The Management Transformation of Huawei: From Humble Beginnings to Global Leadership 1108426433, 9781108426435

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The Management Transformation of Huawei Huawei has become China’s most prominent multinational company and a leader in the ICT sector. Given unprecedented access to the company, the authors of this book examine the management transformation of Huawei from its inception in 1987 until 2019, observing in detail not only the creation of its organizational routines but also the breaking of routines across most major functional areas: management, product development, HR, supply chain, finance, R&D, intellectual property, and international business. “Dynamic capabilities” are central to theories of competitive advantage and this book highlights Huawei as an ideal case study for the successful implementation of change routines and change-supporting values. The chapters cover all the major change initiatives the firm has undertaken since 1996 to import best practices from the west, with the help of consultants. The insights presented in the book will be particularly interesting for academics in the field of strategy, management, and business history.   is the professor of Innovation and Strategic Management, School of Management, Zhejiang University. He has received the title of Chang Jiang Scholar Professor from the Ministry of Education, China, for his outstanding achievements in innovation and entrepreneurship research and education.    is the professor of Strategic Management and Director of the Institute for Management and Strategy, University of St. Gallen. He is the author of Knowledge and Competitive Advantage: The Coevolution of Firms, Technology and National Institutions (Cambridge University Press, 2003), which won the International Schumpeter Prize, and co-editor of China's Innovation Challenge (Cambridge University Press, 2016). He is a deputy editor of Management and Organization.

  is a professor, head of the Department of Innovation, Entrepreneurship and Strategy, and co-director of the Institute for Intellectual Property Management at the School of Management, Zhejiang University. He is also a member of the advisory boards for the Research Center for Technological Innovation at Tsinghua University, the CIPRUN Intellectual Property Management Research Center at the University of Electronic Science and Technology of China, and the Asia Pacific Innovation Conference. He is a senior editor of Management and Organization Review and a member of the editorial boards of several other academic journals.   is Professor of Innovation Management and Strategy, and vice-chairman of the Professor Committee, at the School of Management, Zhejiang University. He is the deputy director of the Joint Research Center for Global Manufacturing and Innovation Management, at Cambridge University and Zhejiang University.

The Management Transformation of Huawei From Humble Beginnings to Global Leadership   Zhejiang University

   University of St. Gallen

  Zhejiang University

  Zhejiang University

University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781108426435 DOI: 10.1017/9781108550987 © Xiaobo Wu, Johann Peter Murmann, Can Huang, and Bin Guo 2020 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2020 Printed in the United Kingdom by TJ International Ltd. Padstow Cornwall A catalogue record for this publication is available from the British Library. Library of Congress Cataloging-in-Publication Data Names: Wu, Xiaobo, 1960– author. | Murmann, Johann Peter, 1967– author. | Huang, Can, author. | Guo, Bin, 1971– author. Title: The management transformation of Huawei : from humble beginnings to global leadership / [by] Xiaobo Wu, Zhejiang University, China, Johann Peter Murmann, University of St. Gallen, Can Huang, Zhejiang University, China, Bin Guo, Zhejiang University, China. Description: Cambridge, United Kingdom ; New York, NY : Cambridge University Press, 2020. | Includes bibliographical references and index. Identifiers: LCCN 2019040751 (print) | LCCN 2019040752 (ebook) | ISBN 9781108426435 (hardback) | ISBN 9781108445146 (paperback) | ISBN 9781108550987 (epub) Subjects: LCSH: Hua wei ji shu you xian gong si–History. | Telecommunication– Management–China. | International business enterprises–China. Classification: LCC HE8430.H83 W89 2020 (print) | LCC HE8430.H83 (ebook) | DDC 338.8/872139167–dc23 LC record available at https://lccn.loc.gov/2019040751 LC ebook record available at https://lccn.loc.gov/2019040752 ISBN 978-1-108-42643-5 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

Contents

List of Figures List of Tables List of Contributors Preface

page vii x xi xiii

  1

The Management Transformation of Huawei: An Overview

1

   Commentary: Arie Y. Lewin, Liisa Välikangas, and Ying Zhang

2

52

The Executive Management Team and Organizational Change: A Routinized Transformation Perspective

71

 ,  ,    Commentary: Jean Chen

3

107

Transforming Product Development at Huawei: The IPD Initiative

110

      Commentary: Jaeyong Song

4

133

Huawei’s Transformation of Supply Chain Management 136  ,  ,   

5

Commentary: Yongjiang Shi

167

Financial Management Transformation in Huawei     

171

Commentary: Ram Mudambi

206

v

vi 

6

The Transformation of Huawei’s HR System

209

     

7

8

Commentary: Katherine R. Xin

238

Huawei’s Internationalization Journey  () ,  ,   

244

Commentary: Carl F. Fey

286

Huawei’s R&D Management Transformation

292

 ,  ,   ,    Commentary: Frans Greidanus

9

344

Huawei’s Intellectual Property Management Transformation   ,  ,

347

   10 The Management Transformation of Huawei: Concluding Thoughts from a Comparative Perspective   

381

Appendix A Number of Employees and Sales, 1987–2018

411

Appendix B List of Presentations at Ruihua Institute of Innovation Management, Zhejiang University

413

Appendix C Interviews Conducted for the Book

419

Appendix D The Huawei Basic Law (1998)

420

Index

451

Figures

1.1

Sales growth of Huawei, ZTE, Cisco, and Ericsson since 1987 (in million USD)

1.2

and the timing of major transformation initiatives 1.3 1.4

page 7

Huawei’s revenues and employees, 1987–2018, Huawei’s major transformation initiatives

9 43

Functional interdependence in transformation initiatives

44

A1.1

CEO influence on organizational design and strategy

55

2.1

The three-level transformation team

75

2.2

The matrix structure in 2009

91

2.3

The dual-identity of the Executive Committee in 2011

3.1

The product development cycle of Huawei from 2003 to 2007

3.2

117

The product failure rate of Huawei from 2001 to 2006

3.3

94

117

The simple version of the cross-functional team structure in Huawei

120

4.1

Supply chain processes based on the SCOR model

145

4.2

Integrative IT system in Huawei

148

4.3

Supply chain management department in Huawei

151

4.4

The “cell division” method

157

4.5

Global supply chain of Huawei

158

4.6

Huawei global supply chain: configuration mapping

170

5.1

Operating profit margin of Huawei 2000–2006

183

5.2

The relationship of four teams in IFS

193

7.1

The trend in overseas sales and total sales

247

7.2

Huawei’s internationalization process

248

7.3

The project-based “Iron Triangle”

263 vii

viii    7.4

The support system: the system department-based “Iron Triangle,” the representative office and the regional department (DP: department)

8.1

264

The five stages of Huawei’s R&D management transformation

293

8.2

Theoretic framework for transformation management

295

8.3

Huawei organizational structure in 1992

304

8.4

Huawei’s organizational structure after the transformation of the digital unit

307

8.5

Structure of the central R&D department in 1995

311

8.6

Matrix management in the central R&D department

316

8.7

New matrix management in the IPD system

326

8.8

The six phases of R&D in IPD

327

8.9

Huawei’s sales from 2002 to 2007

332

8.10

Main international research centers

333

9.1

Total R&D Investment of Huawei, 2004–2018 (in million USD)

9.2

348

Yearly number of Chinese patent applications by Huawei and ZTE, 1985–2013

9.3

Yearly number of US patent applications by Huawei

9.4

Yearly number of patent applications in the

and key competitors, 1980–2013

353 354

European Patent Office by Huawei and key competitors, 1980–2013 9.5

Number of employees at ZTE and Huawei, 2010–2018

9.6

9.8 9.9

356

3G W-CDMA number and share standard essential patents

9.7

355

357

Number and share of declared essential patents for the LTE standard (as of 2013)

358

Number of contributions to the LTE (4G) standard

359

Number of Huawei-involved intellectual property cases

373

   ix 10.1

Share of foreign sales of Huawei and Alibaba (2011–2018)

10.2

Share of economic activity in Chinese manufacturing and utility sectors (2000–2017)

10.3

10.5

393

Sales growth of Huawei and Datang since 1988 (in million USD)

10.4

387

393

Combination, reconfiguration, and asset protection skills

397

Transformation/reconfiguration skills

401

Tables

A1.1 2.1

Origins of internal requisite variety at Huawei The history of Huawei’s transformation and its consultants

79

2.2

Three stages of Huawei’s leadership structure

87

5.1

Days of sales outstanding (DSO) and inventory turnover days (ITO) of Huawei, 2008–2015

195

5.2

Huawei’s acquisitions after 2011

199

6.1

Main challenges for Huawei’s HR system and changes made (1987–2016)

234

7.1

Some examples of cooperation with partners

274

8.1

Content summary of three R&D management transformations

8.2 9.1

336

Summary of characteristics of four steps in each transformation

339

Number of essential LTE (4G) patents by firm and total royalty rates

350

9.2

Top 5G SEP owners

360

9.3

Top companies making technical contributions to the 5G standard

10.1

361

Change meta routines at Huawei and their supporting values

x

page 58

399

Contributors

Xiaoran Chang China Jiliang University Jean Chen University of Macau Xiao Chen Zhejiang University Carl F. Fey Aalto University Frans Greidanus Zhejiang University Bin Guo Zhejiang University Can Huang Zhejiang University Arie Y. Lewin Duke University Lanhua Li Zhejiang University Wen (Helena) Li University of Technology Sydney Ying Li Shandong University Ram Mudambi Temple University Johann Peter Murmann University of St. Gallen Yongyi Shou Zhejiang University Yongjiang Shi Cambridge University xi

xii    Jaeyong Song Seoul National University Liisa Välikangas Danish Technical University & Hanken School of Economics Dong Wu Zhejiang University Xiaobo Wu Zhejiang University Katherine R. Xin China Europe International Business School (CEIBS) Hongqi Xu Zhejiang University Haoyu Zhang Zhejiang University Ying Zhang Erasmus University Zihan Zhang Zhejiang University Ziyi Zhao Hangzhou Normal University

Preface

Ever since Industrial Civilization arose in the eighteenth century, enterprises based on the factory system have been the main players in the economic arena for most countries. In China, Jiangnan Manufacturing Bureau (the term bureau here, “ju” in Chinese, was used as part of the name for thirty-plus factories) was established in September 1865, and since then the country undertook more than 150 years of experimentation: the Self-Strengthening Movement (1861–1895), National Capitalism, Compradors, Public and Private Joint Ventures, 156 Soviet-Aided Projects and Soviet Experts, the Great Iron and Steel Production Movement, the Great Leap Forward Movement, The Charter of the Anshan Iron and Steel Company, Learning from Daqing in Industry Development, the Self-Reliance Plan, and so on. It is a fact that China has never stopped learning from the developed world – the United Kingdom, Japan, Germany, the United States, and the Soviet Union. Such learning became more intensive with China’s “Reform and Opening-up Drive” in the late 1970s. After going through many setbacks, China finally started to catch up. In terms of the scale of manufacturing, the endeavor to surpass the United Kingdom and to catch up with the United States in the 1960s was obviously not so successful. But today China has managed to exceed the United Kingdom, Italy, France, Germany, and has eventually taken over Japan and the United States in terms of the size of its economy. In the past decade a good number of Chinese companies have come a long way from “catching up” to becoming global leaders in their own right. Today’s bookstores, libraries, internet platforms, and social media networks are filled with many heroic tales of successful companies – so many that it is almost confusing for the readers to make their selections. As scholars, when we reflect on the xiii

xiv  achievement some of the leading companies, we aim to go beyond telling inspirational tales and ask the “why” question behind the success. What were the reason why some companies became so successful while many others languished or failed? Many well-known management theories are been developed since the advent of Industrial Civilization that pose these “why” questions: from the United Kingdom, Adam Smith’s The Wealth of Nations and Division of Labor Theory; from France, Henri Fayol’s General and Industrial Management and Fourteen Principles of Management; from Germany, Max Weber’s The Protestant Ethic and the Spirit of Capitalism and Bureaucratic Management Theory; from the United States, F. W. Taylor’s The Principles of Scientific Management, Elton Mayo’s Human Relations Management Theory, Maslow’s Hierarchy of Needs, Herbert Simon’s Decision Making Theory, Peter Drucker’s Modern Management Theory, Michael Porter’s Competitive Strategy; from Japan, William Ouchi’s Theory Z, and also theories of Total Quality Management and Lean Production developed by the Americans based on the Japanese business management practice, and on top of these, there are also books distilled from management practices from those world-renowned companies that have created global impact, such as: Alfred Sloan’s My Years with General Motors, Alfred Chandler Jr.’s The Visible Hand: Managerial Revolution in American Business, Takahiro Fujimoto’s The Evolution of the Toyota Manufacturing System. By no means is this list exhaustive. With rise of Chinese economy in recent times and the success of some its firms on a global scale, there has been considerable interest both in China and the rest of the world to understand how similar or different the management of Chinese firms are from the management of firms in Western countries. To what extent are management principles universal and to what extent are they idiosyncratic to development stage and the cultural and social conditions of a country? These are questions that not only are central to the contemporary scholarship but also of great interest to the

 xv leading Chinese and Western companies that operate in the Chinese context. A few years ago, I had a long conversation with Ren Zhengfei – the founder of Huawei – and Tian Tao, who has been studying and writing about Huawei for many years. That discussion covered the historical changes in both China and the world at large, and our thoughts went back to thousands of years in time. Just like everyone else, we marveled at the continuous growth of the Chinese economy since 1978. After the country implemented the Reform and Opening-Up Strategy, Chinese companies grew at an exponential rate. It is clear that the Chinese companies that became successful were deeply committed to learning from the West in all managerial aspects. But they did not necessarily follow the same development path of Western companies. We also suspected that their success could not be completely explained by the Western management theories. Chinese companies appeared to integrate the traditional Chinese “dialectical Yin and Yang” and “grayness” concept into their management practice, but the gap between “knowing and doing” had yet to be bridged, and the traditional term “Confucian Merchants” could not define them anymore. In a short period of thirty years, Chinese companies went through an equivalent of 100 years of development for their Western counterpart. Companies transitioned from catching up to taking the lead in some sectors, from quantitative change to qualitative change. It seemed to us that these trailblazing Chinese companies deserved to be studied with the same scientific rigor that Western scholars brought the history of IBM, General Motors, Intel, and the like. Furthermore, we strongly felt that the results from such systematic analysis of leading Chinese deserved to be widely disseminated. Driven by such a mission, and with the support of Tian Tao and a group of former Huawei executives, the Ruihua Innovation Management Institute was founded at Zhejiang University School of Management, codirected by Tiao Tao and myself. We organized quarterly forums on Huawei’s management to analyze key

xvi  experiences of Huawei, to find possible rules and principles behind Huawei’s management experience, and to extract theoretical ideas that could be applied to other companies. The quarterly forums brought together a large number of retired Huawei executives and scholars. (A list of all presentation can be found in Appendix B.) These presentation and other interviews we did with former Huawei managers formed an invaluable source of information that allowed us to go beyond the material that is available in the public domain to piece together as systematic as possible and account of the management transformations of Huawei. Just as the core idea of microeconomics features Pareto optimality, for more than a century, the core idea of management has been to establish a balanced and effective allocation and collaboration system, and the core proposition for companies has been to build a stable equilibrium and maintain it for efficiency via means of management. However, Huawei’s management practice tells us that when change becomes the new norm, when breaking balance becomes an active means of management behavior where interferences such as iteration, trial and error, mobility, uncertainty, and ambiguity or grayness is no longer exceptions but the rule. The significance of this book in my view is that it takes us behind the scenes of Huawei, but also to show a new perspective of achieving nonlinear growth. For me the book is a new starting point for committing to sorting out the nonlinear growth management law of Chinese companies and the formation of “C theory.” Over the past several years, our research team endeavored to investigate multidimensional facts about Huawei, taking the perspective of time and motion, of change and stability, to discover the key points from Huawei’s dynamic process of establishing equilibrium and breaking equilibrium and to reveal the science behind its success. Of course, it is impossible to present Huawei’s key for success and come up with a set of complete, in-depth theories in just one book. We admit that we have not said everything one could say about this topic. But we are confident that this book is the most

 xvii systematic attempt to date to critically observe and examine the transformation of the Huawei’s management practices during its first thirty years of existence from 1987 to 2017. I would like to extend special thanks to Mr. Tian Tao, Mr. Hu Yanping, and many of the Huawei people for making themselves available to our research team. Without their willingness to share their experience and insights on the history of Huawei, this book would have far poorer. After the first draft of the book manuscript came out, they gave rigorous feedbacks to the viewpoints presented in the book and helped spotting some factual errors we had committed in our analyses and interpretations. I would like to emphasize that the views expressed in this book should not be construed as the views of anyone within Huawei. This book represents an academic effort. The interviews with members of Huawei are only a small portion of information we analyzed. The authors of the chapters and commentaries came to their conclusions based on all the evidence available as will be apparent in the extensive reference list at the end of each chapter. I would also like to thank the commentators who are renowned experts on their subjects, and have given of their time in discussing the draft of the chapters. I am indebted to their insight and comparison between Huawei and other successful companies that they are familiar with, which greatly enriched the contents of this book. Last but not least, I am grateful to our co-authors, many of whom are our former and current PhD students. Without them, this project would not have been possible. But this book is only the beginning to study Chinese enterprises to extract from their management practices a “C theory” in a general sense. To be sure, other Chinese companies need to be studied in detailed before we can be certain of the robustness of our theoretical ideas. Xiaobo Wu



The Management Transformation of Huawei An Overview Johann Peter Murmann*

.



Huawei is now China’s most prominent multinational company. In 2018, Huawei achieved sales of USD 105.2 billion and operated in over 170 countries around the world, employing around 188,000 people. Forty-five percent of all employees are focused on R&D (Huawei, 2019), giving the firm strong technological capabilities. Huawei has now even surpassed Ericsson and Nokia to become the largest telecommunication infrastructure equipment company in the world. It is also the second largest maker of smart phones. Not surprisingly, academics, business leaders, and policy makers have become very interested in understanding how Huawei has been able to rise from its humble beginnings in Shenzhen as an importer of analog telephone switches to a globally operating information technology manufacturing and service firm. Huawei is now frequently featured on the cover of international business magazines (Economist, 2012) or as a case study in Western business schools (Hitt, Ireland, and Hoskisson, 2008; Peng, 2010) because it has accomplished something that is still rare for a Chinese company: turning itself into a world-leading company and R&D powerhouse.

* I would like to acknowledge the helpful comments I have received on this chapter from the key coauthors of this book – Bin Guo and Can Huang. In addition, I would like to thank Richard Nelson and particularly Sidney Winter for helpful comments on the introduction. The authors also acknowledge the funding from the National Natural Science Foundation of China with the grant Nos. 71832013 (Wu), 71232013 (Wu), 71874152 (Huang), 71732008 (Huang) and 71372054 (Guo), by Zhejiang Provincial Soft Science Research Program through grant No. 2019C25038 (Huang) and by the Fundamental Research Funds for the Central Universities (Huang).



    To date, writing an academic-quality book on Huawei has almost been impossible given that it has been a secretive private company. Until 2010, Huawei did not even publish its governance structure, let alone any information that would make it possible to get deeper insights into how the company operates. Realizing that this secrecy was hurting Huawei’s ability to further expand in key international markets, the firm began to open itself up more. Ren Zhengfei, the founder and key leader, started to give interviews to Western journalists (Economist, 2014a; Pullar-Strecker, 2013). More importantly, the firm granted Tian Tao, a Chinese business journalist and long-time advisor to Huawei, along with Chunbo Wu, an academic from Renmin University of China, access to internal company documents. Huawei also gave them permission to interview hundreds of current and former Huawei managers. Based on their research, Tian and Wu published The Huawei Story (2015), first in Chinese and a few year later in English. The book provides the most comprehensive account of the development of Huawei since its founding in 1987. It lays out in detail the management philosophy and values that have guided the firm’s development as it struggled to overcome its weak financial and organizational capabilities and become an international leader in the information and communication technology industries (ICT). An expanded version of the book was published recently (Tian, De Cremer, and Wu, 2017). With the help of Tian Tao, Zhejiang University School of Management has set up the Ruihua Institute for Innovation Management to further academic research and teaching on how and why Huawei has been able to outcompete so many domestic and international rivals. Earlier explanations for the success of Huawei emphasize Chinese cost advantages, stronger customer centricity, a strategy of first entering peripheral markets before competing in core markets, and the gradual buildup of ever more sophisticated technological capabilities that made Huawei a leader in the next-generation technology of 5G mobile telephony (Fu, 2015; Z.-X. Zhang and Zhong, 2016). As the research at the Ruihua Institute progressed, however, it became

      clear that at the center of Huawei’s success lies an organizational capability to continuously transform itself. For this reason, we made the decision to write a book entirely focused on Huawei’s transformation since its beginning in 1987. We believe that scholars interested in organizational change or more specifically change in Chinese firms will benefit the most from learning about Huawei’s transformation capabilities. Because we realized that the development of new and the breaking of old routines is central to Huawei’s transformation, we decided to use as our overarching analytic lens the theory of routines-based organizational capabilities (Becker, Lazaric, Nelson, and Winter, 2005; Murmann, 2003; Nelson and Winter, 1982; Nigam, Huising, and Golden, 2016; Parmigiani and Howard-Grenville, 2011; Szulanski and Jensen, 2008; Winter, 2003).1 We follow here in the tradition of Robert Burgelman, whose studies of Intel have helped advance our understanding the evolutionary processes underpinning corporate transformations (Burgelman, 1991, 2002; Burgelman and Grove, 2007). To be sure, there is a large literature on organizational change, and our book is not novel in terms of focusing on organizational change. What makes Huawei interesting is its rate of growth and the level of detail in which we can observe not only the creating of routines but also the breaking of routines across most of the major functions of the firm. This makes Huawei an ideal case to advance the theory of routines and dynamic capabilities to change routines (Pisano, 2017; Teece, 2007; Teece, Pisano, and Shuen, 1997). Our book will be particularly appealing to academics in the field of strategy, management, and business history. In December 2018, Huawei was in the headlines all over Western world when its chief financial officer was arrested in Canada on the request of the US government for allegedly violating US trade sanctions. This event is taking place against the larger backdrop of

1

For an excellent review of the routines literature see Parmigiani and HowardGrenville (2011). For a more recent review, see the special issue in Organization Science on routine dynamics (Feldman et al., 2016).

    the US government stepping up its campaign to limit Chinese telecom participation in building 5G networks in Western countries because of national security considerations (Woo, 2018). To avoid false expectations, we would like to be explicit at the outset that the geopolitical struggles over who builds, runs, and effectively controls national telecommunications infrastructures is a topic we will not be dealing with in this book. We are focused solely on the management transformation of Huawei. This transformation by itself is worthy of a scholarly investigation. In the conclusion chapter we offer, however, a short appraisal of Huawei’s future growth challenges, and in this context we will briefly detail the geopolitical challenges Huawei currently faces as it tries to commercialize its leading technological position in 5G mobile technology. Our book should not be seen as an official history of Huawei or a mouthpiece for current and former executives. The research team has been entirely independent of Huawei. The views expressed in this book are ours alone. We benefited immensely, however, from our interviews with many former Huawei executives, access to the firm’s internal newspapers, and the presentations of many former executives at the quarterly Huawei forum of the Ruihua Institute for Innovation Management. In Appendix B, we list the names of the presenters and the title of the presentations at Ruihua Institute. In Appendix C we provide a list of the interviews we conducted, the persons interviewed, and the various positions they had held within Huawei. But we have also drawn extensively on external information, as will become evident in each of the chapters. All information sources are referenced throughout the book.

.

    

Huawei was founded in 1987 by Ren Zhengfei in Shenzhen, where the Chinese government had set up the first special economic zone in May 1980 to experiment with private initiative and foreign investment in what was otherwise a centrally controlled and collectively owned economy (For a sympathetic biography of Ren, see Li, 2017). It

      is not a coincidence that the first special enterprise zone was set up right across the border from Hong Kong. Deng Xiaoping, the key political leader in China at the time, became eager to reform the Chinese economy partly because he noticed how much better capitalist Hong Kong had developed than communist mainland China in the previous three decades (Vogel, 2013). The rise of Huawei parallels in large part the development of Shenzhen as a commercial hub in China. Shenzhen’s population increased from around 300,000 inhabitants in 1980 to over 15 million today, making it the most densely populated city in China (Shenzhen Standard, 2014). Ren Zhengfei, who previously had worked as a civil engineer in the Chinese military corps of engineers, started Huawei just as the Chinese government started a strong push to upgrade the telecommunications infrastructure across the country. In 1978, China had only 2 million telephone subscribers and a total capacity of 4 million lines (Tian and Wu, 2015, p. xviii). In 2015, there were over 1.3 billion mobile phone users (Statista, 2016a). In one generation, having a telephone went from a luxury to what is perceived as a necessity of daily life. Visit any large Chinese city today and you will notice that all people have smart phones in their hands. To get the entire Chinese population connected with mobile phones, the investments that had to be made in telecommunications infrastructure were massive. A key element of Huawei’s history is that it faced fierce competition from the beginning both from domestic and international players. In light of how successful Huawei has become, it is easy to fall into the trap of thinking that the firm’s success was foreordained and that the rise to the top was easy and smooth. When Huawei entered the Chinese market in 1987 as a mere importer of telephone switches, the technologically sophisticated Western firms – Ericsson, Alcatel, Siemens, AT&T (later called Lucent Technologies), Northern Telecom (later called Nortel), Fujitsu, and NEC from Japan – were all competing for orders in China (Tian and Wu, 2015, p. xxiv). What is more, in the mid-1980s there were many Chinese entrepreneurs and

    managers of state-owned local companies who regarded the growth prospects of the telecommunications equipment market as attractive. According to Tian and Wu (2015, p. xxv) at least 400 firms entered the market in this period, creating strong competition also at the lower technological end of the market. For anyone who has studied the development of industries in other countries, the magnitude of entries into Chinese markets that were opened to new entrants is typically by an order of magnitude larger than in other countries. Klepper (2015) provides extensive data on US industries and Murmann (2013) for other countries, demonstrating this fact. As part of their research on the textile color industry in China, Jiang and Murmann (2012), for example, encountered at least 800 Chinese start-ups in the 1980s and 1990s. Turning to a more contemporary example, in addition to the well-known Chinese smart phone brands Huawei, Lenovo, HTC, and Xiaomi, at least 445 other firms manufactured smart phones in China in 2015 (Ibisworld, 2015). No other country comes anywhere close to this large a number of firms competing in the same market. One reason for this is clearly that the Chinese population of 1.3 billion people is four times larger than that of the United States, which is the largest market among the Western countries. Huawei faced strong competition from the beginning, and competition in the industry continued to be fierce over the next three decades even though the global telecommunications equipment market increased from 119 billion USD in 1993 (U.S. International Trade Commission, 1998) to 354 billion USD in 2011 (Statista, 2016b). Especially when the internet bubble burst in 2001, many ICT firms struggled with overcapacities. Since then, many of the key players have merged because they could no longer compete successfully as standalone companies. Between 2006 and 2016, the telephone equipment businesses of Nokia, Siemens, Alcatel, and Lucent successively merged in the hopes of being able to better compete with Huawei and now operate under the Nokia name (Nokia, 2016). By 2013, Huawei became the largest telephone network equipment supplier in the

      95,000 90,000 85,000 80,000 75,000 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1987

1990

1993

1996

1999

HUAWEI

2002

ZTE

2005

CISCO

2008

2011

2014

2017

ERICSSON

 . Sales growth of Huawei, ZTE, Cisco, and Ericsson since 1987 (in million USD) Source: Company Annual Reports

world and over the years moved from simply making equipment to offering turnkey solutions. To make sense of the rise of Huawei graphically, we have created Figure 1.1. It compares the growth of Huawei since its foundation in 1987 to three other firms: Ericsson, its chief international competitor in the telecommunication industry, ZTE, its chief domestic rival in that industry, and finally Cisco, a chief rival in the networking and switching business. Figure 1.1 nicely illustrates how Huawei’s higher growth rates have left all competitors behind. Huawei’s sales surpassed those of Ericsson in 2012 and those of Cisco in 2015. As Huawei overtook Western rivals, taking further market share away from these players became strategically unviable. Governments

    across the world would not have allowed Huawei to become a monopolist. This is one reason why Huawei sought further growth in related industries. In 2002, it started to make handsets and related consumer goods as a contract white goods manufacturer, and since 2009 Huawei has sold smart phones under its own brand using the market leading Android OS (Gedda, 2009). The smart phone business has been Huawei’s fastest-growing segment since 2009, turning Huawei into the second best-known Chinese consumer brand in the Western countries behind Lenovo. In 2015, Huawei became the third largest manufacturer of smart phones in the world after Samsung and Apple, shipping 76 million units and gaining 8.7 percent market share (IDC, 2016). Huawei also entered the enterprise ICT equipment sector, producing everything from corporate networks, storage and security system, routers, IP telephony and video conferencing systems, to cloud solutions and other ICT services (Huawei, 2016b). Here, Cisco is one of the main competitors (Reckoner, 2013). In terms of the relative sizes, consumer sales (largely smart phones) is Huawei’s largest segment with 48.4 percent of sales, followed telecommunication network equipment and services sales to operators (carriers) with 40.8 percent, and the enterprise sector accounting for 10.3 percent of sales (Huawei, 2019). Huawei’s remarkable growth history is visible in Figure 1.2, which tracks the number of employees and total sales over time. The figure makes it plain that looking back over the past three decades, Huawei grew at moderate rates before 1995, subsequently growth rates accelerated until around 2003, and then there was another dramatic jump in growth rates. (Appendix A presents the exact numbers for each year.) These growth rates cannot simply be explained pointing to favorable market conditions that would have allowed all competitors to grow. Many Western competitors mentioned earlier declined over the past fifteen years, and Huawei undoubtedly became stronger as an organization at the expense of its Western competitors. The chapters that follow analyze in detail aspects of Huawei’s transformation. To set the stage, it is useful to discuss a number of

 . Huawei’s revenues and employees, 1987–2018, and the timing of major transformation initiatives

    key features of Huawei that are in the background of all these transformation initiatives.

.

   ’    

When a company becomes as successful as Huawei and when it seems to have as strong as culture as Huawei has today, it is easy to fall into the trap of concluding that the firm possessed the values underpinning the culture from day one. Even if one can show that the founders already possessed these values at the beginning of the venture, it is a mistake to conclude that all employees who joined the firm would automatically embrace the same values. Huawei experienced significant organizational problems as the firm grew from 20 employees in 1991 to 6,000 employees in 1997 precisely because this 100-fold increase in staff numbers undermined the shared culture and philosophy that the founding team may have had. Our book details many initiatives whose clear aim was to create and then maintain a shared culture and esprit de corps as so many new employees were joining the firm every year. Peter Williamson is one of the best-informed Western scholars of Chinese firms (Wan, Williamson, and Yin, 2015; Williamson, 2010). When asked to characterize strategy formulation at internationally known Chinese firms such as Alibaba and Tencent, Williamson explains: “Leaders of private Chinese firms simply made it up as they went along” (Williamson, 2015). Unlike firms in the West, a blueprint that the first private companies in China could follow in the high uncertainties in the Chinese environment did not exist. While China recognized the legitimacy of the private sector already in the 1988 revision of its constitution, property rights in the Western sense of the word were not as secure as they are in West from interference from the state (M. Zhang, 2008). Legally speaking, the Chinese constitution did not formally recognize the legality of private property until 2004 (Nee and Opper, 2012; M. Zhang, 2008) and its institutional environment makes it more difficult than in the West to predict what

      policies the government will enact five years later (Lewin, Kenney, and Murmann, 2016). Williamson’s description of Chinese strategymaking at what now have become leading private companies is reminiscent of Deng Xiaoping’s often invoked aphorism “that he groped for the stepping stones as he crossed the river” (Vogel, 2013, p. 2). He used this aphorism to articulate his incremental approach to transforming the centrally planned economy into one that extensively used market mechanisms to allocate resources. Hence any well-read executive living China during the 1980s and 1990s would likely have come across this idea of approaching major changes incrementally. There is strong evidence that Huawei’s cofounder and long-time CEO Ren Zhengfei also “made up” the strategy as Huawei developed from a small importer of telephone exchanges to a globally operating multinational. And just as in the case of Deng, Ren came to adopt the general philosophy that one needs to proceed incrementally in an environment where so many things change. While by no means a dominant view in Western academic writing on firm strategy, building on the work of the political theorist Lindbloom (1959), James Brian Quinn (1980) has termed this approach as “logical incrementalism.” Ren admitted, “I am half-literate about technologies, corporate management, and financial affairs. I am trying to pick up and learn about these things along the way. So I must gather a number of people and let them play their own parts so that the company may move forward. Personally, I must remain modest, and depend on the collective power” (Tian and Wu, 2015, p. 114). We will return later to the question of when and to what extent Ren used collective decision making during the first twenty years of Huawei’s existence. Tian and Wu (2015, p. 71) report that ever since Ren cofounded Huawei in 1987, he has been reading widely on history, economy, politics, society, humanity, literature, and the arts to find good ideas for how to improve the way Huawei is managed. He also has been talking to many different leaders both in China and in the West to refine his thinking about best management practices for the

    different stages of the firm’s development (Tian and Wu, 2015, p. 122). Conversations in 1997 with CEOs of leading of US tech firms such as IBM, Lucent (Bell Labs), and HP, for example, solidified his conviction that Huawei needed a radical transformation of its operating procedures to continue its growth and catch up in efficiency with global leaders. To bring some precision to the discussion of how Huawei’s management philosophy developed, it is useful to trace the key management ideas Ren articulated for Huawei over time, where he likely got the ideas from, and when – during the thirty years of Huawei’s existence – these ideas became central in the way the firm was managed. Since 1997 – ten years after the start of the firm – the two central management principles that the leadership of Huawei has believed to be key for being successful in the telecommunications industry are customer centricity and dedication of all employees to the corporate goals of Huawei (De Cremer and Tian, 2015). Ren leaves out no opportunity to communicate that customer centricity is the most important principle. In a recent interview with the Forbes China correspondent L. Yang (2015), Ren explained: Our culture is very simple: staying customer-centric and inspiring dedication. In this world, our customers treat us best, so we need to devote ourselves to serving them. As we want to earn money from our customers, we must treat our customers well, and make them willing to give us their money. In this way, we establish good relationships with them. How can we serve our customers well? By working hard despite all the hardships we might encounter.

It is useful here to recall that corporate management always involves a complex tradeoff between different goals and stakeholder groups who to some extent have incompatible objectives. This is what makes top management always challenging and also explains why computers have not yet replaced CEOs. Consider one simple tradeoff: If you want to give employees a 30 percent increase in salary to increase their job satisfaction, you typically will not achieve the same profits that you

      would have made before the pay raise. Even if employees are more motivated, they are very unlikely to be 30 percent more efficient. This means that every company explicitly or implicitly has to trade off the different stakeholders – be they employees, shareholders, customers, government, or society at large. However, to provide direction to employees regarding what goals they should focus on and prioritize when in doubt how to resolve conflicting goals, companies frequently elevate one stakeholder group to be the most important one. Under the leadership of Herb Kelleher (1981–2001), for example, Southwest Airlines told all managers that their top priority was to provide value to employees in the form of a superior and more fun work environment allowing the firm to attract a high-quality work force even though it only paid industry average wages (Hallowell, 1996). Kelleher and his team believed that happy employees treat customers well, and happy customers in turn come back very often, filling the planes of the airline, which in turn allows the company to make very good returns for its shareholders (Gittell, 2003). By contrast, inspired by economists such as Milton Friedman (1970) who argued that firms should be focused on increasing profits for shareholders, many American CEOs between the 1980s and the financial crisis in 2008 elevated the goal of increasing shareholder value to be the most important goal of their corporations. The logic in this approach goes like this: To make consistent profits, companies need to offer products and services that provide value to customers. If not, customers will abandon the firm and no profits will be made. Similarly, companies need to pay a fair wage to employees if they want to keep good human resources that allow them to provide products and services that are valued by customers. But without having profits for shareholders as the most important goal – so the argument goes – firms waste valuable resources and society is worse off. Having business organizations focus on shareholder value is seen as optimal for society. Fairly or not, Jack Welsh, who was the CEO of GE from 1981 to 2001 and under whose leadership the value of GE

    increased by 4,000 percent, was held up as the best example of this focus on shareholder value. In the case of Huawei, the focus is once again different: All employees since 1997 have been systematically told to prioritize customers over all other stakeholders. Peter Drucker (1974) is the management writer who popularized the idea that companies should center their efforts on satisfying customers. The logic of this view runs like this: Customers are the ones who are paying all bills. Without them, no benefits can be distributed among employees, shareholders, and the tax office. So the primary task of any company that wants to flourish should be to focus on continuously providing value to customers. If managers figure this out, everything else seen as relatively straightforward. The first time a focus on customer centricity is mentioned in any of Huawei’s printed communications is in the context of drafting a constitution for the firm – the so-called Huawei Basic Law. The drafting process started in 1996 and was completed in 1998. (We have translated the Huawei Basic Law document from Chinese and provide the full text of it in Appendix D). The goal of the constitution was to apply the same principles of management to all different parts of the growing firm. There is no evidence that Ren got the idea of focusing the firm on customer centricity directly from Peter Drucker. According to C. Li (2006), Ren learned the concept from Louis Gerstner, whom Ren visited in 1997 and who received worldwide fame in management circles when he saved IBM from collapsing by undertaking one of the most dramatic corporate transformations in the 1990s. Gerstner later described his change management approach in the book Who Says Elephants Can’t Dance?: How I Turned Around IBM (Gerstner, 2003). Given that Huawei was started as a trading company and not a manufacturing firm, it is possible that from inception Huawei’s founders had a strong sense that to sell in a competitive market, it is necessary to have products that appeal to customers. There is some evidence that Huawei initially made up for its inferior products with excellent customer service (Tian and Wu, 2015, p. 3). But it is quite clear that only when Huawei expanded rapidly between

      1994 and 1998 did it ensure that all employees would embrace customers as an explicit management goal. As is clear from the earlier Ren quote, the second most important value that Huawei has been trying to instill in all employees is dedication to their job at Huawei. Start-ups typically have to work hard just to stay alive. This was certainly the case at Huawei. Huawei outcompeted many Western firms by encouraging particularly the people in the customer service area to go the extra mile. Ren acknowledges that he has no hobbies other than reading and contemplating (Tian and Wu, 2015, p. xxxv). He is clearly the living example of full dedication to Huawei. Tian and Wu report that “from the age of 44 to 68, Ren Zhengfei has kept his mobile phone on 24/7 and has spent one third of his time on business trips” (Tian and Wu, 2015, p. xxxv). But as a firm grows and becomes more bureaucratic and successful, maintaining dedication to hard work among all employees typically becomes a challenge. Starting in 1997, as we are describing in detail in Chapter 6, Huawei implemented with the help of the Hay group and other consultants HR routines that would reward and promote those individuals who worked the hardest. Similar to GE, where until 2016 the worst 10 percent of all employees would be removed, Huawei started to systematically manage out people. Huawei developed a reputation that it would require employees to work such long hours that they would routinely spend the night sleeping under their desks. In the early days, Huawei handed out blankets and sleeping pads to take naps but employees would often also use them to sleep overnight (Tian and Wu, 2015, p. xxxv). When in 2008 a few Huawei employees committed suicide, Huawei found itself in the middle of a public media storm for its alleged “mattress culture” that required employees to work so hard they may crack under the pressure (Tian and Wu, 2015, p. 34). Huawei tried to explain to the public that a company like it that wants to be able compete with the best multinational companies in the world needs employees who work as hard as the best athletes in the country (L. Yang, 2015). Huawei continues to be able to recruit top talent because the hard work that employees put in is

    rewarded through higher salaries, benefits, bonuses, and employee stocks. Anyone who has worked for Huawei for at least eight years and is forty-five years old can retire and keep their stocks in the employee-owned firm. However, anyone who leaves the company or wants to work for another company after retirement must give up their shares (Tian and Wu, 2015, p. 229). Apparently, employees who no longer show “dedication” need to give up their shares as well. It is important to point out here that this approach of requiring employees to work much harder than at the average firm by definition cannot be imitated by every firm in the economy. Firms need to think carefully if they can offer employees sufficient rewards. Huawei can demand hard work because it has now become the leader of the industry and is attractive to new recruits. Those people who want a more balanced lifestyle simply leave. One other special feature of Huawei is that, notwithstanding its size, it is not listed on the stock exchange but is a fully employeeowned company. While many listed companies in the United States give some stock to their employees, leaving aside professional law and accounting firms, there were only 2000 fully or in the majority employee-owned companies in the United States in 1990 (Hyde, 1991) out of roughly 5 million enterprises (U.S. Census Bureau, 1992). And none of them are as large as Huawei. In general, large employeeowned firms are a very rare species in Western economies and rarely seem to work well even though one can easily develop a rationale for why employees who own the company would be more motivated to work hard because all gains would go to them as owners. Observing that fully employee-owned companies rarely work, Western scholars have constructed elaborate arguments why they would not work. The simplest one is that employees would prefer to give themselves higher wages rather than invest back into the company, making the company not competitive over time (Ginglinger, Megginson, and Waxin, 2011). Another one is that when employees have a large stake in the company, decision making becomes too complex, as managers constantly have to trade off between different groups of stakeholders (Fama and

      Jensen, 1983; Jensen and Meckling, 1976). In the case of Huawei, full employee ownership has worked very well, and as we argue in the chapters that follow, there are good reasons to believe that Huawei’s transformation capabilities have been helped rather than hurt by the collective ownership of the firm. As we describe in Chapter 6 on the transformation of its financial accounting system, Huawei has been able to raise a large amount of capital from its employees to fund growth. Yet is also clear that Ren did not fully foresee the benefits of this arrangement: I designed the employee shareholding scheme soon after I founded Huawei. I had intended to knit all my colleagues together by a certain means of benefit sharing. At that time, I had no idea about stock options. I did not know that this had been a popular form of incentive for employees in the West, and there are a lot of variations. The frustrations in my life made me feel that I had to share both responsibilities and benefits with my colleagues. I discussed this with my father who had learned economics in the 1930s. He was very supportive. But no one had expected that this shareholding scheme, which came into being by chance more than by design, would have played such a big role in making the company a success. (as quoted in Tian and Wu, 2015, pp. 44–45)

