“THE crisis, decline and even bankruptcy of Huawei are to come. We are in spring, but winter is very close. Don't forget that the Titanic set sail in the atmosphere of hurrah.” Few bosses would be as alarmist as Ren Zhengfei, but he spoke those words in 2000 at the height of the technology bubble. He rightly feared it would pop and that it might destroy the firm he founded. Yet Huawei quickly bounced back and in 2010 became the world's second-biggest maker of telecoms equipment, with annual sales of $28 billion—not far behind the leader, Ericsson, with $30 billion in sales. This year, Huawei, which employs 110,000 people, may overtake the Swedish champion.
For Mr Ren there is still a long way to go. Within the next ten years Huawei wants to become not only a technology leader but also a $100 billion company playing in the same league as Western IT giants such as Cisco, HP and IBM.
Whether China's brightest technology star makes this transition has wider implications. It will be a test of how far Chinese companies are prepared to play the Western game to become global brands. It will also reveal how willing the West is to let a big Chinese player in—and for Huawei that is a particular problem.
Ask a politician in Washington, DC, about Huawei and the chances are that he will respond with a description of a sinister organisation: a company that is supposedly run like a military operation, which does not respect others' intellectual property and whose products are heavily subsidised by cheap loans from the China Development Bank. And, worst of all, Mr Ren once served in the People's Liberation Army (PLA).
Despite much investment and lobbying in America, the idea that Huawei is a PLA front and that Chinese spooks use its gear to listen in and even remotely control things continues to dog the company. As a result, Huawei remains confined to the periphery of America's telecoms market. Last November, when Sprint Nextel, America's third-largest mobile carrier, considered awarding a multi-billion-dollar contract to Huawei, the American firm's boss is said to have received a call from Washington, DC, and eventually opted for another vendor. In February the American government even forced Huawei to undo a minor deal: the $2m purchase of patents from 3Leaf, a bankrupt Silicon Valley start-up.
Huawei's sprawling campus in Shenzhen, across the border from Hong Kong, presents a rather different image. The multi-storey glass buildings could be in Silicon Valley. Tired faces in the lifts suggest long working hours, although the bedrolls next to desks are used for a nap during the lunch break rather than for nights at the office. At the campus's centre sits “the tower of ten thousand engineers”, whose efforts can be admired in Huawei's glitzy exhibition centre. The firm pioneered the SingleRAN, a base station for mobile networks programmable for different wireless standards. It was also the first to make easy-to-use dongles that plug into laptops to connect to the internet wirelessly.
But in contrast to Silicon Valley, laptops are nowhere to be seen in Huawei's huge canteen. Leaving the office with a computer involves tiresome security procedures—in case it somehow finds its way to the firm's crosstown Chinese rival, ZTE, which Huawei recently sued over patent and trademark violations. In fact, Huawei has as much intellectual property to protect as any Western technology giant, says Song Liuping, the firm's chief legal officer. By the end of 2010 it had been awarded nearly 18,000 patents, including 3,000 overseas ones.
Other suspicions about Huawei are more difficult to quieten. In an open letter to the American government after the failed 3Leaf deal, Ken Hu, Huawei's deputy chairman, confirmed that some customers do benefit from loans from Chinese banks, but he gave little detail. Huawei has tried to allay fears about security by setting up outfits that allow customers and governments to examine its equipment. The approach has not worked well in America, but seems to be accepted in Britain, where the firm in November opened a “Cyber Security Evaluation Centre” to openly test equipment to show it meets security standards.
I did it Huawei
Still, Huawei can feel a bit like a corporate version of the Chinese Communist Party. Mr Ren is a charismatic leader. He was born in 1944, his parents were teachers and he studied civil engineering before joining the PLA. In 1987, after the PLA disbanded its engineers corps, Mr Ren started Huawei with 21,000 yuan (then $4,400) of his own money. He first imported telephone switches from Hong Kong, then decided to build his own products and spend on average 10% of revenues on R&D.
Mr Ren's mission is to help China develop its own telecoms technology (Huawei means both “China can” and “splendid act”). To achieve this, he has taken more than one page from Chairman Mao, says Liu Shengjun, deputy director of the China Europe International Business School in Shanghai. “Using the countryside to encircle and finally capture the cities”, is one of Mr Ren's business strategies. Finding it tough to sell to carriers in China's big coastal cities, where state-owned equipment makers and foreign vendors reigned supreme, Huawei first went for the provinces. Offering technically advanced but cheaper equipment, and deploying armies of salespeople, the firm quickly managed to persuade local operators to buy its products. It then moved on from there.
The firm repeated the trick abroad. In Europe, for instance, the Russian government was the first customer. Contracts in eastern Europe followed, with cash-strapped operators welcoming a firm that charged at least 25% less than competitors. And the mobile miracle in Africa might not have happened so quickly without Huawei's cheap and robust equipment.
Another tactic Mr Ren copied from Mao is ideological education. In the early years, he had employees sing revolutionary songs. Even today, the thousands of new recruits hired every year undergo a six-month course that includes two weeks of cultural induction on the Shenzhen campus and an internship on the ground, for instance helping to set up base stations. This is when new Huaweians are supposed to acquire the “wolf spirit” which is said to drive the firm on.
