecommunications networks; providing operational and consulting services and equipment to enterprises inside and outside of China; and manufacturing communications devices for the consumer market. Huawei has over 140,000 employees, around 46% of whom are engaged in research and development (R&D). It has 20 R&D institutes in countries including China, the United States,  Germany, Sweden, Ireland, India,Russia, and Turkey,  and in 2011 invested around US$3.74 billion in R&D.
In 2010, Huawei recorded profit of 23.8 billion CNY (3.7 billion USD). Its products and services have been deployed in more than 140 countries and it currently serves 45 of the world's 50 largest telecoms operators.
Introduction: ABOUT ZTE
ZTE Corporation (formerly Zhongxing Telecommunication Equipment Corporation) is a Chinese multinational telecommunications equipment and systems company headquartered in Shenzhen, China. It is the world's fourth-largest mobile phone manufacturer measured by 2012 unit sales[2] and the world's fifth-largest telecoms equipment maker measured by 2011 revenues (after Ericsson,Huawei, Alcatel-Lucent and Nokia Siemens Networks).[3]
ZTE's core products are wireless, exchange, access, optical transmission and data telecommunications gear; mobile phones;[4] and telecommunications software.[5] It also offers products that provide value-added services,[6] such as video on demand and streaming media.[7] ZTE primarily sells products under its own name but it is also an OEM, manufacturing some products which retail under other brand names.[8]
ZTE was founded in 1985 by a group of state-owned enterprises associated with China's Ministry of Aerospace.
1.    Aspiration level
 Aspiration level is a soft index which is difficult to measure—not like revenue or investment level which can be expressed clearly by numbers.

Huawei’s aspiration level leads the pack.  This company has invested heavily in research and development, as seen in the high number of patent applications – number 1 in 2009.  Ren Zhenfei, founder of Huawei, expects that Huawei’s development in future can go beyond the dependence on single competition element including technology, talent and capital; no longer rely on blind low-cost production. He expects Huawei to become a business organization with high effectiveness, and eventually grows into an international enterprise.

By comparison, ZTE’s culture is pragmatic, controllable, invisible and tangible. Like Huawei, ZTE’s investment to R&D is also about 10%, but they are more cautious about entering new areas.  Before an obvious market potential is visible, they are extremely cautious to present to market, and every further step has to be verified by visible market potential. We conclude it has a moderate aspiration level, which is also heavily rooted in the company’s history and culture.

At Datang, the high aspiration level is fulfilled through the government’s financial support, not though market. Quite a large part of the research funding of Datang is from the central government’s budget. This kind of aspiration level is not sustainable, because it is sustained largely by external funding support.

Eastcom suffers from lack of sufficient aspiration level. From the very beginning, it was an OEM factory and more than ten years later it is still an OEM factory. Even employees at the company despise its overwhelming interest in making money and shortage of pursuit of core competency.

When UTstar gained sudden ascendancy, many people envied its success.  But it declined just as fast, and many think it’s because it failed to build core competency and core product. This opportunism, coupled with a disordered management, led to its short-term success story. 

2.    Marketing Capability
Marketing capability simply means market judgment.
Huawei and ZTE go together on this one. They are both very good at marketing, in fact they are overwhelmingly skilled. We know that Huawei and ZTE are persistent in R&D investment, but they are also very careful in investing in R&D: every decision has to be verified by market demand, confirmed by market potential. The typical example is their strategy of “encircled cities from countryside”.

Around the early 1990s, the two companies perceived that although the Chinese mobile market was mostly occupied by multinationals, these big companies had no time to take care rural market and marginal region. Just because these niche markets were ignored by the big competitors, or more exactly were despised as lower end market by the MNC, Huawei and ZTE decided to develop self-owned product to meet the demand for rural telephony and marginal network. The breakthrough started from these niche markets and then based on the small breakthrough, they nibbled the rest market little by little.

With regard to the two companies Eastcom and UTstar, we have to admire their excellent market view. Eastcom was a very small telecom equipment manufacture before the early of 1990s, but they’re aware the tendency when technology evolves from fixed line to mobile, and grasped the opportunity by first working as OEM and agent for Motorola.

3.    Learning And Innovation
Learning and innovation are very crucial in all telecommunication industries, and depend heavily on R&D i.e. Research and Development. All companies willing to make progress always have a group of people or a department working on the research and development. The future of the company might not be certain with the absence of R&D.
The R&D in telecommunications can be divided into three layers. The first is the physical layer of research; they are the basic algorithm research which can make revolutionary change in telecom industry. The second layer is the software development, for example chip design. The third layer is the application development.