Over the years, Ren reduced his own stock ownership to 1.4 percent (Huawei, 2015, p. 112; 2017, p. 99) but he continues to hold veto power of major corporate decisions. The rest of stock is owned by employees through a company called the Union of Huawei Investment and Holding Co. A few years ago, 81,144 of 180,000 employees held some stock in the “Union” (Huawei, 2017, p. 99). Stock is granted to employees based on their level of performance rather than on the egalitarian notion that every employee should receive some or even the same amount of stock. Unlike many of other practices that were imported from the West with the help of consulting companies, the way the employee ownership plan is set up and managed is clearly

    a homegrown development. Precisely how and why in the case of Huawei full employee ownership has worked while it has not worked well for large companies in Western countries is a fascinating topic that deserves to be investigated in more detail in a separate study. We can only offer some speculations: Perhaps the more collectivist Chinese context plays a role? Perhaps the strong meritocracy where higher performing individuals receive a lot more shares is key? Perhaps the fact the founder Ren Zhengfei is still around plays a key role because his special status prevents infighting among the different employee owner groups? Remember that Deng Xiaoping continued to be the most powerful Chinese leader even after he gave up his formal role. This would be unthinkable in a Western country. What is clear, however, is under the leadership of the founder who has reduced his ownership over the years and a team of longtime Huawei leaders and co-owners, Huawei has been able to make dramatic changes to the way it operates. Another key part of Huawei’s culture is its long-term orientation. The goal of Ren has been to build an organization that would last for a very long time. One of the reasons why Ren has rejected going public has been because markets would not allow the firm to be managed for the long term (L. Yang, 2015). Organizational changes are easier if a firm can wait five to ten years before the full benefits of the change are achieved. A few years ago, Michael Dell decided to take Dell computer private again because he came to the conclusion that the stock market would not allow him to make losses in the short term to finance the investments required to transform the company from mainly a PC maker into a cloud computing and service enterprise (Sherr, Benoit, and Thurm, 2013). Many of the transformation initiatives at Huawei that we analyze in this book took more than five years before most benefits were realized. A good example is the integrated product development (IPD) initiative, whose goal was to make new product development much more efficient and faster. This initiative ushered in a large cultural change and gave Huawei the confidence to carry out the subsequent major transformation. As Chapter 3 describes

      in detail, Huawei, after recruiting IBM to help with the initiative in 1999, spent the next three years in the preparatory stages to roll out the approach across the company. The first integrated portfolio management team (IPMT) was established in 2003 and subsequently the new routines for product development were spread throughout the company. Consistent with the philosophy and practices advocated by the total quality management movement in the United States in the 1990s (S. G. Winter, 1994), Huawei has continued to refine and optimize the system of routines behind the integrated products development approach. Fifteen years after the start of the initiative, one of the measures to track improvement in product development still did not score at the target level set by the company, triggering another round of changes. When it comes to innovation, many companies in China – because of the environmental uncertainties – invest in projects whose benefits can be realized in the short term (Breznitz and Murphree, 2011; Chi-Yue Chiu, Liou, and Kwan, 2016).Testifying to its longterm orientation, Huawei has invested since 2012 in basic research initiatives whose benefits will take many years to come to fruition, as we know from the basic research efforts at Western companies such as Google and Microsoft, which all have units dedicated to basic R&D. The changes to the way Huawei has organized its R&D efforts are described in detail in Chapter 7. Openness to ideas and learning from around the world is another central feature of the corporate culture that Ren and his leadership team have been trying to instill in the company. We mentioned earlier that Ren was picking up ideas from his wide-ranging reading and conversations with other leaders. Before Huawei entered international markets after 2000, a development we describe in detail in Chapter 9 on internationalization, the firm imported best practices from Western firms. Huawei today can be aptly described as mixture of practices coming from the East and the West. Ren may have picked up lessons from Mao Zedong about first conquering the countryside before the cities and ideas about incrementalism from Deng Xiaoping. But present-day Huawei, unlike many other Chinese firms,

    is unimaginable without Western management know-how regarding how to create best in class organizational routines and structures. Deng Xiaoping initiated a program to send students to the United States to learn advanced technology so that China could catch up with the West (Vogel, 2013). When Ren and his leadership team visited top American firms including IBM, HP, and Bell Labs (Lucent), he realized how far Huawei was behind in best practices. Locking themselves up for the three days in a hotel room in Silicon Valley on Christmas Eve, they produced a 100-page document outlining the key learnings (Tian and Wu, 2015, p. 53). Inspired by the transformation of IBM between 1991 and 1996 under Louis Gerstner, he then hired IBM consulting to help Huawei transform major aspects of its operation starting with the aforementioned integrated product development (IPD) initiative launched in 1999, the integrated supply chain initiative in 1999, and the integrated financial services initiative launched in 2007. IBM also provided materials for courses at Huawei University to train employees. Huawei in subsequent years also hired other Western consulting firms – the Hay Group, PriceWaterhouseCoopers, Mercer, Accenture, Fraunhofer – to help it develop best in class routines for its own customer-driven processes, human resources management, financial management, marketing management, and quality assurance (Tian and Wu, 2015, pp. 118, 160). After World War II, many European firms hired American consulting firms to learn how to adopt American management ideas such as the multidivisional form (Kipping and Westerhuis, 2012; McKenna, 2012). But the extent to which Huawei used Western management consultants to upgrade its routines and structures stands out. Another feature of Huawei’s openness that makes it special among Chinese firms is its alliances with Western firms. Starting in 1997, Huawei also created product and technology partnerships with many Western firms including Texas Instruments, Microsoft, 3Com, Qualcomm, Siemens, HP, Symantec, and more (Y. Zhang, 2009). We should point out that the industry Huawei is competing in, telecommunications, requires a large degree of cooperation in the setting of

      standards that enable all phone users around the world to call anyone else. Without agreed-upon international standards, this would not be possible. This clearly mattered for the intellectual property rights strategy that Huawei developed over the years, which we describe in more detail in Chapter 9. Before Ren founded Huawei, he studied civil engineering. Then from 1974 to 1983, he worked in that capacity in the military’s corps of engineers until the corps was disbanded in 1983 (Huawei, 2016a). Tian and Wu (2015, p. 78) come to the conclusion that “Ren had transplanted military tenets into the corporate culture of Huawei, including discipline, order, obedience, aggressiveness, unwavering courage, uniform will, and team spirit.” It is equally plausible that as avid reader and student of history, he learned the ideas about courage, obedience, discipline, and mass mobilization from Mao and the Chinese Communist Party (CCP), which he joined in 1978 (PullarStrecker, 2013). In fact, Tian and Wu (2015, p. 62) report that, “Thirty years ago, [Ren] won the title of Model Learner of Chairman Mao’s Works, and the writings have certainly inspired him ever since.”2 And they also report that Ren acknowledges having learned a lot from the CCP (p. 139). But let us not forget that, without ever having been a member of the military, many business executives use military language (creating a sales force, rallying the troops, fighting a battle, killing the competition, etc.), and that the entire field of strategy has its origins in writings about military strategy. Hence the evidence that Ren was deeply influenced by military culture is rather thin. There is no question that in early years Ren and the other leaders encouraged everyone at Huawei to be aggressive in trying to win customers and

2

Tian and Wu (2015, p. 62) continue to note that, “Some critics are saying that Huawei’s management philosophy has clear Maoist features. This is true, but it is totally wrong that Ren Zhengfei is running the company with the thoughts of Mao Zedong.” We agree with this assessment. Ren has been influenced by many people, as noted earlier. If anything he is more influenced by Deng Xiaoping, as we alluded to earlier, who emphasized openness and reform in China. But, as we discuss later, he has been imitating Mao’s ideas about how to mobilize people and rally them behind an important goal.

    that Huawei often uses military language. Even much later, Ren said, “We don’t expect the manager we select through the competency review process to be a perfect person. A perfect person is a saint, or a Buddha, or a priest. We would rather pick strong fighters who can form an army” (Tian and Wu, 2015, p. 101). Early Huawei had to be aggressive if it wanted to survive the competitive landscape of China of the late 1980s and early 1990s. Unlike in the case of Chinese telephone network operators, where the Chinese government created a tight oligopoly for state-owned companies (e.g., China Telecom) and prevented entry of private or foreign companies, the government had the opposite policy in the telecommunications equipment market until 1996 (C. Li, 2006). There it encouraged foreign firms to create joint ventures in China and virtually all big Western equipment firms came to China and competed fiercely. Furthermore, as mentioned before, the industry also saw hundreds of local Chinese start-up firms, which made the industry even more competitive. But the history of the company reveals the competitive pressures in the early years of Huawei did not lead to the creation of a tightly centralized chain of command where every member of the organization would follow routines approved by the hierarchy. If anything, the organization resembled – to use military language – a loose organization of guerrilla fighters who improvised as they encountered different obstacles. As a result, different managers implemented quite different practices in whatever part of the organization they were responsible for. Perhaps the most revealing statement by Ren about the early period of Huawei from 1987 to 1997 is this: In Huawei’s early years, I had left our “guerrilla commanders” alone in managing business operations. As a matter of fact, I didn’t really have the ability to lead them. During the first decade, we rarely had any operational meetings. I flew to different parts of the country to hear their reports, tried to understand their situations, and give them the “go ahead.” I listened to the brainstorming of the R&D staff. R&D was a mess at the time. We hardly had a clear

      direction, hopping around like a ball in the pinball machine. As soon as we heard customers who demanded improvement, we would exert great energy to meet the demand. Financial management was an even bigger challenge because I had not the least idea of finance. In the end, I had not got the relationship with finance staff right, and, to my regret, promotions for them had been rare. Maybe because I was not capable, I had set the hands of most people in the company free, who have therefore brought so much success to Huawei. I was then called a “hands-off boss.” I had wanted to be “hands on,” but I didn’t know how. Around 1997, different groups had emerged with their own leaders and agendas; hence alternative ideas and thoughts existed. No one could tell the direction of the company. (Tian and Wu, 2015, p. 112, we changed the wording in the second last sentence in the quote to capture better the meaning of the Chinese original)

In 1997, Huawei organizationally was a mess. But Ren did not turn to consultants from the CCP or the Chinese military to bring better organizational practices and routines to Huawei. Instead, as mentioned earlier, he and other top managers visited US firms to gain ideas on how to fix the ever-increasing organizational problems. And he turned to American consulting firms, chief among them IBM, which before long had seventy consultants working at Huawei (Tian and Wu, 2015, p. 164). What sets Huawei apart from most other Chinese companies is that the company married its Chinese origin with the most advanced Western routines and practices. A year before Ren and senior leaders went to America, Huawei also started an effort to counter the increasingly diverse practices that the various managers had created. Through a collective process, Huawei began to formulate a “constitution” for the firm that would be binding for everyone working there. A professor from Renmin University at the time was helping the marketing department, and some of his Renmin colleagues were recruited to help draft this constitution that often is referred to the Basic Law or charter of

    Huawei (Huang, 2002).3 The process of creating the Basic Law took three years from 1996 to 1998. John Kotter (1996), the Western expert on change management, would have been impressed with the way Huawei’s top management created a sense of urgency for the process and created a guiding coalition and vision for the change that was then systematically implemented over many years. We will describe the contents of the Huawei Basic Law in the next section because it is a crucial piece of evidence for the central argument of our book that Huawei has a special ability to create routines and break routines when they no longer serve the strategic goals of the company. One way in which Ren got the organization to accept change was to start emphasizing the need for organizational “criticism” and “self-criticism.” Here, Ren took a chapter straight out of the playbook of Mao campaigns to unify the party members behind his plans (Dittmer, 1973). Tian and Wu (2015) explain: In 1997, . . . Ren Zhengfei started to advocate self-criticism more often, and its meetings of criticism and self-criticism, the so-called “democratic meetings” which had lasted 10 years, were institutionalized and extended to every level and part of the organization. This is a typical CPC practice for organizational development and has helped Huawei in developing its own managers and teams.

Without question, the extensive organizational transformation of Huawei during the period from 1997 to 2005 led to a massive centralization of power. Ren achieved a similarly powerful position to the one that Bill Gates possessed at Microsoft in the 1990s. The hands of Ren were clearly on the wheel as he brought in foreign consultants and insisted that Huawei follow the advice of the

3

The Renmin academics who, according to Huang (2002) helped draft the Huawei Basic Law, were Wu Chunbo, Sun Jianmin, Huang Weiwei, Peng Jianfeng, Bao Zheng, and Yang Du.

      consultants and copy exactly Western practices unless the consultants themselves approved modifications for the Chinese context. Ren explained: In this process, we don’t want any skeptical people or those who believe they are wiser than the IBM advisors. We must guarantee that there’s proper understanding and consensus, and there must be active involvement. We must eliminate those who think they are smarter than IBM and smarter than anyone else in the world. (as quoted in Tian and Wu, 2015, p. 185)

As part of the change campaigns, 100 mid-level and senior managers left the company or were demoted, or removed when they became a roadblock in the direction Huawei wanted to move. Yet in the process of becoming the indispensable leader, Ren became clearly overburdened. Having his mobile phone on 24/7, ready to troubleshoot issues that might flare up in a globally expanding firm, he came to suffer from severe physical and mental health issues. Tian and Wu (1995, p. 154) report that Ren between 1999 and 2006 developed “hypertension, diabetes, two cancer operations, and depression.” A true sharing of power at Huawei started only around 2004 with the creation of an executive management team. Chapter 2, which covers transformation of the top management team, provides many details on how Huawei created new routines and practices to become less dependent on the founder. Perhaps the most the interesting one is the system of rotating acting CEOs that was instituted in 2011. Ren comments: In recent years, we have instituted democracy first among senior management, and then the whole organization has become democratic. Decisions are now made collectively. The process is slower, but we have made fewer mistakes. Any idea must be marinated and communicated gradually throughout the company, and we do not expect any change overnight. It will produce great

    power if it is implemented after being accepted by all in the company. (as quoted in Tian and Wu, 2015, p. 211)

By 2005, more than 50 percent of Huawei’s sales came from international markets. Huawei’s corporate routines and practices at this point needed to be able to accommodate employees in many foreign companies around the world. At that time, Ren started to stress the value of tolerance. For over ten years now, Huawei has added tolerance for people who have other ideas as another key pillar of its corporate culture. Here is one of the many statements Ren has made to communicate the important of tolerance: People are born different. To be tolerant means to accept differences. A manager must show enough tolerance to draw together people with different characters, skills, and preferences in order to create synergy, and therefore, fulfill the mission of the organization. . . . To be tolerant is a sign of strength; not weakness. Tolerance, as part of a plan, means the ability to take a step back in order to reach a certain goal but still hold on to the initiative. Of course, it is not tolerance if one has no other choice and is forced to do so. (as quoted in Tian and Wu, 2015, p. 109)

Since Huawei is now operating in 170 countries, being inclusive of different national cultures is important to motivate employees who are not Chinese. But Ren also connects tolerance of other people as a key ingredient for stimulating innovativeness, as Huawei has tried to become a leader in innovation in recent years: China still has no soil for another Steve Jobs. We are not tolerant enough, and we do not protect intellectual properties well enough. Millions of Chinese mourned the death of Steve Jobs, but we wonder why we cannot tolerate Chinese business people? Innovations are only possible on the ground of tolerance. So are great business people. (as quoted in Tian and Wu, 2015, p. 110)

      For a Western audience, it may appear strange that tolerance is elevated to an important corporate value since Western societies have worked on institutionalizing tolerance for hundreds of years. The quote makes clear that Ren believes that in the Chinese cultural context, a company needs to stress tolerance to get managers to pay attention to all good ideas no matter where they come from. One important way in which Huawei has tried in recent years to encourage tolerance of other people’s views is by institutionalizing oppositional voices. Under the strategy development committee, Huawei has set up a “Blue Army” department. The “Red Army”4 are the managers who officially are in charge of the company. The Blue Army role is to review the strategy plans of the Red Army from a different perspective. Furthermore, the department is supposed to organize debates and simulations that seek disruptive technology alternatives (Tian and Wu, 2015, p. 213). More recently, the Blue Army department has been asked to help push the practice beyond the corporate level strategy process to the business units by helping the business units set up their own Blue Army teams. We offered this review of Huawei’s management philosophy and culture to set the context for our book. Furthermore, instead of depicting the firm as always having the same values, we wanted to show that some values changed over time as the firm faced different strategic problems. Perhaps the most dramatic change concerned decision making at the firm. After a pronounced period of centralization and concentration of power in the hands of Ren during the period from 1997 to 2003, Huawei has decentralized power and set up a process where strategic questions are debated rather than decided by the CEO. 4

The choice of “Red Army” is not meant to designate the army of the communist state. Both the Chinese and US militaries use the red army and blue army labels to designate opposing armies in war simulation games. For China see www.popsci.com/great-stride-forward-chinas-best-troop-take-realistic-training. For the United States see www.rense.com/general29/soubts.htm. There are also several computer games that use the label. See www.roblox.com/games/127905671/WarGame-Red-Army-vs-Blue-Army-Battle. All links accessed on September 1, 2016.

   

.

     “We don’t rely on individuals to lead the company. We use the certainty of rules to deal with the uncertainty of results.” —Ren Zhengfei, 2015, as quoted in Yang (2015).

The central argument we are making in this book is that Huawei has developed a transformation capability through dynamically creating routines and through breaking routines when they no longer work well as the company grows to a different scale and faces a different strategic context. The term “routine” is used in an expansive way in this book. We do recognize that “organizational routines” are highly diverse in their origins and functions, and in an organization the size of Huawei this potential variety is likely going to be well represented. It is a serious mistake to try to squeeze the variety into a single, small conceptual box. However, the important task of pointing out key distinctions among cases is best left to the discussion of the cases themselves. What deserves emphasis here is the unifying theme that justifies the use of a single term across a wide range of phenomena, and that theme can be summarized as follows: At any given time, a very large proportion of an organization’s knowledge of how to do concrete things is stored in its routines. The information thus stored is the fruit of experience, and is analogous to habit or skill at the individual level. Situations where the organization lacks an applicable routine for a task it confronts are marked by groups of people standing around talking, discussing around a conference table or otherwise communicating about how to address the task. They have to do that because there is no obvious answer available. The advantage of developing a routine then can be called upon every single time the same how question arises to the extent that it makes those interactions unnecessary. Developing such a routine that solves the problem at hand requires effort, and initial solutions may not be that good and require modifications until it works sufficiently well.

      But as time goes by, it becomes increasingly likely that, for one reason or another, the existing answer falls short of alternatives that could be discovered. In that case, the routine should change; those conversations that have been efficiently avoided for a long time will have to take place. That is the process of change, the process of breaking routines and creating new ones. It is a very different thing from the exercise of established routines. Of course, there can be habits, skills, rules, and attitudes that shape the change process itself, and this, too, is an important part of the Huawei story. One very simple example from our research serves to illustrate this theme. When a new employee comes aboard in an organization, it is necessary to adjust the record-keeping to reflect that the individual is now an employee. A part of that process is providing an ID number for the employee. There are many ways to do that; there are relevant criteria, and it is clear that it would not be reasonable to have a thorough discussion of all the possibilities every time there is a new employee to deal with. A routine is needed, but what should it be? Huawei’s early practice was to assign numbers based on the time of hiring. This seems sensible, but it has an important consequence, quite possibly unintended: An individual’s seniority in the company can be inferred from his or her employee number. The pros and cons of making the seniority information so readily available are something that can be discussed. In the Huawei discussion, the “cons” won on the basis of the argument that the established routine for employee numbers gave an unintended boost to the company’s hierarchical culture – so the company switched to a routine based on random assignment of employee numbers. The most elaborate example of creating routines to standardize practices across the different managers of the firm is the formulation of a firm constitution, the Huawei Basic Law, from 1996 to 1998. Huawei attempted something similar to what Ernst Abbe did in 1896 when he wrote the foundation statutes for the Zeiss Company, which continues to be a leading optics company that produces scientific microscopes and nowadays camera lenses for smart phones. Abbe

    wanted to lay down clear rules for how the company was supposed to be managed in the future and also provide the reasoning and intentions behind the rules (see Buenstorf and Murmann (2005) for details on the Zeiss document). The difference was that Abbe wanted to lay down rules for the period after he was dead, and he codified mainly existing practices. Abbe wrote the document himself, as he owned 100 percent of the shares of Zeiss that he transferred into a foundation. In the case of Huawei, the purpose of the three-year collective process was to bring agreement about how the firm was going to reduce the diversity of practices and develop a common approach. Several drafts were published for comments from members of the organization, and as previously mentioned a team of six Renmin University academics helped to draft the document (S. Yang, 2016).5 Ideas that the Huawei leadership team acquired during their 1997 US trip may have shaped the wording of the final document a bit. For those who will find it beneficial to examine the details of Huawei’s Basic Laws, we have translated the 9000-word, 103-article document and offer it for the first time in English in Appendix D. Here we want to give a brief overview of key ideas in the document and provide a sense of how the Huawei Basic Law was a tool to help bring standardized routines and practices across the rapidly growing firm. Part I (Articles 1 through 20) sets out the vision of becoming a world-class equipment supplier, describes values for Huawei – many of which we already described earlier – and it identifies some key intermediate goals, for example, to develop independent intellectual property. Throughout the articles that follow, the document not only sets out routines to be followed, but frequently aspirations for the various functions of Huawei are articulated and the rationale for them is also sketched. Every top- and middle-level manager was supposed to read and master the Basic Law so they would have a shared understanding of where Huawei wanted to go and what methods of getting

5

In chapter 6 of his book The Huawei Way, Yang (2016) provides many details of how Ren recruited the Renmin professors and how he interacted with them.

      there would be condoned and what methods would clearly be in violation of the Basic Law. Part II (Articles 21–25) sets forth basic operating principles. Article 25, for example, articulates that “customer satisfaction” should be the yardstick to value all work. Notice that the idea of customer centricity only appears in Article 25 and not Article 1, highlighting that this principle was elevated later to be the most important principle of Huawei. Article 26 articulates a key resource allocation rule and differentiates Huawei from many other local firms in the telecommunication industry. It guarantees that at least 10 percent of sales are allocated to R&D. Huawei has implemented this rule consistently. In 2018, 14.1 percent of sales were allocated to R&D. Article 27 sets forth the organizational structure for R&D, which we will describe in detail in Chapter 8. Article 37 sets forth a clear rule that the company will not engage in unrelated diversification, a principle that the firm has followed since 1998. Part III (Articles 39–54) articulates key features of the organization structure and it sets up aspirations for the level of competence to be achieved in the different functions of the firm. What comes out very strongly in these articles is the attempt to centralize control and not to allow individuals to run their own fiefdoms. Part IV (Articles 55–73) articulates human resources aspirations and policies. After announcing that development of superior human resources is key for the success of the firm, the articles in this section focus on how to create a fair and transparent human resources system. We describe in Chapter 6 in detail how Huawei went about achieving this. Here we simply want to highlight one important routine in Article 72. It stipulates a job rotation policy for senior executives to give them broader experience. Part V (Articles 74–99) sets forth principles for the management control system of the company. The key idea behind the rules is to strengthen the control of the center of the entire organization. The 25 articles touch on the areas where the firm needs to make real improvements and articulates principles that should be followed to

    make it happen. One way to interpret this section is that it articulates a collective agreement for the various transformation initiatives that were started in 1998 including the IPD, integrated supply change management and HR system initiatives that we analyze in this book. Article 78 sets the goal of engaging in total quality management and stipulates that the routines that Huawei will establish for this purpose will comply with ISO-9001 requirements. Article 79, among other things, sets a specific goal, namely that a product on average will run 2,000 days without fault. Part VI (Articles 100–103) outlines that Huawei needs to balance using routines with introducing new routines. It also makes stipulations for who should succeed current managers, how they should be trained, and finally when and how the Basic Law is to be revised. Article 100 articulates the need to proceed incrementally with changes, emphasizing, “We must develop and inherit.” The final article (103) stipulates that the Basic Law is supposed to be revised every ten years. Here again the document is different from the Zeiss foundation statutes, which only allowed changes under exceptional circumstances (Buenstorf and Murmann, 2005). Huawei’s Basic Law sees itself as a short- and medium-term articulation of the organizational vision and key routines. The Huawei document is explicit that to achieve the vision of becoming a leading telecommunications company, the company needs to change its routines whenever this is deemed necessary. In fact, what makes the Huawei philosophy different from Zeiss foundation statutes is that it much more explicitly sees the need to constantly break routines in parts of the organization to remain able to adapt to new circumstances. Reflecting on the history of Huawei, Ren notes: We have been alternating from stability to instability, from equilibrium to non-equilibrium, from certainty to uncertainty. We are doing this over and over again to maintain the company’s vitality. (as quoted in Tian and Wu, 2015, p. 134)

      As far as we can tell, Huawei never published an updated Basic Law document. Instead it created separate manuals for the different functions of Huawei where some parts of Basic Law reappear but some old routines are clearly broken and replaced by new principles and routines. The chapters in this book provide many striking examples of such de-routinization of existing practices (Edmondson, Bohmer, and Pisano, 2001). At the level of the top management, Huawei centralized more power around its founder and CEO in the period from 1999 to 2003. As is described in Chapter 2, this pattern was broken in 2003. With the help of the consulting firm Mercer, Huawei developed new routines for how the highest level of the firm operated. It allocated more decision-making power to an eight-member executive management team, which had the responsibility for strategic decision making and worked together with the CEO to lead the firm. The chair of the member committee rotated every six months and the chair functioned at the same time as the chief operating officer (COO). This arrangement lasted from 2004 until 2010. In 2011 it was replaced by a different decision-making structure. Huawei created a thirteen-member board of directors and the CEO and the founder became one of four deputy chairmen of the board of Huawei. To transfer even more power from the founder, a rotating acting CEO arrangement was created. Three senior executives started to take turns being the acting CEO, rotating in and out of the acting CEO position every six months. The three rotating acting CEOs and four executive directors (one of them was Ren) from then on formed the executive committee, which replaced the executive management team at the corporate level. Every start-up that manages to survive the early years learns quickly that to scale operations, learning routine ways of dealing with particular tasks is typically the only effective way of proceeding (Rao and Sutton, 2014; Szulanski and Jensen, 2008; S. Winter and Szulanski, 2001). Often the initial routines come about through experimentation or they are imported from other firms where some of the founders had experienced certain routines. Huawei developed

    routines in the first eight years that focused on coordinating work more within the business functions, procurement, R&D, sales, production, etc., than across the business functions. As the firm grew from 1,200 people and CNY 885.21 million (106 million USD) sales in 1995 to 8,000 people and CNY 5,960.95 million (720 million USD) million in sales in 1998, the existing routines were no longer effective, as product development times increased, development costs soared because many products failed, and customers frequently did not receive products on time. As mentioned earlier, the top management then embarked on a process to import from the West best practice routines for product development and supply chain management. In both cases, the new routines that were introduced into these two functions broke with existing routines that coordinated mainly within the specific function. The newly created routines coordinated much more extensively across functions. In the case of the integrated product development (IPD) initiative, the CEO insisted that Huawei employees copy exactly the routine templates that IBM consultants provided to Huawei. Unlike the “copy exact” strategy of Intel where the firm insisted that a second factory making a particular generation of chips copy exactly the design of the first factory (Winter, 2010), IBM consultants made a few changes to the IPD templates copied from IBM’s practices to accommodate the context of Huawei in China. But Huawei’s leadership insisted employees had to copy exactly what the IBM consultant told them. To overcome resistance to the change, the CEO repeatedly told employees that Huawei “cut its feet to fit in the shoes” (Yu, 2013) of the IBM templates. The resistance to the proposed new routines was grounded in the fact that Huawei’s gradually grown routines would be broken by the new system. Before IPD product development followed serial routines. Marketing and Sales sent requests for new products, R&D next would develop technological solutions that were handed to manufacturing and logistics would organize shipping to customers. Frequently, the products did not work as promised, because there was no back and

      forth between functions to ensure the technology worked well for customers. What is more, the same kinds of products were developed over and over again because different sales and marketing groups sent requests for similar products to R&D, which treated them as independent products. In 1997, there were over 1,000 version numbers of often similar products (Liu, 2015). As a result, product development costs increased dramatically and were out of line with international competitors. The new IPD routines required that cross-functional teams were formed to interact frequently during the product development phase and to prioritize what products were to be developed to avoid duplication. Marketing had misgivings about this change in routines, because under the old routines when a product failed, marketing could simply blame R&D as marketing was not involved in the product design phase. In the new IPD system, marketing was deeply involved in the design stage and could no longer pass the blame to R&D. The breaking of old routines initially caused product development to be even slower, but before long the new more coordinated approach to product development increased efficiency significantly. The average time to market for a new product decreased from 74 weeks in 1999 to 48 weeks in 2003 (L. Zhang, 2012). A similar lack of coordination across the different business functions existed between sales, procurement, product, and delivery before Huawei hired IBM consulting to help it bring its supply chain practices up to world-class standards starting in 1999. The integrated supply chain (ISC) initiative broke existing routines that focused on coordinating within functions rather than across. Before 1999, the sales function took orders from customers without considering whether plants had the capacity to make the product in time. This often led the sales department to promise delivery dates that could not be kept by production and outbound logistics. The production department in turn had no sophisticated way to predict demand, and hence it was difficult to plan production much in advance. The procurement department signed up suppliers without having good forecasts on how many parts of a given type were needed. This led some

    parts to be oversupplied and some parts to be undersupplied. As a result of this weak coordination, the ratio of timely delivery at Huawei was only 50 percent, whereas the average level for telecom equipment manufacturers worldwide was 94 percent (Chapter 4 provides details). The ISC initiative replaced functional silos with many cross-functional routines to improve the efficiency of the supply chain. Just as product development was greatly improved through the deployment of state-of-the-art information technologies, the various functions of Huawei involved in supply chain were also much better coordinated through the introduction of much more sophisticated IT tools for customer relationship management, resource planning and procurement tools that helped break the functional silos. Consistent with the routinization goals articulated in its Basic Law, Huawei rolled out between 1998 and 2007 under the name of “Four Standardizations” uniform financial accounting principles. This was done first across its offices in China and then across the world. Following a competitive selection process, KPMG consultancy was hired in 2000 to help with this process. By 2007, there was a strong perception that some of Huawei’s routines connected with financial accounting had become too rigid. Huawei had been moving more and more from selling equipment to selling turnkey solutions all around the world. The pricing routines that worked relatively well for selling equipment did a rather poor job in predicting with accuracy what projects would make money and what projects would not. Under previous routines, sales people would develop contracts with little input from the finance department. Furthermore, as competition in the global telecommunications industry increased, becoming more efficient in the management of cash flows became a key goal for Huawei. There was a strong perception that this could only be achieved by creating businesses practices that integrated financial analysis more deeply into the various business departments such as marketing, sales, supply chain management, and so on. Again IBM consultants were hired in 2007 to help with a multi-year program of replacing existing financial planning routines with coordinated routines that allowed

      Huawei to know better what projects would be profitable, how to contain risks and how to reduce working capital requirements. Huawei also developed and refined its HR routines well beyond what was articulated in the 1998 Basic Law. In a drive to continuously upgrade its human resources, HR practices were later codified in training manuals (Huang, 2016) and in courses given in its in-house training facility, Huawei University. In the process of creating new routines, Huawei also broke with old routines. As previously alluded to example make this point well: To help counter the hierarchical culture of Huawei, the company stopped assigning employees numbers based on the time of hiring. Instead it randomly assigned employee numbers so that it would not be longer possible to see who was more senior simply by knowing someone’s employee number. Even more significantly, to allow foreign employees to get similar rewards as Chinese employees could through the employee ownership scheme, Huawei changed the routines for sharing profits across its employees. Chinese law restricted employee ownership to Chinese nationals, and for this reason a different mechanism entitled time unit plan (TUP) had to be developed to share profits with an ever-growing number of international employees (details of these changes are described both in Chapter 5 and 6). Organizational structures are formal ways to coordinate the actions of individual employees in the firm, and they shape routines to a considerable extent. Any significant change in the organizational structures entails the breaking of existing routines. As Huawei expanded from 50 to 150,000 employees, the organizational structures for achieving its R&D function were changed significantly, disrupting existing routines. When Huawei initially started to develop its own products in 1992, this R&D was carried out as part the manufacturing division. Soon Huawei noticed that with the rise of mobile phones, transmission was increasingly moving from analog to digital technology. Hence it decided to create a special R&D division in 1993 to focus on digital technology outside the manufacturing department. The digital unit formed a separate department reporting directly to

    the CEO. As the scale of R&D efforts increased, Huawei broke this structure in 1995 and created a central R&D department that coordinated all R&D efforts. This structure was again broken with the introduction of the integrated product development routines (see Chapter 8 for details on all major structural changes to the R&D function). The Basic Law expressed the clear goal of developing independent technology and independent intellectual property (IP). Before 1995, Huawei filed no patents at all. In 2015, Huawei was the fifth largest filer of patents in Europe (European Patent Office, 2015) and in terms of number of patents granted in the USA held position No. 50 (IPO, 2015). But creating the organizational capability to file and receive so many patents proved rocky. Huawei initially formed an IP function in 1995 as part of the newly formed Central R&D department. Four years later, when Huawei created a Legal Affairs Office at the corporate level, the IP function was moved out of central R&D to become a unit of the Legal Affairs Office. Two years later, the IP unit was split again and was moved back to Central R&D. Across all these moves, it was difficult for the leaders of the IP department to change the routines of researchers at Huawei who were not used to keeping written notes of their works and filing patent applications. Huawei also could not make up its mind how it was going to implement its IP strategy until it was sued in 2003 by Cisco in the United States for patent infringements. The case was later settled without admitting guilt. This event clearly served as a wake-up call for the entire organization that it needed to take the filing of IP and the recognition of other firms’ IP much more seriously.6 Huawei has been paying large amounts of licensing fees to Western tech companies ever since. The CEO then set much more specific five-year plans for how many

6

As we describe in Chapter 9, in January 2019, the US Department of Justice announced that it brought criminal charges against Huawei for allegedly stealing trade secrets from T-Mobile USA from 2012 to 2014 and obstructing justice when T-Mobile threatened to sue Huawei in the US District Court in Seattle. It may be necessary for Huawei to further develop among all employees a strong culture of respecting other firms’ IP.

      patents Huawei should file to build up its own IP portfolio and help it negotiate more favorable deals with holders of other IP that Huawei’s products build on. With the support from top management, the routines of R&D process were modified to make it easier to obtain patents. Filling patents became KPI for all research teams and embedded in the performance appraisal routines of individual researchers. Similarly, every new product development project would now have a routine investigation of what IP was owned by other firms. As the scale of patent filings and patent analyses increased, the IP department once again was moved back from Central R&D to the Legal Affairs department. As this short history of Huawei’s IP office makes plain, only by 2003 did Huawei make a clear commitment to disrupting existing routines in the R&D function so that the firm would become a very large holder of IP in the telecommunications sector. In the telecommunications equipment business, all leading players during the past few decades have sold their products all over the world not just in their home country. Ren had determined by 1994 that Huawei needed to become a global player to survive. Internationalization was seen as strategic necessity. Ren formulated the clear goal that “[i]n 10 years, Huawei will be a top-three player in the global telecom market” (Tian and Wu, 2015, p. 227). To become an international player, Huawei needed to de-routinize many practices that were no longer effective when the firm expanded operations from China to 170 countries all over the world. In addition to the aforementioned changes to how employees would participate in the profit-sharing plan, Huawei changed its staffing routines for international operations. Initially, Huawei sent Chinese managers who had proven their business skills in China abroad even though they spoke very little English. Like so many other Western companies before, Huawei learned to be successful in a foreign market it needed to rely mainly on local talent instead of Chinese expatriate staff. To communicate with non-Chinese employees, Huawei HQ needed to change how it communicated with international offices. Even though this proved difficult for many staff, Huawei forced HQ to answer

    emails in English rather than send them to a translation department, which would cause several days of delay. In 2008, a number of positions in the company were required to do all their email and reports in English. By 2014, Huawei had adopted English as the second official business language and it expects its higher management talent to be skilled in English (Economist, 2014b). In summary, what sets Huawei apart is that the firm was repeatedly willing de-routinize existing practices and replace them with new, frequently more coordinated routines. One can speak about Huawei developing meta-routines that constituted dynamic capabilities (Winter, 2003) to transform itself continuously. These metaroutines involved (1) bench-marking with the best firms in the world; (2) hiring leading Western consultancy firms, which would help close the capability gap with the best foreign firms by transferring templates for best practices; (3) initially copying foreign routines as faithfully as possible; (4) having the CEO and the other top managers deeply involved governing the change. (We will provide more details on the meta-routine in Section 10.4 of the concluding Chapter 10.) Between 1998 (when the Basic Law was finished) and 2008, Huawei grew from 15,000 to 81,000 people. Tian and Wu (2015, p. 223) report that Ren already in 2006 “started to think about how to disrupt the balance and address the ills of large corporations.” At that moment, the massive centralization of power that was started in 1996 became a problem for Huawei. Fast forwarding to a few years ago, Ren came out with radical statement. He said that, The Huawei basic law has become obsolete. The management expertise of IBM is not totally fit for Huawei. (As quoted in Tian and Wu, 2015, p. 231)

This is a clear declaration that Huawei, which now is also making consumer products such as smart phones and is very active in cloud services, needs to develop new routines and practices. In contrast to Zeiss, Huawei has been willing to revise its Basic Law dramatically. From a Western perspective, one is struck by this willingness to

      embrace this need for stability and change at the same time. As scholars have discussed extensively in the journal Management and Organization Review under the heading of Yin and Yang balancing (see for example, Fang, 2012; P. P. Li, 2014, 2015; X. Li, 2014), Chinese culture may be more able to embrace two contradictory goals such as stability and change. Many of the statements that Ren makes call for the balancing of opposing forces. For example, Ren says: You are destroying yourself if you embrace innovation, but if you reject innovation, you will be destroyed by others. (as quoted in Tian and Wu, 2015, p. 235)

If one reads all the management pronouncements that Ren has made over the past thirty years, it is clear that he does not believe that management can be boiled down to simple formulas. What constitutes effective management in his view depends on the situation, and it changes dramatically as an organization grows and as it becomes a multinational company.

.

    

Previous books and articles on Huawei (e.g., De Cremer and Tian, 2015; Tian and Wu, 2015) already presented good accounts of Huawei’s management philosophy and culture. If one wants to learn about how to run a company and grow on ideas similar to Huawei, learning about key principles such as customer centricity, dedication, employee ownership, long-term orientation, openness, and learning from around the world, collective decision making and tolerance is useful. But these principles are not sufficient to lead an organization. James March (March and Weil, 2009) poignantly remarked that leadership involves both poetry and plumbing. The poetry part is about creating a vision and defining an organization’s culture. The plumbing part is what is typically called management, and it involves the creation and modification of a set of organizational routines that collectively lead to an implementation of the grand vision for an enterprise.

    Our goal in the chapters that follow is to reveal important aspects of Huawei’s “plumbing,” particularly in regard to how Huawei’s transformation initiatives were carried out. As theorists of organizational change have emphasized (Kotter, 1996; Tushman and O’Reilly, 1997), major organizational change requires top management involvement. Hence Chapter 2 examines the role of top management at Huawei in its transformation efforts and describes how the routines and process of the top management have changed over the almost thirty-year history of Huawei. Next we present chapters that analyze the most important transformation initiatives of Huawei. Figure 1.3 presents a timeline of major events and transformation initiatives. The first major transformation Huawei tackled was to create an integrated product development (IPD) process. Chapter 3 analyzes the problems Huawei faced in its product development process. As Figure 1.4 illustrates, to achieve the full benefits from the system of product development routines that were imported from Western firms with the help of IBM consultants, this initiative required involvement and/or changes in all functions of Huawei. Chapter 4 presents a similar analysis for Huawei’s integrated supply chain (ISC) initiative that started in 1999, and Chapter 5 analyzes the transformation of the financial accounting routines (the IFS initiative) that was begun in 2007. Next, we present an analysis of the changes Huawei made in the course of its history to its human resource management system (Chapter 6). Chapter 7 shows how Huawei needed to change its existing routines and develop new routines as it started to internationalize from 1996 onward, and over time came to be a true multinational corporation operating in 170 countries. The next two chapters analyze the changes of the R&D organization (Chapter 8) and the strategy and organization for Intellectual Property Management (Chapter 9). Chapter 10 offers some conclusions from the study. We realized that we could make this book even more valuable to readers by soliciting commentaries on the various chapters from other scholars who are experts on the topic discussed in a particular

 . Huawei’s major transformation initiatives

    Integrated Human Product Resource Development Management

Integrated Financial Services

Integrated Supply Chain Management







Top Management R&D









Human Resource Finance











Marketing and Sales Intellectual Property International Expansion



















 . Functional interdependence in transformation initiatives

chapter. We asked the commentators four questions to stimulate their reflections. i.

To what extent are the Huawei practices described in the chapter special or very common in China (or in the world)?

ii. Given your knowledge of Huawei, what is missing from the chapter? We suspect there is plenty of room to make different interpretation of what the facts mean from the one offered in the chapter. If you have different interpretations, this would be clearly something valuable for a reader to know. iii. Somewhat related to point 2, what would you like to know more about having read the chapter? iv. If you could do additional research on the topic, what other questions would you think are worthy to pursue? Should one study those questions by trying to find out additional evidence from Huawei or should one study other firms instead?

As you will see after various chapters, the commentators have put Huawei into a larger context. We build on this in the final chapter, where we offer “Concluding Thoughts from a Comparative Perspective.” Our goal for this book is to provide the reader a unique tour of how a Chinese entrepreneurial start-up has transformed itself into a leading global player. We hope that the reader will agree at the end of

      this book that we achieved this goal even though we certainly have not provided the final word on Huawei.

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Commentary on Chapter 1 Arie Y. Lewin Duke University

Liisa Välikangas Danish Technical University & Hanken School of Economics

Ying Zhang Rotterdam School of Management

.



This book is unique on several dimensions. It describes the evolution of the Huawei Company from founding in Shenzhen in 1987 selling telecom switches to becoming a 105.191 billion USD company in 2018 and the number one provider of networking equipment (the backbone of telecommunication networks) and major global player in Android-based smart phones. It is unique in its contribution to the extant organization design literature by focusing on the dynamic evolution of organizational and decision-making routines involving successive periods of experimentation, consolidation and routinization, breakup, and again experimenting and enacting new routines always in response to new operational challenges or changes in strategy (e.g., Zhang, 2009, 2014). Third throughout the book the leadership of the cofounder Mr. Ren Zhengfei emerges as the major driver, thought leader and strategist behind the successive twist and turns in the early years and the subsequent growth story of this non-governmental affiliated private Chinese Company.

.

   

In the annals of corporate histories from founding to becoming iconoclastic success stories Huawei is not unique. In 1917, Konosuke Matsushita left Osaka Electric Light Company and founded, without capital, or a formal education, or experience in manufacturing, the Matsushita Industrial Company that today is known as the Panasonic company. In 1959 Dr. Kazuo Inamori founded the Kyocera company in Kyoto Japan. Dr. Inamori developed and managed the company based on his Amoeba Management (2006) system that institutionalized principles of flexibility, adaptation, and self-organizing



      critical for survival in the early years of the company. In 1976 Stan Shih Chen Jung and a few friends, with an initial investment of $25,000, founded “Multitech International,” which became Acer, which in the early years designed and marketed hand-held electronic games and later went on to distribute semi-conductors imported at lower costs from developing countries. In its early years Stan Shih directed attention to the necessity of being adaptive and flexible and following any opportunity short of “selling their wives.” In 1984 Zhang Ruimin became the founding general manager (later CEO) of the failing Qingdao Refrigerator Company, which he transformed into the Haier Company, the largest global white goods company (Lewin et al., 2017). On November 1, 1984 Liu Chuanzhi and ten engineers left the Chinese National Academy of Sciences and founded the Legend Company in Beijing with 200,000 yuan (25,000 USD). Legend evolves to become Lenovo a national champion, and a global player in the PC, server, and smart phone sectors. Although the odds of success for start-ups are notoriously slim to none, successful survivors share several attributes. At founding the companies share severe vulnerabilities of no financial resources, and no proprietary products, manufacturing, or technologies. However, in all of the above cases the role of the leader strategic IQ (Levine, Bernard, and Nagel, 2017) as thought leader and strategist are common to all documented stories of successful start-up companies. However, very few examples can be cited of detailed accounts of these start-ups’ early periods of survival and growth or of the role of the founder or of the critical handoff from founder to successor CEO. Most of the accounts can be gleaned from Harvard Business School teaching cases (e.g., Matsushita and ACER), from founder self-accounts (e.g., Inamori (2012); Matsushita (1991), or a few research studies and cases (e.g., Burgelman accounts of Intel, and Tian and Wu, 2015, Lewin et al., 2017; Zhang, 2017). This book is unique in its detailed accounts of the early period of trial and error, guerrilla strategies of finding small neglected unexploited market opportunities, surviving on small margins, dedication to discovering and satisfying the customer, and the subsequent organizational and strategic transformations through the lens of the evolving organizational routines (the iterative process of recognizing need for formalization, trial and error in creating routines, legitimization and formalization, experiencing failure, problemistic search to adjust routine, total breakup, and implementing new routines). However, transparency requires that we remind readers that case studies and books on start-up companies that discuss the successful surviving

    companies are criticized for left censoring. The analysis does not include startup companies who failed. In other words, perhaps the companies who failed engaged in very similar strategies as the successful organizations. Therefore, from the perspective of academic research such studies make interesting case studies but do not satisfy criteria of falsifiability, data transparency, and replication. Nevertheless, we find the book very compelling in its contributions to management knowledge on self-renewal through the lens of organizational routines, and to the growing literature on founder CEOs. In the commentary that follows we focus on the early period of trial and error strategy and opportunism, Ren Zhengfei’s leadership early selection as national champion, and Ren Zhengfei almost single-minded focus on maximizing the commitment and contributions of employees to the company, as well as some thoughts on the challenge of managing the handover from founder to next generation of professional managers. Figure A1.1 serves as the framework for our observations on the book. The figure should be thought of as evolving over time and provides the basis for analyses of founder – CEO strategic IQ (Levine, 2017) and actions at different stages of company evolution as well as of organization changes (such as routines) and strategies. Because of space limitations, we chose to focus our observations on founding conditions during the early years and on how the founder Ren Zhengfei manages requisite variety, achieves unprecedent employee commitment, leverages the company’s domestic success, and ultimately becomes a global competitor in IT networks infrastructure, smart phones, and a technology innovator. Lastly, we explore the challenge of the handover from the founder to the successor CEO.