Yet in more than one way, Huawei differs from other Chinese firms. It avoids speculative investments in property and the stockmarket. It puts customers first and develops new products in co-operation with network operators (although it sometimes also makes offers that turn out too good to be true). And Mr Ren does not hesitate to ask foreign experts for help. After a trip to America in the late 1990s, he decided better management systems were needed and ever since has spent up to 3% of revenues buying advice from Western companies like IBM.
In Europe Huawei has now clearly reached the cities. In May the firm won its first order for mobile network equipment in Britain from Everything Everywhere, a joint venture of Orange and T-Mobile. Richard Windsor of Nomura, an investment bank, predicts the market for wireless networks will become essentially a game of two players: a technology leader, Ericsson, and a cost leader, Huawei. “Operators need a cost leader to keep Ericsson honest,” says Mr Windsor.
This leaves plenty to do for Mr Ren, now 66, before passing on his command. Even without its various overseas hurdles, maintaining Huawei's rapid rate of growth (see chart) is the firm's most pressing challenge, argues Stéphane Téral of Infonetics Research, a market-research firm.
The reason is that the market for telecoms equipment is shifting. In recent years, most investment has gone into building networks, particularly the wireless kind. In this area, Huawei could deliver exactly what was needed: well-designed cheap equipment. Yet increasingly, as in most IT markets, it is software and services where money is being made. At Ericsson, services already generate a third of revenues, compared with half that proportion at Huawei.
In software and services it will be harder for Huawei to catch up than it was in hardware, expects Dan Hays of PRTM, a consultancy. Language and cultural differences can be big barriers to understanding the needs of foreign customers. A highly disciplined and hierarchical organisation like Huawei may be very good at optimising and cleverly combining bits of technology, but less so at providing high-end services and writing cutting-edge software.
No peeping inside
The biggest cultural barrier to Huawei's continued growth, at least in the West, may be its lack of transparency. As customers come to rely more and more on the firm, they will want to know a lot about its internal workings, predicts Dan Breznitz, a professor at the Georgia Institute of Technology and co-author of “Run of the Red Queen”, a book on innovation in China. But trying to understand Huawei is a bit like Vatican-watching.
Who really controls Huawei is still an unanswered question. The firm says that Mr Ren holds only 1.42% of the stock and that the rest is in the hands of the employees who own Huawei's holding company. These pool their interests in a shareholders' union which is run by an elected committee. But the firm does not disclose much about this body, or who sits on it. Some say that the power rests with members of Mr Ren's family. Others argue that the place is actually run by a “shadow structure” of the Communist Party.
An even bigger mystery is Mr Ren himself, who must be the most reclusive boss in the technology industry. He has never given a press interview—proof, some say, of his great self-discipline. The most detailed biography Huawei has released is some 200 words in its open letter to the American government.
To its credit, Huawei has started to address both its strategy and cultural problems. As for its strategy, the firm says it wants to enter the “enterprise market”, selling networking equipment and other types of hardware to companies other than telecoms operators. And Huawei plans to move fast, says William Xu, the president of the newly founded unit charged with this task: by the end of 2011 it will already boast 10,000 employees.
Huawei also intends to take a big part of the market in data centres for cloud-computing services and in smartphones. If it succeeds with smartphones, Huawei could become a household name. It wants to offer models costing between $70 and $200—the “golden range”, in the words of Victor Xu, who leads the efforts to market Huawei's devices. By 2013 he wants Huawei to be among the world's top five mobile-phone makers.
These moves play to Huawei's strengths, but adapting its culture may be more difficult. Like its rivals the firm has spread its research activities around the world; it now operates 20 R&D centres globally. It has also hired more Westerners, in particular to work for its services business. But Shenzhen is still the centre of Huawei's universe and non-Chinese employees remain a small minority there. None have made it into the inner-management sanctum.
Most importantly, efforts to become more transparent have not got very far. In April its annual report, which is audited by KPMG, for the first time named the directors of the firm's boards and even gave short biographies. But it failed to mention that one member is Mr Ren's daughter and another his brother—a fact that the firm confirmed only later, adding that both have been senior managers for some time.
Nor does it help that, as far as Mr Ren's succession is concerned, the firm appears to be moving backwards. Most observers expected that a member of the tight circle of top executives would eventually take the helm, most likely Sun Yafang, who chairs the board. However, in October it was reported that Mr Ren was trying to promote family members and has plans to position his son, Ren Ping, to become his successor. Spokesmen deny that there are any such plans, but it would not be the first time in China that rumours have been launched to test the waters.
The move that would create true transparency seems to be the one that is still out of the question: taking at least part of Huawei public. Being a listed company would distract management and limit the freedom to make decisions, company officials explain. Yet, observes Duncan Clark of BDA, a telecoms consultancy in Beijing: “The fact that they haven't gone public is feeding the suspicions.”
Huawei appears to want to have it both ways: remaining a culturally Chinese company, perhaps even family-run, while competing with publicly traded Western giants. This is unlikely to work. One way or another, Huawei needs to become less secretive if its long slog is to reach the destination that Mr Ren is aiming for.