The latter two layers demand large amount of brain labor to test many changes of software. Whereas the high cost of R&D labour in developed countries limits their activities, Huawei takes advantage of the abundant labor resource, continuously investing in the second and third layers of development by sustained testing and adjustment, and finally realizing technology improvement again and again. 

Huawei’s hi-tech enterprise is termed “knowledge-labor intensive” by the Chinese.  Knowledge-labor refers to that labor who grasps professional knowledge. The strategy fully takes advantage of the human resource of high-tech industry in China, while also avoiding the most challenging technologies, since one has to admit that the current Chinese research level still cannot overcome the core technology.

Generally speaking, the observation and discussion with Huawei and ZTE tell me that their catch-up in technology learning is totally relying on their own development. The most common method is that they import foreign technology or product, then deploy large amount of engineers to imitate and modify. This is called “technology-borrower.”

Management capability
Management capability is heavily correlated with innovation capability. Successful R&D is absolutely not simply adding up talent and capital, neither is it an issue that can be solved by FDI. An effective and sustainable R&D demands continuous catch-up in technology, from the beginning it requires an accurate market sense, then it is going to involve an organization’s comprehensive decision making capability, finally follow-up project management and logistics management are also necessary.  Conversely, poor management will eventually neglect talent and waste capital.

Huawei learns a lot from western countries.  From 1992, Ren visited companies in the US, European countries and Japan, including Alcatel, Siemens and other leading companies. After visiting Hughs, IBM, Bell Innovations and HP in 1997, he proposed a reform plan after deliberate consideration. The proposal laid foundation for Huawei’s global operation strategy. The proposal presented by Ren was not based on the “Chinese way”, but “integrating global resource into Huawei’s network” based on global perspective.

From 1998, Huawei decided to focus on IBM as its learning model and strategic partner in the path to become an international enterprise. Huawei firstly defined its transformation from telecom equipment manufacturer to telecom total solution provider and service provider, in order to fully take advantage of full scale products line.

In the following five years, Huawei invited 50 IBM management consultants to work on the Huawei project in order to improve internal management and business procedure, by investment 50 million USD. In addition, Huawei set up a 300-employee management engineering department to handle implementation of IBM’s recommendations.

 ZTE: There are many studies about Huawei’s management, but few about ZTE. One of the reasons is that Huawei’s “wolf” culture is certainly attention-grabbing, but the “golden mean” of bull culture from ZTE is much less attractive.

Most of the ZTE employees who have been working for them are still with them since the past ten years. ZTE always steadily occupies and expands in the market. In 2000, when IT industry was suffering winter, ZTE kept it as another high speed year; from 2001 to 2003, when other Chinese companies including Huawei tried to freeze hiring or even laid off many people, ZTE still kept hiring many new employees. This shows a very high management capability.

Huawei and ZTE are quite successful when facing management transformation.  Huawei applies the western system which manages people by a regulation and proceeding. ZTE follows a Chinese Confucianism management model to manage people by relationship and bond. Both of these two systems make it possible to motivate all the people in the company to work for the enterprise by combined efforts, but not get collapse for their own interest.  Both have created a management system which is supported or accepted by most of their employees.

From the case of UTstar, we find that although they bought a handful of foreign companies, they failed to transform the external knowledge into their core competency. Companies like UTstar remained on the surface in their adoption of various technologies; they did not manage to absorb and make these purchased technologies their own. It is not because of wisdom or foolishness of the company, it is because of the management quality.

Eastcom expected FDI could bring technology improvement, and reaped tragic results. 

All those other companies, like Dragon, Huawei, and ZTE, that ever acquired core technologies mostly depended on self development.  These companies started when the Chinese market just opened, in the background of limited information and knowledge from foreign countries, they depended on their own capability and university resources to develop their own technology.

Based on the 2011 paper:  A COMPARISON STUDY OF THE CHINESE TELECOM INDUSTRY, by Hui Yan, Aalborg University, Denmark. 

The three authors are undergraduate students in the Department of Electrical Engineering at Bells University of Technology.  They studied Hui Yan’s paper and prepared this summary under my supervision  for the course CEN 302: Introduction to ICT.  - Tosin Otitoju

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