.

   

Founding conditions (Stinchcombe, 1965) have been theorized to imprint themselves on the functioning of an organization past the start-up stage. However, it is rare to reconstruct key details of the early start-up period as described in this book about Huawei. How does such a journey start and evolve? The first steps taken by Huawei as documented in the book were characterized by Peter Williamson’s Leaders of Private Chinese Firms Simply Made It Up As They Went Along (Williamson, 2015; interview by Peter Murmann on June 3, 2015). Ren Zhengfei is quoted in Chapter 1 that he needs collective power, or knowledge, to move forward (Tian and Wu, 2015, p. 114). He humbly admits in another quote (Chapter 1) that he would not have been

 . CEO influence on organizational design and strategy Adapted from (Lewin and Stephens, 1994)

    able to lead the different activities even if he had wanted to (“As a matter of fact, I didn’t really have the ability to lead them”). Rather, he left the frontline “guerrilla commanders” to opportunistically follow and manage multiple strategies autonomously, not knowing how to become a more “hands-on boss,” which he desired eventually to become. “As a result, different managers implemented quite different practices in whatever part of the organization they were responsible for” (p. 14). This may also have allowed the business managers to choose unusual industry strategies and organizational routines and to serve niches overlooked by competitors. Reviewing founding conditions serves to examine the heritage on which Huawei’s strategies, organization, and management practices build on. Of particular, interest to this commentary is the extent to which the culture of improvisation and autonomous “guerilla” leaders of business units aligned with Ashby’s law (1956) of requisite variety and enabled exploitation of serendipitous opportunities in the business environment. We are particularly interested in the ways in which requisite variety is initially infused into the organization. From the description we note that initially, there was a highly varied culture reminiscent of guerrilla operations where the main goal is simply to get the mission done – serve the customer – without concern for conserving efforts, being efficient or having any rule books to go by. The hardworking culture resembles firefighting, but with a singular focus on solving customer issues, and like firefighting may have required countless, and uncounted, working hours and heroic commitment. How such commitment was created under extremely hardworking conditions – including employees not returning home and sleeping at the workplace (which earned Huawei the mocking moniker “mattress company”) is a later topic. Some competitors even referred to Huawei employees as a “wolfpack” due to their presumed ferocity and gang-like teams. However, the Huawei “packs” were highly focused, nevertheless. Customer needs determined the dedication of limitless effort: “As soon as we heard customers who demanded improvement, we would exert great energy to meet the demand” (Chapter 1, p. 14). As the company grew Ren Zhengfei assumes a more direct leadership role, in particular directing attention to emerging inflection points regarding administrative and organizational problems. In essence he insists on learning from and adopting Western “best management practices” such as supply chain management and always starting with the spirit of “copy exact.” Such

      attitude required genuine humbleness: “We must eliminate those who think they are smarter than IBM and smarter than anyone else in the world” (Chapter 1, p. 15). Although the insistence on learning from and adopting Western best in class routines must have the undesirable consequence of decreasing internal requisite variety, it is remarkable that Ren Zhengfei is openly worried about inertia setting in: We have been alternating from stability to instability, from equilibrium to non-equilibrium, from certainty to uncertainty. We are doing this over and over again to maintain the company’s vitality. (As quoted in Tian and Wu, 2015, p. 134 and Chapter 1 of this book, p. 19)

Ren Zhengfei also directs an effort to institutionalize “oppositional voices,” or “Blue Army” department: [T]he [Blue Army] department is supposed to organize debates and simulations that seek disruptive technology alternatives (Tian and Wu, 2015, p. 213). More recently, the Blue Army department has been asked to help push the practice beyond the corporate level strategy process to the business units by helping the business units set up their own “Blue Army teams.” (Chapter 1, p. 17)

Furthermore, routines are also broken with some regularity. To become an international player, Huawei needed to “de-routinize” many practices that were no longer effective as the firm expanded operations from China to 170 countries all over the world. For example, the company changed how employees participate in the profit-sharing plan, adopted new staffing routines for international operations and English was adopted as the company language. Ren Zhengfei moved even beyond best Western management practices. “The Huawei basic law has become obsolete. The management expertise of IBM is not totally fit for Huawei” (as quoted in Tian and Wu, 2015, p. 231, chapter 1, p. 24). Table A1.1 summarizes the origin and subsequent practices that contributed to the development and evolution of requisite variety capabilities at Huawei. It is evident from the accounts in the book, that Ren Zhengfei’s strategic IQ, thought leadership and environmental sensing capability has on many occasions directed attention to emerging inflection points that underlie resilient organizational capabilities. Ren has

    Table A1.1 Origins of internal requisite variety at Huawei 1. 2. 3. 4. 5. 6.

Lack of ability to lead complex business Autonomous guerrilla style operations Limitless dedication to any emergent customer issue Business units improvise in their business environments Unusual industry strategies (find a neglected niche) Seek and adopt Western best in class practices and operational processes 7. Spirit of “copy exactly” 8. Seeking oppositional voices (e.g., the Blue Army) 9. Moving beyond best practice and developing practices uniquely suited for Huawei also helped bring about the socially enabling mechanisms that support flexibility, adaptivity and change (Lewin et al., 2017).

.      Most commentators on whether China can escape the middle income trap by 2030 and become an innovation economy argue that to accomplish this national goal China must liberalize its economy and adopt some form of Western democracy. Lewin et al. (2017) observe that the collective history and deep-rooted behavior of successive generations of Chinese must be seen as an outcome of 3,000 years of rule by successive emperor dynasties and that the average Chinese considers and accepts the rule by the Communist Party merely as another manifestation of central authoritarian control. This is not to say that China will never adopt some form of Western democracy. However, the consequence of not knowing or not having ever experienced a different socio-political system suggests that the dominant socially enabling mechanisms of surviving the rule of successive emperors, and since October 1, 1949 the rule of the Communist party, is deeply manifested in the concept of loyalty and obedience. It underlies family dynamics, superior subordinate relationships, and acceptance of Communist Party leadership in directing social change and guiding the country economic development. Organizations in China, whether governmental, state-owned enterprises, national academies of science and engineering, private non-government affiliated companies,

      family enterprises etc., expect and rely on a high level of employee commitment to the organization. This is not to say that Chinese companies do not experience voluntary turnover. However, compared to liberal democracies in the West, commitment and loyalty to the enterprise is a dominant dynamic in China often to the point of voluntary sacrificing self for the good of the company. In post–World War II Japanese companies leveraged the promise of lifetime employment into an absolute commitment by employees to the company. Loyalty and obedience were reinforced by a seniority-based compensation system and guaranteed retirement income and benefits. Consistent with Confucianism, Ren Zhengfei believes in, and expects total employee commitment and loyalty. However, it seems that Ren Zhengfei also implemented an employment relationship that reinforces employee commitment through a very effective Machiavellian bargain that is reflected in a coercive dimension (resource control) and a pro-social aspect. The resource control aspect (the coercion) is explicit in the potential financial rewards (the Employees Share Ownership Plan), policy of laying off weak performers (bottom 8 percent), and a strict merit-based performance evaluation system that rewards high performing “strivers.” The prosocial aspect is reflected in Ren Zhengfei interpretation of the four spheres of living (Fung Yu-Lan, 1930) especially the moral sphere, and the transcendent sphere although not articulated in the book but is discussed later in this commentary (Zhang, 2017). The bargain has been very effective. The combination of employees share ownership and allocation of bonuses and dividends based on a strict merit-based performance evaluation system, rewards high performing “strivers” with a disproportionate share of annual dividend and bonuses. The rationale behind this ownership structure is the belief underlying Chinese transitional management philosophy that “collective vision and collaboration can only be facilitated when complemented by wealth sharing” (人聚财散) and psychologically, Huawei employees can always hope to become a “rich” high performing “striver.” As a consequence, employees’ autonomously selfsacrifice for sake of company success. They work long hours as a striver “believer” to the point of high burn out and divorce rates. Apparently, the company earned the public moniker as the “mattress company” because of the prevalence of employees remaining at their desk and sleeping on blankets and mattresses provided by the company or supplied by the employees.

    Although the PR may have been embarrassing, sleeping on mattresses may actually somehow enforce togetherness – and it points to the need to compete harder than the guy on the next mattress. Moreover, following the crucial meeting in the year 2000 between Prime Minister Zhu Rongji and Ren Zhengfei in Shenzhen, as a result of which Huawei was unofficially recognized as a national champion, may have further reinforced employee identification with the company and may have underlined the importance of working together toward a higher goal. Another form of resource control relates to human resources polices and Ren Zhengfei stated belief that “leaders” must strive to improve themselves – “Improving personal quality is the concern of leaders themselves, and Huawei provides a platform for them to improve, but they had to pay for the training” (Ren Zhengfei, 2011, p. 20, Chapter 6 this volume). As a result, leaders (and perhaps high-performing strivers), pay for their own continuing managerial education, simultaneously reflecting both a form of commitment to the company and as a way to maintaining their high-performing striver status. In January 2008 the State Council enacted a new labor law that protected the rights and interests of employees who had worked in the same company for more than ten years or had twice signed an employee contract with the same company. The new labor law conflicted with basic principles of Huawei flexible HR policies, and Ren Zhengfei became concerned that the new law could make Huawei inflexible, reducing its ability to respond to competitive and technological changes. To preserve the basic values of Huawei, the company required a new round of collective resignations. As in prior collective resignations, all 7,000 managers who had been employed by Huawei for over eight years submitted a resignation letter by the end of 2007 (p. 27, Chapter 6). The strategic reserve work force was another human resource routine created to give Huawei managers flexibility in managing staff whose positions become obsolete due to changes in Huawei competitive environment, strategic reorientation of the company or technological changes (e.g., when applications of artificial intelligence replace service staff positions in predicting network break downs). A specific example involves the transfer of 2000 R&D staff to the strategic reserve force in 2016, to be reassigned to providing product solutions or working in the department of global technology service (p. 31, Chapter 6).

      However, as employment has grown to 170,000 globally the company is discovering that outside of China managing employee commitment and loyalty to company presents new challenges. Confucianism cannot be counted on for commitment and loyalty to the company outside of China. For example, in many EU countries laying off employees comes at high administrative and financial costs. Also legally the original employee profit sharing plan cannot be extended to non-Chinese Huawei employees. The need to rethink the original employee share ownership plan and especially to adjust for employees who have become less committed or burned out, has led to phasing in the time unit plan (TUP), in 2014 (described in Chapter 7). In summary, it is altogether clear, that from the inception of Huawei, Ren Zhengfei has been resolutely, perhaps single-mindedly, focused on employee ownership forms of incentives that maximize commitment and contributions of Huawei human resources. To us it seems, that in his mind, this is a challenge that requires constant attention, tweaking and restructuring, in line with Huawei employment growing globally. Most recently, for example, executives (but not members of the founding team) can retire at age forty-five if they have worked at least eight years at Huawei and upon retirement return a portion of their shares to the company.

.

  

In his book The Treaties on the Nature of Man, the most respected Chinese philosopher Professor Fung Yu-Lan (1930) argued that the nature of man is defined by four spheres of living – the innocent sphere, the utilitarian sphere, the moral sphere, and the transcendent sphere. The core values of Huawei, as reflected in many of Ren Zhengfei speeches and numerous comments to employees are consistent with these four spheres of living. However, the behavioral implications and strategies are more like an open conversation through which Ren Zhengfei revisits the manifestation of these spheres at the inflection point of each stage of Huawei’s evolution. The innocent sphere is analogous to inception when like children and primitive people and without being self-conscious or understanding consequences of actions, individuals engage in trial and error behaviors. Success is attributable to luck, good fortune, or the gifts of the nature. In the very early years Ren Zhengfei is quite open and humble about being “innocent” and not knowing how best to manage or how to discover good

    business opportunities and therefore, his preference for trial and error and multiple parallel explorations. In the utilitarian stage individual is focused on maximizing self-benefits. The utilitarian stage is manifested in “each Huawei person can be striver” and “strivers must be respected and rewarded” and most importantly “rewards must come from bitter striving effort and a psychological sense of achievement but assessed strictly based on merit.” The moral sphere perhaps best embodies Ren Zhengfei’s pro-social thinking. It assumes that individuals recognize being a member of society and consistent with Confucianism he believes in acting “for the sake of righteousness, and not only for the sake of personal benefits.” In other words, his actions should also benefit the society. Ren Zhengfei’s teaching emphasized that “. . . Huawei is a Chinese company, is devoted to its own country and the company has a responsibility to advance China’s prosperity beyond just obeying laws and rules.” Starting with assumption that all Huawei employees are good people who collectively also care for society, Ren Zhengfei establishes an internal “Huawei morality committee” whose role is to identify “striving stars” who also care for society. In the transcendent stage the individual is assumed to understand that he/she is not only a member of a society, but a citizen of a universe. It is actually not clear from Ren Zhengfei speeches and his teachings what the transcendent stage means for Huawei and its employees. He does seem to link earlier teachings that “Huawei’s success inexorably rests on collaborations with customers, suppliers and institutional actors” with a responsibility to “contribute to the world.” Although there is no direct evidence that Ren Zhengfei is influenced by the Zhong Yong’s The Doctrine of the Mean (Sheng Dai, Han Dynasty China). Much of his beliefs seem to reflect the precept of The Doctrine of the Mean, especially as they apply to the Huawei notion of “gray” management of avoiding extremes, objectivity, sincerity, honesty, propriety, and perfecting oneself by learning from others to improve self during the process of self-cultivation (e.g., via self-education or when company was making extraordinary R&D investment), self-discipline (i.e., focusing and concentrating), and self-questioning (improving from problem-solving). In terms of collaborating with stakeholders (Zhang, 2017), Ren Zhengfei attitudes reflect very much Zhong Yong advocacy of leniency in the context of trying to improving partners’, suppliers’, and customers’ capabilities, in understanding and eliminating concerns, and in exercising forbearance

      especially when it involves Huawei customers (customer-centered strategy) (Zhang, 2017).

.        In recent years the subject of founders and successors has been receiving renewed attention (Wasserman, 2003). However, with the exception of studies on succession involving “sons of bosses” of family businesses, the literature is not well developed with regards to the enormous increase in start-ups, especially in Silicon Valley. Of particular interest is the case of founder CEOs who are heavily invested in their firms psychologically, have served the business for many years, and now face retirement or external pressure to hand over management to a CEO successor. Over half of the richest families in Asia, listed in the 2015 ranking of the Forbes Asia top fifty richest are of Chinese descent. But none of them are based in mainland China. The list also includes fourteen Indian families. To qualify, a family’s wealth and participation in building its fortune had to extend at least three generations, which is the major reason why recently minted indigenous wealthy Chinese families are not listed. However, the Forbes 2016 list of richest families in China identifies over 600 families with a net worth of 1 billion USD or more, of which eighty-two are led by founders whose age is sixty-two years or above. This suggests that some of these Chinese wealthy families may have already confronted the handover challenge from founder to next kin successor or to professional managers who are not family related. The analysis of the overseas Chinese family businesses by Gordon Redding (1993) provides the most cogent account for why founders of overseas Chinese family businesses end up aspiring building a family dynasty. The Chinese family business is seen as a “family fortress” and as the means for accumulating wealth by specific members of the family clan (usually immediate family members) and will also include a very small number of outsiders that have clear mutual dependence with the family. The family business is guarded from any outside influences and most importantly its internal workings are not observable to outsiders. It is managed on the basis of benevolent paternalism and control is determined by nepotistic means. The wealth creating effectiveness is based on intense managerial commitment and dedication by family members and key middle management staffs, very flat

    organizational structures, and great flexibility and adaptive capabilities. Continuity is assured by continuing the family dynasty. In the United States the Mars Company founded in 1922 by Frank C. Mars was ranked by Forbes in 2015, as the sixth largest privately held company in the United States and is perhaps the most iconoclastic manifestation of a US family business dynasty that fits Gordon Redding description of overseas Chinese family business dynasties. The modern history of private business ownership in China and the rise of the newly minted super rich Chinese families can be traced to 1978. Although for the vast majority of wealthy Chinese families or founders the issue of handing over the business to next generation may not be actual because of young age, there are at least eighty-two families whose founder age is above sixty-two and the handover issue could be approaching the moment of decision. Private family enterprises in China, that are not government affiliated, may fill a unique institutional void between state-owned enterprises and collective enterprises at the province or city level by developing and exercising governance through family ownership (Peng and Yi, 2010). In such a case, family governance may provide the basis for navigating complex societal environments based on trust, perceived commitments, and other cultural factors. In the case of Huawei, it would be important to determine if a family heir is viewed as a necessary condition for domestic institution maintenance or perhaps a family heir could complicate navigating the complexities of Huawei global business. The company is characterized by a highly competitive culture. Thus, anyone inheriting the mantle of CEO-ship ought to be seen worthy in terms of his or her commitment to the company and also in terms of exceptional performance. An interesting analog perhaps, is the global furniture giant IKEA where the founder-CEO Ingvar Kamprad evidently thought his three sons were not suited for running the company after initially giving them more visibility (Hansegard and Grundberg, 2012) and chose outsiders to run the company while giving the sons the moral obligation to sustain and continue the founder’s values. If Ren Zhengfei appoints a family member, a daughter or a son, how will it impact the credibility of Huawei’s competitive culture? A more strategic consideration for Ren Zhengfei, who at the time of this writing is seventy-four years old, is to determine if the CEO-to-be has the strategic perspective required beyond the obligatory managerial and administrative abilities for guiding the company over next ten years of global development. In short has the CEO-to-be demonstrated the vital strategic IQ

      for anticipating and making the next moves? In other words does the CEO-tobe have the strong strategic intent to drive this global company forward (Hamel and Prahalad, 1989), and the deep belief in the moral sphere described in the leadership philosophy of the company? Lastly, it is not clear whether Ren Zhengfei has built enough of an institution and ownership control and has the moral privilege of making that choice in the eyes of Huawei employees, customers, and other key stakeholders (e.g., the state, which is treating the company as a national champion) to make the decision by himself. But we find it especially noteworthy that in 2013, Ren Zhengfei announced in a letter to the employees of Huawei,1 that his son and daughter do not have what it takes to succeed him, “. . . they do not have vision, character or ambition to become the next CEO of the company” and that “Huawei’s successor should not only have vision, character and ambition, but also a good global perspective and the acumen to drive the business. . . . My family members do not possess these qualities. Thus, we will never be in the running of the successor race.” This is a surprising confession in the world of Chinese company founders, who often make their offspring their heir apparent. This letter makes it clear that Ren Zhengfei has arrived at a decision that neither should be considered as the next leader of the company. This letter to employees should signal to the top echelon of executives at Huawei that the company will commence a process to select a CEO internally. The race to select a successor that was triggered by Ren’s letter could actually damage the company and result in an exodus of some talented senior executives. Ren Zhengfei’s daughter has significant executive position in the company, i.e. deputy chair of the board of directors, however, she is not part of the rotating executives’ group who rotate every six months as acting CEO of the company. That group includes individuals that are not related to Ren by blood and include deputy chairmen Ken Hu and Guo Ping, and vice president Eric Xu and all three are considered as possible successors. Moreover, the expanded executive policy group has assumed strategic and operational decision making. The clear impression is that Ren Zhengfei has been concerned with establishing management continuity following his retirement from actively leading the company and that he is seeking to hand over

1

Chon, G. (2013, April 29). https://qz.com/79280/huawei-ceo-ren-zhengfei-says-hisson-and-daughter-dont-have-what-it-takes-to-succeed-him/.

    leadership of Huawei to a professional executive successor who will continue to maintain and lead according to values and management philosophies espoused by Ren Zhengfei. These considerations of founder successor are common in many large companies around the world. Peng and Yi (2010, p. 254) note that family ownership is more the rule than an exception: “[In] Asia, (continental) Europe, and Latin America, the vast majority of large, publicly traded firms are family owned and controlled” (Ahlstrom et al., 2004; Carney and Gedajlovic, 2002; Claessens et al., 2000; de Miguel et al., 2004; Faccio et al., 2001; Gedajlovic and Shapiro, 1998, 2002; La Porta et al., 1999; Silva and Majluf, 2008; Thomsen and Pedersen, 2000). A final note on a perspective that may be helpful in presuccession planning is proposed by Chen et al., 2016). It relates to the concept of stewardship: Stewardship in the business context refers to the unusual devotion to the continuity of the company through the assiduous nurturing of a community of employees and by seeking closer connections with customers (Miller et al., 2008). Since stewardship places the long-term interests of a group ahead of an individual’s self-interests (Hernandez, 2008), the founder CEOs of family firms should choose successors who have a sense of personal responsibility. Founder CEOs can foster stewardship in their successors, especially professional managers, through various relational, motivational, and contextually supportive leadership behaviors. (p. 5112)

The authors suggest that CEOs as stewards who care deeply “about the long-term prospects of their business and their family’s fortune, reputation, and future” (Chen et al., 2016, p. 5112; Miller et al., 2008) are more likely to be motivated to influence or control the selection of their successor. Suppose, that this is of importance to Huawei’s founder. Are Huawei and the family one and the same or two very different paths to unfold?

.



In this short commentary, we have sought to combine an analytical approach with a contextual understanding of the leadership of Ren Zhengfei, one of the iconic figures in the annals of Chinese corporate world post-1978.

      The overall focus of the book was on the emergence, development, and change of organizational routines, a largely unexplored theme in strategy and organization theory. Throughout this original, comprehensive, and insightful account the role of Ren Zhengfei looms larger than life. We conclude that to analyze a Chinese national champion company like Huawei, poses the challenge of fathoming the founding conditions, underlying the early days and the leadership of Ren Zhengfei, the patriarch CEO who himself evolved to become the thought leader, teacher, and strategist behind the remarkable evolution and growth of the company. Ren Zhengfei’s December 2011 speech2 to Huawei employees is highly revealing of his early difficult childhood experiences (mostly upsets and traumas), which led him to appreciate that “hero leadership” does not work for him and that his leadership advantage derives from leveraging collective power – delegating management and entrepreneurial initiatives to team or business leaders (guerrilla commanders in the early days) – that became the basis for accepting and encouraging improvisation and opportunism. He also candidly acknowledged that, at the time of founding Huawei, he “knew nothing” (very little) about how to manage a company and how to develop technology, and therefore, he needed to attract people who could take initiatives, act opportunistically (guerrilla commanders), and solve operational independently. That became the basis for advocating the use of best in class “partners” such as consulting companies, IBM, and Renmin University professors. In this sense, he leveraged the “collective power” concept as a way to embed an open innovation mind set to adopt best in class management practices and ultimately to develop Huawei superior capabilities. Specific transformative events include, for example, the “IPR battle” with Cisco and the decision to abide by international IP regimes, but at the same time, the launch of the huge investment in building Huawei’s own R&D capabilities that have placed the company on the 5G technology frontier. Throughout the company evolution Ren Zhengfei has shown a single-minded focus on human resources policies that were intended to maximize employee commitment and contributions to the company. He shows a keen understanding of repeatedly adapting the basic idea of creating a collective vision reinforced with opportunity to share wealth on the basis of strict merit driven

2

www.fastcompany.com/3048197/why-purpose-driven-companies-are-often-moresuccessful

    performance evaluation (i.e., strict fairness in profit sharing, stock options, and dividends). Most recently as the company employee base expanded globally Ren Zhengfei anticipated that the employee stock option plan policies will have reached the point of diminishing effectiveness and orchestrated the shift to the time unit plan. Moreover, the company has been resilient through its entire history since founding in 1987. Starting from rather modest beginnings of muddling through, we suggest that the foundation for resilience is perhaps due to initially creating a serendipitous organizational capacity – stemming from the early improvisational necessity – to maintain internal requisite variety despite the focus on growth. Resilience was in our view further reinforced by the unique leadership philosophy of Ren Zhengfei that imbued the organization with a sense of something larger than just performance goals, including a sense of mission to contribute to building China and the strategic importance living up to extreme expectations of being customer centric. Ren Zhengfei leadership of articulating the moral sphere may be typical of Chinese leadership but they are increasingly discussed as purpose-driven business globally too.3 However, it remains to be seen whether the company can maintain its incredible drive after the founder makes room for the successor and whether the successor will be able to maintain the company’s ambition of global growth, transformation, and commitment in particular as the company is gearing up for the era of 5G and the competition with Qualcomm and other suppliers for 5G dominate at a time when Huawei is being shut out from the US market.

 Ahlstrom, D., Young, M. N., Chan, E. S., & Bruton, G. D. (2004). Facing constraints to growth? Overseas Chinese entrepreneurs and traditional business practices in East Asia. Asia Pacific Journal of Management, 21, 263–285. Ashby, W. Ross (1956). An Introduction to Cybernetics. London: Chapman & Hall, London. Carney, M. & Gedajlovic, E. (2002). The coupling of ownership and control and the allocation of financial resources: Evidence from Hong Kong. Journal of Management Studies, 39, 123–146. 3

See e.g., Fast Company, July 21, 2015 www.fastcompany.com/3048197/whypurpose-driven-companies-are-often-more-successful

      Claessens, S., Djankov, S., & Lang, L. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58, 81–112. Chen. Yi-Min., Liu. Hsin-Hsien., Yang. Yung-Kai., & Chen, Wei-Hua. (2016). CEO succession in family firms: Stewardship perspective in the pre-succession context. Journal of Business Research 69, 5111–5116. De Miguel, A., Pindado, J., & de la Torre, C. (2004). Ownership structure and firm value: new evidence from Spain. Strategic Management Journal, 25, 1199–1207. Faccio, M., Lang, L., & Young, L. (2001). Dividends and expropriation. American Economic Review, 91, 54–78. Fung, Yu-Lan. (1946). Xin yuan ren (A New Treatise on the Nature of Man). Chongqing: Commercial Press. Gedajlovic, E. & Shapiro, D. M. (1998). Management and ownership effects: Evidence from five countries. Strategic Management Journal, 19, 533–553. Gedajlovic, E. & Shapiro, D. M. (2002). Ownership structure and firm profitability in Japan. Academy of Management Journal, 45, 565–575. Hamel, Gary. & Prahalad, C. K. (1989). Strategic intent. Harvard Business Review, 83(7), 148–161. Hernandez, M. (2008). Promoting stewardship behavior in organizations: A leadership model. Journal of Business Ethics, 80(1), 121–128. Inamori, K. (2012). Amoeba Management: The Dynamic Management System for Rapid Market Response. London: Taylor & Francis. La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54, 471–517. Levine, S. S., Bernard, M., & Nagel, R. (2017). Strategic intelligence: The cognitive capability to anticipate competitor behavior. Strategic Management Journal, 38(12), 2390–2423. Lewin A. Y. & Stephens, C. U. (1994). CEO attitudes as determinants of organization design: An integrated model. Organization Studies, 15(2), 183–212. Lewin, A. Y., Välikangas, L., & Chen, J. (2017). Enabling open innovation: Lessons from Haier. International Journal of Innovation Studies 1, 5; doi: 10.3724/ SP.J.1440.101002; http://engine.scichina.com/doi/10.3724/SP.J.1440.101002 Matshutia, K. (1991). Velvet Glove, Iron Fist and 101 Other Dimensions of Leadership. New York: PHP Institute, Inc. Miller, D., Le Breton-Miller, I., & Scholnick, B. (2008). Stewardship vs. stagnation: An empirical comparison of small family and non-family businesses. Journal of Management Studies, 45, 51–78. Peng, M. W. & Yi, J. (2010). Institutions behind family ownership and control in large firms. Journal of Management Studies, 47( 2), 253–273. Redding, G. (1993). The Spirit of Chinese Capitalism. Berlin: Walter de Gruyter.

    Silva, F. & Majluf, M. (2008). Does family ownership shape performance outcome? Journal of Business Research, 61, 609–614. Stinchcombe, A. (1965). Social structure and organizations. In James G. March, (Ed.), Handbook of Organizations, Chicago: Rand-McNally, pp. 142–193. Tian, T. & Wu, C. (2015). The Huawei Story. Thousand Oaks, CA: Sage Publications. Thomsen, S. & Pedersen, T. (2000). Ownership structure and economic value in the largest European companies. Strategic Management Journal, 21, 689–705. Wasserman, N. (2003). Founder-CEO Succession and the Paradox of Entrepreneurial Success. Organization Science, 14(2), 149–172. Zhang, R. (2017). Haier is the sea. Management Organization Review, 12, 797–814. Zhang, Y. (2009). Alliance-based network view on Chinese firms’ catching-up: Case study of Huawei Technologies Co. Ltd. United Nations University, MERIT Working Paper #2009-039. Zhang, Y. (2014). Catching-up by Chinese multinational firms using network strategies. M. Marinov & S. Marinova (Eds.), Successes and Challenges of Emerging Economy Multinationals. London, UK: Palgrave Macmillan. Zhang, Y. (2017). Huawei: Nothing is more important than you being inspired and empowered. EUReporter. www.eureporter.co/frontpage/2017/03/18/china-noth ing-is-more-important-than-you-being-inspired-and-empowered/



The Executive Management Team and Organizational Change A Routinized Transformation Perspective Ziyi Zhao, Bin Guo, and Xiaobo Wu

.



Firm entrepreneurs play essential roles in determining the long-term growth of a firm. On the one hand, entrepreneurs possess strong power to make strategic choices that shape the firm’s development trajectory. On the other hand, entrepreneurs’ values and managerial philosophy can significantly influence the formation of a cultural gene inside the firm. Huawei is a good example of the influence of firm entrepreneurs on organizational transformation. As one of the most innovative technology-based firms in China, after thirty-one years’ development, Huawei’s revenue reached 105.2 billion USD in 2018, with an astonishing year-on-year growth rate of 19.5 percent (Huawei, 2019). In fact, Huawei’s rapid growth over the years has significantly benefited from the gene of routinized transformation. The gene of transformation was implanted by the founding entrepreneur, Ren Zhengfei, from the beginning of Huawei’s establishment and was further forged by the executive management team (EMT)1 in the journey toward becoming a leading global company. This chapter first describes how Huawei’s top management team plays the roles of initiator, leader, and champion in its routinized 1

As Ren Zhengfei indicated in 2015, one of the key elements that brought about Huawei’s constant success lies in its strong management team (speech at the Marketing Activities Conference, April 2015).



  ,  ,    transformation. In particular, three aspects of the relationship between the top management team and Huawei’s transformation are discussed: how the top management team was involved in the transformation, how the top management team controlled the entire transformation process, and how the top management team implemented routinized transformation. Second, this chapter examines the transformation of the top management team itself. The transformation of Huawei’s leadership structure has evolved along with Huawei’s development over all these years, in addition to the fit of the internal structure with a changing business environment and development strategies. Thus, it is important to understand how Huawei maintained consistency among all possible changes over time. It is worth noting that, as one of the prominent features in Huawei’s transformation history, these transformations have never been planned and implemented as a one-time activity. Instead, Huawei’s transformation is characterized as a constant process of “de-routinization, re-construction, routinization,” which to a certain extent provides the foundation for this company to survive and thrive in the ever-intensifying competition in the telecommunication equipment sector.

.

    

Beginning in 1996, Huawei took three years to establish the first version of its management system, which was manifested in the Huawei Basic Law.2 Since then, Huawei has never stopped in its steps of organizational transformation with a focus on business operations improvement. In 1999, Huawei started to tease out the internal structure and launched the integrated product development (IPD) and integrated supply chain (ISC) transformation projects later that year. In 2007, the 2

The Huawei Basic Law is an official document for the Huawei Company that explicitly clarifies its strategy, mission, value, and culture, and management rules. The document includes six chapters and 103 sections, with approximately 9,800 words. The entire text is provided in Appendix D of this book.

    &    customer relationship management (CRM) system transformation projects were initiated, which established a solid basis for Huawei’s transformation in international financial services (IFS). In parallel, Huawei devoted much effort to organizational restructuring to enable the launch of new routines. Notably, the successful implementation of these large transformations can be attributed to the active roles of Huawei’s leaders in the transformation process, i.e., initiating transformation through a routinized transformation management structure, implementing transformation with routinized steps, and building the gene of routinization into the company’s culture.

Top Management Team as the Catalyst of Change “The sustainable development of Huawei ultimately relies on scientific and reasonable mechanisms as well as successors of generations after generations who are committed to the company’s core values and who continue to struggle constantly. As far as I am concerned, the establishment of such a mechanism should start with me.” —Ren Zhengfei. Letter of Resignation, 2007

Huawei’s transformation is not the responsibility of one specific functional or business department. Horizontally, all related departments have contributed to the transformation. Vertically, it has been initiated and well controlled by the top management team. One of the critical features for transformation management is that Huawei’s organizational transformation has the full support and direct involvement of the top management team, which is heavily involved through a routinized method. The idea of transformation may originate from one or two top leaders. Ren Zhengfei, the founder of Huawei, often has major influences on the goal-setting and strategies in transformation but may leave untouched the tactics around marketing or research and development. A standardized mechanism has been built up to guarantee the initiation and smooth implementation of

  ,  ,    transformation; it consists of the executive steering committee (ESC), the transformation project management office (PMO), and the transformation project team. Since the launch of the IPD and ISC projects in 1999, Huawei has formally institutionalized the executive steering committee (ESC) for instructing and strategically managing transformation projects from the top management team level. The chairman for committee was Sun Yafang, who also worked as the president of the Huawei board. Ren Zhengfei has never been the committee chair, only a member. Similarly, the head of the IBM consultant team was a member but not chair of the committee. This arrangement made it easier for the new mechanism to not be completely dominated by Ren to prevent the company from “stepping on old roads even with new shoes.” The members of ESC were chief directors from specific departments. The responsibility of the committee was to elucidate the vision of transformation as well as the overall outcome. Thus, ESC made crucial decisions concerning different transformation stages, from the strategic approach to steer transformation in the right direction (Hu, 2016). Ren would not be present at every meeting of the ESC but at important major decision points, and he would help the chair when internal resistance to the change plans needed to be overcome (Hu, 2016). The major administrative office for the ESC was the project management office (PMO), which was first led by one of the later rotating CEOs, Guo Ping. The PMO was responsible for the concrete transformation process, including preparing all documents about the transformation meetings, tracing the progress of the transformation and supervising the completion quality (Hu, 2016). The PMO coordinated the resources between different transformation teams. The communication between transformation teams could be achieved through the PMO to alleviate possible conflicts and advance multiple projects. The PMO members were professional leaders selected from functional departments. Therefore, the PMO office also served as an appropriate venue for cultivating the vision of the overall direction and incubating future leaders.

    &    In addition, Huawei formed professional teams for specific transformation projects. One executive director or senior vice president from the top management team was appointed as the sponsor of a specific project. The project team consisted of a core group and peripheral teams. The core group was equipped with full-time team members who were fully released from their former work, led by managers who were the directors of or the most important people from the primary functional departments (Hu, 2016). The peripheral teams were included in the transformation team while still maintaining their original positions and responsibilities, because the company believes that such a practice can deepen the understanding of practices and change during their planning for transformation (Hu, 2016). Therefore, Huawei has established routines in its transformation management. The top management team plays different roles in the transformation mechanism. First, it was the leader of a specific management team because transformation was a typical “top leadership project.” For example, Ren Zhengfei led the IPD/ISC transformation project team himself, with all team members directly reporting to him. Subsequently, Meng Wanzhou, who later in 2011 was elected to Huawei’s board of directors, was in charge of the IFS transformation team. In leading the transformation project team, the leaders do not merely decide directions based on their managerial power or personal

 . The three-level transformation team Source: summarized by authors

  ,  ,    judgments. Instead, the leaders at Huawei initiate transformation according to the suggestions and feedback from front-line employees, whose experience can be used to locate current deficiencies and to find target opportunities. Therefore, transformation has served as an incubator for the next generation of leaders. Second, the top management team played the role of the pioneers of transformation. According to the adage, those in subordinate positions will follow the example set by their superiors. Leaders are role models for employees and should be involved in transformations even more deeply than other employees. During the transformation process, people are often reluctant to accept new routines for fear of losing the rights that they used to have. Aiming to facilitate changes, Huawei’s top managers revealed their high commitment to the company and even volunteered as the first to make changes. Evidence supports the fact that top managers at Huawei took the lead in transformations. In 1996, Huawei began to deliberate on human management system transformation by reshuffling all the employees. A representative event is the “collective resignation” of the sales department. Regular employees in the sales department were required to submit both a personal progress report and resignation report at the same time. But only one of these two reports would be approved by the company, which implies that employees were constantly competing to keep their jobs with the company. Employees were reluctant to do so because they were worried about losing their jobs. The director of the sales department, Sun Yafang, took the lead to resign first (Wu, 2014). After her, other leaders of the sales department handed in their annual report as well as their resignation letter, which gradually spread to the entire department. Four years later, when Huawei encountered the “winter” of the information technology industry, Sun Yafang, then on the Huawei board of directors, again stood out, voluntarily taking a pay cut to help Huawei survive the economically difficult period. Following Sun’s action, mediumand high-level leaders all voluntarily applied for pay cuts. Ren Zhengfei himself is also strictly constrained by Huawei’s transformation

    &    mechanism. As the major initiator of transformation, Ren took the lead to conform to the new routine. In 2007, to mitigate the drawback of the existing seniority payment system,3 to stimulate organizational vitality and to better motivate employees, Huawei called for another round of collective resignations to reshuffle the working IDs. Ren Zhengfei took the lead in resigning, though he ranked No. 1 in the old employee ID system. Following him, approximately 6,687 employees were involved in the mass resignation, with 6,581 of those resigning labor contracts with the company. A total of ninety-three leaders from different levels voluntarily resigned and were reemployed in lower positions. A total of thirty-eight employees chose to retire from work, fifty-two left for other career opportunities, and sixteen left due to performance and competence problems (Huawei, 2007). To summarize, transformation needs a clearly structured mechanism and leaders to take the lead. The standardized mechanism minimizes the possible influence of biased experience and improper personal influence. Leaders can maximize their understanding of real situations and gain the most possible utilizable resources through vertical or horizontal communication to achieve transformation success and to cultivate their managers’ change management capability. Simultaneously, leaders should take responsibility for transformation to ensure that the organization moves in the right direction and that the new routines are reconstructed based on real problems inside the organization. More importantly, to transform, leaders first serve as role models for subordinates and increase the acceptance of transformation, particularly when the transformation may be harmful to personal benefits.

3

In the seniority payment system, seniority ranks are closely related to the large salary difference between senior employees and new employees. Meanwhile, the employee ID number reflects the level of seniority in the company (the so-called Huawei employee ID number culture).

  ,  ,   

Transformation Cycle: Copying Exactly, Refining Later, and Then Solidifying “We are now purchasing a pair of American shoes from the Hay Group. They may not currently fit Chinese feet. On the concept of improving management and learning Western advanced management concepts, our strategy is to cut our feet to suit the shoes, to copy exactly, to refine and then to solidify.” —Ren Zhengfei, The Top Priority Is to Survive, 2001

In parallel with transformation management structure, the implementation of transformation is also crucial. Huawei has taken implementation as a crucial critical issue in every step of transformation. Huawei selected leaders from the functions to join the fulltime transformation team for the consideration of smoothing the implementation of transformation. Together with the routinized transformation mechanism, new IT systems were set up in advance to support transformation and to assist with new routines. Moreover, unlike other firms that adopt transformation as a type of formalism or a prestige project, Ren Zhengfei insists that Huawei should implement each transformation project following a standardized process based on incrementalism: “Transformation is an incremental process and cannot be accomplished in one action. What the company should do is to copy exactly first, then refine and finally solidify” (Ren, 2001b). The first step in the implementation is to copy exactly what the external consultant firms suggest, given that Huawei invites external experts and consultant firms to help design and implement transformation projects. On the one hand, to copy exactly means to learn completely from external experts to ensure sequential gains. Ren Zhengfei demanded all of Huawei’s employees adopt the experts’ suggestions. He made this approach very clear by literally saying that it is necessary “to cut off your feet to wear the shoes” (xue zu shi lv).

    &   

Table 2.1 The history of Huawei’s transformation and its consultants

Time

Transformation

1996.3–1998.3

Huawei Basic Law

1997 1998 1999 1999 2003–2004

HRM transformation IT S&P IPD ISC Organizational Structure Design IFS LTC/CRM

2007–2014 2007–2015

Consultants/External experts Six professors from Renmin University Hay Group IBM IBM IBM Mercer Group IBM Accenture

Notably, the goal of inviting external consultants is to solve problems. The contracts between Huawei and the consultant firms were semi-open-ended. That is, different from the practice of Western firms with a fixed due date for the consulting service contract, the consulting contracts in Huawei were often without a preset fixed due date (Hu, 2016). Under such contracts, the payment for consulting services was made according to the number of experts, the amount of working days and, most importantly, according to the transformation quality after evaluation. Therefore, the consultants would be willing to investigate the roots of problems in detail and work out plans step by step. On the other hand, to copy exactly also means to imitate other departments inside Huawei that had accomplished transformation successfully before. Huawei’s transformation basically took an incremental approach and always started with a pilot transformation within one department. Once the pilot transformation reached the proposed expectation and outcomes, other departments exactly copied that department.

  ,  ,    Therefore, to copy exactly from the consultant firms was to accept all of the possible changes, guaranteeing that the company would actually learn from the outside through overcoming reluctance toward change and would de-routinize thoroughly. To copy exactly from the pilot department was to cut down transformation costs with a focus on routinization. The next step is to refine the practices learned from outside according to real situations through internalizing the external knowledge and turning it into company assets to reconstruct the system. The reconstruction process is in fact a continuous trade-off of deroutinization and routinization, requiring constant refinement and filtration based on real situations, in addition to a combination of both externally acquired expertise and the company’s internal experience. Ren encourages the top management team to constantly meet with the external consultant on both formal and informal occasions. Constant communication creates viable solutions because it allows the external consultant to clearly grasp the idea of the top management and because it cultivates professional leaders who can stimulate implementation. The spirit of self-reflection is addressed in the refinement because Huawei considers self-reflection to be the premise for improvement (Ren, 1998). Huawei routinizes the self-reflection spirit as an index for evaluating senior managers’ performance. “If an employee cannot master this weapon, then he can never be promoted” (Ren, 2001a). However, organizational transformation should not be endless but rather periodical. If there is no routinized system to constrain transformation, then such changes will be chaotic and out of control. Thus, one characteristic of Huawei’s transformation is standardized solidification. Huawei develops professional transformation templates. Employees follow the templates to achieve the required performance within a shorter period of time and with less effort, even in the absence of leaders. Additionally, specific IT systems are set up along with the transformation to solidify the new routines.

    &    Furthermore, Huawei solidifies transformation and routinization with the distinct imprints of its “customer-centric” culture.

Building the Gene of Routinization into Company Culture “If management did not start from small changes, then nothing could be achieved. The only thing that does not change is change itself; and the only thing that we need to implement constantly is management improvement.” —Ren Zhengfei, Do Not Be a Flash in the Pan, 1998

For Huawei, transformation is not only a response to external change but also, more importantly, a proactive action that originates from its leaders. Huawei has deeply rooted transformation and its principles from its leaders’ idea into its cultural gene. Transformation is often initiated as a top-down process. Leaders’ thoughts on the external environment and on transformation can be delivered to the top management team and then to the entire company through sense-making, which would cultivate the organizations’ understanding and behavior. Through the sensemaking process, the vision of the top leader spreads layer after layer. For example, through Ren Zhengfei’s speeches and communication contacts, his vision and strategic thinking on transformation disseminated to employees in a thorough and structured manner. His vision and strategy also credit the top-level design of the management team. On average, each of his speech drafts has been revised more than fifty times before being delivered. The draft was passed back and forth among Ren’s self-revisions, discussions with executive board directors and support from expert advisors. This construction process for Ren’s ideas is not easy and takes a long time, but it brings sufficient identification among the top management team as well as sufficient consensus for the subsequent transformation.

  ,  ,    Ren Zhengfei exhibits the features of a modest and cautious leader. He believes that “a team should never rest. Once it rests, it rusts” (Ren, 2008), but he is very cautious about rapid change or radical change. He believes that Huawei is not a perfect firm and that he himself is not a perfect leader. Thus, both the company and he himself should be open to transformation. This self-awareness explains why, as the top leader of Huawei, Ren always tries to keep one step ahead in realizing the deficiencies inside the company. Ren Zhengfei told his employees not to be bewildered by the current success. In 2001, when Huawei grew at a good rate, he said, “Crisis is not far away. Death is eternally approaching. You have to believe that the day will finally come to us. According to nature’s law, none of us can resist. Only if we clearly recognize our problems can we postpone the date when we meet that day. Bad times hide behind prosperity. Roses are beautiful but they have thorns. Everything has two sides and is not absolute . . . we will definitely die if we are not prepared for danger in times of safety.” Influenced by Ren’s management philosophy, both the managers and employees of Huawei develop a strong sense of crisis and a high level of alertness, which in turn pushes them to keep self-criticizing and to keep adjusting. In addition, although the company has experienced a series of transformations, the principle of “quality first” is rarely changed. Although the aim of Huawei’s constant transformation is to eliminate inertia, activate the “deposited” resources and fit into the changing environment, transformation should “infiltrate everything in silence like the rain in spring,” instead of following a radical approach. The way of transformation also originates from Ren, who advocates that “A tiny improvement will result in a big reward from the company, but sharp suggestions only receive encouragement.” In Huawei, the evaluation of the success of transformation is its quality and outcome, to which greater attention is paid than costs or considerations of time. The “quality first” principle has been refined to evaluate both managers and external experts who work in the transformation team. Huawei uses transformation initiatives as important

    &    training tools for cultivating leaders. The executive managers of functional departments are chosen to join the transformation team and are forced to be separated from their original post. Future leaders do not have the “route of retreat,” and therefore, they must focus on transformation projects. The performance evaluation for transformation team members is also specially designed, with the transformation outcome being the priority. To guarantee the quality of transformation, managers are encouraged to communicate with both experts and customers. Thus, they search both internal and external environments for any issue that may affect the organization (Bartunek et al., 1999). Above all else, Huawei insists on being “customer-centric” in the entire process of its transformation. Being “customer-centric” is Huawei’s core value as well as the standing point of transformation. An increase in customer complaints is the signal for almost all of Huawei’s transformations (Tian and Wu, 2015). Transformation has helped Huawei implement being “customer-centric” into everyday activities, including research and development, the supply chain, legal affairs, and IT systems. For example, after the CRM and L2C transformation, each of the activities of the front-line sales personnel could be traced in the IT system, which greatly helped Huawei satisfy customers’ needs in time and solve possible cash flow problems. Overall, instead of achieving a project-based one-time-only transformation, Huawei builds the gene of transformation into its culture and routinizes the principles of “quality first” and being “customer-centric” into transformation through leaders’ explanation. The top management team reasonably interprets external information and forms its understanding by constantly tuning its thoughts according to external conditions. Strategic choices and principles are made through the interplay between actions and interpretations rather than via leaders’ individual influence and evaluation (Weick, Sutcliffe, and Obstfeld, 2005). This process helps solidify the gene of routinized transformation and helps Huawei’s employees identify

  ,  ,    with Huawei’s core value, just like the top management team. Therefore, the original intention of transformation is kept consistent.

.

     

In addition to playing a key role in the firm’s transformation, the top management team itself has also been transformed and evolved. The transformation of the top management team constantly intensifies the shaping of consistent cultural value; in turn, the consistent culture value guarantees strategic consistency, which can unify the directions of transformation. The transformation can be divided into three stages. In the first stage, Huawei was led by a single CEO, Ren Zhengfei. Thus, power was highly centralized. Then, beginning in 2003, Huawei started to employ a completely new leadership structure to manage the company. As a type of collective decision-making mechanism, the executive management team (EMT) system was introduced with the help of Mercer. The EMT takes responsibility for strategic decision-making. Eight executives (Sun Yafang, Fei Min, Hong Tianfeng, Xu Zhijun, Ji Ping, Xu Wenwei, Hu Houkun, and Guo Ping), who took the actual responsibility of being the chief operations officer, began to rotate as the chair of the EMT; each took the chair for six months. Ren Zhengfei (CEO) and Sun Yafang (chairman of the board) still formally participated in and had significant effects on every significant decision. The third stage began after eight years of piloting the rotation of the COO, when the rotating EMT members became ready to take responsibilities and the system was mature enough after numerous collisions and adjustments. In 2011, Huawei elected its new thirteenmember board of directors. Three senior executives, Guo Ping, Hu Houkun, and Xu Zhijun, were selected to take turns and rotate in the position of chief executive officer, with each term lasting six months. This leadership structure was then solidified as Huawei’s

    &    rotating CEO system. Three rotating CEOs and four executive directors formed the executive committee. To achieve the leadership structure transformation, Huawei first de-routinized the centralization of power in the CEO to avoid individual leaders’ rigidity and limitations in making rational decisions. Then, Huawei reconstructed the structure step by step by knowledge searching and information processing, constantly looking for the best match between its structure and firm size enlargement, strategy transitions, and the change in the environment. Finally, Huawei routinized the new structure of moderate centralization, allowing for both strategic flexibility and strategic consistency. Most importantly, the powerful culture of esprit de corps and a unified strategic vision at Huawei helped to ensure that Huawei’s top management team could concentrate its resources on crucial strategies, regardless of who was leading the way, thereby achieving a long period of stability and prosperity.

Moderate Decentralization in the Leadership Structure “Later, I realized that, no matter how hard-working one could be, one can never chase the steps of time, particularly in a time of knowledge explosion. You can only touch the feet of time by organizing tens of, hundreds of and thousands of talented individuals to struggle together with you.” —Ren Zhengfei, The River Flows Eastwards, 2011

The transformation of Huawei’s top management team is the “deroutinization, re-construct and routinization” process of Huawei’s leadership structure. The power has gradually been decentralized from Ren Zhengfei, the once-almighty CEO, to the EMT, and then to three rotating CEOs who represent a collective decision-making system. “One person was authorized to act as a company CEO, and the fate of the company rested with this single person,” said Ren Zhengfei, and “History has proven time and again that this practice

  ,  ,    poses great risks” (Ren, 2012). Thus, Huawei gradually transformed its leadership structure to fit well with the strategic goals of different development stages. One Mighty Leader. In the first stage, Huawei’s development was focused on its core products: communication equipment for telecom carriers. The aim was to lower the costs, enlarging the production scale to compete with the market leaders. During this period, from 1988 to 2003, the leadership power was centralized in its CEO, Ren Zhengfei. Ren directly led the general management headquarters (the so-called general office). There were five large functions (R&D, marketing, manufacturing, finance, and administration) affiliated with the general office (Liu, 2013). The directors of the five functions had absolute managerial power within their departments and reported directly to Ren; subordinate employees in each function reported to their immediate superiors. In this period, the line structure was simple but sufficiently agile to implement strategic deployment directly and efficiently. Thus, at the early stage, it helped Huawei avoid losing control and allowed Huawei to survive and win a great share in the Chinese telecommunication market. In 1992, Huawei had fewer than 200 employees, and its sales were approximately 71.69 million yuan. However, Huawei experienced large expansions in both its revenue and number of employees, together with geographical dispersion. At the end of 1998, the number of employees reached 8,000, and the revenue was approximately 5.9 billion yuan, both of which were almost twice the respective figures of 1997. As the firm size dramatically increased, the shortcomings of the line structure were gradually revealed. First, when the one leader was absent, the company could not find a decent replacement, possibly leading to poor coordination across departments. Second, large expansion brought problems of how to unify the vision and inspire commitment among employees. Problems such as incentives, control, the pursuit of value, and the mission also emerged. The leaders thought it necessary to formulate The Huawei Basic Law to create unity across the entire organization.

Table 2.2 Three stages of Huawei’s leadership structure One-mighty leader Ren Zhengfei

Leader

Executive management team

Rotating CEO

Year

Before 1998

1998–2003

2003–2011

2011–2017

Firm size

8,000 (1998)

22,000 (2003)

140,000 (2011)

180,000 (2017)

Revenue (CNY)

5.9 billion (1998)

22.3 billion (2003)

203.9 billion (2011)

603.6 billion (2017)

Major market

Domestic City Market

Overseas Market: Emerging Countries

Overseas Market: Developed Country Market

Overseas Market: Developed Country Market

Major problem to solve

Unify the value and vision of the entire company; Respond to customers rapidly.

Respond to customers rapidly; Power decentralization and balance; Legal problems.

Respond to customers rapidly; Cultivate leaders of the next generation; Cash flow problems.

Strategy

Low cost and large scale; Research and production in a single product line

Vertical integration; Diversification; internationalization

The synergy of “cloud-channeldevice”



 Table 2.2 (cont.) One-mighty leader Ren Zhengfei

Leader

Executive management team

Rotating CEO

Structure

Line structure (Liu, 2013)

Two-dimensional structure (The Huawei Basic Law, 1998)

Matrix structure (Huawei Annual Report, 2009; 2011; 2013)

Decisionmaking mechanism

Five systems report directly to the general office.

Business divisions; Regional office.

Three standing committees. Business units and functional units.

Four standing committees. Three business groups.

Centralization

Individual centralization

Collective centralization

Moderate decentralization

    &    Subsequently, to seek a balance between the former line structure and a more matrix-like structure, a new division mechanism was introduced to Huawei (Ren, 1997). The Huawei Basic Law (1998) had a clear definition for the division mechanism. The basic structure would be a two-dimensional structure – business units, which would be divided according to strategic businesses, and regional firms, which would be divided according to different regions (The Huawei Basic Law, 1998). The two-dimensional structure was believed to be capable of creating new sources of growth, motivating employees, and responding to customer demands rapidly. However, in Huawei, true autonomous business units were not realized because Ren Zhengfei insisted on a high level of control over the business units, given that “losing control of the business units would lose the goal that we established for them . . . it is not necessary to decentralize if we do not efficiently achieve control” (Liu, 2013). Therefore, a comprehensive platform was set up at the headquarters, and Ren Zhengfei remained the sole CEO of the firm. The Executive Management Team. Being the CEO means an extremely high level of pressure and sense of burden from the task. Circa 2002, Ren’s pressure exploded, with Huawei facing a turning point in which both internal and external crises occurred simultaneously. Huawei lost some of its Chinese market share because it chose not to follow the personal handy-phone system technique. Making matters worse, Ren Zhengfei was diagnosed with depression. Recalling those days, he has said that he “slept with nightmares for half of the year and often woke up with tears” (Ren, 2011). Fortunately, the long period of preparation for entering international markets was starting to bear results. The revenue from the international market in 2003 was twice the revenue in 2002, reaching more than 1.05 billion USD, and the revenue in the CIS and Russian Region exceeded 300 million USD. Additionally, British Telecom started its supplier evaluation on Huawei by the end of 2003, and had added Huawei into its supplier list in 2004, which laid a good

  ,  ,    foundation for Huawei’s expansion in the European market. In addition to the acceleration of internationalization, Huawei sought constant changes in its internal organizational structure to fit well with its internationalization strategy. From 2003, Huawei contracted with the consulting firm Mercer to help rebuild its organizational structure and leadership structure. In 2003–2011, Huawei replaced the one powerful CEO system by implementing the executive management team (EMT) system of collective centralization. Since then, the EMT has taken charge of making strategic and managerial decisions under the guidance of the board of directors. The board of directors takes responsibility for overseeing Huawei’s operations, including setting strategic directions and goals, budgeting, and appointing senior management. Three committees were established to take charge of Huawei’s daily operations. The strategy and customer standing committee manages strategic development and discusses ideological guidelines. The business transformation executive steering committee is specifically responsible for all business transformations. The investment review board supervises product investment and makes decisions regarding the R&D process. In regard to the EMT itself, there were the eight members in the EMT: seven of them were drawn from the different functional departments such as marketing, R&D, and human resources management and they rotated the EMT chairman position among them every six months; and the eighth member was the CFO of Huawei, whose position was relatively steady. The EMT chairman also acted as the COO of Huawei. On the one hand, the rotation could help EMT members be familiar with the business; on the other hand, this regime could avoid the formation of a small clique inside the top management team. Below the executive management team, Huawei has developed a matrix organizational structure, consisting of strategy and marketing, R&D, business units (BUs), market units (MUs), the delivery supporting platform, and functional units (FUs). Therefore, the matrix structure facilitates the continuous decentralization of power and solidifies

    &    the connection between the EMT and the business units. Notably, the arrangement of the so-called “business units” is different from the virtual business units. Instead of giving business units a lot of autonomy, business units in Huawei are subject to a centralized platform. Resources on the centralized functional platform (including finance, HR, IT system, and R&D) can be shared for different businesses at the company level. However, the distance between the centralized platform and front line has been gradually stretched with the expansion of the firm’s size. Excessive process control points breed many problems. Faced with rapidly expanding markets, front-line employees have less time to seize market opportunities as most of their time is devoted to communicating back and forth with the backup platform. Front-line employees should be empowered with greater discretion to make quick decisions and responses in a turbulent environment to satisfy customer needs rapidly. The initial idea was to simplify hierarchies to increase efficiency in resource allocation and communication between front-line functional departments and supporting departments. However, the EMT did not reach an agreement because simply cutting the

 . The matrix structure in 2009 Source: Huawei Annual Report, 2009

  ,  ,    command chain could not meaningfully solve the problem – when administrative leaders and staff were pushed to the first line, the cost of functional departments might increase but generate no additional gains. At that time, a report from a business branch in the North African Region inspired Ren Zhengfei and the executive management team. In 2007, the North African regional office in Sudan decided to form a specific working group composed of a customer-relationship manager, problem-solving specialists, and delivery experts. This working group was operated as a project team that broke barriers across functions to efficiently access customers, provide better services, and solve customer problems (Ren, 2009). Huawei’s top management team then discussed this working group mechanism and agreed that it could be a viable approach for the rest of the firm. The front-line team should have decision-making power and act as a project team when necessary, with the functional department providing backup support. As a result, the “business units” own autonomy in their own operations and decision-making, and they undertake some responsibilities such as investment and transformation project management. Thus, unnecessary processes were eliminated and excess staff was downsized. Rotating CEO. When the EMT mechanism gradually became mature, Huawei transformed its organizational structure again and developed to the third stage. In 2011, the new board of directors was elected, and a rotating CEO system was formally routinized. Guo Ping, Hu Houkun, and Xu Zhijun were selected as the three rotating CEOs, taking turns serving a six-month tenure as the acting CEO. The central executive management team became an executive committee that acted as the execution agency of the board of directors. Four committees were formed under the director of the executive committee: the HR committee, the finance committee, the strategy and development committee, and the audit committee. On the front line, this newly developed organizational structure consists of three business groups (BGs), i.e., carrier-network business group, an enterprise business group, and a consumer business group.

    &    The central executive management team was decentralized into different business groups. An executive management team of the business group level was also set up. The heads of the three business groups4 are members of the board of directors as well as the chair of the BG-level executive committee. The dual identity of the CEO of each BG bridges the executive committee and front-line business groups, ensuring strategic alignment between the BG and the entire company (see Fig. 2.3). Each BG sets up its own investment review board and project management office, which are responsible for product investment decisions and transformation management within their operational authority. Thus, the decision-making process now became distributed to different business groups. Simultaneously, the business groups now heavily rely on the resources and support from the company. Group functions and service business groups were set up to provide support for business groups. Therefore, the power became more balanced between the top management team and the business groups. In 2014, the unified functional platform was further separated from the business groups and completely transferred as a supportive role to provide resources and assistance for the front-line team, whereas the top management team ensured that power would not be misused through strategy-oriented initiatives and supervision. For example, vertically, the business process & IT team (BP&IT), as a group function department, represents the strategy & development committee and guarantees the launch and implementation of transformation strategies; the vision and steps of transformation then are distributed to different business groups. Front-line business groups have been empowered with great discretion and are freed from supportive work; horizontally, they seek help from the group functions, if necessary. 4

In 2011, the CEOs of Huawei’s three business groups were Xu Wenwei, Ding Yun, and Yu Chengdong, who were also directors of the board. The former two executives then took other responsibilities and left the position of BG CEO in the following years.

 . The dual-identity of the Executive Committee in 2011 Source: Summarized from the Huawei Annual Report, 2011

    &    Now, from bottom to top, the front line became endowed with greater decision-making authority, which reflects the principle of being “customer-centric” immediately; from the back to the front line, Huawei’s functions provide support to facilitate front-line work; from top to bottom, Huawei relies on strategic initiative and supervision to prevent the front line from abusing its power and to ensure that the front line moves forward in accordance with headquarters. Thus, the reconstruction of power not only entails decentralization but also moderately delegating power to the appropriate place. Finally, the newly routinized structure reflects both the power balance of the leadership structure and the influence of consistent cultural value.

Seeking Strategic Consistency with Various Leaders “The implementation of core values requires a group of leaders.” Ren Zhengfei, To Catch the Dragon Boat with the Spirit of a Turtle, 2013

In 1996, Ren Zhengfei visited Dubai. Although Dubai was not as wealthy in its petroleum resources, he was greatly surprised by its rapid development. Young people were encouraged to study in advanced Western countries and then return to Dubai to contribute to the improvement of the entire society. Simultaneously, Dubai was devoted to formulating advanced institutions and development plans to attract investment worldwide. Huawei was in a situation somewhat similar to that of Dubai in its early years because Huawei did not possess many resources but instead had to rely on its own strong effort. With the Dubai story as a background, Ren Zhengfei advanced the idea of building Huawei’s core value as “Resources may drain, but the culture can be eternal.” In the same year, the Huawei Basic Law established being “customer-centric” as Huawei’s core value. Although transformations have occurred constantly over all of these

  ,  ,    years, the core value remains consistent and has even become the pillar for long-term growth at Huawei. Successive leaders are the carriers of the company’s cultural value. Instead of fixing the power of decision-making in the hands of a single CEO, the collective decision-making mechanism and rotating CEO system have had a profound effect in keeping the momentum of development. Having different leaders take turns to lead the company avoids the myopia of any one individual, prevents the company from skewing its strategic direction, and provides a feasible solution for cultivating successors who share the same culture and determination. After Ren Zhengfei’s tenure as the sole leader, in 2003, the executive management team became Huawei’s next-generation successors. Then, in 2011, the three rotating CEOs were pushed forward to take the responsibility of being the acting CEO. Note that all three have a professional background and rich business experience and have worked as individuals who can “hear the gunfire.” Guo Ping, Xu Zhijun, and Hu Houkun all have technological backgrounds and had once worked on front-line functional teams. By rotating in and out of the acting CEO position, the three top leaders could gradually grow to be competent in steering this business giant and Huawei developed wider leadership capabilities. In addition to the professional background (see Appendix 1), executive committee members are the stakeholders of Huawei according to the employee stock ownership plan, which further motivates them. Being a stakeholder of the company can greatly reduce the lack of alignment between personal interests and company interests. Thus, each leader has the motivation to conquer any possible inertia and generate flexibility for organizational transformation. The rotating CEO system endowed the top management team with an impetus to progress. Since the acting CEO constantly changed, how could Huawei still keep its consistent cultural value? Huawei guarantees that its leaders will know the right direction from the cultivation and selection of leaders. Instead of being a propaganda slogan, the cultural value must be deeply rooted in the company’s

    &    routines. For example, in 2003, Huawei established the strategy and customer standing committee to support the EMT in leading Huawei to achieve the goal of “providing the best services for customers.” The committee assists the EMT in ensuring that strategy implementation in the entire company is driven by customer demands. This committee then evolved into the strategy and development committee, which remains a standing committee. Additionally, in their transformation initiatives, the value of being “customer-centric” is deeply rooted in each of the steps. Thus, instead of relying on a single leader or a temporary project team, Huawei has completely routinized transformation into its structural design, which continues to play the role of implementing and supervising transformations, maintaining Huawei’s customer-centric principle and “seven rules of against,”5 in addition to moving in the right direction. Huawei is not the only firm that adopts rotation among its top management team. Alibaba, Lenovo, and many other firms have taken the selection of the top management team as a crucial solution for cultivating the next generation of leaders after being led by an influential entrepreneur. Alibaba started its partnership approach in 2010; not only is its mechanism totally different from the CEO rotation of Huawei but it also enables senior managers to collaborate and override bureaucracy and hierarchy (Alibaba, 2016). Partners in Alibaba are selected according to their previous performance and whether they can reflect Alibaba’s mission and core value. They are inheritors of Alibaba’s culture, operators of the company business, and stakeholders. Thus, the selected partners are believed to be capable of insisting on Alibaba’s core value and long-term interests to create long-term interests for employees and stakeholders. The

5

“The seven rules of against” are the guiding principles of Huawei’s business transformation; they refer to the following: against perfection; against tedious philosophy; against blind innovation; against local optimization without global efficiency gains; against leaders without a global view to dominate transformation; against employees who lack experience participating in transformation; and against applying processes that are not fully demonstrated.

  ,  ,    partnership is more of an inherent motive mechanism instead of an authority (Lu and Dang, 2016). The rotation is on the board level; the partnership system went into effect by taking control of the board of directors, thus building an internal ecosystem according to Alibaba’s strategy. In Huawei, the rotating acting CEOs are characterized by a centralized platform and distributed decision-making mechanism, which represent a method of maintaining the momentum of development and inheriting the company’s core value. The rotation is concentrated on the position of acting CEO, who represents the overall development direction and the unified, highly centralized supportive platform behind the front line, whereas the executive managers have been empowered with moderated power to execute their dual identities, reflecting the alignment of the centralized strategy and the distributed decision-making system. Both the partnership of Alibaba and the CEO rotation of Huawei facilitate strategic consistency through selecting proper leaders of the next generation. Thus, influenced by a consistent cultural value, the transformation is less likely to deviate from the agreed-upon direction. The firms’ strategy will not be easily abandoned due to the change in the management team. Therefore, Huawei’s management philosophy is that the company can be led by diverse leaders to sustain its development if the core values in the organization can be kept consistent to ensure its development in the right direction. The balance between seeking constant transformation and maintaining strategic consistency becomes extremely crucial for the company’s development process.

.



On the one hand, the transformation in Huawei represents unrest over time and is reflected as a dynamic process of “de-routinization, reconstruction and routinization”; on the other hand, there are some parts of Huawei (e.g., the cultural gene of change) that remained

    &    consistent in the constant transformation over all these years. The synergy of change and stability cannot be separated from Huawei’s top management team. Leaders played crucial roles in Huawei’s transformation as transformation initiators, transformation implementers, and the establishers of Huawei’s transformation gene. Simultaneously, the leadership structure also transformed along with the series of transformations in Huawei’s development. Specifically, the crucial role of leadership in Huawei’s transformation suggests that the active participation of willing and strong administrative leadership can smooth transformation. At the transformation initiation stage, the top leader and the top management team must be able to sense the need for transformation ahead of external shocks, which reflects the “clear direction,” as Ren Zhengfei indicates (Ren, 2010). Thus, leaders can initiate proactive transformation through “de-routinization.” At the transformation implementation stage, the top management team first leads the way of transformation and inspires subordinates to follow in its steps and to accept the possible changes. A supportive mechanism should be operationalized to eliminate the outdated routines and to establish the new routine. Implementing transformation into daily routines can counter organizational inertia and keep reconstructing along with environmental change and technological progress. Doing so allows the necessary focus, effort, and resources to be committed for transformation and greatly enhances the operability of transformation. Most importantly, the success of transformation depends on the collective effort of the entire company. Leaders should deliver their vision and strategy to the entire organization and build the gene of routinization into the company’s culture. Thus, cultural value provides an inexhaustible source that motivates the company to maintain a consistent routine of constant transformation. In turn, the evolution of the leadership structure in a growing firm helps create the success of organizational transformation. A leadership structure that can facilitate strong administrative support, a

  ,  ,    routinized mechanism, and culture cultivation should be established to sustain each significant transformation. As the case of Huawei shows, as the organization grew from 22,000 to 140,000 employees, the leadership structure changed from the one almighty leader to a moderately decentralized collaborative decision-making mechanism. Headquarters in this stage of growth provided a highly centralized platform, based on which resources were shared, whereas decisionmaking was distributed to the front line to respond rapidly according to customer demands and market opportunities. A balance was discovered between centralization and decentralization in the decision-making process according to the change in the environment and company strategy. Successive leaders who deliver a consistent cultural value bring momentum for maintaining the overall direction for the firm’s development. Huawei has never stopped seeking consistency even when empowering different executives and rotating CEOs. Actually, the essential priority for a company is not who is currently leading the way; instead, the right direction and the goal are the top priority. A motivating vision and mission with a long-term orientation are central to cultivate leaders and to guide all transformation activities. Therefore, a company should develop a compelling reason for transformation and a firmly proposed direction for the long term that is worth every employee’s fighting to achieve. Such a reason and direction should be deeply rooted in the organization’s cultural value, because then the values can act as the genes of a company from which everything else springs.

 Alibaba. (2016). An introduction on Alibaba Partnership. Available at: www .alibabagroup.com/cn/ir/governance_9 (accessed July 30, 2016). Bartunek, J., Krim, R., Necochea, R., & Humphries, M. (1999). Sensemaking, sensegiving, and leadership in strategic organizational development. Advances in Qualitative Organizational Research, 2, 37–71.

    &    Hu, Y. (2016). Interviewed by Bin Guo, Ziyi Zhao via telephone, November 8. Huawei. (2007). To all employees. (www.aliyun.com/zixun/content/2_6_1524095 .html (accessed May 31, 2016). Huawei. (2010). Annual report 2009. www.huawei.com/ucmf/public/documents/ webasset/hw_092117.pdf (accessed October 28, 2019). Huawei. (2011). Annual report 2010. www.huawei.com/en/about-huawei/annualreport (accessed May 30, 2016). Huawei. (2012). Annual report 2011. www.huawei.com/en/about-huawei/annualreport (accessed May 30, 2016). Huawei. (2014). Annual report 2013. www.huawi.com/en/press-events/annualreport/2013 (accessed October 28, 2019). Huawei. (2019). Annual report 2018. www.huawei.com/en/about-huawei/annualreport (accessed April 2, 2019). Liu, Z. (2013). The Gene of Shenzhen. Shenzhen: Haitian Press. Lu, T. & Dang, Y. (2015). The Alibaba partnership and its construction of strategic board of directors. Tsinghua Management Review, 7, 57–60. Reng, Z. (1997). Self-improvement, sharing wear and woe, and promote the progress of management. www.aiweibang.com/yuedu/117139106.html (accessed November 11, 2016). Reng, Z. (1998). Do not be a flash in the pan. Available at: http://dy.qq.com/ article.htm?id=20151225A00NMH00 (accessed 31 May 31, 2016). Reng, Z. (2001a). The winter of Huawei. http://money.163.com/10/0625/14/ 6A1G9KH300253G87.html (accessed May 31, 2016). Reng, Z. (2001b). The top priority is to survive. P&T Enterprise Management, 7. Reng, Z. (2007). Letter of resignation. http://mt.sohu.com/20151214/n431255914 .shtml (accessed May 31, 2016). Reng, Z. (2008). Do not try to be a complete person. http://tech.hexun.com/201405-30/165286692.html (accessed May 31, 2016). Reng, Z. (2009). Let the people who can hear the gunfire calls for the fight. www.iceo.com.cn/zazhi/2009/0412/191547.shtml (accessed June 4, 2016). Reng, Z. (2010). Grey management. Business (Review), 4, 48–50. Reng, Z. (2011). The river flows eastwards. http://finance.ifeng.com/news/people/ 20120227/5667533.shtml (accessed May 31, 2016). Reng, Z. (2012). The debate on CEO rotation system under the leadership of the board of directors. Communications World, 16, 5. Reng, Z. (2013). To catch up with dragon boat with the spirit of turtle. http:// tech.ifeng.com/telecom/detail_2013_12/31/32631215_0.shtml (accessed June 1, 2016).

  ,  ,    Tian, T. (2015). The methodology of transformation: Huawei’s philosophy and practices (transcripts). Speech on Huawei Forum, April. Tian, T. & Wu, C. (2015). The Huawei Story. Thousand Oaks, CA: SAGE. Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2005). Organizing and the process of sensemaking. Organization Science, 16(4), 409–421. Wu, C. (2014). Huawei Has No Secrets. Beijing: China CITIC Press. Zhang, B. (2012). How to Upgrade Organization Capability on Project Management: The Best Practice of OPM3 and Case Analysis. Beijing: Public House of Electronics Industry.

Appendix A2.1 List and background of Huawei EMT members Start Year at Huawei

Name

Background

Sun Yafang (F)

Engineer, Beijing institutions of information technology

1989

Guo Ping

Master, Huazhong University of Science and Technology

1988

EMT tenure

Current Position (2016)

Engineer in Marketing Dept.; President of procurement Dept. & Marketing Dept.; President of BT-ESC, Huawei University; Chairwomen of the Board.

2004–2011

Chairwoman of the Board

R&D Project Manager, General Manager of the Supply Chain, Director of executive offices, President of BP-IT Dept., Corporate Development Dept., Chairman and President of Huawei Device, Corporate EVP.

2004–

Chairman of the Finance Committee; Rotating Acting CEO (since 2011).

Career at Huawei



 (cont.) Start Year at Huawei

Name

Background

Hu Houkun

Bachelor, Huazhong University of Science and Technology

1990

Xu Zhijun

Doctor, Nanjing University of Science and Technology

1993

EMT tenure

Current Position (2016)

President of Huawei China, Latin America, Global Sales Dept.; Chief Sales & Service, Strategy & Marketing officer; Chairman of Corporate Global Cyber Security Committee, Huawei USA; Corporate EVP.

2004–

Chairman of the Human Resources Committee; Rotating Acting CEO (since 2011).

President of Wireless product line; Chief Strategy & Marketing officer; chief products & solutions officer, Corporate EVP.

2004–

Chairman of the Strategy and Development Committee; Rotating Acting CEO (since 2011).

Career at Huawei



Xu Wenwei

Master, Huazhong University of Science and Technology

1991

President of International Technical Sales & Marketing Department, European Region, Joint Committee of Regions; Chief Strategy & Marketing Officer, Sales & Service Officer; CEO of Enterprise BG.

2004–

President of Strategy and Marketing.

Fei Min

Tsinghua University

1993

President of R&D Dept., President of IT Management Dept.; Corporate EVP.

2004–2011

Left the company in 2011.

Hong Tianfeng

Huazhong University of Science and Technology

1993

President of Operations and Delivery Systems; President of Central R&D Dept., Human Resources Dept.; Chief Operations Officer; Corporate EVP.

2004–2011

Left the company in 2011.

Ji Ping (F)

One of the entrepreneurs of Huawei

1988

Chief Financial Officer; Corporate EVP.

2004–2011

Left the EMT and financial system; Chief Health Officer, Corporate senior vice president.

 (cont.) Start Year at Huawei

EMT tenure

Current Position (2016)

Regional President, President of Global Technical Service Dept., Human Resources Dept., Joint Committee of Regions.

2011–

President of Joint Committee of Regions.

1993

Director of the International Accounting Department, CFO of Huawei Hong Kong, President of the Accounting Management Dept.; CFO.

2011–

CFO

1996

Product Line President, President of Global Solution Sales Dept., Global Marketing Dept., CEO of Carrier Network BG.

2011–

President of Products and Solutions.

Name

Background

Li Jie

Master, Xi’an Jiao Tong University

1992

Meng Wanzhou (F)

Master, Huazhong University of Science and Technology

Ding Yun

Master, Southeast University

Career at Huawei

Commentary on Chapter 2 Jean Chen University of Macau

Heraclitus, a Greek philosopher, was quoted as saying “the only constant is change.” The insight of Heraclitus was not only highly relative to his time, it also seems to be more valuable today as we are currently living in a rapidly changing world. This insight has also been well reflected in Zhao, Guo, and Wu’s new contribution, which is the second chapter of the provocative and insightful book The Transformation of Huawei. This chapter of the book discusses the routinized and institutionalized change processes and practices in Huawei by focusing on the role of executive team. The chapter’s title, ‘‘The Executive Management Team and Organizational Change: A Routinized Transformation Perspective,’’ speaks to their core argument: that the TMT plays a critical role in organizational change by routinizing the transformation of various management practices. The world we are living in has been changing much more rapidly than ever before. In terms of electronic technology, there is a principle that underpins constant improvement, i.e., Moore’s Law. Moore’s Law was proposed by Gordon Moore, who worked for Fairchild Semiconductor and Intel. He predicted that the number of transistors in a dense integrated circuit doubles approximately every two years starting in 1965. Surprisingly, the “law” has been proved valid over the past fifty years. For a company that focuses on producing electronic equipment, Moore’s Law implies that it needs to produce something almost totally different after every five years. We have also observed so many “winners” come and go in this rapidly changing telecommunications industry, some of their names still strongly resound in our ears, e.g., Motorola and Nokia. Not surprisingly, management scholars have debated intensely how an organization could cope with this fastchanging environment and addressing this question has long been a central theme of strategy and management (Teece, 2007; Teece, Pisano, and Shuen, 1997). I believe that this book provided an inspirational and comprehensive explanation by conducting a deep analysis of Huawei, which is one of the most successful companies in the industry. In particular, Zhao, Guo, and Wu’s



  ,  ,    chapter addresses the key academic and practical questions in coping with the changing environment. What is the role of an executive management team and how does it implement constant and sustained transformation in the company. More importantly, change itself is neither the purpose nor the objective of a firm. Therefore, how can the TMT ensure that the transformation is on the right track? Last but not least, how one overcomes the human nature of resistance to transformation is also a phenomenon worth exploring. This chapter is impressive in that the business model described is very unique, not only in China but also in the world. It offers new insight for business practice based on the new business model especially in fast moving industry like IT. Generally speaking, Chinese people are fairly conservative but not so proactive. Chinese culture also emphasizes the importance of stability. For instance, the idiom “maintaining the status quo” (in Chinese, 以不变应万变) clearly reflects the tendency to remain stable and refuse changes. It is also believed that senior managers are more likely to avoid risks and uncertainty because they believe it is safe to keep their social status and hierarchy without changes. However, the counterintuitive observation is that Huawei’s executive team leaders are not passively adapting to organizational changes, but playing the role of as initiators, leaders, and champions in Huawei’s transformation. Moreover, they have fostered a culture of sustained transformation from the very beginning of Huawei’s history. Last but not least, they “routinize” the practice of transforming in Huawei. Hence, the chapter has described a very interesting and unorthodox managerial phenomenon, which is rare in China. Secondly, the chapter extensively analyzes and emphasizes the role of TMT in organizational changes at different stages of Huawei’s development, including micro (individuals’ decisions and actions), meso (different groups, e.g., stakeholders, TMT), and macro (institutional and its context), by investigating the rich historical data of Huawei’s development. The analysis for each level of development provides important insights into the process of routinizing the transformation practices. Having mentioned the merit of the chapter, I would also like to use this opportunity to offer some suggestions for future research on Huawei. It is mentioned in the chapter that “On the one hand, the transformation in Huawei represents unrest over time and is reflected as a dynamic process of de-routinization, re-construction and routinization; on the

    &    other hand, there are some parts of Huawei (e.g., the cultural gene of change) that remained consistent in the constant transformation over all these years” (p. 98). I believe that the issue about constant versus change can be much better elaborated. More specifically, from an academic perspective, I believe that the following research direction could be further considered. 1. Why are there some parts of Huawei that remained consistent and precisely what those parts (beyond the cultural gene of change)? It was also mentioned in the chapter that the principle of “quality first” is rarely changed (p. 82), however, those “rarely changed” factors have not been fully displayed, therefore, created a little bit confusion when reading the text. Further, some strong statements need solid evidence to support. 2. What are the differences and relationships between relative stable factors and changing factors? Are these factors relating to principles or practices? How could the changing versus stable factors be distinguished? Why do those “consistent” factors exist? More in-depth analysis is required here. 3. If those “consistent” factors are considered as axioms in Huawei, i.e., they are untouchable, why and how does Huawei need to make any changes? 4. What is the most important role of TMT members in the institutional/ routinized transformation of Huawei? Are they the role models who take the lead in change (p. 77) or building the gene of transformation (p. 81) by establishing policies? 5. What is the effective approach and smooth process for routinizing transformation and how could it cast new insight for others to follow even in different market situation?

I believe if future research could address the above questions, the findings could be generalized to offer more practical implication and guidance to the business world not only in high-velocity markets but also in less dynamic markets.

 Teece, D. J. 2007. Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319–1350. Teece, D. J., Pisano, G., & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509–533.



Transforming Product Development at Huawei The IPD Initiative Zihan Zhang and Johann Peter Murmann

.

     

All managers in Huawei regard the integrated product development (IPD) transformation as the beginning of Huawei’s history of transformation. It started in 1999 as the first transformation project with a specific budget (Li, 2015). IPD was first implemented at IBM in 1992 because IBM faced inefficiency in its product-developing activities (Wang, 2007). The IPD system helped IBM lower R&D costs and shorten its development cycle. Imitating a world-class company might be a smart way to solve the common management problems that emerge during company expansion. However, many companies failed in the implementation for various reasons. The successful implementation of IPD at IBM made many companies want to implement a similar system. IPD transformations were popular among Chinese firms ten years ago, but only a few companies actually benefited from such changes. Huawei was one of them. During its early stage of development, the rapid growth of Huawei mainly depended on the booming ICT industry in mainland China since the company’s major products focused on the Chinese market (Wu, 2014). Although Huawei gradually expanded its business, the inefficiency of the entire company seemed to be a constraint on further development. From 1997 to 1999, Huawei’s gross profit rate declined from 45 percent to 39 percent, and compared to other competitors such as Cisco, the product development cycle of Huawei was much longer and lacked many successful products on the market 

      (Liu and Hu, 2015). The gap between Huawei and other top-class firms was due to a variety of factors.

Lack of Balance between Technology Development and Product Development Huawei did not have a formal R&D plan and technology management system before the IPD transformation (Liu, 2015). The technology and resources that would be needed before a project started were not evaluated, and the majority of R&D activities occurred when there were technical problems in a project that needed to be solved. The development cycle was long and unpredictable because no one had any idea how long it would take until all the technical problems were solved. The employees who could solve technical problems in a short period of time were highly praised as “heroes” (Liu, 2015). As a result, the R&D system of Huawei during that period excessively relied on individual heroes and flexibility. Moreover, some technologies were put into use immediately after development without testing or observation (Li, 2016). Some defects in these technologies could not be detected in the short period allowed for testing. Although some technologies seemed to be solutions to technical problems in the laboratory, after a period of operation, the defects of these technologies might cause other problems, which resulted in the low quality of the products. As a result, the lack of reliability in these technologies resulted in a higher failure rate.

The Lack of Standard Processes in Product Development Another reason for the gap was the lack of standard processes and templates in R&D activities. Before the IPD transformation, Huawei had no long-term plan for product development or a routinized process to decide whether to invest in a project. At that time, developmental activities were typically driven by the marketing department (Zhang, 2012), and this situation was described in terms of “the noisier kids getting more sugar” (Li, 2016). Some people from the marketing department bypassed the regular channels and delivered

       their clients’ requirements directly to the R&D department while trying to place considerable pressure on the R&D department so that it would meet their needs immediately. As a result, a project’s level of priority depended on the status and power of the person who was pushing it. While it may have seemed efficient to some people, other projects might be influenced and delayed, and the quality of new products could not be assured (Liu, 2015). As a result, customer service was faced with greater pressure because almost every project needed a dedicated customer service person to handle quality issues.

The Paradox between Customer-Centricity and Efficiency In its early development stage, Huawei regarded customer orientation as the company’s core value (Huang, 2016). The employees of Huawei tried to meet all of the customers’ needs to build up a pragmatic image and reputation. This strategy helped Huawei break through new markets and gain many new customers at the beginning (Wu, 2014). However, as the number of Huawei’s customers grew, the high customer-centricity became a heavier burden for the R&D department. At that time, Huawei did not have effective methods to manage customers’ needs and product. As a result, the products Huawei provided for different customers seemed unique but were actually similar (Zhang, 2012). The product version numbers were so unorganized that even the employees from the R&D department often became confused. Without an effective product management method, a paradox between customer centricity and efficiency emerged. A high customer centricity meant that Huawei would provide customized solutions to its customers, which in turn would lead to low efficiency. However, if Huawei provided generic solutions to increase its efficiency, it would become less customer-oriented. This paradox was not obvious in the early development stage because of the small numbers of customers. However, when the number of customers expanded rapidly, the low efficiency of product development limited the development of the company. Huawei realized that it needed to address

      this hard trade-off to solve the low efficiency problems in product development. Overall, the old type of product development in Huawei might result in higher user-friendliness and a faster response speed if the company scale were small and its advantages helped Huawei build its competitive advantage during the early stage of its development. However, as the scale of product development increased, the disadvantages made further expansion difficult for the company. This old type of product development was just like a crossroads without traffic lights; it seemed to be efficient with less traffic, but it would cause chaos when traffic increased. By 1997, that chaos began to appear in Huawei. There were over a thousand version numbers, which meant that the management of products had already fallen into the trap of inefficiency (Liu, 2015). Ren Zhengfei, the CEO of Huawei, realized that it was dangerous to scale up any further without an effective management system, and that it was necessary to improve management during the expansion. As a result, he visited the United States with Huawei’s top management team in 1997, seeking solutions to this development bottleneck (Tian and Wu, 2012). They visited Microsoft, IBM, and other top-class firms. IBM greatly impressed them because it had faced inefficiency problems in 1992 that were similar to the situation that Huawei faced at that time. IBM had ultimately spent 8 billion USD on its transformation to solve the problem (Ren, 1998). In one of the articles (Ren, 1998) Ren wrote about the visit to IBM, he noted that the transformation experience of IBM might help Huawei reduce its detours during development; however, IBM’s story also made him feel less optimistic for Huawei’s future. Ren realized that the management problems that Huawei faced at that time were of the same type that caused the crisis that almost led to the collapse of IBM. Huawei was much smaller than IBM in 1992, but the transformation would still be difficult. Furthermore, although this transformation might entail large costs, Ren still felt that it was urgent and necessary (Ren, 1998). Huawei soon invited consultants from IBM to make an information technology strategy and

       plan (ITS&P) for the company (Chen, 2008). IBM provided a plan that included several information technology projects and business process reengineering projects. IPD, an integrated supply chain (ISC) and an integrated financial transformation (IFS) were all noted in the ITS&P report. Huawei chose IPD as the first transformation project and made it the highest priority for the entire company. From today’s perspective, the successful implementation of the IPD project was of great significance for Huawei. First, it was the start of Huawei’s history of transformation. If the IPD project had failed, then Huawei would most likely have rejected continuing with the ITS&P processes led by IBM. Second, the IPD transformation itself helped Huawei form a more effective management system, which was the foundation of the expansion of the company. The IPD system changed the product development activities at Huawei in several ways.

The Establishment of the Cross-Functional Team Before the IPD transformation, different departments oversaw different stages of product development, and it was organized as a serial process. The manufacturing department would occasionally find that the design of a product was defective and ask the R&D department to redesign it (Li, 2016). However, under the IPD transformation, Huawei changed its process to a parallel one, which meant that every department would participate in the entire product development cycle as a cross-functional team. Therefore, even the installation department could make a proposal to change the position of a screw to increase efficiency in an installation. The reorganization of the product development process reduced the need for costly redesigns and ensured that the team that finished the project would be better able to deliver that project on time.

The Establishment of Routinized Working Processes and Templates The cross-functional team resulted in more participants in product development activities. In a general context, more participants might

      cause higher coordination costs and lower management efficiency. To make the coordination among multiple participants more efficient, the IPD system provided a set of working processes and templates (Liu and Hu, 2015; Wang, 2007). After the transformation, Huawei established a series of routinized working processes and templates that ensured that even an employee with little or no experience and know-how would be sufficiently trained. The IPD process also required the peer evaluation of resources and technologies before a project was approved. To meet these requirements, Huawei had to finish the technology development long before the product development (Sun, 2016). A technology management system and a long-term strategic plan for the company were required to manage the technologies and determine the technological trajectory of the entire company. After the IPD transformation, Huawei started to formulate a strategic plan for the long-term and shorter-term business plans for the different departments. In terms of the R&D department, Huawei started to invest in future technology. With the expansion of the company, Huawei spent more resources on basic research (also see the chapter on the transformation of R&D). Separating research activity ensured that all the technologies used in product development had been proven and tested, resulting in a lower product failure rate. Additionally, the investment in basic research increased the company’s intangible resources and helped it increase its competitiveness with regard to its leading foreign and domestic rivals.

The Establishment of a Market-Oriented Evaluation System The IPD transformation also changed Huawei’s evaluation system. From the perspective of IPD, expenditure on R&D is an investment. Therefore, company profit should be evaluated. In the IPD system, the evaluation of an outcome was mostly related to how profitable a product would be (financial evaluation) and not the performance of a single stage. This meant that every department was responsible for the economic benefit of the products. In such an evaluation system,

       every project has independent financial indicators and a cost accounting system. As part of the IPD system, Huawei changed its financial system and used the cost accounting in different projects to much more precisely represent what drove the company’s costs (Zhou, 2011).

The Transformation of Customer Orientation Although the customer orientation had been proposed as a core value and became one during the early development stage of Huawei (Huang, 2016; Huawei, 1998), the staff understood it differently in their early years. To the employees from the R&D department, customer orientation was only empty talk because they were actually technology-oriented (Li, 2016). They tried to make technologically better products and did not care about the financial outcomes (usually profits) for the firm. To the staff from the marketing department, customer orientation meant that they should try to force the R&D department to meet their customers’ requirements exactly as soon as possible. After the implementation of IPD, the technology-oriented culture in the R&D department changed to a customer-oriented one because market success was included as a KPI of employees from R&D department (Liu and Hu, 2015). The marketing department no longer blindly delivered the requirements from the customer to the R&D department without analysis. As a result, the IPD transformation unified employees’ understanding of customer orientation. Overall, the IPD transformation has been a significant turning point for Huawei in becoming a world-class enterprise. The IPD system was implemented over a ten-year period at Huawei, and during this period, their sales grew from 720 million USD to more than 105 billion USD. The number of employees increased more than tenfold from 8,000 in 1998 to 188,000 in 2018. The product development cycle and product failure rate declined, whereas customer satisfaction continuously increased (Liu and Hu, 2015). Moreover, the IPD system became a strong piece of evidence that convinced Huawei’s clients and partners that Huawei now possessed

       . The product development cycle of Huawei from 2003 to 2007 (Ouyang, 2015)

product development cycle (weeks) 90 84

80

79

77

70 60

58

54.5

50 40 2003

2004

2005

2006

2007

product development cycle (weeks)  . The product failure rate of Huawei from 2001 to 2006 (Liu and Hu, 2015)

product failure rate 20% 15% 10%

17% 10.40% 8%

5%

5% 2% 1.30%

0%

2001 2002 2003 2004 2005 2006 product failure rate

a set of advanced management methods that would ensure its product and service quality.

.

    

Customer-Oriented: What Products Should Be Developed? What products should be developed? Huawei’s basic law states that its purpose is to serve its customer (Huawei, 1998). However, the understanding of this customer-oriented principle changed after the IPD implementation. Before 1997, Huawei lacked a standard method of managing customer requirements and did not have any idea how to analyze the future needs of its customers (Liu, 2015). As a result, various products were developed, and although they seemed different, they all had something in common. The R&D department had spent most of its time and effort on urgent requirements and had

       no time to explore the common needs and the future needs of the company’s customers. However, an IPD process implies that product development should be guided by the common and future needs of customers and the direction in which the market is likely to develop (Sun, 2014). It provides templates to determine the different levels of requirements and the method of managing the market (Wang, 2007). With guidance from IPD, Huawei developed its strategic plan for the next five years according to its analysis of future requirements. This strategic plan was updated in the first half of every year (Liu and Hu, 2015). In the next half-year, Huawei extended its strategic plan to the company’s business plan, which included a budget for the following year. Aside from the company’s business plan, there were also business plans for each business unit and each functional department. Subsequently, Huawei started operating and controlling organizational activities according to the business plan. One of the most important parts of the business plan and strategic plan was the product or technology roadmap. The product roadmap described the direction and long-term strategy of products and solutions, which could affect the project charter and technology management. Additionally, the product roadmap could be used to convince clients that Huawei’s products could adapt to market developments. The technology roadmap described the trajectory of the technology, which guided investments in technology development. The technology roadmap could help Huawei become aware of the technology for the next generation of products. By developing technologies for the next generation, Huawei hopes to have a head start on the competition when mainstream technology is replaced by advanced technology. Both in product and technology development, Huawei used information about future market developments and customer requirements as a consistent standard and target. With the identification of future demands and common demands across customer groups, the product lines of Huawei were organized more logically and in a

      future-oriented manner, and Huawei’s projects were consistent with the company’s strategy.

The Cross-Functional Team: Who Should Be Responsible for Product Development? Who should be responsible for product development? In many companies, even Huawei in 1997, only the R&D department performed product development: It received the requirements from the marketing department and finished the design by itself, receiving suggestions from other departments and then repeatedly modifying its design. However, the department never valued feedback from the market (Li, 2016). The IPD requires that every department be included in the product development design and that all departments should be responsible for the profit of the product. To adapt to the IPD process, cross-functional teams are established in the company. The highest-level cross-functional team in Huawei is called the investment review board (IRB); it consists of approximately ten people from different departments, including the R&D department, the purchasing department, the marketing department, the supply chain department, the manufacturing department, the legal department, the financial department, and the central research department (Li, 2016). The IRB controls the direction of product development. It decides whether a product should be developed and whether to invest in a technology. The integrated portfolio management team (IPMT) is the second-highest level in Huawei. An IPMT consists of approximately six to seven people, each from a different department. There were approximately six IPMTs in Huawei in 2003 when the IPD system was implemented corporate-wide (Li, 2016). Each IPMT manages a product portfolio, which is the equivalent of the business unit in some other firms. The IPMT decides whether a project should be established and reports its work to the IRB. Members of the IPMT are typically the heads of each functional department, and they represent their respective department. For example, the marketing department

       first integrates all of the requirements proposed by its employees. Because each employee wants his or her own needs to be met first, the marketing department resolves conflicts among its members and then offers an integrated proposal in the IPMT meetings. This mechanism solves the problems associated with the “noisier kids getting more sugar” phenomenon and ensures that the decision-making procedure is more orderly. The business management team (BMT) and product development team (PDT) consist of approximately seven people from different departments. The BMT is responsible for the development of a product, and the PDT is responsible for a single version of the product. The BMT and PDT each have independent cost accounting, and the evaluation of each member is tightly related to that. In the terms of technology development, there are also technology development teams (TDTs), technology management teams (TMTs), and integrated technology management teams (ITMTs). Technology development teams seek clues from the technology push and the market pull to determine the technical solutions for future product development. Compared to the BMT and PDT, the outcome of the ITMT, TMT, and TDT cannot be tested by the market over the short term; therefore, they have different evaluation systems (Li, 2016). The cross-functional teams in Huawei ensure that every department can participate in product development. In such a system, the  . The simple version of the cross-functional team structure in Huawei

IRB

IPMT

ITMT

BMT

TMT

PDT

TDT

      barriers to communication between different departments are reduced. Without the cross-functional teams, the R&D department might ignore some details in product development such that when other departments would discover the problems, they would ask the R&D department to redesign the product. However, in a crossfunctional team, these types of problems can be identified at the product development stage, ensuring that the product can be correctly designed the first time.

Standard Process and Templates: How Is Product Development Correctly Performed? How is product development correctly performed? For Huawei, the success of product development in 1997 was closely related to the employees who were involved in the project. At the time, people with substantial experience and flexibility were valued in the R&D system. However, the IPD transformation changed the situation at Huawei. Through its standard processes and templates, even new employees without any experience could understand how to correctly finish their jobs. They were informed as to exactly what materials they should prepare for a technology review and how to evaluate their colleagues’ work in their report. Under the standard process, all employees were aware of what they should do, what they were responsible for and whom they should ask for help, if needed. For example, during the product development process, a PDT must pass seven technology reviews (TRs) and five decision check points (DCPs) at different stages (Liu and Hu, 2015). The IPD system has a series of documents for PDT that make it clear as to what type of paperwork should be prepared for submission to the IPMT and what components should be included in the paperwork for the TR. Members of the IPMT can also be guided by specific process standards to measure the state of the project by checking the document from the PDT. The standard process defines the responsibilities of all involved and gives each member a clear task to complete. The standard process in the Huawei IPD system strictly followed the IPD documents that IBM provided. The original IBM

       document was created by summarizing the operational management practices at IBM. However, IBM consultants also made small modifications to adjust the document to the Huawei context. The standard process ensures that product development is efficiently structured; for example, the standard process divides product development into six stages: product concept, develop product definition and plan, develop and verify, qualify and certify, ramp up and launch, life cycle management. Before the IPD transformation, R&D activities in Huawei consistently neglected the concept and planning of a product. However, after the IPD transformation, the PDT was made to spend more time on the first two stages (three weeks in 1999 and thirteen weeks in 2003), resulting in a shorter total development cycle (seventy-four weeks in 1999 and forty-eight weeks in 2003) (Liu and Hu, 2015). The IPD system also offers employees a set of instruments and templates to improve the accuracy of their work. For instance, the requirement analysis seems to be complicated because its object is difficult to describe and recognize. However, the IPD documents state that the requirement can be divided into different categories, such as long term, middle term, and short term. It also suggests using the “$APPEALS” framework for analysis. “$APPEALS” refers to price, availability, packaging (which refers to the outside of a product), performance, ease of use, assurance, lifecycle, and social acceptance (Wang, 2007). This framework provides a structure requirement analysis; initially, people might not be able to understand why it contains these eight components, but this confusion will not affect their reports. New employees with little training can easily follow the framework and independently finish the required analysis. As a result, with the standard process and templates, R&D activities are led by rules rather than the experience of specific employees, and the company is less reliant on the stars of the staff. The human capital requirement can be lower because experience becomes less important and substantial R&D work can be performed even by green hands, if they have the relevant training.

      The standard process and templates ensure that all employees can perform their allocated tasks following specific guidelines, that responsibilities are more clearly defined and that the outcome of the work can be more stable and scalable as well.

.

   

The IPD transformation that commenced in 1999 was the first of multiple transformation projects that were planned (Liu, 2015). Huawei established a special team for this transformation, starting with approximately twenty people who were top leaders from Huawei’s primary sectors. Sun Yafang, the chairwoman of the board, was the director of this team. The team had adequate resources including seventy consultants from IBM at most. This joint team designed the IPD project. They then became larger to ensure that the transformation project received adequate support. The integrated product development system helped Huawei overcome its bottleneck and transform itself into to a world-class firm. However, Huawei was not the first Chinese firm that tried to adopt the IPD system. Many companies had failed to implement the system well, but Huawei could improve the efficiency and scalability of its product development process. Why was the implementation more successful at Huawei? There are some unique features at Huawei that ensured the success of implementation.

CEO Project The IPD transformation is a top-down project that was fully supported by Ren Zhengfei. Ren visited the United States in 1997 with Huawei’s top management team, and he decided to change Huawei’s product development situation. Ren realized that Huawei needed to improve its management and efficiency. Learning from IBM, Ren knew that the transformation would be tough and would cost a huge amount money and effort, but he also knew that the transformation was necessary for further development (Ren, 1998). In 1998, the IBM consultants were invited to China to help Huawei with its information and technology

       strategic plan. Soon, the consultants offered Huawei a diagnostic report in which many of the company’s problems and crises were listed and all the achievements Huawei had made in the past were summarized. Ren believed that the crises part should be emphasized and the transformation should be carried out as soon as possible. Ren demonstrated his resolve during the IPD implementation (Yu, 2013). He was involved in the transformation project team as a committee member to get the firsthand information and make important decisions about Huawei’s IPD transformation. At the beginning, there were many objections from the inner company. However, Ren always insisted that the transformation would not be stopped and that anyone who could not follow the new rules of IPD should leave the company (Zhang and Wen, 2015). Thus, Huawei regarded the IPD transformation as a CEO project with the highest priority. With the support of the leading figures and the top management team of the company, the IPD transformation could be implemented with substantial support from within. The transformation project team was able to conduct a deep investigation before IPD implementation so that the consultants could understand Huawei’s situation and arrange the implementation accordingly. Additionally, the high priority placed on the transformation ensured that the transformation project team would obtain the resources they required, which ensured the success of IPD transformation.

Copying Precisely, Refining, and Solidifying The implementation of IPD can be divided into three stages: copying precisely, refining and solidifying (Wang and Li, 2012). The three stages were divided based on logic but not on strict timelines. For example, at the beginning of the IPD transformation, Huawei emphasized adaptation and promotion; however, it also simultaneously collected feedback from the experimental unit and made a few modifications based on the original version of IPD provided by the IBM consultants. All of the modifications that Huawei made in the preparation stages were approved by the consultants from IBM

      after a long period of discussion to ensure that none of the modifications would violate the principles of IPD (Li, 2016). In the stage of copying precisely, product development activities in Huawei were strictly followed according to the regulations set forth in the IPD documents from IBM. Copying precisely does not mean that Huawei had to adopt the same organizational structure and regulations as IBM. The basic principles of IPD were consistent, such as “regard R&D as an investment” and “market-oriented innovation.” As for the specific implementation, IBM had formulated a particular plan as well as several documents for Huawei based on its situation before IPD was implemented. Most of the employees in Huawei only had the IPD documents provided by the transformation project team, and they were all required to work precisely according to those specifications. The main focus of the transformation project team was to make everyone believe that the IPD system was important and to encourage every department and employee to adopt the IPD system without question. At the very beginning, Huawei decided to implement the IPD system with strong resolve. Ren Zhengfei tried to make all employees aware that the IPD transformation was important, stating that it was the highest priority in the Huawei basic law, the constitution of Huawei (Huawei, 1998). The head of every affected department was recruited onto the transformation project team, and they were all told that if they failed in the IPD transformation project, they could not return to their previous position. In other words, if they failed, then they would have to leave Huawei. These provisions ensured that every member of the transformation project team did his or her best to advance it. Ren once said that the IPD transformation in Huawei might need to “cut its feet to fit in the shoes” (Yu, 2013). From February 1999 to February 2000, the transformation project team worked hard to ensure that all employees from the different departments would realize the management problems in the company and persuade them that IPD transformation was the only solution.

       Ren Zhengfei was aware of the conflicts between the IBM rules regarding how to perform IPD and the context of Huawei, which resulted in resistance from many Huawei employees at the beginning of the implementation. For example, the marketing department had to use a series of requirement management processes to deliver its requirements to the PDT, which meant that it could no longer pressure the product development team to immediately meet its needs. That made some personnel feel less powerful and believe that the IPD ran counter to their customer-oriented principle (Liu, 2015). Additionally, the IPD system could not bring immediate benefits, and some other employees expressed doubts because they believed that the IBM rules did not fit the context of Huawei, especially in software development. Compared to hardware, software development has a shorter development cycle and more issues of uncertainty (Sun, 2016). The extensive and complicated IPD process seemed inapplicable to software development. However, in the stage of copying precisely, Huawei’s top leadership deliberately ignored the discord. Ren insisted that Huawei should initially copy the IPD practices of IBM precisely because he believed that doing so would be the most efficient method of establishing a modern system similar to those in world-class enterprises and that if the company initially dwelled on its differences excessively, then the transformation would never take hold there. Ren was adamant about supporting the IPD and its rules. He once said that employees who could not adapt to the IPD should leave the company. Additionally, all employees were evaluated as part of the transformation. The criteria for evaluating employees included not only financial indicators but also process indicators, such as their degree of conformity with the IPD process. If an employee failed in the evaluation, then he or she was to be switched to another position and his or her salary was also to be adjusted (Zhang and Wen, 2015). Moreover, the consultants from IBM were asked to attend each IPMT meeting at that time to correct all details that did not meet the requirements of IPD. The “copying precisely” stage meant that

      Huawei had to bear a large cost (including a large consulting expenditure) and extra work time on corrections. The attitude of employees changed over time. Initially, most employees felt that the IPD process was complicated and reduced efficiency because they spent more time on paperwork (Li, 2016). In 2002, when Huawei was trying to enter the UK market, the marketing department persuaded British Telecom to grant a supplier certification to Huawei. When product development was evaluated, Huawei presented the British experts with its IPD system and received an “excellent” rating after three years of working on it (Liu, 2015). This certification encouraged the entire company, and most employees then believed that the IPD system was important for internationalization. Many employees started to adapt to the process and felt that it was less time-consuming. Only after the basic principle of the IPD was accepted by the majority of employees did the transformation project team start to refine the system. When the first experimental PDT was established, it was only in charge of a version of a product unlike the original version in IBM. As a result, the management jurisdiction of the IPMT seemed to be too wide, such that each IPMT had to manage more than ten PDTs. The IPMT was faced with a heavy burden and spent all its time meeting with PDTs. Moreover, it was difficult to perform independent cost accounting for a single version of a product. To solve the problem, the transformation project team added the BMT to the IPD system, placing it in charge of a single product and redesigning the evaluation system of the IPD. These modifications took approximately two years (Li, 2016), and increased the effectiveness of the IPD system. Additionally, the criteria of employee evaluation were also changed according to Huawei’s own contexts. Chinese people seem to be more sensitive about numbers and the evaluation criteria than Westerners. For this reason, more objective indicators were subsequently used in Huawei’s evolution system than in the IBM version. However, although many details in the IPD routines were changed

       during the refining period, the basic principles remained the same. Moreover, Huawei was always very cautious when making large modifications, and they were only made after a long period of testing to ensure that they would indeed improve matters.

Slow Adaptation In 1999, Huawei performed its first experimentation and established its first product development team (PDT). The first integrated portfolio management team (IPMT) was established at the beginning of 2003, and by the end of 2003, all IPMTs were established and the IPD was operating throughout the entire company. From that point on, products were no longer transferred in a sequential manner among different departments during the development period, and a single PDT would be responsible for the entire process. However, the implementation of the IPD in Huawei lasted for a long period of time. To date, Huawei continues to update and evaluate the IPD transformation project. One of the indicators, the transformation progress metrics, which represent the outcome of Huawei’s IPD transformation project, only scored 3.3 of 5 in 2014 (Liu and Hu, 2015), which meant that Huawei was still not satisfied with its IPD transformation because it wanted scores over 4, representing worldclass practices. Huawei still believed that its IPD system was not sufficient, and therefore, it would make continuous adjustments in the future. The cost of a slow adaptation strategy for Huawei was very large because the consulting fee for every consultant per hour was between 300 USD and 680 USD. The direct investment in the IPD and ISC programs amounted to about 1.5 billion RMB. That was the main reason that most Chinese companies seemed to be impatient with this transformation. Another reason was that they did not want to miss the market opportunity during the transformation, and they were also unwilling to surrender part of their limited resources to implement the transformation. As a result, many companies that stated they were undergoing IPD transformation were always eager

      to complete the transformation as soon as possible, and they always abandoned the IPD transformation very quickly when they felt it was lowering their efficiency (Liu and Hu, 2015). Compared to them, Huawei seemed to be more patient and far-sighted. Ren once said that Huawei does not need a quick revolution (Ren, 2014a). This statement reveals his attitude of slow adaptation. He understood that for any company, it would take a long time to adapt to a new management system. Huawei spent more than three years from 1999 to 2003 on the preparation stages. During this period, Huawei only implemented IPD in several product lines as an experiment and repeatedly discussed every detail of the IPD while collecting feedback. After a long preparation stage, Huawei sent employees from the transformation project team who had a deep understanding of IPD to become members of the IPMT and bring the IPD system to the entire company. These employees from the transformation project team played the role of tutors in the newly established IPMT to guide and supervise the IPD implementation at the IPMT and PDT levels. For example, in some of the IPMTs, the tutor would first review all of the documents submitted by the PDT and BMT before the IPMT meeting and then offer members from lower-level cross-functional teams individual guidance to ensure that they all understood what should be included in the documents. This guidance lasted for more than five years (Li, 2016). In the first few years, at least one consultant from IBM was invited to every IPMT meeting to ensure that members were correctly following the process. In summary, Huawei has spent a great deal in extra expenditure and time during the IPD transformation to ensure that the transformation would occur smoothly and successfully. The principle of slow adaptation also prevented many severe conflicts that might be harmful to the company. One key feature of the successful IPD implementation was the unwavering commitment of the top management team to moving to the new system and creating a cross-functional team that brought all of the key stakeholders on board.

      

.



The IPD transformation is of great significance to Huawei. The integrated product development system helped Huawei overcome significant bottlenecks and inefficiencies during its development. Huawei lowered its product development costs and shortened its product development cycle by building up a cross-functional team and using consistent routines supported by regulation and templates. The IPD system helped Huawei combine technology development and product development and find the balance between R&D and marketing. By importing leading Western know-how about product development, Huawei solved its low-efficiency problems during expansion. Without the IPD initiative, Huawei’s growth would have been curtailed. The success of Huawei in product development transformation is not only because it borrowed the expertise of a Western consultancy (Yu, 2011). One of the most important reasons is Huawei has a unique philosophy toward transformation, which was gradually formed during IPD implementation. For example, Huawei believes that transformation is not a one-time occurrence but a routinized project (Ren, 2016). With respect to product development, IPD transformation did not end until today, and there were new versions of IPD documents carried out in almost every year (Li, 2015, 2016). Now Huawei has become a leading company in some areas, and its R&D management is quite different compared to that of 1998. In the future, Huawei will have to solve new problems, such as basic knowledge research management and global collaborative product development, which will require new transformations. However, unlike many other companies, Huawei has found a way to avoid institutionalizing and instead has become a coalition for change. The success of IPD transformation demonstrated its value for Huawei’s development and its employees, and other major transformation projects were subsequently started. Had the IPD initiative not been successful, it is doubtful that Huawei would have embarked on the other major transformation initiatives that are described in the

      subsequent chapters of this book. This suggests that it is a very important for a firm to plan such initiatives very carefully and ensure that it has sufficient management support to overcome the initial decrease in performance. When such a massive first transformation is successful, it provides a platform for further transformations and helps to develop an overall capability for change.

 Chen, A. (2008). IBM consultor review Huawei’s management revolution. Huawei People Newspaper. 199. Huang, W. (2016). Customers First: Huawei’s Business Management Philosophy. Beijing: China CITIC Press. Huawei. (1998). Huawei Basic Law. Shenzhen: L. HUAWEI TECHNOLOGIES CO. Li, Y. (2015). Interviewed by Can HuanG, Ziyi Zhao, Haoyu Zhang, and Hongqi Xu in Shenzhen, December. Li, Y. (2016). Interviewed by Can Huang, Zihan Zhang via Wechat, 10 May. Liu, H. (2015). Interviewed by Can Huang, Ziyi Zhao, Haoyu Zhang, and Hongqi Xu in Shenzhen, October. Liu, J. & Hu, B. (2015). Huawei Can, you also Can: IPD Restructure the Product Development. Beijing: Peking University Press. Ouyang, J. (2015). R&D Management Transformation of Huawei. Presentation at the Huawei Forum organized by the Ruihua Institute for Innovation Management, Zhejiang University, Hangzhou, China. Ren, Z. (1998). What should we learn from American people. China Entrepreneur, 11, 34–35. Ren, Z. (2014). How will Huawei fail. www.huxiu.com/article/34331/1.html?f= member_article (accessed October 24, 2019). Ren, Z. (2014). Why Huawei should learn from “LanXueShiJie.” www.huxiu.com/ article/35680/1.html (accessed October 24, 2019). Ren, Z. (2016). Why Huawei Feel Confused. http://mini.eastday.com/a/160602115 529454-2.html Sun, K. (2014). Huawei’s Project Management. Beijing: China Machine Press. Sun, Y. (2016). Interviewed by Can Huang, Zihan Zhang via Wechat, 10 May. Tian, T. & Wu, C. (2012). Will Huawei Fail Next or Not. Beijing: China CITIC Press. Wang, J. (2007). Research Based on Integrated Product Development of Huawei Products R&D Management. HeFei: HeFei University of Technology. Wang, W. & Li, H. (2012). Huawei’s Management Mode. Shenzhen: Haitian Press.

       Wu, C. (2014). Huawei Have No Secret. Beijing: China CITIC Press. Yu, S. (2011). Reveal Huawei. Beijing: China CITIC Press Yu, S. (2013). How Far Can Huawei Go. Beijing: China Youyi Press. Zhang, J. & Wen, L. (2015). Huawei’s Human Resource Management. Shenzhen: Haitian Press. Zhang, L. (2012). Huawei R&D. Beijing: China Machine Press. Zhou, H. (2012). Huawei Scriptures: 14 Management Rules Make Huawei Become a Technology Empire. Shenzhen: Huazhong University of Science and Technology Press.

Commentary on Chapter 3 Jaeyong Song Seoul National University

In my view, Huawei is the most competitive Chinese manufacturing company. I believe that its product development capabilities played a critical role in the great success of Huawei. I learned from the chapter that the IPD initiative of Huawei made an amazing transformation of its product development system. As an author of the “The Samsung Way,” which was published in English by McGraw Hill and Chinese by the CITIC Press, I think that it is worthwhile to make comparisons of the Huawei’s transformation with that of Korea’s Samsung, which also became a world-class corporation thanks to Chairman Lee Kun-Hee’s new management initiative. In 1993, in response to major environmental changes resulting from democratization, globalization, and digitization, Mr. Lee announced a new management initiative. He led a massive transformation of the company to overcome the threat of competition and pave the way for Samsung to take advantage of better opportunities. The new management initiative included the lofty goal of improving Samsung’s products and services to the point of excellence and making Samsung one of the leading global companies of the twenty-first century (Song and Lee, 2014). I found some interesting similarities and differences between Huawei and Samsung in its transformation process. In terms of similarities, both Huawei and Samsung were eager to benchmark world-class corporations in advanced countries. Huawei benchmarked IBM for its transformation of the product development system. Samsung benchmarked Toyota and leading Japanese companies for operations management as Japanese manufacturing companies have been global leaders in quality and productivity. Samsung also benchmarked American companies such as GE and HP for best practices related to strategy, marketing, and human resource management. Active benchmarking of global best practices became an important basis of great transformations of both companies. Moreover, CEOs of both companies led the long-term corporate transformation. In the case of Huawei, Ren Zhengfei, the CEO of Huawei, initiated the IPD transformation. In the case of Samsung, Chairman Lee



       Kun-Hee led the new management initiative. I found that both Ren and Lee were persistent enough to spearhead massive corporate transformation for a long time. In spite of slow adaptation and huge costs, they did not give up the initiatives and pushed forward the long-term change management of corporate culture and management system. In both companies, most employees were initially pessimistic or resistant against the ambitious transformation. However, both Ren and Lee eventually changed the mindset of employees. More importantly, they had strategic foresights and long-term perspectives. They realized the importance of learning, new product development, and innovation in the hypercompetitive and fast-changing electronics and ICT industries. Both Ren and Lee led massive R&D investments to make new product development capabilities of Huawei and Samsung globally competitive. While Huawei gradually increased in basic research, Samsung also made substantial investments in basic research by establishing the Samsung Advanced Institute of Technology. Samsung went a step further by developing technologies two or third generations ahead. I also found many similarities in the new product development process of Huawei and Samsung. In the IPD initiative, Huawei organized a crossfunctional team by including employees not only from the R&D department but also from the marketing department and the manufacturing department. Samsung developed a similar process that is often called concurrent engineering. By adopting concurrent engineering in its new product development, Samsung was able to shorten the time required for development, design, and production. Although there were many similarities, I also found some subtle differences in the transformation process of both companies. For example, in the IPD transformation, Huawei adopted the “copying precisely, refining and solidifying” principle. In the first stage of IPD transformation, “product development activities in Huawei were strictly followed according to the regulations set forth in the IPD documents from IBM.” To adhere strictly to the principle of “copying precisely,” Huawei invited a substantial number of IBM consultants in the adoption process. Huawei’s principle of “copying precisely” and the involvement of external consultants in the transformation process are somewhat different from Samsung’s typical practice. In the case of Samsung, Samsung’s own think tank named the Samsung Economic Research Institute (SERI) carefully benchmarked global best practices. Internal consultants in SERI studied

      which elements of benchmarked practices can be compatible with Samsung’s unique corporate culture and business systems. If necessary, they modified benchmarked practices from the beginning so that these practices can be adopted smoothly. Typically, Samsung experimented these modified practices in a single affiliate company or a division and then it modified the practices further before the company decided to diffuse the practices throughout the business group. However, in the case of Huawei, substantial modifications of the IPD practice that it imported from IBM were made gradually in the later stage. I think that great companies have many common success factors, as you can find the case of Huawei and Samsung. Huawei and Samsung have been the most successful companies in China and Korea respectively. They are among a few outliers from emerging economies, which became world-class corporations. Latecomer companies in emerging economies that are aspiring to become the next Huawei or Samsung should take lessons from the great transformation process spearheaded by Mr. Ren Zhengfei and Lee Kun-Hee that I described above.

 Song, J. & Lee, K. (2014). The Samsung Way: Transformational Management Strategies from the World Leader in Innovation and Design. New York: McGraw Hill.



Huawei’s Transformation of Supply Chain Management Ying Li, Can Huang, and Yongyi Shou

.



The transformation of Huawei’s supply chain can be divided into two stages, the establishment of an integrative supply chain (ISC) from 1999 to 2003 and the establishment of a global supply chain (GSC) from 2005 to the present. An ISC is an integrated network of suppliers, manufacturers, retailers, distributors, and customers. An organization is composed of different functional departments that support different operational activities, such as the purchasing and warehousing department for material supply, the production department for manufacturing, assembling and adjusting, the sales and marketing department for order management, the shipping department for delivery, and the customer service department for maintenance and technical support. The ISC aims to break down department barriers and link all of these internal functional departments together. It also aims to match supply with demand, improve customer satisfaction, reduce transaction costs, and deliver products correctly and in a timely manner. Further, the ISC emphasizes integration between the manufacturer and its suppliers and customers in the supply chain through information system integration, interorganization collaboration, process simplification, and connectivity (Chen et al., 2009). The entire supply chain operates as a unified organization through internal, supplier, and customer integration. As an advanced management philosophy, the ISC has attracted a great deal of attention from leading multinational enterprises around the world, such as IBM, Nokia, Cisco, Dell, and HP. These companies apply supply chain management theory to the design and operation of a production and logistics system to improve operational 

’       performance and enhance their quick response capability to better adjust to demand changes (Flynn et al., 2010; Frohlich and Westbrook, 2001). Huawei hired IBM consultants to launch an integrative supply chain transformation project in 1999. When executing the project, the IBM consultants and the Huawei project team identified seventyeight problems in Huawei’s supply chain practices and classified them into three categories: processes, IT systems, and organization. Huawei and IBM worked together to design operational processes, clarify the role of each process, propose requirements for the IT system and organizational change, and establish key performance indicators to measure the progress of the ISC transformation. By 2003, when the ISC project was concluded, the efficiency of Huawei’s supply chain system had been greatly improved. The GSC refers to the global and integrated network of supply chain partners, which broadens the ISC model to a global scale. Huawei started its efforts to establish a global and integrated supply chain to serve customers around the world in 2005. In that year, Huawei’s revenue amounted to 49.0 billion RMB (5.98 billion USD), and for the first time in the company’s history, the sales revenue from overseas surpassed that from China (Huawei, 2007; Wu, 2014). In addition, in 2005 Huawei signed a supply contract with British Telecom and became one of the priority telecom equipment suppliers for Vodafone, demonstrating Huawei’s international success and momentum. The first action that Huawei undertook in the GSC transformation was to implement the enterprise resource planning (ERP) system in its overseas subsidiaries and representative offices. The main challenge that it encountered was the idiosyncrasies of laws, regulations, and customer requirements in different countries. Huawei organized an “overseas ERP” project team with more than 200 staff from finance, supply chain, procurement, process, and IT departments and used a “cell division” method to diffuse successful experiences. Next, emphasis was placed on establishing a global and integrative supply chain, in which front-line employees played an important role in finding creative solutions to tailor the main system to local laws,

  ,  ,    regulations, and customer needs. The relentless efforts to transform the supply chain have helped Huawei to greatly improve its operational efficiency and earn fifth place as a leading Asia Pacific supply chain organization in 2012, as reported by Gartner (2012). The rest of this chapter is organized as follows: The second section introduces Huawei’s ISC transformation from 1999 to 2003. Specifically, we describe how IBM identified Huawei’s problems in their supply chain practices and discuss how Huawei routinized its organizational processes, IT system, and organizational change management to support ISC transformation in the first stage. Implications are discussed accordingly. In the third section, Huawei’s GSC transformation is introduced to show how Huawei promoted ERP systems in its overseas subsidiaries and built an integrative and global supply chain network. We also summarize the lessons learned from Huawei’s experience. Finally, the fourth section concludes the chapter.

.

 :   

Select IBM as the Teacher and Wear a Pair of American Shoes Eleven years after its foundation, by 1998, Huawei had become the largest telecom enterprise in the Chinese market, with sales revenue of 6.0 billion (CNY) and 8,000 employees; moreover, it had started to develop international markets such as Africa, Southeastern Asia, Middle East, South America, and the Commonwealth of Independent States. However, the rapid expansion threw Huawei’s management system into chaos and disorder. Although Huawei invested 10 percent of sales revenue in product development, its wasted research and development expenditures and product development cycle time were twice the world-best level. Sales revenue was increasing year by year, while gross profit margin was decreasing. The profit per capital in Huawei was only one-third to one-sixth of that for Cisco and IBM (Li, 2014). As many of Huawei’s managers noted, one reason that Huawei achieved rapid expansion before 1998 was that employees put in extra hours and immersed themselves in their work. Expanding

’       the business but failing to effectively manage operations is not sustainable. Huawei began to think about how to manage its supply chain to support its explosive growth. Ren Zhengfei, the founder and CEO of Huawei, recognized the gap between Huawei and the world’s leading enterprises and decided not to operate the business blindly and individually, instead turning to learn from the achievers (Wang, 2015). The week before western Christmas in late 1997, Ren led a group of Huawei’s top managers to visit the world’s leading companies including Hughes, IBM, Bell Labs, and Hewlett-Packard from east to west across the US mainland. The executives from these American companies emphatically introduced their management system. Among them, the advanced management methods of IBM and particularly its transformation experiences attracted Ren’s attention, leading him to hire IBM consultants for several important management transformation projects at Huawei (Ren, 2003). At that time, IBM was working to reinvigorate its business under the leadership of Louis V. Gerstner and had just completed the transition from being a computer company to being a global consultation service company. Huawei and IBM reached an agreement and launched the IT strategy and planning (IT S&P) project in 1998. IBM sent six to eight consultants to plan business transformation projects and IT projects for the next five years, among which IPD and ISC transformation were the two major projects. After the IPD transformation project started to rebuild Huawei’s product development processes in 1998, Huawei officially launched its ISC transformation in 1999 to improve its operational processes. Unlike the IPD transformation, the ISC transformation was executed without a blueprint. IBM had successful IPD transformation experience but was also exploring the appropriate way to promote ISC practices in its own business. In the process of Huawei’s ISC transformation, IBM provided the supply chain management theory, and Huawei explored and tailored detailed practices according to its business activities. Three basic objects were first identified to guide the implementation of the ISC transformation. The first object was to

  ,  ,    provide customer-focused service. Huawei’s ISC needed to satisfy customer demands and to improve its customer service capability. The second was to lower operational costs. The cost levels of Huawei were very high because of its weak operational capability. Reducing supply chain costs became one critical way to increase business profit as competition in the telecommunications industry had intensified. The third was to improve Huawei’s quick response capability, which required high levels of integration and coordination among the different departments and organizations across the whole supply chain.

Problems After the ISC transformation project started, the IBM consultants recognized that Huawei’s supply chain practices were unable to support its business expansion (Yu, 2015). Due to rapid business development, low product quality, and frequent changes, Huawei failed to deliver products in a timely manner. Purchasing and ordering could not match production capacity. Demand forecasting and production planning had consistently low accuracy. The shipping department often made mistakes by sending the wrong items. As a result, the level of timely delivery was only 50 percent, whereas the average level for telecom equipment manufacturers worldwide was 94 percent. Inventory turnover was also low, at 3.6 times per year, whereas the international average level was 9.4 times per year. The cycle time of order fulfillment was twenty to twenty-five days, whereas the international average level was only approximately ten days (Yu, 2015). To identify the specific problems, the consultants from IBM conducted a series of interviews and surveys of Huawei’s customers to evaluate Huawei’s performance in customer service, including contract negotiation, contract signing, product delivery, engineering installation, repairs, and maintenance after service. The actual needs and expectations of customers were identified as a key input to Huawei’s ISC project. In addition, IBM investigated Huawei’s operational practices. It should be noted that the scope of the ISC transformation project was very important due to limitations in time

’       and resources. If the scope was too broad, the project would not be delivered in time and could not achieve the expected outcomes. Conversely, if the scope was defined too narrowly, some key issues might be left unaddressed. After gaining a deep understanding of Huawei’s business and after frequent discussion with Huawei’s top managers, IBM identified seventy-eight key problems with Huawei’s supply chain practices and classified them into three categories: processes (fifty-two problems), IT system (fourteen problems), and organization (twelve problems). The fifty-two problems within Huawei’s processes fell within six areas: sales orders, customer service, planning and scheduling, procurement, logistics, and manufacturing. However, customer service was not included in the scope of the ISC transformation project, so only the remaining five areas were analyzed and streamlined. The fourteen IT problems were related to enterprise resource planning, customers, and underlying IT technology. The twelve organizational problems were manifested in the organizational structure, roles and responsibilities, and culture and communication. Details are as follows. Problems in the Processes. Before the ISC was launched, the sales department often signed contracts first and reviewed them afterward. The procedures for contract review were very complicated, which meant that it was not possible to quickly respond to customer requirements. Additionally, the sales department failed to obtain the available-to-promise (ATP) information, which is determined by uncommitted inventory and planned production in the master schedule.1 Therefore, the salespeople made commitments to customers without considering inventory and production capacity, and the agreed delivery date was not in accordance with production planning, which led to 30–40 percent of orders being urgent orders. As a consequence, the production department could not ensure timely delivery or a quality deliverable. Product delivery did not match the

1

Master scheduling is a detailed planning process that tracks manufacturing output and matches this against customer orders that have been placed.

  ,  ,    commitment in the contracts. Customer complaints were consistently at a high level. Before the ISC was launched, strict sales and operations planning (S&OP) was not conducted at Huawei. On the one hand, due to the incomplete historical data on customers and a lack of efficient forecasting methods and tools, the accuracy of sales forecasting was never high. Demand management and forecasting lacked a scientific and rational basis. On the other hand, no early warning information was sent before the production department received orders, resulting in inaccurate material requirements planning (MRP) and manufacturing resource planning (MRP II). Further, in the MRP II system, the data for the bill of materials (BOM), process route, work force, and so on, were also mostly inaccurate. For the above reasons, the production department could not commit itself to a production schedule and quantity. Moreover, the plants did not even operate according to a master production schedule. In the procurement process, the component expert group (CEG) was not fully involved in supplier selection, resulting in an unevenly distributed number of suppliers. There were too many suppliers providing some components and too few providing the others. In addition, the quality of components provided by different suppliers was also uneven due to a lack of control over suppliers. The procurement department maintained simple transactional relationships and did not recognize the significance of a long-term supplier strategy. Another procurement problem was that the processes were too complicated, directly increasing purchasing costs. With respect to logistics management, the material procurement cycle was very long, whereas the product lead time was relatively short. For example, the average procurement cycle of electronic materials was approximately twelve to sixteen days. Furthermore, the lead time of some products was only twenty to twenty-five days (ISC project team, 2009). The poor efficiency in purchasing, inventory, and shipment had a direct negative influence on manufacturing processes.

’       In manufacturing, products could only be partially assembled due to the weakness in planning and scheduling and the resulting shortage of some specific components or materials. A make-to-stock strategy was adopted to produce semi-manufactured products; it was intended to reduce the cycle time of order fulfillment but eventually led to excess inventory. However, due to the confused planning and scheduling, semi-manufactured products accumulated in the warehouse but were not on the list of customer orders. Additionally, the manufacturing processes involved several independent departments, but these functional departments operated independently and lacked communication, collaboration, and information sharing between them. The manufacturing capacity of the production department could not keep up with the growth in business. Problems with the IT System. Before the ISC transformation began, Oracle MRP II was not being fully applied. The BOM information, process route, and labor were always inaccurate and could not be updated in the system in a timely manner. Some data were stored in a database environment other than Oracle, which resulted in a “data silo” problem and incomplete data. Due to the lack of a customer relationship management (CRM) support system, salespeople did not have customers’ detailed address and product configuration information. Thus, they were mostly unable to track the customer’s problems and requirements. There were no applicable contract management tools that could help address changes in the marketing and order management processes. In addition, the contract information was incomplete. Problems in the Organization. Before the ISC transformation, all processes were implemented by functional departments. However, there were too many levels in Huawei’s original organizational structure, which generated additional business processing costs and created excessive decision points. The unclear and overlapping roles and responsibilities of different functional departments also led to low efficiency in business processing. In particular, there was no communication and collaboration between these departments. For example,

  ,  ,    sales and planning operated in their own manner. A salesperson was unable to access order status information, and a planning person could not obtain accurate demand forecasting information.

Solutions Huawei and IBM worked together to design detailed operational processes, clarify the roles of each process, propose requirements for the IT system and organizational change, and set key performance indicators to measure the progress of the ISC transformation. Next, Huawei conducted pilot projects for the ISC transformation within specified product lines, regions or defined groups of customers or suppliers. After the pilot projects were finished and the outcomes reviewed, the designed ISC model (including organization, process, and IT systems) was solidified and prepared for promotion at a larger scale.

Process To solve the identified problems and build an integrative supply chain, Huawei first benchmarked its internal processes with the best supply chain management practices of world-class enterprises. The supply chain operations reference (SCOR) was selected as the basis for the ISC transformation process. As shown in Figure 4.1, the SCOR model is the world’s leading supply chain framework, and it links the basic processes of ordering, planning, sourcing, making and delivery into a unified structure to provide end-to-end solutions (Poluha, 2007). Huawei improved its order, plan, source, make, and delivery processes as follows. Ordering. Huawei emphasized product introduction and marketing to increase orders. Order management served as the bridge to link Huawei’s internal departments with their customers, involving order entry, quoting, customer data maintenance, order allocation, product price data maintenance, etc. To improve supply chain visibility for sales, representative offices were authorized to access ATP information and track the order status in a unified information platform.

’      

PLANNING Supply Chain Planning

ORDERING Marketing

SOURCING

MAKING

DELIVERY

Sourcing Materials

Making Products

Delivering Products

Enabling Sourcing

Enabling Making

Enabling Delivery

Customers

Suppliers

Enabling Supply Chain Plan

 . Supply chain processes based on the SCOR model (Yu, 2015)

The platform integrated all customer information, including the contract, installation, configuration, detailed address, service procedures, and historical records. In this manner, sales could respond to customer requirements as soon as possible. In addition, salesmen provided web-based product configuration methods to personalize customer service according to the customers’ requirements. With regard to contract management, Huawei reduced the levels and steps involved in contract processing to decrease order processing cycle time. A contract management tool was developed for the sales department to manage contracts that provided a contract scheduling function. Before committing to the customer, sales could confirm whether production capacity, available materials, and delivery date would meet the customer’s requirements and thereby enhance the customer’s confidence in a timely delivery. Planning. Huawei established and executed sales and operations planning (S&OP), including order planning, production planning, procurement planning, and inventory management in all production lines. Huawei monitored the effects of demand changes on purchasing, manufacturing, and inventory and fully took into account the

  ,  ,    current plan, back orders,2 material and capacity constraints to update and maintain a feasible plan for the production department. S&OP translated the high-level business plan into concrete operational plans. In particular, it set the latest entry time for urgent orders to prevent orders that could not be fulfilled from entering into the system. Meanwhile, S&OP improved the accuracy of basic data such as BOM, items, and process routes through adequate information sharing across functional departments, including sales, purchasing, and warehousing. Sourcing. Huawei standardized its purchasing processes and established collaborative relationships with its suppliers from a long-term and strategic perspective. The IBM consultants suggested that Huawei should select suppliers based on competitive assessment methods; these emphasized sustainable development capability, technical capability, quality assurance, etc. Competitive assessment methods can prevent a price war and ensure continuous service capabilities. Furthermore, Huawei built strategic partnerships with selected qualified suppliers based on reciprocity and mutual benefits. In the product design phases, the involvement of suppliers in R&D and purchasing can help to ensure the timely delivery and quality of materials and to decrease inventory levels and costs. Additionally, Huawei shared forecasting information with its suppliers to keep them updated on demand changes. Information sharing enabled Huawei and its suppliers to respond to customer requirements in a timely manner. D company can provide an example. D was a top logistics service provider that provided shipping, warehousing, dispatching, and distribution processing for Huawei. After several rounds of communication, negotiation, and discussion, the two sides reached an agreement on deeper integration and signed a cooperative contract,

2

A back order is a customer order that has not been fulfilled. A back order generally indicates that customer demand for a product or service exceeds the company’s capacity to supply it.

’       stating D supplier promised to give priority to Huawei to ensure highquality service and highly competitive support. Making. Huawei focused on improving each link in its material supply chain to ensure the availability of materials in the manufacturing process. The MRP II system was perfected to improve the quality of planning and the relationships between departments. Additionally, to achieve the maximum utilization of resources, the production department set priorities for material supply and optimized and integrated the limited resources. Most importantly, Huawei designed a differentiated production mode for different products and moved toward adopting a build to order (BTO)3 approach to improve production flexibility over the long term. Delivery. The delivery module involves logistics and distribution, contract management, inventory management, engineering installation, accounts receivable management, and collecting and invoicing. Huawei adopted bar code, label printing, and radio frequency identification to reduce manual input by keyboard and to realize coordination, synchronization, and automatization. The application of logistics management technologies improved logistics efficiency.

IT System The successful ISC transformation relied on the integrated IT system. To promote information sharing and coordination between different functional departments, Huawei further improved the performance of its IT systems and integrated its fragmented systems into a unified platform. As shown in Figure 4.2, the integrated IT system includes APS (advanced planning and scheduling), i-Procument, ERP (enterprise resource planning), and CRM (customer relationship management) to support Huawei’s planning and scheduling, purchasing, manufacturing, and customer service and also included a set interface of related systems. In addition, Huawei saved all problems, requirements, and 3

Build to order (BTO) is a production approach where products are not built until a confirmed order is received.

  ,  ,   

APS (Advanced Planning and Scheduling)

ORACLE ERP R11i

BOM, MPS/MRP, WIP, OM, PO, INV, QA Base Layer of the IT system

Transaction Database Work Order System

ASMS

Database

Barcode Database

ERP Database

Master Database

Freight System

Analysis layer of the IT system and data platform

Purchasing System

Computer-Aided Manufacturing System

Order Fulfillment System

Logistics Management System

HR management system Computer-aided process design Operations layer of the IT system BOM (Bill of Material) MPS (Master Production Schedule) MRP (Material Requirements Planning) WIP (Work in Process)

OM (Order Management) PO (Purchasing Management) INV (Inventory Management) QA (Quality Assurance)

 . Integrative IT system in Huawei (Yu, 2015)

’       solutions in an integrated knowledge base that employees could use to share and communicate knowledge within the organization. In the analysis layer of the IT system, the transaction database and ERP database store the data obtained from the purchasing system, the computer-aided manufacturing system, the order fulfillment system, the logistics management system, and the freight system to support the running of APS, ERP, and CRM.

Organizational Change Huawei used similar change management structures to conduct the ISC transformation. Conceptualizing the ISC as a large project, project management techniques were used to execute this transformation (Yu, 2016b). For this reason, a temporary project-based organization was set up at Huawei. During the transformation period, Huawei also set up a transformation steering committee at the corporate level. To ensure the timely delivery of all transformation projects, the top leaders of Huawei took charge of the multiproject management and coordination across different departments. Under the steering committee, transformation project teams were formed to execute the major transformation initiatives such as ISC, IPD, and others. With respect to the ISC transformation, Huawei assigned Guo Ping to be the sponsor of the project. Guo Ping was the former director of the manufacturing department and was very familiar with Huawei’s operational processes. Huawei then set up an ISC transformation steering committee, which was composed of department directors for sales, procurement, logistics, finance, manufacturing, etc. These directors were the stakeholders in the ISC transformation. Under the direction of the committee, eight subprojects were established corresponding to Huawei’s operational processes and IT system, and the leader of each subproject was the director of each department. All of these directors took direct responsibility for the design and implementation of the ISC, and committed to the outcomes of the project. In particular, the directors of each department created training plans to internally promote new processes and systems. In addition, Huawei

  ,  ,    established a project management office to coordinate the eight subprojects. The high involvement of Huawei’s top managers in project design and implementation ensured the success of the ISC transformation and minimized resistance. Meanwhile, Huawei’s organizational structure was adjusted throughout the entire ISC transformation process. Because there had been no supply chain management concept in Huawei previously, the manufacturing management office under the manufacturing management committee played the role of coordinating activities across departments such as planning, order management, procurement, quality management, and delivery. After the ISC model was designed, the original manufacturing, planning, procurement, import and export, certification, shipping, and inventory departments were merged into a unified department, named the supply chain management (SCM) department. The SCM department was responsible for the management of supply chain practices. The senior vice president of Huawei held the post of president of the supply chain management department. Figure 4.3 shows Huawei’s organizational structure for supply chain management.

Evaluation of Performance To evaluate performance of the transformed ISC, several key performance indicators (KPI) were established including customer satisfaction, inventory turnover ratio, total cost, and lead time from order to delivery. Specifically, customer satisfaction was expected to be improved by 15–30 percent; inventory turnover ratio was expected to be improved by 25–60 percent; order fulfillment cycle time was expected to be reduced by 30–50 percent; and cost was expected to be reduced by 25–50 percent (Huawei, 2014; Yu, 2015).

Outcomes and Discussion In the first year implementing ISC transformation, Huawei successfully integrated its internal processes from order processing, purchasing, and manufacturing to delivery. As a result of the ISC transformation and

Supply chain management department Product management department

Planning and order management department 1st product sector supply chain representative

Data card

Operations support department

Manufacture engineering (ME) department

Data card ME section

Quality management (QM) department

Data card QM section

Manufacture management department

Manufacture section

Procurement department

Logistics department

Parts procurement section

Materials and parts logistics

Accessories procurement section

End product logistics

Structure procurement section

Reverse logistics

Machine procurement section

Logistics monitoring

… 3G mobile phone 3rd product sector supply chain representative

Planning management section

3G mobile phone ME section

3G mobile phone QM section

CDMA phone ME section

CDMA phone QM section

CDMA phone

GSM phone

GSM phone ME section

GSM phone QM section

 . Supply chain management department in Huawei

Outside processing section

Equipment management section

  ,  ,    subsequent continuous improvement afterward, the order operation cycle was shortened from two months to two weeks. The production mode was shifted in 2005 from build to forecast (BTF)4 to build to order (BTO). The flexible configuration of the production line shortened the product transition time from one day to one hour. Production scheduling was implemented once a day. Above all, the response, flexibility, and customer service capabilities of Huawei have greatly improved. To conclude, we want to draw a number of implications from Huawei’s experience. First, Huawei’s ISC transformation was top-down and could not have succeeded without the support of top managers. Ren Zhengfei, as the founder of Huawei, made the decision to promote management transformation prospectively. The members of the EMT formed a transformation steering committee and were also in charge of the transformation project management. Meanwhile, most directors associated with supply chain practices were involved in the ISC transformation project and took direct responsibility for the design of the ISC model. Because directors from different departments such as manufacturing, procurement, planning, and logistics had the best understanding of Huawei’s operational processes and associated problems, the model designed by these directors fit best with Huawei’s context and could be implemented with the least resistance. In addition, these EMT members and directors were directly responsible for the promotion of new processes and the outcomes of transformation. Because there was a collective agreement among the Huawei leadership that the ISC transformation needed to be successful, any directors who objected to the transformation were not allowed to continue in their position. Second, it should be noted that there are no one-size-fits-all solutions. Huawei promoted ISC transformation without any mature and successful experience. Even though IBM provided consultation services to Huawei, the details of the ISC model were invented by Huawei’s managers and tailored to Huawei’s context. Huawei first

4

Build to forecast (BTF) is a production approach where products are built according to the company’s demand forecasting.

’       established three objectives for ISC transformation, which also served as three challenges. The designed ISC model aimed to solve the corresponding problems and achieve all objectives. No template can be copied, but supply chain theory was able to provide guidance for practice. In particular, the establishment of the ISC was accompanied by the development of the management information system. An integrated information system gave Huawei the ability to routinize its operational processes. In the 1960s, MRP was developed to solve the issues of demand management and planning (Plossl and Orlicky, 1994). Subsequently, manufacturing resources planning (MRP II), just in time (JIT), and total quality management (TQM) prevailed by offering the benefit of high production efficiency. However, MRP II only focused on the optimization of internal resources (Sheikh, 2003) and could not adapt to the fierce competition that developed in the 1990s. The concept of enterprise resources planning (ERP) was proposed and developed; it stressed business process reengineering and supply chain management and introduced new modules for project management, e-business, electronic data interchange (EDI), and transportation management into MRP II (Malakooti, 2013). Based on the ERP system, Huawei also integrated APS and other fragmented information systems into a unified structure, which facilitated integration of the information flows, material flows, and capital flows associated with all supply chain processes and thus served as the infrastructure of the ISC (Lenny et al., 2006). Finally, the establishment of the ISC occurred from the inside out, beginning with internal integration and extending to external supplier and customer integration step by step. This means that Huawei first optimized the procurement and logistics processes to minimize purchasing cost and ensure timely delivery. Then, all internal operation activities including purchasing and sales within the organization were integrated to improve operational efficiency and enhance customer service capability. After internal integration was established, Huawei had the capability to manage suppliers and

  ,  ,    serve customers better, and thus could extend its integration practices from internal functional departments to external suppliers, customers, and partners. Consequently, the combination of internal and external integration can achieve supply chain visibility, that is, it allows supply chain activities to be traced and tracked by all supply chain members through real time information exchange around forecasting, planning, ordering, etc.

.

 :   

The Challenges of Global Supply Chain Management Although ISC was successfully implemented in 2003, the ERP system established in the ISC transformation only supported domestic business and did not support overseas business. At that time, Huawei had registered subsidiaries (or representative offices) in dozens of other countries that focused on sales and service. The employees in the subsidiaries could only expand the overseas market based on strong entrepreneurial spirit and improvisation. Sales contacted headquarters and conducted business using Lotus Notes, which is internal communication software. The technical people worked with their laptops and generic equipment and tools. The finance department could hardly work out accounts accurately because it lacked an IT system. All overseas business was handled manually at a very low rate of efficiency. Meanwhile, in 2005, Huawei had only one manufacturing base with limited capability in Shenzhen, while its customers were located in Southern Asia, Southeastern Asia, Northern Africa, the Middle East, North America, Western Europe, and the East Pacific. Huawei started its global supply chain transformation in 2005 with the objective of organizing supply chain practices to support overseas business, ensure timely delivery after signing the contract, and manage orders from a dozen regions around the world. Additionally, there were considerable differences in supply chain practices among different countries. When Huawei was starting to conduct overseas business, it had little market power compared to

’       its customers. As a result, it had to sign contracts and deliver products completely according to customer requirements. The variety of delivery methods and the number of customer requirements increased the difficulty of managing contracts and orders. In addition, the culture and regulations varied for different countries, which also brought massive challenges to Huawei’s supply chain management. The employees of Huawei had to provide specific solutions according to the context of local countries. In response to the above three challenges, Huawei first decided to implement an ERP system to improve the operational efficiency of overseas businesses. At the same time, Huawei began to establish a global supply network to satisfy orders from around the world. The promotion of the ERP system and the establishment of the global supply network helped Huawei to build the basic infrastructure for a GSC. With respect to specific supply chain practices in each country, the front-line employees took the initiative to solve their specific problems. The concrete actions taken are documented in the following sections.

Implement Overseas ERP Project Pilot Projects in Selected Countries With the expansion of Huawei’s overseas business, the old operational model, which relied on the manual processing of order management, financial statements, procurement, and supplier payments, experienced major problems. In 2005, Huawei decided to promote the overseas ERP project in its overseas subsidiaries to improve operational efficiency. The overall goals of this project were to integrate the operational processes of the overseas subsidiaries and to implement the ERP system in qualified subsidiaries to support supply chain operations and financial management. Due to a lack of experience, the project group selected eight countries to conduct pilot projects and planned to complete the projects in one year. In 2005, Zhou Yanfang, the manager of the Nigeria ERP project, took charge of promoting the ERP system in Nigeria. The front-line

  ,  ,    staff was willing to support project implementation. After six months of effort, the ERP system was successfully implemented: orders from Nigeria could enter the Shenzhen supply center with a single mouse click. Similarly, the implementation of ERP was comparatively easy in European countries because the regulations and laws were complete, enforceable, consistent, and specific, and the capability of suppliers could be ensured. Therefore, supply chain management practices and processes could be generalized and adopted in most regions of Europe (Guo, 2014). However, the overseas ERP project did not always go well, especially in Brazil. An ERP system needs to not only incorporate management requirements and processes but also conform to local laws and regulations. The tax rate in different states in Brazil varied and regulations were very complex. When equipment was sold, Huawei had to provide information on where the equipment had been stored to compare the difference in tax rates between where it was initially stored and where it was finally sold. This required Huawei to issue invoices and receipts even when it was moving equipment between different warehouses within Brazil. Peng Zhijun, CFO of Brazil at that time, led the group, which spent five years addressing these problems and designing the ERP system according to the regulations and laws of Brazil. Meanwhile, the group also built an interface between its sales processes and its customers’ purchasing processes to improve the visibility of the order.

Diffuse with a “Cell Division” Pattern In 2005, the ERP system was successfully implemented in only six countries: Egypt, Saudi Arabia, South Africa, Nigeria, the UK, and Pakistan. As the above discussion shows, the regions, countries, representative offices, and stations had different levels of difficulty in implementing the ERP system and supply chain practices. To enable the implementation of the ERP system in all overseas subsidiaries, Huawei established a specialized “overseas ERP” project team with over 200 members from the finance, supply chain, procurement,

’      

 . The “cell division” method

process, and IT departments in 2006. The project team applied a “cell division” method to gradually expand the scope of the ERP system in the overseas subsidiaries. First, it built a group and concentrated on solving the problems of several subsidiaries. After successful implementation, the members in the group held accumulated knowledge and experience. They were then divided into two groups that could help promote ERP in other subsidiaries. In this cell division manner, project members gained useful experience and diffused successful processes (Figure 4.4). By 2007, the number of overseas subsidiaries that had successfully implemented ERP had reached more than eighty countries. After the ERP system was developed by the “overseas ERP” project team, day-to-day operations were gradually handed back to the local management organizations.

Establish an Integrative and Global Supply Network Huawei’s sales activities covered Europe, the Eastern Pacific, Latin America, Asia Pacific, the Middle East, North Africa, and South Africa. To serve demand from these regions, Huawei built five supply centers in China, Mexico, India, Brazil, and Hungary. Europe can provide an example of this process. The Hungary center can supply many countries in Europe and North Africa and ensure the timely arrival of products within two weeks. Meanwhile, Huawei also established three

  ,  ,    regional distribution centers in China, the Netherlands, and Dubai. Due to the poor supply environment in Africa, Dubai was chosen as the distribution center for delivery in Africa. Additionally, five purchasing centers were established in China, the United States, Japan, Germany, and Taiwan. Huawei adopted the principles of “central certification and decentralized purchasing” to manage the electronic parts and components manufacturers and industrial goods producers from around the world. The global supply chain of Huawei is presented in Figure 4.5.

Supply chain collaboration systems (SCC)

Supplier

Region

Purchasing e-commerce system

Global procurement system

Europe Eastern Pacific

Global APS

Latin America Contract management

Shenzhen-ERP

Asia Pacific

Plant Shenzhen

Langfang-ERP

Integrated configurator

Langfang Brazil-ERP

Middle East & North Africa

Brazil Russia India

Russia-ERP

India-ERP

Distribute order management system

Common we alth of Independent States South Africa

Logistics

Global logistics system

 . Global supply chain of Huawei (Yu, 2015)

’       Global APS. Huawei performed three-to-five-year business planning and operations planning every year. Supply chain planning was an integral part of supporting operations planning and was further divided into production planning, capacity planning, purchasing planning, etc. This planning is crucial for directing the firm’s business activities, including procurement, production, and inventory. Huawei executed integrative sales and operations planning to manage global demand. The sales department, production department, and procurement department held meetings each month to define the gap between demand and supply capacity and to adjust the purchasing plan, production plan, and delivery plan to bridge the gap accordingly. Moreover, the planning relied on the accuracy of demand and customer forecasting. Huawei conducted sales and forecasting meetings to ensure the exchange of information across different departments. Information systems such as global advanced planning and scheduling (APS) also provided a platform for the planning department to acquire and update global information and then to allocate the available-topromise (ATP) capability to sales. Global Order Management. Huawei exerted great effort to balance the orders from different regions with the production capacity of supply centers. To determine the coverage of the supply center, several factors were considered, such as the production capacity of the supply center, the physical distance to the covered countries, the transportation environment, the transportation costs, the trade relations between the supply country and the covered country, and how to settle accounts. When customers placed an order in the order management system, the system would automatically allocate the order to the nearest and most convenient supply center to prepare the goods. Huawei called this the order split solution. The combination of multiple supply centers and the order split solution ensured the coordination of ordering and delivery in the supply chain network and promoted order fulfillment in an accurate, cost-efficient, and timely manner. Global Logistics. Huawei also built a global logistics system to ensure delivery. When Huawei developed business in the domestic

  ,  ,    market, its own logistics department was able to cope with the demand. However, in foreign countries, Huawei had to outsource this service to third- and fourth-party logistics enterprises. On the one hand, Huawei built collaborative relationships with the best international logistics enterprise to ensure delivery from the supply center to every region. On the other hand, Huawei also hired small local logistics enterprises to provide services shipping products from local customers to base stations and sites. These local logistics enterprises were certificated by the representative offices.

Tailor Local Supply Chain Practices The promotion of the ERP system and the establishment of a global supply network helped Huawei build the basic infrastructure for the GSC. However, detailed problems still existed in every link of the supply chain. No supply chain best practices are applicable to all types of businesses and regions. Ultimately, a general supply chain management system must be tailored to specific laws, regulations, and customer requirements in various countries and regions. In Huawei, the ISC framework was often localized and customized by front-line employees. Several examples for Saudi Arabia, Brazil, and Nigeria are given below to describe how Huawei tailored its supply chain practices. Saudi Arabia was treated as a special country when promoting the ERP system (Yu, 2016a). The customers in Saudi Arabia preferred to sign a one-year purchasing contract and then place orders at any time they wanted. After receiving the orders, Huawei was required to deliver within two weeks. To fulfill the contractual obligations and ensure timely delivery, Huawei had to establish one large warehouse in the country. Therefore, Huawei in Saudi Arabia faced great challenges in warehouse management, inventory management, dispatching, and shipping. When working to sort out the detailed delivery processes, Huawei also improved contract management. Huawei divided large contracts into small subprojects that could be signed separately, and meanwhile, it standardized the procedures for contract

’       signing and order fulfillment to connect with the customer’s purchasing processes. The sales engineer in Brazil, Xizi, encountered a major inventory problem (Xizi, 2011). At that time, Brazil’s warehouse was cluttered with numerous goods without any order. As a result, Xizi was always receiving calls from his marketing colleagues, asking him to look for the goods they needed, and then he had to spend many days finding them. To solve this problem, Xizi actively learned about supply chain management, international trade, and international logistics from Huawei’s experts and colleagues. Together with Hou Zhicheng from the IT department and Chen Chunzhu from the supply chain management department, he developed a fully functional inventory management system for Brazil that worked very well after six months spent to optimize and upgrade. Later, Xizi took part in the Vivo project, in which Huawei built stations for the GSM network for Vivo. The cabinet, power system, and modules were shipped to Brazil. To reduce the duration of the project, the cabinet, which was the first received, needed to be sent to stations directly. However, due to a mismatch between internal radio frequency cables and the cabinet, Xizi and his colleagues had to open each box of the cabinet, make the adjustment, and then repackage the box, which wasted time and resources and reduced the accuracy of inventory data. After this experience, Xizi and his team developed an effective shipment solution called “basic configuration plus item,” which allowed them to simplify the configuration of the cabinet and reconfigure all of the products in the station directly. This kind of flexible approach greatly improved project delivery and won competitive advantages for Huawei in Brazil. The sales engineer, Zhu Tong, started to work in Nigeria in 2006 when one project had trouble with logistics and almost failed to be delivered on time (Yao, 2009). After she joined the project team, she found that the main barrier was inefficient communication. For example, the team knew little about when goods would be delivered to the customer. Processes such as the transfer of documents and

  ,  ,    inspection and acceptance were not standardized. To this end, Zhu Tong suggested that the team, the customer, and the customer clearance agency conduct regular trilateral meetings to communicate the relevant information and to urge all parties to execute according to their commitment. Soon the logistical work was well-organized and standard processes were established. This process system was copied and applied by other countries in West Africa. Before the project in Nigeria concluded, Zhu Tong was sent to another project team in the Ivory Coast. She recruited two local African employees to work on logistics with her. In this situation, the import application number was applied very late by the customer. As a result, more than a dozen batches of goods were stuck in the port and warehouse, while the project construction staff had to wait anxiously in the station. Under this circumstance, the local employees took initiative to communicate with the customer, the agency, and customs, and successfully managed to get the shipment released out of customs relatively quickly. All of the above examples indicate that the implementation and improvement of ISC relied on Huawei’s front-line employees. Thus, how to motivate front-line employees became the key to the successful implementation of the GSC transformation. Because Huawei is an employee-owned company with more than 80,000 shareholders and because inspiring dedication is incorporated into the company’s core values and encouraged by the human resource management system, front-line employees were able to benefit from the rapid growth of the company, and they were motivated to achieve success in their respective functions. The employees who creatively tailored and improved the ISC management in different countries and regions were the key to building an effective GSC management system.

Discussion In 2018, the sales revenue of Huawei reached 105.2 billion (USD), of which revenue from overseas business accounted for 48.4 percent

’       (Huawei, 2019). The establishment of the global supply chain efficiently supports Huawei’s overseas business expansion. The integrative supply chain runs through different functional departments and organizations, whereas the global supply chain involves different countries around the world. Several implications can be drawn from Huawei’s GSC transformation. First, it should be recognized that global supply chain management practices are dependent on contingencies. No supply chain best practices are applicable to all types of businesses and regions. Ultimately, the management system is designed to help the firm achieve its financial goals. In different regions around the world, Huawei has always been committed to exploring the most efficient method of increasing sales revenue, reducing transactional and operational costs, and rapidly responding to customers’ requirements. Compared to the supply chain management in a country, the design of the global supply chain needs to consider more factors such as customs duties, the exchange rate, consumption taxes, and local regulations, laws, and culture. The experience of Huawei indicates that the implementation of an ERP system and the promotion of integrative supply chain practices in the overseas business departments should be tailored to the local laws, regulations, situations, and customer requirements rather than simply transplanted and copied. Second, unlike the ISC transformation, the establishment of the GSC model was a bottom-up process. Huawei established the framework and logic of the ISC before entering the GSC stage. Therefore, Huawei just extended the basic ISC model into the overseas regions, representative offices, and stations at a global scale. To proceed further, the detailed operational processes were adjusted to address specific problems. All of these problems were identified and then solved by front-line employees, and the solutions were integrated into the unified structure to ensure centralized control. We can see that frontline employees played an important role in the extension of ISC and the establishment of GSC. The initiative and the proactive, hardworking, and responsible attitudes of Huawei’s employees were also

  ,  ,    the reason that Huawei grew rapidly. Relying on and rewarding those employees who dedicated themselves the most to the company (inspiring dedication) was incorporated into the core values of the company. This, in turn, facilitated the implementation of the supply chain management transformation. Third, an integrated IT system was built to enhance the efficiency of information processing and to coordinate supply chain activities and processes. However, it was not easy to establish an integrated ERP system to cover global activities for Huawei, because the business processes varied for different regions, countries, representative offices, and especially stations. Huawei’s solution was to keep the general principles simple and the local solutions flexible. This means that overseas subsidiaries were allowed to develop their own ERP system according to their specific situation, and the main system was designed simply enough to connect all the ERP systems together based on the principles of integration.

.



The supply chain management transformation project has helped Huawei build a much stronger and more efficient organizational capability, take advantage of numerous market opportunities, produce major economic benefits, and establish a solid foundation for global business development. This chapter describes the problems that Huawei experienced in its supply chain management during the stages of domestic market expansion and internationalization. It shows how Huawei gradually established its integrative supply chain and global supply chain over the past decade and generates insights from Huawei’s experience. While Huawei’s ISC transformation was top-down, and could not have occurred without the support of top managers, the establishment of Huawei’s GSC model was a bottom-up process. The basic ISC model was kept consistent and unchanged in the overseas business when building a GSC model. However, the global supply chain was developed by the front-line employees as they proposed and

’       implemented solutions for specific problems. Since Huawei’s ISC transformation was promoted without any mature experience, Huawei hired a consulting company to help, and the establishment of the ISC took a gradual inside-out approach, beginning with internal integration and then extending to external supplier and customer integration step by step. Building an integrated IT and information system was crucial to developing both the ISC and GSC models. Although Huawei has obtained great achievements through its ISC transformation, it is still working to improve its supply chain agility, alignment, and applicability to cope with the expansion and complexity of global business. A new challenge to Huawei’s managers and a driver for Huawei’s continuous improvement has now become how to prevent the supply chain structure and mechanism from becoming rigid. Especially after 2011, Huawei clearly announced that it aimed to develop businesses for the consumer, enterprise, and carrier segments, which represent three types of customers and require different supply chain management models and practices. Thus, how to develop a differentiated supply chain to support multiple businesses will remain a key issue for Huawei’s supply chain managers in the years to come.

 Chen, H., Daugherty, P. J., & Roath, A. S. (2009). Defining and operationalizing supply chain process integration. Journal of Business Logistics, 30(1), 63–84. Flynn B. B., Huo B., & Zhao X. (2010). The impact of supply chain integration on performance: A contingency and configuration approach. Journal of Operations Management, 28 (1), 58–71. Frohlich, M. T. & Westbrook R. (2001). Arcs of integration: An international study of supply chain strategies. Journal of Operations Management, 19(2), 185–200. Gartner. (2012). Gartner announces ranking of top Asia Pacific supply chain organizations for 2012. www.gartner.com/newsroom/id/2090615 (accessed June 6, 2016). Guo J. X. (2014). Transformation of overseas ERP: Four years of hard and good. Huawei People, 282, August 18.

  ,  ,    Huawei. (2007). Huawei 2006 annual report. www.huawei.com/cn/about-huawei/ annual-report (accessed October 24, 2019). Huawei. (2014). Learning material of ISC transformation project. http://wenku .baidu.com (accessed September 11, 2016). Huawei. (2019). Annual report 2018. www.huawei.com/en/about-huawei/annualreport (accessed April 2, 2019). ISC project team. (2009). Inside-out pressure, and outside-in transformation. Huawei People, 109, September 22. Lenny Koh, S. C., Saad, S., & Arunachalam, S. (2006). Competing in the 21st century supply chain through supply chain management and enterprise resource planning integration. International Journal of Physical Distribution & Logistics Management, 36(6), 455–465. Li Y. H. (2014). Wear a pair of American shoes: Find the value of Huawei’s experience. www.c114.net/news/126/a876871.html (accessed 15 July 15, 2016). Malakooti B. (2013). Operations and Production Systems with Multiple Objectives. Chichester: John Wiley & Sons. Plossl, G. W. & Orlicky, J. (1994). Orlicky’s Material Requirements Planning. New York: McGraw-Hill Professional. Poluha, R. G. (2007). Application of the SCOR Model in Supply Chain Management. New York: Cambria Press. Ren Z. F. (2003). What did we learn from American people? China Entrepreneur, 11, 34–35. Sheikh, K. (2003). Manufacturing Resource Planning (MRP II): With Introduction to ERP, SCM and CRM. New York: McGraw-Hill Professional Publishing. Wang Y. K. (2015). Ren Zhengfei told you how Huawei learned transformation from IBM. http://blog.sina.com.cn/s/blog_4ab9bb690102vw2u.html (accessed July 15, 2016). Wu, Chunbo. (2014). Huawei Has No Secrets (Huawei Mei You Mi Mi). Beijing: CITIC Press Group. Xizi. (2011). The transformation from manufacturing engineer to supply chain specialist. Huawei People, 240, September 29. Yao L. (2009). Happy dancing youth in Africa – The interview on Zhu Tong. Huawei People, 208, January 20. Yu D. H. (2015). Huawei’s transformation in supply chain management. In forum held by Ruihua Innovation Management Institute in Zhejiang University. Yu D. H. (2016a). Interviewed by Huang Can and Li Ying in Hangzhou, April 28. Yu D. H. (2016b). Interviewed by Huang Can and Li Ying in Hangzhou, July 5.

Commentary on Chapter 4 Yongjiang Shi Cambridge University

Supply chain (SC) and its management (SCM) have emerged as one of the most critical management topics in the last twenty years. In not only practical but also academic worlds, the related topics have attracted great attention and, to a certain degree, the focus has changed from firm-based management to interfirm collaborative networks and their management. The chapter focusing on Huawei’s supply chain management and transformation therefore is very interesting and timely to understand how Huawei’s supply chain management adapted itself and eventually formed Huawei’s competitive advantages in the radical changed Chinese domestic and global business environments. Huawei’s supply chain management and its transformations are unique because of Huawei’s fast growth in the business and historical experiences in the catching up and overtaking development phases. The chapter is very useful for emerging nations’ practitioners who want to learn from Huawei’s transformations in its supply chains and management principles. The chapter highlights two key transformations of Huawei Supply Chain Management: the first phase was between 1999 and 2003, and the second is 2005– present. Distinguishing between these two phases is very important to appreciate the different challenges that Huawei faced over time. The first phase transformation was so critical for Huawei because it laid down a foundation for Huawei’s further business growth and transformed the whole company from a fast-growing entrepreneurial type of company toward a wellestablished corporation with robust business processes in its main business developments. IBM played a fundamental role in the transformation by transferring its business process and establishing Huawei’s integrative supply chain (ISC). In 1999, Huawei employees grew to 12,000 from 8,000 in previous year and its business almost doubled in the following year based on the data in Appendix A. Without such large scale of integration and formalization of business process, the achievements in business growth and transformation were unimaginable. The chapter highlights some challenges and difficulties in the four year transformation by telling the stories how the IBM consulting team helped Huawei to identify the business problems firstly, improve the

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  ,  ,    business process secondly, and then to build up the compatible information system later, which is so critical for many companies that they still mistakenly believe the computer oriented management information system (MIS) can magically improve their business without thorough business process analyses and improvements. It is also very interesting to know how Huawei as a learner at the beginning stage absolutely followed the IBM’s way to change the traditional established business processes, which must have been a very painful period. But it was more important for Huawei to adapt the process and system after the learning to be able to face new challenges and business requirements. This type of dynamic capabilities of learning are so critical and are not very frequently found in companies. Huawei is special in this regard in that it can not only learn faster but also unlearn effectively for new environments. During the transformation, Huawei also accumulated a set of rules for changes, for example, Huawei always follows its adapted business process first and then tries to change its organization after the business process is proven to be effective and well established. This keeps Huawei very adaptive and at the same time makes it very robust from organizational structural perspective. The second phase of transformation covers a much longer period from 2005 to today. It covers Huawei’s globalization of strategic plays and operations. This phase has many more challenges including expanding its business horizontally from China across the globe and expanding its business scope towards the consumer product sector mainly in its smart phone business and the chapter mainly focus on the former extension by highlighting Huawei’s establishment of global supply chain (GSC). For such a young company from China, it is not difficult to imagine the many challenges Huawei had to face and to tackle to win the new global competitions against so many well-established global giants. The inside stories about the GSC are essential to help us understand how the external achievements were supported by the GSC and how the GSC was built up on the physical and virtual levels. In summary, the chapter provides two strategic transformational phases for Huawei’s supply chain developments. The chapter provides many interesting detailed transformation stories, making it very readable and inspirational. It discloses Huawei’s secrete winning weapons from its supply chain perspective, which makes this chapter and book outstanding among so many books on Huawei’s phenomenal growth.

’       There are further opportunities for research on Huawei’s GSC. In addition to analyzing Huawei supply chain’s information flows, future research could examine the physical material flow-oriented value creation process and organizational networks. The diagram shown in Figure 4.6 was codeveloped based on a Cambridge research team working with Huawei SCM team. From this classical perspective, it is easily understood that supply chain should be described and represented through multiple perspectives with different lenses. Many Huawei’s supply chain issues and challenges can actually be better understood with the whole picture about the supply chain. Future research and writing could also examine in more detail the linkage and interaction between supply chain and Huawei’s products. It is very interesting to know that many issues accumulating within the Huawei’s supply chain can be linked back to its historical product and competitive strategies. For example, Huawei in its early stage business development had to focus more on the small fragmented customers with unique requirements that established global giant would not pick up. From marketing perspective, it was great to penetrate the niche markets and train Huawei’s operation system very successfully to cope with the diversities. However, after long term development, Huawei’s product families have become so complex that no supply chain can easily cope with. How to transform toward the next stage? This is one of the current challenges that Huawei is facing. Other topics that deserve more research are: 1. The interactions between R&D, products, and the end-to-end global supply networks 2. How to balance global and local requirements, particularly from local subsidiary perspective in the global supply chain 3. What complexity challenges Huawei faces in its GSC including causes and measurements 4. In the context of fast-growing Chinese manufacturing, how did Huawei dynamically manage its strategic transformation, operational fire-fighting, and continuous improvements.

From an academic perspective, this chapter is excellent and hopefully will inspire a lot more future research. Practitioners will also be able to draw valuable lessons.

 . Huawei global supply chain: configuration mapping

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Financial Management Transformation in Huawei Can Huang and Xiao Chen

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

Huawei was established in 1987 in Shenzhen as a sales agent for Hong Kong companies that produced private branch exchange (PBX) switches. In 1991, Huawei entered the telecommunication industry with its own research and development (R&D) capability. Since then, Huawei has committed to continuously innovating based on the core value of staying customer-centric and inspiring dedication. After nearly thirty years of rapid development, Huawei has become a leading global information and communications technology (ICT) solution provider (Huawei, 2016a). In 2018, Huawei’s revenue reached 105.2 billion USD with its products and services in use in more than 170 countries (Huawei, 2019). During this process, Huawei continuously engaged in management transformation. The company launched a number of large-scale transformations, such as integrated product development (IPD), integrative supply chain (ISC), and integrated financial services (IFS), to improve its management efficiency. The integrated supply chain management transformation represents the firm’s efforts in improving management of tangible assets, while the financial management transformation indicates its work in improving management of intangible assets (Mudambi and Puck, 2016). Because IFS was a relatively recent transformation that only concluded in 2014, existing studies on Huawei have yet to document these changes. Our study is centered on two major financial management transformation projects that were implemented in Huawei’s history, that is, the Four Standardizations project (1998–2007) and the IFS project (2007–2014). These projects focused on transforming the financial accounting practices of the company rather than the ways that 

      Huawei conducts investment and financing decisions, which are two typical main functions of a company’s financial department (Brealey et al., 2011). The reason for this focus lies in the ownership of the company and the leadership’s management philosophy. Huawei is a private company wholly owned by its employees. The Union of Huawei Investment & Holding Co., Ltd, and the founder and CEO Ren Zhengfei own the company. As of December 31, 2018, through the Union, 96,768 employees participate in the employee shareholding scheme. Ren Zhengfei is an individual shareholder in the company and also a participant in the scheme. In total, however, he holds only approximately 1.14 percent of the company’s total share capital (Huawei, 2019). Equity financing, or issuing stocks to the employees, has been a major channel for raising capital since the company’s foundation and debt financing was only supplementary (Peng, 2016). Therefore, the financing decision-making process was not overhauled in the company’s history. Since the early stage of the company, Ren has held the view that Huawei’s financial management should not only support business growth and expansion but also control for risk and supervise business activities. He opposed using project returns as an indicator to make investment decisions but highlighted the supporting role of the financial management system in the company (Huawei, 2016c; Peng, 2016). As Huawei applied this principle consistently throughout the years, the investment decisionmaking process has yet been the focus of the two major financial management transformations. Nevertheless, Huawei’s financing and investment activities greatly contributed to the success of the company, which we will discuss in more detail in Section 5.7. The first large-scale financial management transformation project, Four Standardizations, was carried out from 1998 to 2007 with the goal of standardizing financial processes, policies, accounting subjects, and control systems. A more ambitious IFS project was launched in 2007 and concluded only in 2014 to connect the business and financial processes. The IFS project was considered by the Huawei top management team as a measure to upgrade the financial management

      capability of the company, address the internal operation risk and management inefficiency, and mitigate the external competition pressure. The project as a whole was divided into two stages, IDS I and II, which were designed to connect the financial and business departments to make the accounts accurate and establish responsibility centers and to build up project financial management capability, respectively. Similar to other management transformation projects, Huawei focused on forming new processes, reforming organizations and developing new IT tools in the IFS project, which can be considered the output of the project. The process, organization, and IT tools reinforced one another and contributed to the success of the IFS project. Classical financial management and international business theory argue that because multinational enterprises (MNEs) operate in countries with different market and regulatory environments, the key requirement for their success is the ability to maximize returns from arbitrage in terms of the movement of goods and services. Financial management, which regulates capital movement, must therefore mesh with supply chain management, which administers movement of tangible goods and services to maximize performance (Dunning, 1977; Mudambi, 1998). The financial management problems that Huawei encountered in the course of growth and internationalization and the solutions that it adopted to mitigate the problems can be explained by the classical theories. Huawei’s financial management, however, is clearly the firm’s unique feature. For example, financial management completely serves the overall business strategy. Many managers in the financial department do not have a financial education background but develop their knowledge and skill in financial management after working at Huawei. Investment decisions are not made by comparing the financial returns of various projects but are instead based on the strategic importance of the projects to the core business of the companies. This principle has not changed since the founding of the company. The financial department plays a supportive role in business development, but importantly, also serves as a monitor and controller of business

      development. The project and division leaders must acquaint themselves with financial management knowledge, and the financial managers must understand business. We will analyze how these principles and rules affect the financial management transformation in Huawei in the next sections. We collected materials from a number of public sources such as academic journals, news reports, official websites, and Huawei’s annual reports for this study. We also interviewed several former Huawei senior executives regarding the financial management transformation. The remainder of the chapter is organized as follows: In Section 5.2, we introduce the first financial management transformation in Huawei, Four Standardizations. Section 5.3 presents the IFS background. Section 5.4 introduces the two stages of IFS and highlights several key subprojects at each stage. Section 5.5 discusses how Huawei promoted IFS, and Section 5.6 documents the contribution of IFS to the overall performance of the company. Section 5.7 discusses the financing, investment, and acquisition activities that are important parts of financial management at Huawei, and Section 5.8 concludes the chapter.

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     

Four Standardizations In 1999, Huawei employed more than 12,000 employees and generated 930 million USD in annual revenue (Wu, 2014). In the same year, Huawei hired IBM consultants to guide two large-scale management transformation projects: integrated product development and integrative supply chain transformation. As these two projects unfolded, Huawei also invited several consulting companies to bid for a consulting project to reform its financial management, as an important part of its concerted efforts to improve the overall management efficiency of the company. Klynveld Peat Marwick Goerdeler (KPMG) presented a method called “World Class Finance” in the bid and attracted the

      attention of Huawei’s leadership. Huawei ultimately chose KPMG to undertake the project, and later, KPMG became the auditor of Huawei in 2000. KPMG assisted Huawei in conducting its first management transformation project in the financial area, which was called Four Standardizations and comprised the standardization of financial policies, processes, chart of accounts, and control systems. The first important policy that was standardized was the business trip reimbursement policy. Before the Four Standardizations project was implemented, representative offices had their own reimbursement policies. What type of expenses could be reimbursed, what types of accommodations and transportation could be used, and so on varied across different representative offices. After the transformation, Huawei standardized the business trip reimbursement policy across all of its representative offices, inside and outside China. The second important process that was standardized was the procurement process. Four documents that are key in the procurement process, namely procurement contracts signed with suppliers, orders to suppliers, warehouse vouchers, and receipts provided by suppliers, were required to match each other. In addition, the suppliers were not allowed to give the receipts to the procurement department but had to send them directly to the financial department. This standardized process implemented in Huawei was more stringent than what was implemented in many other companies at the same time. The strict rules and regulations helped Huawei curb corruption (Peng, 2016). In standardizing its chart of accounts, Huawei decided to harmonize the different accounts used by different representative offices and adopt a seven-code system, which includes five codes for the company, region, product, department, and accounts, respectively, and two reserved codes. One reserved code was for projects, and the other was left for each office to decide what it represented later. Before the Four Standardizations project was implemented, Huawei used China’s national accounting standards. In standardizing its accounts, Huawei made changes. For example, R&D expenditure was recorded

      as one item in the national accounting standards. In Huawei’s new accounts, it was segregated into salary, material, travel expenses, management expenses, and so on. Therefore, after implementing the new accounting system, Huawei had more disaggregated accounts than many other Chinese companies did at that time, meaning that Huawei could record financial information at a more disaggregated level. Standardized control was implemented by moving financial management responsibilities from regional representative offices to headquarters and subsequently establishing accounting shared service centers. We will discuss the standardized control system in more detail below. In the high-speed growth period of the mid-1990s, Huawei’s provincial representative offices managed their own finances. The chief representatives hired financial staff in their offices. Accordingly, the financial staff reported to the chief representatives instead of reporting to the headquarters. The weakness of this model was the lack of control and monitoring by headquarters. For instance, in several regional representative offices such as the Hunan Office and Sichuan Office, financial staff embezzled money from the company (Peng, 2016). In addition, because of the lack of standardized financial processes and chart of accounts, reimbursement, and auditing processes were also very slow. It also caused difficulty in using the enterprise resource planning (ERP) software that Huawei purchased from Oracle in 1997. The root of the crisis-of-control resided in the decentralized organizational structure that Huawei had in the mid-1990s. This structure allowed Huawei to expand rapidly by offering the managers of representative offices great autonomy and incentives; however, the company’s leadership felt that they were losing control over a highly diversified field operation in which managers of representative offices had authority over a broad range of issues including financial management. Freedom in this organization structure also bred a parochial attitude in the company (Xu, 2016). One potential solution to the decentralization problem was to establish a program of control and

      review for field managers at headquarters and carefully weigh and distribute capital expenditure across the organization (Greiner, 1997). The ultimate goal of the Four Standardizations project was exactly in line with this theoretical reasoning. It aimed to strengthen the headquarters’ control over front-line managers and employees to prevent corruption and misconduct while simultaneously allowing them to make important decisions about business activities. To develop a set of standardized financial processes, policies, and accounting subjects to form a control system, the Four Standardizations project team first researched and developed the new processes and policies in the Shenzhen headquarters. Subsequently, the project team conducted a pilot project in Changsha, where financial staff had embezzled company funds. After the pilot project succeeded in Changsha, the process and policy was disseminated across the whole company. The responsibilities for financial management, however, were not returned to the headquarters in Shenzhen immediately. They were first returned to the regional offices, each of which managed a large geographical area typically encompassing several provinces. For example, the financial management responsibility in the Northeastern, Northwestern, and Central China area was given to the regional offices located in Shenyang, Xi’an, and Changsha, respectively. Only two years after the reform, financial management responsibility was returned to the headquarters in Shenzhen. To strengthen financial management and control, Huawei later established accounting shared services centers. The shared services center is the entity responsible for executing and handling specific operational tasks, such as accounting, human resources, IT, legal affairs, compliance, purchasing, security, and so on. Shared service centers were established for a variety of reasons, including cost reduction and service improvement, focus on core business, more control of and transparency in cost, better staff performance, elimination of redundant functions, and so on (Janssen and Joha, 2006; Minnaar and Vosselman, 2013; Su et al., 2009). When the integrated financial service transformation was launched in 2007, Huawei established

      seven global accounting shared service centers, following the model and logic of establishing shared service centers in China. Huawei adopted several measures to facilitate the implementation of the Four Standardizations project. First, as in the other major management transformation projects, CEO Ren Zhengfei was the key architect and proponent of the Four Standardizations project. Second, Huawei appointed the directors of the departments that were directly involved in the transformation as the project leaders. Responsibility for the transformation accordingly fell to the department directors, who were left with no choice but to embrace the transformation. Additionally, before the Four Standardizations project was launched in 1998, many financial managers in Huawei were middle-aged. The leadership of Huawei believed that these middle-aged managers were not equipped with state-of-the-art knowledge and had little experience with advanced financial management. Before the Four Standardizations project, they were replaced by young managers who had recently graduated from university, had no vested interest in the old system, and presented no resistance to the changes proposed in the Four Standardizations project (Peng, 2016). Last but not least, the gradual approach of taking the responsibility for financial management from provincial representative offices to regional offices and later to the headquarters also minimized the resistance to the transformation. Scholars have argued that routines, which are the ways of doing things in an organization, can provide a source of resistance to organizational transformation (Edmondson et al., 2001). There are multiple reasons that can explain why routines persist. The first is that learning and relearning routines incurs cost, which leads to the tendency to adhere to prevailing routines. The second is that departure from established routines provokes heightened anxieties and stakes among members of the organization, for example, between managers and workers or managers and managers. Conflict can ensue amid organizational transformation. Therefore, it is reasonable to avoid organizational change by sticking to established routines (Nelson and Winter, 2002). Research has found, however, that authority figures, such as

      project and team leaders, can influence routine change by coordinating the collective learning process (Edmondson et al., 2001; LeonardBarton and Deschamps, 1988). Furthermore, research has suggested that stable teams may become slaves to routine and fail to respond to changing conditions (Katz, 1982). In line with these theoretical arguments, Huawei’s leaders’ unconditional support for the Four Standardizations project and replacement of managers in the financial department ahead of the project paved the way for its successful implementation. Four Standardizations, as Huawei’s first major effort in management transformation in the financial area, established the foundation of the company’s sustained growth in the domestic market and subsequent expansion in overseas markets. In 2003, soon after Huawei entered overseas markets, it began promoting financial standardization in overseas subsidiaries. The effort to standardize the financial system in overseas subsidiaries lasted until the beginning of IFS in 2007.

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  

Development of the Telecommunications Industry By the time Huawei launched the IFS transformation in 2007, the global telecommunication industry had undergone a continuous rapid development period (ITU, 2006). The total sales of the telecommunication equipment market increased from 45 billion USD in 1996 to 139 billion USD in 2007 (Lightwave, 1997; Robson, 2008). By approximately 2005, mobile telephony technology had matured, and the number of subscriptions to mobile telephones surpassed that of fixed telephones in both developing and developed markets. In addition, 3G technology was ready to be commercialized on a large scale. To integrate the large-scale R&D resources and prepare for the fundamental change in the telecommunications industry, a series of mergers and acquisitions occurred starting in 2006. The most salient case was the Lucent Technologies and Alcatel merger in

      2006, creating a company that was worth 36 billion USD and employed 88,000 individuals (IPTV News, 2006). The communications businesses of Nokia and Siemens also merged in 2006, establishing Nokia and Siemens Networks, which began operating in April 2007. By the end of 2007, the global telecommunications market was substantially consolidated. Huawei’s leadership witnessed this trend and believed that the consolidation of the global telecommunications industry would lead to intensifying competition and a tougher market environment for the company in later years. Huawei’s top management felt that it was necessary to prepare the company for the increased competition. The IFS transformation was launched not only as a measure to enhance the internal management capability but also as a way to mitigate the external risk.

Operation Risks In 2006, sales in overseas markets accounted for 65 percent of the total sales revenue of the company, which demonstrates that Huawei became a truly multinational enterprise, not just a company with international business. Huawei’s overseas sales increased from virtually zero in 1999 to 11 billion USD in 2007. In 2007, Huawei employed 83,609 staff. The company successfully attracted more customers and earned more contracts outside China. Some of these new contracts were turnkey projects that involved a significant amount of engineering work, including building towers and digging ditches. For some of these contracts, the revenue from the engineering projects was even greater than that of equipment sales. Previously, it had been relatively easy for Huawei to estimate whether it would make a profit from the equipment sales because Huawei produced the equipment and the company’s enterprise resource plan (ERP) system would clearly indicate the profitability; however, it was very difficult for Huawei to calculate the costs of engineering projects. The geographical conditions, labor cost, and labor regulations varied greatly in different countries, which required Huawei to conduct financial management at the project level. In other words, the transformation of Huawei’s

      business activities required the transformation of Huawei’s financial management. In an internal meeting in 2007, Ren expressed his concerns: “We do receive a number of large overseas orders, but I do not know whether they are profitable” (Li, 2009). Before 2007, the role of the Huawei financial department in overseas markets was largely supportive, engaging in activities such as issuing audit reports. Although the Huawei financial department had already begun to conduct cost accounting in 2000, it was not involved in the budgetary estimation of projects. The budgets were created, but they were not linked to planning of engineering projects. The financial staff did not know how to manage a profit center and had little knowledge about business processes. The financial department was more of a staff function than a strategic function to the company. As a result, it made errors and caused conflicts between the financial and business departments. Huawei’s top management realized that if the financial department was to correctly estimate the accounts and profitability of the contracts, it had to be closely connected to the business departments. For instance, although Huawei already had project delivery and marketing management processes in place before 2007, the involvement of the financial department in the business processes was insufficient and did not make the necessary impact. Revenue recognition had also been an issue for Huawei when undertaking overseas engineering projects. For equipment sales, revenue recognition was completed when Huawei received a preliminary acceptance certificate (PAC) from customers after delivery. The delivery process in engineering projects is complex, however, and can be a prolonged process. The financial staff at Huawei was not able to determine when the delivery was completed and when the PAC was received. Hence, they were unable to correctly manage the accounts. The variation in the definition of revenue recognition caused inaccuracy in the financial data. Some business departments took advantage of this inconsistency to manipulate the financial data. Because of the weaknesses in project financial management, Huawei incurred losses

      with engineering projects, such as those in Brazil, Egypt, and Pakistan (Peng, 2016). It became necessary for the company to take measures to contain the risk associated with engineering projects. Revenue recognition is indeed a classic accounting issue. The U.S. Securities and Exchange Commission forced Lucent Technologies to restate its financial results in 2000 because of the same issue. It booked revenue on shipped inventory in the financial statement that was later returned by distributors. This violated the accounting rule of “no take-back,” which states that a company should not book revenue on inventory that it shipped if the customer can return it at some point in the future. The restatement erased 679 million USD in Lucent Technologies’ revenues for the first quarter of the fiscal year 2000, turning an operating profit into a loss and resulting in the sharp decline of stock prices by 8.5 percent (Kieso et al., 2007).

Financial Efficiency As Huawei entered more countries and gradually established an image as a credible equipment supplier, the company began to earn trust from large leading customers such as British Telecom, Telecom Italia, Mexico Telecommunications, and so on. Around 2006, the value of contracts that Huawei acquired overseas became significantly larger than those obtained in the initial stage of internationalization. As the amount of purchase orders and contracts increased, Huawei began to feel cash flow pressures. The cash reserve the company had to prepare to deliver high-value contracts presented a financial challenge. In addition, the risk associated with the possible bankruptcy of customers who signed large contracts or delayed payment also became an issue that Huawei was not able to ignore. As a result of the insufficient capabilities in financial management, the operating profit margin of Huawei dropped from 2003 to 2006 (Figure 5.1). In the initial stage of internationalization – for example, from 2000 to 2004 – Huawei was able to use the profit earned in the domestic market to subsidize its operations in the international market. In approximately 2005, however, as the volume of its international sales

     

Operating Profit Margin 30.00% 25.00%

24.00% 19.00%

20.00% 15.00%

18.00% 14.00%

17.00%

10.00% 10.00%

5.00%

7.30%

0.00% 2000

2001

2002

2003

2004

2005

2006

 . Operating profit margin of Huawei 2000–2006 Source: Annual Reports of Huawei 2000–2006

surpassed that of the domestic market, Huawei stopped using this strategy; it became obvious that the company needed to transform its financial system to sustain further growth.

.

    

Integrated Finance Services To address the financial management challenge, in 2007, Huawei CEO Ren Zhengfei wrote a letter to Samuel Palmisano, then CEO of IBM, and asked whether IBM would be able to help Huawei transform its financial system to improve the company’s processes and management (Li, 2009). Unlike the process of selecting KPMG to undertake the Four Standardizations project, Huawei did not invite other companies to bid for the project. Huawei only invited IBM, mainly because IBM had earlier helped Huawei transform its product development and supply chain management. The leadership of Huawei realized that because the product development, supply chain and financial management were interrelated, it would be more effective to consult IBM to connect the financial system to the business process that IBM had helped transform than to seek advice from other companies (Peng, 2016). Ren Zhengfei admired IBM for its management system and

      expertise, which had sustained its business development for more than a century. He believed that Huawei’s most valuable asset was its management system, established and improved through a series of large-scale transformation projects. He wanted Huawei’s management system to play a role similar to that of IBM’s in company development (Huawei, 2016c). Palmisano accepted Ren Zhengfei’s invitation, and the IFS transformation began in 2007. The “integrated” in integrated financial services indicates that the transformation aimed to connect the financial and business departments, including R&D, marketing, sales and supply chain management, and so on. “Finance services” means that the financial department would provide services to the business departments. If integrated product development can be observed as a management transformation project to link R&D with marketing and sales, IFS can be considered a project to improve the synergy between the financial and business departments. Its implementation can be divided into two stages: IDS I and IDS II. In both stages, IFS consisted of dozens of subprojects that were carried out in parallel.

IDS I（2007–2011） IDS I began in 2007 and ended in 2011. The main purpose of the transformation at this stage was to connect the financial and business departments. It was expected that the connection would enhance the accuracy of financial reporting, or in other words, correct the account information. In IDS I stage, the IFS transformation consisted of a number of major projects. We introduce the opportunity to cash and procurement to payment projects in detail and address others only briefly for the sake of brevity. Opportunity to Cash (OTC): The main purpose of this crossfunctional project was to connect the financial and business departments to address the revenue and payment confirmation issues and expedite cash flow for Huawei. Four new policies were adopted in the OTC project to meet the project objective. First, the contracts were standardized. The basic elements of the contracts, payment

      conditions, and delivery processes were clarified. Second, credit management was carried out throughout the process of fulfilling the contract. The solvency of a customer was examined before signing the contract, each delivery and installation of equipment and payment. In this new process, the customer’s credit is evaluated and recorded systematically in Huawei’s financial system, which then provides a reference for a future business relationship with the customer. Third, the delivery and invoicing process was optimized. It was decided during the implementation of the OTC project that delivery by Huawei should generate invoicing by the customers. Therefore, in the new process, the Huawei employee who delivers equipment to the customers should write a report and submit it to the customer. According to the contract, upon receiving the delivery report, the customer should invoice Huawei. Fourth, the systematic management of accounts receivables was established. For example, measures were defined to address the customers’ concerns regarding the facilitation of their payment. We use a standardized contract as an example to illustrate the concrete measures that were adopted in IFS. The standardization of contracts was the solution recommended by the OTC project team to tackle the issue of revenue recognition discussed previously. It was suggested that the revenue recognition be clarified in the contracts. If Huawei was not responsible for equipment installation after delivery, according to the contract, revenue recognition would then occur upon delivery. If Huawei was responsible for equipment installation as well, revenue recognition would occur after the installation was finished. As an important measure to expedite the cash inflow to Huawei, the OTC project team recommended adopting the concept and measures of the minimum delivery unit (MDU) and minimum payment unit (MPU). Before IFS was implemented, payment for a typical Huawei contract was always divided into several stages, comprising, for example, one payment after the contract was signed, one payment after the first delivery, and so on. As discussed previously, however, the value of the contracts that Huawei earned in the overseas market

      had increased substantially beginning in 2006. Therefore, the accounts receivables also increased substantially. This posed a risk for Huawei’s operation and became a challenge that IFS needed to address. The IBM consultant and Huawei IFS team generated a solution, which was to define the MDU and MPU of a large contract and use them to divide up that contract. For example, for the private branch exchange product, before the MDU and MPU principles were adopted, pricing was based on a plate that included various parts. In line with the new principle, pricing became based on smaller units, which are parts. With smaller units of delivery and payment, Huawei’s operation risk was significantly reduced (Fan, 2016). Procurement to payment (PTP): This project aimed to improve the management of purchase orders and payments to suppliers and strengthen the connection between the financial and procurement departments. The system established in the project reminded Huawei staff members to pay suppliers in a timely manner, thus helping Huawei establish an image as a credible partner. The system also reminded suppliers to issue invoices to Huawei on time. The improved management of purchase orders and payments to suppliers contributed to the creation of a healthy ecosystem surrounding Huawei. In addition, this project connected the procurement and payment processes, which ensured the accuracy of the procurement data and helped Huawei strengthen internal control. Before the project was implemented, the procurement department had a full say in choosing suppliers and the certification of suppliers. After the implementation, the financial department became involved in the process, which reflects Huawei’s leadership’s long-lasting view that the financial department should be able to play a controlling role when business developed rapidly. Shared services center: The goal of this project was to establish accounting shared services centers across the world following the successful establishment of similar centers within China when implementing the Four Standardizations project. A pilot project was conducted in Malaysia before the project was rolled out to the rest of the world. By 2009, seven accounting shared services centers had been

      established. They were located in Argentina for the Americas; the United Arab Emirates (Dubai) for the Middle East; Romania, Poland and the UK for Europe; Mauritius for Africa; and Malaysia for the Asia Pacific region (Fan, 2016; Peng, 2016). Different from the shared services centers of other multinational corporations, whose functions are to save on costs and improve efficiency, the sharing centers in Huawei were more actively engaged in central accounts, cash management, and importantly, acted as centralized control centers. Information technology: Huawei deemed the management tools based on the IT system to be critical for the successful implementation of management transformation projects because once the new processes were defined, the staff needed to use new tools to implement the processes. This project aimed to develop management tools based on the IT system. The process and IT department of Huawei, which employed several thousand staff, was deeply involved in this project. A couple dozen staff from this department worked closely with the staff from the financial department to codevelop an IT architecture to facilitate the implementation of the new financial and business processes. The financial staff and IT staff were also the core members of the IFS change management project, which is discussed below. Pricing system: The project aimed to establish a pricing system to establish a competitive price for Huawei’s products. The price suggested by the system was to be reasonable and competitive and allow Huawei to obtain the desired profitability, which was critical for the company’s sustainable development. General ledger: The primary goal of the project was to ensure the completeness of the financial data process. In addition, the project emphasized the importance of abiding by the law in all countries, including paying corporate and income taxes for employees. Asset management: The main objective of the project was to ensure that asset management in Huawei would be effective and efficient. Huawei established a global standard of asset purchasing and decision making in this project.

      Payment: In this project, Huawei established a payment management system to ensure that salary payment to staff and the deduction of income tax was accurate. In addition, the payment of salary and reimbursement to expatriate employees through the system had to conform with the laws and regulations of the respective countries. Internal control and internal audit: The main purpose of this project was to improve internal control and combat illegal behavior by staff. Rules were developed in the project and disseminated internally to ensure that they were understood by staff. Authorization: This project aimed to build the framework, standards, and standardized process of authorization. Policy and process: This project aimed to standardize the policy, operations, and processes in the financial area. Data: This project aimed to standardize Huawei’s data, which include customer information, data generated from management and business processes, and so on. Only after standardizing its data was Huawei able to process the data collected by various subsidiaries and generated from its diverse business and management processes. Change management: For a large-scale management transformation project, it is always a challenge to coordinate the effort and obtain support from various departments for implementation. For instance, the OTC project covered eight functions, where each function was managed by a vice president of the company. The change management project was to promote internal communication between the IFS team and the function departments and disseminate the outcome from IFS to the entire company. Project management office: Huawei created both a steering committee of powerful top managers as well as a project management office that ran the day-to-day operations of the change effort, including organizing regular meetings, seminars and exchanges with the IBM consultants. We will provide more details on these organizational structures in Section 5.5. Promotion: In general, the IFS implementation followed a sequence from project design, conceptualization, development,

      verification, and experiment to promotion. Because IFS was implemented globally, the process of implementation in different countries varied. The tasks in the promotion project were to design an optimal process to promote IFS globally.

IDS II （2010–2013） IDS II started in 2010 and ended in approximately 2013. The primary objective of IDS II was to define the responsibility center and implement financial management at the project level. It was decided during the IDS II stage that the regional markets and product lines were both responsibility centers; however, regional markets are primary responsibility centers, but the product lines are secondary centers. The manufacturing and supply chain departments were defined as cost centers because the budgets of these departments depend on the volume of sales. Other departments, such as financial departments and human resource management departments, were defined as expense centers as the budget of these departments does not depend on the volume of sales. IDS II also included dozens of projects. Here, we introduce two subprojects as examples: reporting analytics and project financial management. Reporting analytics (RA): The primary tasks of this project were twofold. The first was to clarify the responsible departments and the cost and expense centers. Huawei established profit centers in 2006. Afterward, every product line claimed itself as a profit center; however, the financial management was not sufficiently effective to calculate the profit and loss of each product line. In 2010, it was decided in the IDS II stage that Huawei should establish a true responsibility center. A question immediately emerged in the discussion as to whether a regional market or a product line should be considered a responsibility center. Both offices (departments) wanted to be considered responsibility centers, but only one could be the primary responsibility center. Ultimately, regional markets were designated as primary responsibility centers and product lines as secondary centers, based on the argument that staying customer-centric is the

      core value of Huawei and that the regional market is closer to the customers than the product line. Another question that was clarified in the reporting analytics project was whether the manufacturing department and supply chain management department could be considered profit centers. In the initial discussion, these two departments proposed becoming profit centers. The proposal was rejected by the Huawei leadership, however, because if there were too many profit centers established in the company, conflicts would ensue among them. In a hypothetical example, when a contract is signed, the revenue would be separated by product lines if each of them acts as a profit center. As long as one of these centers is not satisfied with its share in the total revenue, it would reject the contract that would be otherwise valuable for the company as a whole. On the basis of this reasoning, the Huawei leadership decided to designate the manufacturing department as the cost center, and from then, they only needed to be concerned with the cost savings. The second task of the reporting analytics project was the reporting itself. The charts of accounts in Huawei have seven categories: company, country, department, product, and project, plus the two additional codes. After the responsibility centers were clarified, reporting was straightforward. The directors of representative offices and the managers of product lines received profit and cash flow reports, and the project managers received only a profit report. The managers of supply chain management received a cost report. Project financial management (PFM): This project was a crucial step to upgrade Huawei’s financial management capability. After the project was implemented, the project became the basic unit of management at Huawei, and the project team became the basic organizational unit. Huawei was able to discern which project was profitable and thereby greatly reduced the operation risk while enhancing management efficiency. There are three major differences between Huawei’s project financial management before and after the PFM project was implemented. First, before the implementation,

      project budget estimates were carried out by the sales department only. To earn a contract, the sales department often produced a budgetary estimate that demonstrated profitability of the project, although the outcome could be the opposite. This caused the problem documented in a previous section: Huawei leadership did not actually know which overseas projects, particularly those involving engineering work, were profitable. After the PFM was implemented, budgetary estimations were conducted according to the customer’s proposal by the sales department and financial department jointly, which increased the creditability and accuracy of the estimate. The Huawei leadership stated clearly in 2011 that “all Chief Financial Officers should participate in evaluation of contracts and they should be ready to veto the low-quality contracts” (Huawei, 2016c). Secondly, the actual budgeting was originally performed by the financial department only after the contract was awarded. After the PFM was implemented, budgeting was connected with the statement of work, planning, and execution of the project. The financial and business departments were jointly responsible for budgeting. Last but not least, the final accounts were completed for a project after the PFM implementation to indicate whether the project was profitable and why. Then, the final accounts were used to guide the next budgetary estimate.

.

  

IFS was complex and involved many different departments in the company. Before a new process was rolled out to the entire company, the IFS project team usually conducted a pilot project in a regional office or product line. The only difference between the practice in the pilot project and that later diffused to the entire company is that the new IT systems were not developed during the pilot project. Except for the IT system, the processes, policies, and standards implemented in the pilot project were the same as those later implemented company-wide. The pilot projects were typically undertaken for two to four months. As long as the IFS project team agreed that the new

      processes, policies and standards worked as expected, the new practice was rolled out to the entire company, accompanied by new IT systems (Fan, 2016). As “growing by self-reflection” has become the core value of the Huawei company and the company has invested billions of dollars in management transformation projects in other areas before IFS started, however, there has been a consensus among the Huawei leadership that the only unchangeable in the world is the change itself (Fan, 2016; Huawei, 2016c). Nevertheless, after the transformation was gradually rolled out, it received considerable resistance from the business departments, which experienced difficulty in adapting to the new processes that were suggested by the IFS project team. Ren explicitly supported the IFS project, saying, “IFS is a company-wide transformation that not only aims at the finance system. Every top leader of the company should be involved in the IFS. If there are departments that think they can transform without support from the project team, I will think the departments can generate profit without expenses. Then, the leaders of these departments will not be promoted. In the IFS transformation, the financial department should not close its door either, thinking without involving and consulting business departments” (Huawei, 2016c). Ren’s strategy to implement IFS was similar to implementing the IPD: “First, copy it exactly, then refine and fix it.” Huawei paid a great deal of attention to designing and implementing new processes, creating new organizations, and making and disseminating new IT tools in the IFS project, which were deemed the key outputs from the management transformation projects in Huawei (Fan, 2016). Regarding the organizational structure of the change initiative, a financial transformation steering committee was created to oversee the IFS project. The members of the steering committee included the leadership of Huawei, such as Guo Ping, then chief legal officer; Hu Houkun, then chief sales and service officer; and Liang Hua, then CFO of Huawei. Guo Ping was the chairman of the steering committee. The three of them decided on the important issues for

      IFS and reported to Ren. Approximately 300 people were involved in IFS. More than 200 people from Huawei formed the Huawei project team. Approximately sixty people were consultants from IBM. At the company level, the project management office was established to oversee the activities of the subprojects and coordinate the efforts from these subproject teams. The project team meetings were held approximately every two weeks. Usually twenty to thirty people attended the meeting, including six to seven IFS project management office staff, the leaders of various subprojects and heads of various departments (Fan, 2016; Peng, 2016). In the biweekly IFS project team meetings, the leaders of various subprojects had to report on the progress of the projects that they led. If progress did not match expectations, the project leaders faced tremendous pressure and possible dismissal after the meeting (Peng, 2016). IT tools were used to facilitate the new process and implement the IFS transformation. For example, before e-mail was developed and widely used, Huawei contracts were signed as hard copies. After e-mail became popular, the hard copies of contracts were scanned and transmitted. In both cases, contracts were sometimes lost in transmission. In the IFS transformation, a contract management IT system was established. All of the contracts were uploaded to the system. Anyone in the company who needed access to a contract could do so easily by

Financial Transformation Committee Project Management Office Huawei Project Team

IBM Consultant Team

 . The relationship of four teams in IFS Source: Organizational Transformation of Huawei

      logging into the system. A similar system was created for purchase orders. From signing contracts, placing orders, planning and manufacturing to delivery, all processes could be reviewed in the system by anyone involved in them. These IT systems improved the connection between different departments, enhanced efficiency, and facilitated the implementation of new processes and organizations that were established in the IFS transformation.

.

 

IFS benefited Huawei by helping Huawei improve its overall financial management capability and financial performance, as well as by addressing its particular financial problems. As demonstrated in Table 5.1, before 2010, days of sales outstanding (DSO) and inventory turnover days (ITO) were very large;1 after 2010, they both decreased, which means that the cash turnover and speed of inventory turnover became quicker than ever. Huawei saved approximately 4.95 billion USD because of inventory management improvements. Furthermore, when Ms. Wanzhou Meng, CFO of Huawei, presented the Huawei annual report in 2014, she emphasized that continuous management transformation, including IFS, improved the profit level of the company. Through various measures of risk control, bad debt has been dramatically reduced, and profit was increased to USD 5.685 billion USD in 2015 (Hu, 2016; Huawei, 2016b). There are a large number of particular financial problems that were addressed in the IFS project. We use the inaccuracy of financial data as an example to illustrate the impact of the transformation. In the period from 2007 to 2008, the financial data generated from the profit centers were usually inconsistent, which generated significant conflict between the business departments and the financial 1

Days of sales outstanding is calculated as trade payables at the end of the year divided by revenue and multiplied by 360 days. Inventory turnover days is defined as inventories at the end of the year divided by cost of sales and multiplied by 360 days (Huawei, 2016b). A lower number for both indicators represents better company performance.

      Table 5.1 Days of sales outstanding (DSO) and inventory turnover days (ITO) of Huawei, 2008–2015 Year

DSO

ITO

2008 2009 2010 2011 2012 2013 2014 2015

127 125 95 88 90 109 95 84

110 100 92 73 60 64 104 96

Source: Annual Reports of Huawei (2008–2015)

department. Because ensuring the accuracy of financial information was the main goal in the IDS I stage transformation, by 2010 – when IDS I was finished – the conflicts between the financial and business departments dramatically decreased. Sporadic complaints of incorrect data have appeared, but this has not been a major issue since 2010. Internal customer satisfaction greatly improved with regard to the accuracy of the financial data (Fan, 2016). Before 2010, financial data could be manipulated because revenue recognition was not clearly defined. Through the implementation of the opportunity to cash project, Huawei gradually solved the problem by standardizing contracts and defining revenue recognition. After 2010, the manipulation of financial data by business departments became rare.

.

   

The other aspects of Huawei’s financial management such as financing, investment, and mergers and acquisitions were not the focus of the two above-mentioned major financial management transformation projects. They did, however, contribute immensely to the success of Huawei. We briefly discuss them in this section.

     

Financing Equity financing, or issuing stocks to employees, has been a major channel of raising capital since Huawei’s founding, particularly in the early period. Debt financing was only supplementary (Peng, 2016). Huawei established its employee stock ownership plan (ESOP) in 1990, three years after the founding of the company. The objective of the ESOP is described in Article 17, chapter 1 of the Huawei Basic Law, as, “We let employees become shareholders to form the core of the company and maintain control over it in order to sustain its growth. . . . We implement the Employee Stock Ownership Plan. The program on the one hand lets the model employees who agree with the company’s core value bond with the company and on the other hand makes the most responsible and capable employees the core members of the company” (Huawei, 1998). The ESOP in Huawei went through several reforms in the last two decades. Huawei allowed employees to obtain dividends based on their shares in 1997, introduced virtual stock options and phased out the original ESOP model in 2001, introduced caps for the maximal stock purchase amount for individual employees to reserve stockpurchase opportunities for new employees in 2008, and launched a time-based unit plan to allow all employees, particularly foreign employees, to share company profits, which is similar to the virtual stock options (Yan, 2014; Zhu et al., 2013). None of these reforms changed the major functions of the ESOP program, that is, motivating and incentivizing employees and raising capital. It was reported that from 2004 to 2011, Huawei raised 27.5 billion RMB from the company’s two shareholders, the Union of Huawei Investment & Holding Co., Ltd and Ren Zhengfei. In 2011 alone, Huawei raised 9.4 billion RMB from its shareholders. In the same year, Huawei’s total borrowings (including long-term and short-term borrowings) increased only 7.4 billion RMB (Huawei, 2012). Scholarly studies have demonstrated that ESOP can boost company productivity (Jones and Kato, 1995; Kumbhakar and Dubar,

      1993) because employee ownership can produce favorable employee attitudes and behaviors (Pierce et al., 1991, 2001). Feelings of ownership are also accompanied by a felt responsibility and a sense of burden sharing of the organization, which leads to heightened levels of employee motivation (Druskart and Kubzansky, 1995; Kubzansky and Druskart, 1993). The leadership of Huawei considered the ESOP as the most critical factor of Huawei’s success because the plan ties up employee and the company’s interests, motivates and incentivizes employees and realizes the core value of the company, namely inspiring dedication (Xu, 2016).

Investment Scholars have suggested that a primary function of the headquarters of a multinational enterprise (MNE) is to run its internal capital market, which can effectively redistribute resources within the firm (Lamont, 1997; Mudambi, 1999; Stein, 1997). MNEs’ headquarters can create value by actively reallocating scarce funds across projects. The cash flow generated by one division’s activities may be taken and spent on investment in another division where returns are higher (Stein, 1997). MNEs can also leverage their internal capital markets to move the resources from mature, profit-generating units or markets to young, fast-growing units or new markets, as young units or business are crucial for a company’s sustainable development, although they usually have difficulties turning a profit at first (Mudambi and Navarra, 2004; Mudambi and Swift, 2014). Huawei leveraged its internal capital market. It clearly distinguishes profitability requirements for mature and young businesses. The profitability and operation efficiency of the mature businesses are required to increase every year. In contrast, young businesses are allowed to incur losses. When Huawei makes its annual budget, losses for young businesses are often budgeted for. If a young business loses less than what is budgeted in a year, it would be considered to have demonstrated superior performance. Huawei also differentiates the profitability threshold for core business and non-core business. For

      core business, which is strategically important for the company’s sustainable growth, even if Huawei incurs losses, the company still supports its development. For non-core-business, however, Huawei will collect 16.7 percent of the revenue from the business unit as the operation cost. This means that the business must have a profit rate above 16.7 percent in order not to be closed down by the leadership (Peng, 2016). Unlike the theory and practice in many companies where scarce funds are reallocated to projects according to their returns, Huawei allocates funds to projects that did not necessarily bring higher returns but were core businesses. Even if projects lost profits, if they were related to the core business, they could receive continuous financial support from the headquarters. This practice is closely connected to Huawei’s investment strategy and reflects the founder and CEO Ren Zhengfei’s long-held view that Huawei’s financial management should not only support business growth and expansion but also control for risk and supervise business activities.

Acquisition Huawei grew mainly through its own organic expansion rather than through mergers and acquisitions. A limited number of acquisitions that Huawei conducted after 2011 were disclosed in the annual reports and are summarized below. We can see that most of the acquisitions were aimed at acquiring technologies, such as in the area of the “internet of things” and “software-defined networking,” giving Huawei access to emerging technologies and markets. The targeted companies and transaction values were not especially large and therefore did not prompt acute demand for financing.

.



In this chapter, we document the first large-scale financial management transformation that Huawei has implemented – that is, the Four Standardizations and the subsequent, more ambitious transformation project, Integrated Financial Services. Huawei carried out these two

Table 5.2 Huawei’s acquisitions after 2011 Year of Acquisition



Acquired Company

Introduction of Acquired Company

Amount of Transaction

2011

International Turnkey Systems Technologies W.L.L.（ITS Bahrain）

ITS Bahrain is a company incorporated in Bahrain and is principally engaged in providing integrated information technology solutions and software services.

72 million USD (equivalent to 419 million RMB)

2012

Beijing Huawei Longshine

Beijing Huawei Longshine is a Chinabased company established in 1996. Beijing Huawei Longshine is principally engaged in production and sale of network communications products, computer hardware and software, and the provision of related services.

116 million RMB (equivalent to 18.4 million USD)

2012

Huawei Digital HK

Huawei Digital HK is a Hong Kongbased joint venture established by Huawei Tech Investment and Symantec Hardware in 2008. Huawei Digital HK is principally engaged in research and development and the production and sale of network storage and security products.

530 million USD (equivalent to 3,337 million RMB)

 Table 5.2 (cont.) Year of Acquisition

Acquired Company

Introduction of Acquired Company

Amount of Transaction

2013

Caliopa

Caliopa is located in Belgium and is principally engaged in developing silicon photonics-based optical solutions in the telecommunication industry. In 2013, all of Caliopa’s services were provided to entities within Huawei.

7 million ERU (equivalent to 56 million RMB)

2013

Fastwire PTY Limited (“Fastwire”)

19 million USD (equivalent to 17 million RMB)

2014

Neul Limited

Fastwire is located in Sydney, Australia, and provides operation supporting system services to telecommunication operators. Neul is based in Cambridge, UK, and was incorporated in September 2010. Neul develops and supplies technology to allow network operators to provide a scalable, low-power network service to connect small low-power devices to their online digital presence in the cloud. The acquisition of Neul gives Huawei improved access to the market in the “internet of things.”

15 million GBP (equivalent to 142 million RMB)

2015

Aspiegel Limited

Aspiegel is based in Dublin, Ireland, and develops software-defined networking (SDN) technology to allow network administrators to manage network services through abstraction of higherlevel functionality. The acquisition of Aspiegel gives Huawei improved access to the SDN market.

Source: Huawei Annual Report 2012, 2013, 2014, and 2015 issues.

19 million EUR (equivalent to 132 million RMB)



      projects with the assistance of external consultants from KPMG and IBM, respectively. We analyze the background of the transformations, the motivation of Huawei’s top management in implementing these transformations, the major projects and activities connected to each transformation, as well as their impact. We find that the success of the Huawei financial transformation is largely due to three key outputs of the projects, namely new processes, organizations, and IT tools, which were assigned significant importance by the project team. The new processes were generated from the standardization of the existing but repeated activities, which were instrumental to improving management efficiency and reducing operation costs. New project organizations were created to implement the transformation. The staff in these new organizations planned, designed, and executed the processes and discussed and coordinated their efforts with the involved business departments. New IT tools were developed to facilitate the implementation of the new processes, which was key to disseminating new practices and routinizing new processes. The three key elements combined contributed to the success of the financial transformation at Huawei. The financial management problems that Huawei encountered in the course of growth and internationalization and the solutions that it adopted to mitigate the problems can be explained by classical financial management and international business theories. Huawei’s financial management, however, clearly possesses unique features. For example, financial management is strictly dominated by its overall business strategy. Investment decisions are not made by comparing the financial returns of various projects but are based on the strategic importance of any given project to the core business of the company. This strategy has not changed since the founding of the company. The financial department must play a supportive role in business development, but importantly, also serves as a monitor and controller of business development. In addition, Huawei is a private company wholly owned by its employees, and the employee

      stock ownership plan was used as a means of raising capital for the company. All of these explain why the abovementioned two major financial management transformation projects did not focus on financing and investment decision processes of the company but on its financial accounting processes.

 Brealey, R., Myers, S., & Marcus, A. (2011). Fundamentals of Corporate Finance. New York: McGraw-Hill Education. Druskat, V. U. & Kubzansky, P. E. (1995). Measuring the psychological sense of ownership in the workplace. In Annual Meeting of the Academy of Management, Vancouver, Canada. Dunning, J. H. (1977). Trade, location of economic activity and the MNE: A search for an eclectic approach. In The International Allocation of Economic Activity (pp. 395–418). PUB CITY: Palgrave Macmillan UK. Edmondson, A. C., Bohmer, R. M., & Pisano, G. P. (2001). Disrupted routines: Team learning and new technology implementation in hospitals. Administrative Science Quarterly, 46(4), 685–716. Fan, H. (2016). Interview for Huawei financial management transformation. Greiner, L. E. (1997). Evolution and revolution as organizations grow. Harvard Business Review, 76(3), 55–60. Hu, Y. (2016). Organizational transformation of Huawei. Presentation at the Huawei Forum organized by the Ruihua Institute for Innovation Management, Zhejiang University, Hangzhou, China. Huawei. (1998). The Huawei Basic Law (Huawei Ji Ben Fa). http://pan.baidu.com/ share/link?shareid=773694769&uk=4012145748 (accessed on August 27, 2016). Huawei. (2012). Huawei 2011 annual report. www.huawei.com/cn/about-huawei/ annual-report (accessed on August 27, 2016). Huawei. (2016a). Corporate information [Online]. www.huawei.com/en/about-hua wei (accessed June 2, 2016). Huawei. (2016b). Huawei 2015 annual report. www.huawei.com/cn/about-huawei/ annual-report (accessed on August 27, 2016). Huawei. (2016c). Seek the company’s long-term and efficient growth, financial management, principal discussion 2.0. Huawei. (2019). Huawei 2018 annual report. www.huawei.com/en/about-huawei/ annual-report (accessed on April 2, 2019). IPTV NEWS. (2006). Alcatel and Lucent technologies to merge. April 3.

      ITU. (2006). World telecommunication/ICT Development Report. Janssen, M. & Joha, A. (2006). Motives for establishing shared service centers in public administrations. International Journal of Information Management 26, 102–115. Jones, D. C. & Kato, T. (1995). The productivity effects of employee stockownership plans and bonuses: Evidence from Japanese panel data. The American Economic Review, X, 391–414. Katz, R. (1982). The effects of group longevity on project communication and performance. Administrative Science Quarterly, X, 81–104. Kieso, D. E., Weygant, J. J., & Warfield, T. D. (2007). Intermediate Accounting, 12th edition. New York: John Wiley & Sons. Kubzansky, P. E. & Druskat, V. U. (1993). Psychological sense of ownership in the workplace: Conceptualization and measurement. In Annual Meeting of the American Psychological Association, Toronto, Ontario. Kumbhakar, S. C. & Dunbar, A. E. (1993). The elusive ESOP – productivity link: Evidence from US firm-level data. Journal of Public Economics, 52(2), 273–283. Lamont, O. (1997). Cash flow and investment: Evidence from internal capital markets. The Journal of Finance, 52(1), 83–109. Leonard-Barton, D. & Deschamps, I. (1988). Managerial influence in the implementation of new technology. Management Science, 34(10), 1252–1265. Li, Y. (2009). Ren Zhengfei financial transformation. CEOcio China, 23–24. Lightwave. (1997). Telecom equipment market to reach $51 billion in 2001, 86. Minnaar, R. A. & Vosselman, E. G. (2013). Shared service centres and management control structure change: Exploring the scope and limitations of a transaction cost economics approach. Journal of Accounting & Organizational Change, 9, 74–98. Mudambi, R. (1998). A review of international financial management. Journal of Finance, 53(3), 1194–1197. Mudambi, R. (1999). MNE internal capital markets and subsidiary strategic independence. International Business Review, 8(2), 197–211. Mudambi, R. & Navarra P. (2004). Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs. Journal of International Business Studies, 35(5), 385–406. Mudambi, R. & Puck, J. (2016). A global value chain analysis of the “regional strategy” perspective. Journal of Management Studies, 53(6), 1076–1093. Mudambi, R. & Swift, T. (2014). Knowing when to leap: Transitioning between exploitative and explorative R&D. Strategic Management Journal, 35(1), 126–145. Nelson, R. R. & Winter, S. G. (2002). Evolutionary theorizing in economics. The Journal of Economic Perspectives, 16(2), 23–46.

      Peng, Z. (2016). Interview with authors on Huawei’s financial management transformation. Pierce, J. L., Kostova, T., & Dirks, K. T. (2001). Toward a theory of psychological ownership in organizations. Academy of Management Review, 26(2), 298–310. Pierce, J. L., Rubenfeld, S. A., & Morgan, S. (1991). Employee ownership: A conceptual model of process and effects. Academy of Management Review, 16(1), 121–144. Robson, S. (2008). Telecom equipment sales reach $139bn. Arabian Business. Stein, J. C. (1997). Internal capital markets and the competition for corporate resources. The Journal of Finance, 52(1), 111–133. Su, N., Akkiraju, R., Nayak, N., & Goodwin, R. (2009). Shared services transformation: Conceptualization and valuation from the perspective of real options. Decision Sciences, 40, 381–402. Wu, C. (2014). Huawei Have No Secrets. Beijing: China CITIC Press. Xu, Z. (2016). Cherish opportunities, grow with Huawei in the course of globalization, open up an extraordinary life chapter. Memo of Xu Zhijun’s Meeting with New Staff on July 13, 2016. http://xinsheng.huawei.com/cn/index.php?app= forum&mod=Detail&act=index&id=3136083 (accessed on August 25, 2016). Yan, W. (2014). How Huawei will reform its employee stock ownership plan? http://finance.sina.com.cn/zl/management/20140618/154319450543.shtml (accessed on August 27, 2016). Zhu, Z., Hoffmire, J., Hoffmire, J., & Wang, F. (2013). Employee stock ownership plans and their effect on productivity: The case of Huawei. International Journal of Business and Management Invention, 2(8), 17–22.

Commentary on Chapter 5 Ram Mudambi Temple University

Multinational enterprises (MNE) are organizations that create value by leveraging and integrating resources from globally dispersed locations. They do so by internalizing market transactions across national borders (Buckley and Casson, 1976). These transactions are inherently complex and encompass two facets that mirror one another: the real side and the financial side (Mudambi, 1998). While each real transaction necessarily has a financial side, MNEs typically separate the two to ensure that each is undertaken in the most efficient location (Mudambi and Puck, 2016). Given the nature of the MNE, the financial side is composed of many currencies, whose relative value is constantly changing. This is one of the main reasons that MNEs need to standardize their financial processes, since they typically track and report their overall performance in terms of one benchmark currency. The need for financial standardization is based on two key drivers: (a) the separation of each financial activity from the underlying real transaction and (b) the placement of financial activities in favorable locations for external (e.g., taxes) and internal (e.g., incentives) objectives. Emerging economy multinational enterprises (EMNEs) are latecomers to global operations and rarely have a great deal of experience with the realities of implementing international financial processes. Further, many EMNEs have grown very quickly from relatively modest beginnings and these rapid expansions are often characterized by subsidiaries implementing their own standards to suit their local needs. After a few years, many EMNEs find themselves with a hodgepodge of systems that impede top management’s efforts to assess the value creation of each subsidiary, as well as to gauge the performance of entire corporate group. At this point, it is critical to rein in the proliferating internal systems and impose standardization. Founded in 1987, Huawei has gone from strength to strength and is one of the most successful EMNEs in the world. In its 2015 Annual Report, audited by KPMG, the firm reported global sales in excess of 60 billion USD for 2015, generating almost 6 billion USD in net profits. In this report, the firm’s top management reported that the firm was in “a robust financial



      position, with stable cash flow from operating activities, increased cash availability, and effective risk control” (Huawei, 2016). The top management’s ability to make such a clear assessment of the firm’s financial position as well as KPMG’s ability to audit the firm’s vast network is due in no small measure to the Four Standardizations (1998–2007) and the Integrated Financial Services (2007–2014) projects analyzed by Huang and Chen in Chapter 5. Huang and Chen point out that one of the keys to Huawei’s success is that financial decisions are made in support of the firm’s strategic goals. This ability to focus on longer-term strategy at the expense short-term profits is possible, in part, due to the firm’s ownership structure. Huawei is wholly owned through an employee stock ownership plan (ESOP). However, Huang and Chen note that through the mid-1990s, Huawei’s strategy was relatively decentralized, allowing subsidiary managers a great deal of autonomy and incentives. Top management recognized that the unfettered growth of the company’s first decade had resulted in weak control systems. In particular, subsidiary independence inevitably bred parochialism with local managers pursuing their own agendas (Mudambi and Navarra, 2004). Allowed to proceed unchecked, this threatened the future cohesion of the firm. The goals of the Four Standardizations project were to establish tight controls over the firm’s internal capital market (Mudambi, 1998), while at the same time allowing subsidiary managers the freedom to pursue business opportunities. In other words, to control the financial side centrally, while allowing the real side to be managed locally. The only way this can be achieved is through complete internal capital market transparency – which was the goal of the project. Huawei ventured into global markets in 2003 and its global business grew rapidly. At the same time, the global telecommunications equipment industry was experiencing significant consolidation with the Alcatel-Lucent and Siemens-Nokia mergers. Faced with both growth and increased competition (that put pressure on margins) in global markets, Huawei CEO Ren went to the extent of saying that he was not even sure which of the firm’s foreign businesses were profitable. This was a clear indication that the Four Standardizations project, successful as it was, had not gone far enough. The integrated financial services project was an even more ambitious project, undertaken against the background of substantial growth in terms of the firm’s scale and scope. Implemented with the assistance of IBM consultants, it aimed to put in place a system to permanently weave together

      the financial and real sides of the business. The two key parts of the project were data and incentives. In effect, the project applied to principles of agency theory (Mudambi and Navarra, 2004), so that transparency emerged as the outcome of managers pursing their own self-interest. Overall, Chapter 5 provides the reader with a fascinating inside look at the implementation of large-scale financial transformation in one of the largest EMNEs in the world. It will serve as a very useful case analysis for international business scholars, especially those with an interest in emerging markets. It suggests that in spite of the MNE’s multiple embeddedness (Meyer et al., 2011) and limitations of managerial bandwidth (Narula, 2014), transparency, and cohesion are achievable through creative organizational design.

 Buckley, P. & Casson, M. (1976). The Future of the Multinational Enterprise. London: Macmillan. Huawei, (2016). Huawei Investment and Holding Company 2015 annual report. May 22. Meyer, K., Mudambi, R., & Narula, R. (2011). Multinational enterprises and local context: The opportunities and challenges of multiple embeddedness. Journal of Management Studies, 48(2), 235–252. Mudambi, R. (1998). Review of international financial management. Journal of Finance, 53(3), 1194–1197. Mudambi, R. & Navarra, P. (2004). Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs. Journal of International Business Studies, 35(5), 385–406. Mudambi, R. & Puck, J. (2016). A global value chain analysis of the “regional strategy” perspective. Journal of Management Studies, 53(6), 1076–1093. Narula, R. (2014). Exploring the paradox of competence-creating subsidiaries: Balancing bandwidth and dispersion in MNEs. Long Range Planning, 47(1), 4–15.



The Transformation of Huawei’s HR System Hongqi Xu and Johann Peter Murmann*

.



Unlike many static analyses of human resources (HR) systems, this chapter analyses changes in Huawei’s HR practices as the number of employees dramatically increased and as the requirements for the development of an HR system changed. Huawei’s HR system experienced periods of routinization and radical change that are described in detail. Motivation for these changes and their results differed over time (Huang, 2016). In the early stage of Huawei’s development, simply hiring people was the most urgent activity. Later, as Huawei gradually developed, the focus shifted to motivating, staffing, cultivating, and other related tasks. To accurately describe these changes, it is expedient to divide the history of Huawei’s HR system into five distinct stages, 1987–1991, 1992–1997, 1998–2005, 2006–2010, and 2011–2016 that we call, respectively, personnel management (PM), beginning of human resource management (HRM), strategic human resource management (SHRM), international human resource management (IHRM), and talent management (TM). Huawei relied extensively on international consultants, such as the Hay group, to import Western best-practice HR techniques. Many episodes in the development of Huawei’s HR system support the conclusion that alternating phases of routinization and radical change greatly contributed to Huawei’s success over the years. Additionally, Huawei’s history also demonstrates that what makes

* We would like to thank Jiyue Tang and Haibing Song for their help. Additionally, Professors Xiaoyun Xie and Katherine Xin provided valuable comments on previous versions of this chapter.



       for a good HR system changes over time; however, HR changes are contingent on the size and strategic goals of the firm.

.

 

Personnel Management (1987–1991) In 1987, six people established Huawei in Shenzhen. At that time, the company only had fourteen employees, including the six shareholders (Tang, 2016). Huawei focused on selling private branch exchanges and in 1990 began assembling them, but assembling or conducting OEM did not make Huawei stand out. Therefore, the basic strategic goal of Huawei was just to survive in the market. To accomplish this, the number of employees increased slightly because Huawei only hired workers to meet the minimum requirements for selling and assembling products (Huawei, 2016). Moreover, at this early stage of a private start-up in the telecommunication industry, it was difficult to conduct any large-scale recruitment since the industry was monopolized by state-owned enterprises. In 1991, only twenty employees were on the payroll of Huawei. The founder, Ren Zhengfei, was familiar with every employee in the company, and thus, the distribution of rewards was relatively straightforward and easy to accomplish based on the evaluation of employee dedication. In short, the personnel management process at that time was simple and straightforward. It focused on hiring limited staff and reasonably allocating benefits among them. Huawei began providing extra benefits to its employees in 1991 by allowing them to purchase stock in the firm. Not surprisingly, this event had a major impact on the future direction of human resources management (HRM) at Huawei; it was the first time Ren revealed his emerging management philosophy for HRM, which can be translated into English as the “inspiring dedication.” “Inspiring dedication” is the one of the core principles of Huawei, emphasizing that all the mechanisms or systems, particularly the HR system, should focus on rewarding employees who work hard and strive to help Huawei achieve its goals. The HR system was key to implementing

   ’    the “inspiring dedication” since it controlled the rewards allocation process. In 1991, due to the implementation of the internal stock sharing plan, Huawei became a collectively owned enterprise, which is considered by many scholars to be the prerequisite for the future transformation of HRM (Wen and Zhang, 2012, p. 85). The company also reached a milestone in 1991 with the beginning of mass production, which was accompanied by a substantial increase in the number of employees. After several years in business and after performing some independent research and development (R&D), Huawei began to manufacture its own private program exchanger, the first self-developed large-scale digital PBX in China (Huawei, 2016). Given the increase in demand for its products, Huawei needed to expand beyond twenty employees, and this growth provided challenges for the HR system. It also marked the end of the first stage of development in Huawei’s personnel management, which focused on basic hiring and allocating rewards.

.

 

The Beginning of Human Resource Management (HRM) (1992–1997) By 1992, Huawei had reached 71.69 million Chinese Yuan in sales, and in one year, the number of employees increased ten times from 20 to 200. At that time, Huawei began to hire staff on a larger scale, and the number of employees surpassed 1,200 in 1995. Top leaders were no longer able to evaluate each of the 1,200 employees. The allocation and distribution system that rewarded employees became a real problem (Wen and Zhang, 2012, p. 33). Additionally, Huawei’s products had become more diverse than they had been over the previous eight years. Specifically, the large demand for its selfdeveloped product C&C08 private branch exchange marked the beginning of Huawei’s rapid development. This rapid development had a major influence on Huawei’s HRM for the following reasons. During the founding stage, a newly formed company operates around

       a core of “heroes” and they, unconsciously or subconsciously, hire and motivate staff using their own personal methods without incorporating formal norms or institutions. However, this practice resulted in suboptimal performance in segments of Huawei’s operations (Peterson et al., 2009). Certain early “heroes” had already achieved relatively high positions at Huawei. After successfully surviving the first stage, the company’s strategic goals gradually moved. It now wanted to expand its size and influence by becoming a leading enterprise with a diverse set of products and services. Because of a quickly changing environment, some early employees could not meet the requirements of this rapid development. As a result, Huawei was held back from further development. The first major transformation of the HR system occurred in the sales department (literally translated as “marketing department”). This department was regarded as one of the most important departments in Huawei because it had made a significant contribution to the company during its early stage when selling was the company’s primary business. Additionally, cultivating a good sales manager was a difficult process, and firing a sales manager could result in lost customers if the new sales manager could not quickly establish the same beneficial relationship. Considering the importance of the sales department, Huawei recognized that the best sales managers were quite indispensable (Song, 2016). Despite the above-mentioned dangers, Ren chose to transform the selection and promotion of sales managers because he believed that otherwise, the firm would stagnate and further development would be impeded. Thus, in 1996, the first significant transformation in Huawei’s HRM began. In January, all leaders in the sales department were required to submit a personal annual report in addition to a resignation report, which was used to reevaluate their performance and determine whether they were a good fit for their current position. Through this process, more than 30 percent of the leaders in the sales department were replaced by new employees who were more ambitious and energetic. Thus, this forced turnover was deemed

   ’    beneficial because Huawei became more competitive, its Chinese market share increased, and the firm continued to grow. To a certain extent, this collective resignation in the sales department helped create what later would be internally referred to as a “wolves culture.” Huawei reexamined the practices of the HRM system and focused on creating more flexible human resources policies. Radically breaking with a common practice of the majority of Chinese companies at the time, Huawei began to systematically hire and promote managers based on competence rather than seniority. Furthermore, Huawei staff who did not perform well were demoted. The goal was to energize the organization and instill a passion for dedication (Wen and Zhang, 2012, pp. 12–13). This radical change in requiring the performance of sales managers became the foundation for shaking up many of the HR practices and developing an advanced HR system. Huawei faced an additional problem in allocating rewards to an employee population that had grown to more than 6000 people by early 1997 (Zhang, 2012). Evaluating every individual staff member fairly without having clear and documented criteria is very difficult. For the sake of the sustainable expansion and development of the firm, the benefit allocation system also needed to be changed. Therefore, top management felt an urgent need to develop a formal, comprehensive wage system that would have a standard evaluation system to determine what level of wages should be attached to each position within Huawei. The following episode focused the attention of the leadership on the problem. To increase its domestic market share, Huawei assigned salespeople to other districts in China. One was assigned to Shanghai and one to Xinjiang to sell identical products. However, a large gap existed between them with regards to sales performance because the market in Xinjiang was considerably less competitive than in Shanghai and thus the Xinjiang salesperson could sell products more quickly. According to the existing wage system, the wage gap between these two salespeople should be 200,000 RMB. Obviously, using sales performance to evaluate the salespeople in this instance was not

       appropriate because it could not measure their dedication in environments in which the pressure and markets were vastly different. This unfair wage system demotivated the salespeople. This scenario reflected one type of conflict affecting the wage system of Huawei. However, it also revealed defects in HRM that needed to be solved. Ren established a specialized transformation group of top managers who focused on transforming the wage system. Unfortunately, this group failed to reach an agreement after several long and heated discussions. As a result, a professional consulting company, the HAY Group, was hired via public bidding to provide solutions for Huawei. The HAY Group introduced a matched function-wage system to Huawei that emphasized the value of every position in the company. The most important trait of this system was its design, which was based on the principle of the separation of staff and their positions. Specifically, this method used three elements to evaluate staff: their knowledge capacity (input), their capacity to solve problems (working), and their responsibility (output). Using this evaluation system, the “degree of difficulty” was calculated, and a wage commensurate with the level of difficulty was assigned to each position. Theoretically, different positions possessing the same difficulty level could receive the same wage regardless of the tenure, age, or educational background of each employee. This advanced wage system helped Huawei evaluate staff in terms of their dedication and overall performance, implementing the “inspiring dedication” of Huawei’s philosophy. Thus, with the help of the HAY Group, Huawei moved to this matched function-wage system and laid the foundation for future development in which the selection, evaluation, and promotion of talent would play a key role. During this stage, Huawei began to change its personnel management system into human resource management, which focused on how to attract talent, improve the overall HRM system, and especially motivate staff to keep working hard. However, additional rapid growth in terms of sales and the number of employees resulted in new problems for the company.

   ’   

.

 

Strategic Human Resource Management (SHRM) (1998–2005) To upgrade its technological capabilities in a sector that had experienced rapid technical change, it became necessary for Huawei to hire more R&D personnel. In late 1997, Huawei hired more than 800 research personnel. This was the first large-scale recruitment in Huawei, and it nearly doubled the number of research employees. Now, Huawei faced the problem of imposing its existing culture and routines on the new employees, as the number of new employees was equal to the number of existing employees. Furthermore, the newly hired employees were individuals who were more highly educated on average than the previous workforce. Managing these new employees was difficult, since they were ambitious and eager to change Huawei in their own way. The company’s top leaders struggled with this conundrum for a long time (Tang, 2016), eventually deciding to address the problem by developing a personal quality test model to evaluate potential research employees at the beginning of the recruitment process. This routinization process for the recruitment of research employees began in 1999 (Tang, 2016). Huawei’s personal quality test model for potential research staff was specifically designed to determine how well applicants matched the position’s requirement. This model consisted of six distinct measurements, including thinking ability, collaboration ability, passion for achievement, learning ability, initiative, and tenacity. The test was carried out during an interview. Existing employees would test applicants using formalized questions, then judge how well they matched the position’s requirements. Only applicants who scored well on the test would proceed to the next step. When Huawei discovered that this personal quality test model operated well in the R&D department and reduced the dropout rate of new employees while increasing the efficiency of the recruits’ work, Huawei then implemented the

       method in the sales department, the after-sale service department, and finally in the entire company (Tang, 2016). Socializing such a large number of new recruits was also challenging. Huawei had intense debates over how to effectively address this challenge, but top management could not come to an agreement until a manager, Tang Jiyue, the director of the leader department (literally translated as cadre department) in the Carrier Network Business Group, suggested a mentorship program (Tang, 2016). The HR department in every business group originated from the leader department. Initially, the leader department was established within the R&D division with the goal of cultivating and evaluating leaders. This focus differentiated the leader department from the HR department, which was responsible for all staff. The specific goal of this mentorship program was to allow existing research staff to mentor new staff in better understanding the culture and overall work environment at Huawei. Existing staff not only were required to instil the core values of Huawei’s organizational culture and key practices but also had to introduce newcomers to their colleagues in the office so they could turn to old staff for help in case of trouble. To more effectively achieve this goal, new employees were split into several smaller groups, which allowed the socialization program to be more intimate. This new process turned out to be effective, and new research employees were integrated into Huawei more easily. Thus, acting as a mentor was routinized and became a job requirement for all existing registered staff in Huawei who wanted to be promoted. The chance to receive a promotion was motivating because employees would receive more money and hold higher social status both within and outside the company. This was particularly true for “dedicators,” and ensuring that the best-performing employees would receive a promotion was a key tool for instilling the “inspiring dedication” culture of Huawei. However, the promotion system in Huawei remained a work in progress. Promoting leaders from the lower levels of the organization had become a significantly greater

   ’    challenge. Prior to 1997, two methods were used to determine promotions at Huawei. The first path was referred to as rocket promotion, which meant that employees were directly promoted by senior- or toplevel managers. The primary disadvantages of this method included a lack of criteria and opportunism. It was impossible for leaders to become familiar with each employee, which meant that at times, valuable talent was overlooked. The second method was referred to as contribution-induced promotion. This type of promotion was evaluated based on the contributions that staff made to Huawei, particularly in the areas of sales and technology development. These two methods of promotion were based on business capabilities, but little attention was given to evaluating the comprehensive ability of the employees or whether they identified with and lived the intended culture of Huawei. Furthermore, conducting daily business is only one type of abilities that is necessary for leaders. The capabilities needed to deal with the frequent crises that arose are also important. For all these reasons, a more effective qualification system for evaluating the promotion and certification of future leaders became necessary to upgrade the organizational capabilities of Huawei. Ren Zhengfei realized this urgent need and stated, “Due to rapid development . . . we have promoted many staff from lower levels; however, most of the promotions were conducted due to managers’ own feelings and preferences, and we have not implemented formal and scientific rules or regulation for promotion. For the sake of the future survival, we must implement a better mechanism to ensure the qualification of leaders in the following three to five years” (Ren, 1998). In 1998, Huawei began routinizing the process of selecting and promoting future leaders by introducing the national vocation qualification (NVQ) system. NVQ was originally formulated by the London Chamber of Commerce and Industry Examinations Board and the National Ministry of Labour in the United Kingdom. This qualification system was widely recognized as improving personnel quality and aiding in the development of future leaders (Tang, 2016). Within a two-year period (1995–1997), Huawei’s employee roster had grown

       from 1,200 to 6,000 individuals, and annual sales revenue had grown from 0.88 billion to 3.2 billion RMB. The NVQ system was first implemented among the secretarial staff. Using the basic standards of the NVQ, Huawei established a rudimentary personnel management and staff training platform and thus clarified the professionalism and standardization necessary for the work of secretaries. Upon the formation of this framework, Huawei modified and detailed the certification standard according to the actual operating situation and then gradually established a multilevel evaluation system for vocation qualification for the entire firm (Tang, 2016). With regard to qualification for secretaries, for example, typing speed, meeting preparation, and information management in the office became the components of the vocation qualification system. As part of the appraisal, all secretaries could verify their own performance according to the standards required for their position. If they determined that their own performance did not meet the standards established in the vocation qualification, they would be able to see the gap, receive training, and improve their performance. The initial rollout of this process among the secretarial staff was a considerable success because this method not only opened the promotion path for secretaries but also increased the motivation of employees since they learned NVQ could aid in the development of their future career paths. As a result, the efficiency of secretaries employed at Huawei was three times greater than secretaries employed at other companies (Wen and Zhang, 2012, p. 40). Although he acknowledged the superiority of the NVQ system, Ren Zhengfei also noted that it was rigid. He came to believe that Huawei should somehow add vitality into the system by combining the NVQ system with the matched function-wage system created by the HAY Group. He believed that combining the two approaches would help cultivate and promote leaders from within. Huawei gradually implemented the NVQ system with the matched function-wage system in all other departments following the success of the secretary department from 1998 to 2000.

   ’    To further guarantee success in vocation qualification, Huawei established a new department called the “qualifications authority department.” This department focused on qualification authentication and completed the vocation qualification system for all remaining positions. Additionally, six training centers were established in the vocation qualification department. This marked the beginning of Huawei’s attempt to design a dual path for career development that could motivate employees to constantly improve. To be specific, dual path for career development means that not only that the employees in the business group could be promoted but also that the R&D employees would be promoted according to their dedication. The best performing R&D employees could obtain a “fellow” title, which was equivalent to a very high managerial position. The dual-path policy improved the average motivational levels throughout the company, including the R&D department, which now also had clear opportunities for promotion. The vocation qualification system helped employees understand the gaps between their current levels of operating and the expected levels; Huawei would then conduct targeted training for employees to close these gaps. Therefore, Huawei enhanced career development for employees through the use of the matched functionwage system, the NVQ system, and the training system. With the implementation of these systems, the basic framework of the HRM system in Huawei was developed, and the hiring process, the certification process, and the promotion path operated in a routinized manner. During start-up operations, managers can adopt many different functions. As firms become larger and more bureaucratized, employees are more likely to feel limited to a functional role. This also happened in Huawei, and some employees lost their motivation to contribute. To ensure that employee motivation and work levels remained at the highest possible level, Huawei implemented a new system, the “rotating system and inferior performance elimination mechanism” (Tang, 2016). This system was developed to energize the organization by developing and cultivating good employees and eliminating inferior staff.

       These two mechanisms were tightly integrated into other HR practices and influenced the HRM system in the following three ways. First, these processes proved to be effective methods for upgrading and developing staff. With the rotating system in place, employees could change positions to determine the most suitable one for them, and at the same time, the best management skills could flow through the organization, improving Huawei’s managerial effectiveness. Furthermore, as mentioned, certain individuals only lost their passion after a long tenure in the same position. The rotating system could help solve this problem. Additionally, it provided a good opportunity for employees to comprehensively improve their work-related skills. Second, this mechanism could effectively manage the risk of individuals or small groups taking control of particular units in the firm and moving them beyond the effective influence of the firm’s leadership. Particularly in the context of China, small groups controlling units within a firm for a long period of time often attempt to hide their extra resources and private dealings from top leadership. To eliminate (or at least reduce) this risk, the rotation system proved to be a useful strategy. Third, the rotating mechanism was beneficial in eliminating inferior performers. Generally, promotion is considerably easier to perform than demotion because everyone is happy to be promoted. However, a common problem for HR departments has been the proper demotion of employees. Huawei implemented a mechanism to eliminate underperformers alongside its rotating system. According to the standards of the forced elimination mechanism, all departments were required to eliminate the bottom 5–10 percent of employees each year (Tang, 2016). This requirement is similar to GE practices under the leadership of Jack Welch from 1981 to 2001 (Welch and Welch, 2013). Forcing out underperformers made room for attracting new talent. Due to these two joint mechanisms, employees of Huawei were more motivated on average than employees of other Chinese companies, particularly state-owned enterprise competitors. These methods proved quite important in Huawei’s further development.

   ’    By 2004, Huawei already possessed a relatively well-rounded framework and institutionalized process for HRM that included a systematic selection process, vocation certification, a rotating system, a system to eliminate inferior employees, a leader promotion path, and rules for the allocation of rewards. These formalized processes helped Huawei grow into the leading telecom company in China, achieving a sales revenue of 31.7 billion RMB and employing more than 22,000 employees in 2004. Huawei then hired a professional consulting company to help design an organization structure for the entire company. This consulting company, which helped to design the organizational structure, determined that Huawei did not have a central decision-making body for long-term strategy decisions for the entire firm and for reviewing major decisions. Furthermore, Huawei generally designated the top managers of the company directly and without any systematic selection processes. The company needed to formalize the process that designated top managers and formed the executive management team that became the central system of Huawei. Ren was not willing to be the permanent chairman of the executive management team because he wanted to create a more collective leadership. Thus, he implemented a rotating president system (Tang, 2016). The eight members of the executive management team would take turns holding the chairman position for a six-month term. The president of the executive management team was also the COO and managed daily operations and the agenda for top-level meetings. The rotating president position of the executive team not only helped develop executive management team members but also ensured that they would approach problems from the perspective of the business unit or function from which they had been hired. Because Ren implemented the rotating president system, each of the eight top managers were required to balance the interests of all departments while acting as president of the team; otherwise, they would not receive support from the other members of the executive management team. Due to this special type of collaboration within the executive management team,

       all major decisions of Huawei were examined by all executive management team members. Huawei leadership believed that this decreased the number of errors that had been made when a sole chairman was responsible for all major company decisions. Huawei developed the rotating leadership mechanism further, and by 2011, even the CEO position came to be rotated (Tang, 2016). We will describe this development in more detail later. By 2005, Huawei had developed an excellent reputation in the telecom industry, and it continued its fast-paced development, which placed higher demands on employees and particularly the leaders of the organization. To protect its continued market expansion and a focus on in-house R&D, Huawei had to provide an opportunity for leaders to improve themselves in line with the goal of becoming a global player in a dynamic industry. However, Huawei did not have a fully developed system in place to cultivate the leaders needed for the increased complexity of the firm that arose from expanding the product portfolio and operating in a greater number of countries. Specifically, Huawei collaborated with the HAY Group again in 2005 to establish a new program for cultivating leadership by establishing Huawei University that same year. The HAY Group helped Huawei develop a standard model for leadership training based on the following dimensions: cultivating leadership, leadership development, and leadership evaluation. Huawei developed its own corporate “university,” which was not a new idea for a company; for example, GE founded the first company-owned “university” in the world in 1956 (Tichy, 1989). In 1993, Motorola introduced this idea for cultivating employees by establishing the first company-owned university in China. Thus, the concept of a company-owned university was not new when Huawei established its university. However, Huawei added an innovative feature to this model. Initially, Ren established Huawei University for two reasons. The first was to cultivate the new staff, especially those who had just graduated from university. Ren had come to believe that Chinese universities were ivory towers where students did not learn how to

   ’    address real-world problems. Huawei University’s purpose was to fill in those gaps. The second goal of Huawei University was to spread the successful experience of Huawei to the other companies; however, Huawei gave up this goal due to limited energy. As a result, the scope of training was enlarged to more staff in Huawei, and it was no longer limited only to the new staff (Song, 2016). The purpose of Huawei University was to cultivate the “generals.” When Huawei University started, it was free for trainees, but Ren realized that it was the business of the employees to improve, and they should therefore pay for the program themselves, especially in the case of the leaders who are ranked higher than the department managers. Thus, it became the policy that staff who ranked higher than department managers had to pay the tuition at Huawei University for its personal development programs. However, the programs addressing the introduction to basic business or operation processes in Huawei were free. Orientation programs for new staff continued to be free and were conducted at night and on the weekends. This policy differed from most other company-owned universities, which were free for all company trainees. Additionally, Huawei employees who enrolled in personal development programs at the university not only paid for their courses but also took a leave of absence from their duties without salary. These guiding principles were introduced by Ren because he believed that this was the only way to change the traditional passive method for cultivating leaders to an active method that helped leaders realize the importance of selfimprovement and changed their minds regarding the value of leadership training programmes. Ren said, “Improving personal quality is the concern of leaders themselves, and Huawei could provide a platform for them to improve, but they had to pay for the training. Paying was not a type of loss because the personal improvement, after training, would be reflected in the salary and promotion in Huawei” (Ren, 2011). Second, managing trainers was a significant challenge in other company-owned universities because training was regarded as a

       relatively small job and did not receive enough attention in other companies. Based on this unconscious psychological hint, trainers could lose their passion for training and the confidence required for promotion. Huawei approached this issue differently than other organizations. Top managers, particularly Ren attached great importance to finding and developing good trainers. More than 1,700 experienced trainers were hired, and nearly 1,500 of them were part-time (Chen, 2014) from Huawei while a few of them were fulltime working for Huawei University, including experts in both business and technology. This helped to guarantee the quality of the training. Huawei University has trained nearly 30,000 employees in a single year with an average of over 20,000 employees each year (Chen, 2014). Additionally, retired experts and professors were often hired to teach at Huawei University (Zhang and Wen, 2015, pp. 208–209). Third, Huawei University preferred to use the case-study methodology for training. Ren required that all cases were real-world scenarios that reflected actual events at Huawei or other companies. He opposed the use of the imaginary cases that are often used in textbooks (Zhang and Wen, 2015, pp. 210–211). Lastly, Ren strongly believed in focused, short-term training. He stated, “One month or two months in training is enough. The only way to cultivate ‘real generals is by going to the front, and the value of Huawei University is to instil the basic knowledge and methods in them. Again, the real generals are raised on the battleground” (Zhang and Wen, 2015, p. 212). Huawei University eventually became a platform that gave leaders the opportunity to acquire new knowledge and skills through access to experienced trainers. After introductory training, participants could continue learning via the internet or by directly communicating with their trainer from Huawei University. The establishment of Huawei University marked an important milestone for Huawei’s HR department; it now possessed the inhouse capability to provide leadership development training to its

   ’    ever-increasing management ranks. The development of the HR department also ensured Huawei’s ability to utilize internal talent to replace retiring leaders. To summarize, in the years leading up to 2005, Huawei’s HRM system gradually became more comprehensive. The core principle was “people are the only competitive advantage,” a principle that is often invoked but rarely practised and implemented in an HR system with the conviction and long-term focus of Huawei. Ren verbalized Huawei’s focus on securing the best talent by saying, “We could lack everything except for talent, and we should compete for talent at any cost” (Zhang and Wen, 2015, p. 205). All future changes in Huawei’s HRM practices were built on this basic framework. In this period from 1997 to 2005, Huawei laid a firmer foundation for its fast-paced development. It was during the most profound stage of HRM transformation that Huawei launched its strategic HRM process. From then on, Huawei addressed other major challenges that arose through the rapid internationalization of the firm, namely, by transforming the HRM system to better manage a diverse workforce.

.

 

International HRM (2006–2010) Huawei began global operations in the late 1990s (Huawei, 2016). It established an international markets department in 1996 and its first overseas R&D center in 1999. For the first time, international sales exceeded domestic sales in 2005. Because of this gradual deep-seated international development, Huawei encountered numerous managerial and daily problems. One primary concern was the way to appropriately integrate different cultures. To achieve the goal of internationalization, the HRM system needed to change. For example, Huawei began operating in the Saudi Arabian market in 1999; it employed only two individuals at that time, but that number grew to over 300 by 2005 (Wen and Zhang, 2012, p. 219).

       Saudi Arabia is a religious country and follows a strict interpretation of Islam. Thus, all employees prayed at the same time each day, regularly putting aside daily work activities to stop and pray. This introduced difficulties in the daily operation of the Saudi Arabian subsidiary. This cultural issue was a major challenge for Huawei; the integration of different national cultures not only occurred in Saudi Arabia but also in many other countries. Respect for cultural diversity became a primary principle of globalization when Huawei expanded its operations to other countries. Respecting cultural diversity and appropriately integrating differences were certainly major challenges for the company. Huawei had to find a balance between instilling its core cultural principles into foreign employees and respecting local culture through a process of gradual integration. Another issue that arose regarding globalization was the linguistic problem, which had a major impact on efficiency because communication was one of the most basic tasks in daily operations. Due to linguistic problems and cultural differences, Chinese representatives of foreign subsidiaries could not successfully communicate with local employees. Furthermore, business executives in most foreign countries were Chinese, but vice executives and at least 60 percent of employees were part of the local population. Many local employees chose only to report their work to the local executives and never communicated with the Chinese executives. Meanwhile, Chinese employees only reported their work to the Chinese executives, which seemingly separated the organization into two different teams. This introduced managerial problems for headquarters. At that point, when a foreign employee sent an e-mail to headquarters, he would receive a reply after several days because the e-mail was sent to the translation department before a reply could be returned; this adversely impacted efficient and effective communication between employees. Huawei headquarters had not converted to English as the working language, as was the case with many European multinational companies. This communication issue had a significant impact on the promotion of foreign employees because they had to communicate

   ’    with headquarters once their position reached a certain level within the company. This communication issue was one reason that executives of all foreign subsidiaries and agencies were Chinese; it was also a major hurdle for the promotion of foreign employees. This limitation conflicted with Huawei’s principles of promotion that were based on dedication and ability, negatively influencing the motivation of foreign employees. It became necessary for Huawei to make changes to ensure the success of globalization efforts. The changes that Huawei undertook involved a two-part process. The first part included changes at the headquarter level. Huawei established a language reform team aimed at improving linguistic competence and helping the entire company set linguistic standards for different positions. Huawei used the TOEIC, TOEFL, and IELTS tests as the standards for evaluation. This team also developed several rules to reinforce the change. For example, by the end of 1997, all e-mails and reports sent overseas were required to be in English; once the English email was received, all replies also had to be in English. Furthermore, in 2008, specific positions were required to use English for e-mail and reports, and by the end of 2008, these specified positions had to achieve Anglicization (Wen and Zhang, 2012, p. 211). For example, the supply chain department had started using English for daily meetings. Routine use of English was the key to smoothing the process of globalization for a company in a non-English-speaking country. This transformation became an opportunity for employees to improve their own Englishusing capacity, and it resulted in a solid foundation for Huawei to further enhance the globalization of its operations. After solving the most immediate problems of cultural differences and communication, Huawei attempted to persuade foreign employees to accept the strong culture of Huawei. One way the company tried to do this was by selecting outstanding representatives from foreign subsidiaries and agencies to visit China and participate in specific training programs focused on culture, practice and skills (Song, 2016). These programs helped the foreign employees better absorb the values of Huawei. Once absorbed into the company, these

       leading foreign employees were required to work with and study the daily operations and culture at the company’s headquarters. The duration of the visit varied for different staff. They could learn and participate in the daily operation of Huawei, which allowed them to experience and better embrace the Huawei culture. Most importantly, these leading foreign employees could enhance their understanding and support of Huawei’s culture when returning to their working location, allowing them to influence additional foreign employees. To build an HR system that more fully incorporated the ever-growing number of foreign employees, systematic work had to be undertaken rather than a single activity or slogan (Song, 2016). As Huawei worked to solve the challenges inherent in global operations in 2007, a transformation was brewing in mainland China. The government of China published a new labor law to be implemented on January 1, 2008. Huawei had to comply with this crucial law. According to this law, Huawei would lose its power to fire lowperforming employees because the new labor law protected the rights and interests of employees who had worked in the same company for more than ten years or had twice signed an employee contract with the same company. This new labor law conflicted with the basic principles of Huawei, and Huawei managers feared that the new law would make Huawei rigid, reducing its ability to respond to competitive and technological changes. To keep the basic values of Huawei, top managers requested a new round of collective resignations. Like prior collective resignations, all 7,000 individuals who had been employed by Huawei for over eight years submitted a resignation letter by the end of 2007. Then, two choices were offered to them. The first choice was to sign a new labor contract with Huawei; the second choice was to resign with compensation. Furthermore, Huawei took advantage of this opportunity and reassigned employee numbers to returning employees. Prior to this, Huawei had assigned employee numbers according to their hire date. This endowed job numbers with special meaning because a smaller number typically meant a higher position since the employee had been

   ’    employed for a longer period of time (Wen and Zhang, 2012, p. 19). After signing new contracts, employees were assigned random employee numbers so that their position was no longer easily recognizable. The goal was to help break down explicit hierarchy among staff. While these forced resignations were criticized, Huawei believed that they reinforced its ability to elicit dedication from its staff, which helped to break down rigidity within the organization.

.

 

Talent Management (2011–2016) By 2010, Huawei had become a giant in the telecom industry: it achieved overall sales revenue of 185,176 million RMB and employed more than 110,000 individuals globally (Huawei Annual Report, 2010). By that time, Huawei had set the strategic goal of leading the future direction of the telecommunications industry. Because talented employees would be key to making Huawei the leader in the industry, the HRM system would need to change again to focus on developing and enabling talented employees. The first important change occurred with the CEO position. Many of Huawei’s achievements were clearly due to its founder, Ren Zhengfei. The issue of selecting a successor had been discussed intensely. Ren himself thought deeply about selecting a successor and stated that, “It is hard for Huawei to pick a well-rounded method for succession given that it is facing this rapidly changing world” (Ren, 2012). Because of its systematic leadership development, Huawei had no shortage of talent. Along with the previously mentioned method of rotating presidents, Huawei implemented a rotating acting CEO system in 2011, a practice that is not common either in China or the West. The stated motive behind the rotating CEO position was that the personal ability of an individual is limited. Taking charge of the daily operation of the company occupies a considerable amount of a CEO’s time and attention and leaves him or her little time to gain

       additional knowledge and plan for the future. Huawei’s rotating acting CEO system gathered a group of talent individuals to be its “CEO” to avoid individual bias and rigidity. All members of this core group participated in the decision-making process even if they were not the CEO at the time. Ren stated, “As a rotating CEO, they should not only focus on the internal matters but also need to pay attention to the external world to make Huawei fit with the environment, and it is the rotating acting CEO system that gives them this chance to achieve continual progression, the same as Huawei” (Wen and Zhang, 2012, pp. 46–47). The second important change was prompted by Huawei’s strategy to do more basic research and strengthen its ability to develop world-leading technologies. For this purpose, Huawei established numerous research centers and hired many more highly reputable scientists and engineers to do their most advanced research. By the end of 2013, Huawei had established sixteen research centers all over the world and provided a platform for research staff to improve themselves constantly. For talented staff to produce good ideas, they need to collaborate with other talented staff both within and outside Huawei. To emphasize that importance of informal collaboration among staff, Ren started encouraging R&D staff to meet and exchange ideas in 2014. He wrote in an e-mail to all staff, “A cup of coffee could assimilate the whole of cosmic power. We should invite experts to drink coffee and make full use of the coffee time to let them impart knowledge to us” (Ren, 2014). Ren requested that seventeen fellows of Huawei, who are the top technology experts in the company, spend at least one-third of their time each year attending academic conferences and visiting leading universities throughout the world to absorb and understand state-of-the-art technologies. They were required to organize internal seminars or meetings in Huawei to discuss the latest technological developments in the world and their implications for the company’s business development (Tian, 2016). In recent years, Huawei has made some reforms to address problems related to its long-term incentive scheme. It started its

   ’    own employee stock ownership plan (ESOP) in 1990. However, foreign employees were not able to participate in the ESOP due to restrictions under Chinese law. Additionally, many retired employees still possessed Huawei’s stocks. By owning the company’s stocks, they could share in Huawei’s profit without any continuous dedication. This contradicted the core value of the company, i.e., inspiring dedication. To address these problems, Huawei started to implement the time unit plan (TUP) in 2014. The TUP is a profit-sharing and bonus plan based on employee performance for all eligible employees, including foreign employees. Under TUP, time-based units are granted to the eligible employees, which entitle them to receive a cash incentive calculated based on the annual profit-sharing amount and the cumulative end-of-term gain amount (de Cremer and Tian, 2015). Using the TUP, Huawei aimed to avoid rewarding employees who hold a large amount of stock but contribute less and offer long-term incentives to all contributing employees who will be then motivated to act upon the core value of inspiring dedication. ESOP and TUP will both serve as Huawei’s incentive schemes in the years to come, though it is expected that the share of the profit allocated to the TUP out of the total profit will gradually increase, while the share of profit allocated to the ESOP will accordingly decline (Wu, 2015). The most recent major transformation in Huawei’s human resource management was building up the strategic reserve force (Ren, 2015, 2016). Through its basic activity, which is training, the strategic reserve force is equipped with the necessary knowledge and capabilities to work in other positions in the company, which are normally require different functions or are in different regions. For example, Huawei planned to transfer 2000 R&D staff to the strategic reserve force in 2016, and later, they will engage in activities other than R&D, such as providing product solutions or working in the department of global technology service. The strategic reserve force also absorbs staff who lose their positions due to changes in the market environment, strategic reorientation of the company or technical changes. For example, the service staff may lose their positions

       when artificial intelligence becomes more powerful in predicting breakdowns in the network, and the company will need less manpower to maintain the existing network. In this sense, the strategic reserve force serves as an enabler of continuous management transformation in the company by on the one hand training staff, equipping them with the capabilities to undertake different tasks and increase personnel mobility in the company, and on the other hand, providing support and protection to the staff who lose their positions in the company due to market environment, strategic reorientation, or technological changes. In terms of organization structure, Ren himself is chairman of the steering committee of the strategic reserve force. The three rotating CEOs and the CEO of the human resource department are the members of the steering committee. Therefore, the strategic reserve force has become an important part of Huawei’s human resource management system, complimenting the human resource department and Huawei University and is in the charge of the top leadership of the company. The implementation of the strategic reserve force is companywide; it is not only limited to the R&D department but also appears in marketing, finance, supply chain and so on. The staff in the strategic reserve force comes from three channels. First, they are selected every year from the best 25 percent of the staff of the company. Second, because of market uncertainty or turbulence, business in some countries may encounter temporary difficulties. Instead of maintaining the office or team in countries in which the business is in decline, Huawei will move the whole office or team into a strategic reserve force. Third, due to strategic reorientation of the business, some product lines will be ended. The R&D teams of these products will be dissolved, and the staff can move into the strategic reserve force. Ren Zhengfei (2016) emphasized in a speech that an important function of the strategic reserve force is to select talents and assign them to front-line positions. The force has no right to appoint its staff as managers, but it can recommend the staff to be appointed by the

   ’    human resource department as managers and transferred to the frontline positions. The strategic reserve force has independent budget, which comes from two channels. First, the staff in the strategic reserve force will be assigned to front-line positions in departments or regional offices. If they perform well, their departments or regional offices will have to share a part of their profits with the strategic reserve force because the staff are trained by the strategic reserve force. Second, if the offices or teams in the countries in which business declines are moved to the strategic reserve force, the budget of those offices or teams will move with them to strategic reserve force as well.

.



As it grew from a few employees to a large firm operating around the globe, Huawei’s HR system experienced different challenges. To accurately describe these important changes, we divided the history of Huawei’s HR system into five distinct stages and designated them as personnel management (PM), beginning of human resource management (HRM), strategic human resource management (SHRM), international human resource management (IHRM), and talent management (TM). Table 6.1 summarizes the main challenges experienced in each of the stages and the main changes Huawei introduced to address these challenges. To allow for continuous growth, Huawei imported many Western HR practices with the aid of Western consulting firms and combined them with the Chinese tradition of cultivating a strong commitment to a large organization. Huawei innovated on Western ideas by, for example, requiring employees to pay for their own training costs at the company university. Huawei’s CEO has always been willing to introduce change and has stabilized and routinized changes so they would have time to become permanent, but when these new methods no longer worked, he was willing to introduce a new round of changes. It remains to be seen whether the current HRM system will work as well when the founder is no longer around.

       Table 6.1 Main challenges for Huawei’s HR system and changes made (1987–2016)

Stage

Number of employees (approx.)

Main challenges

Main changes

Personnel management 1987–1991

14–20

 Survive in competitive market

 Implement internal stock sharing plan

Beginning of HRM 1992–1997

200–6,000

 Evaluate the increasing number of employees  Build wage system

 Introduce HAY group with function-wage system

 Incentive managers

 Collective resignations

 Select talented staff

 Implement personal quality test model

 Manage larger scale of R&D staff

 Implement mentorship program

 Promote leaders

 Introduce NVQ system

 Motivate the staff for continuous contribution

 Implement rotating system  Implement inferior performance elimination mechanism

 Lack of central decision-making body for long-term strategy decisions

 Implement rotating chairman system

Strategic HRM 1998–2005

8,000– ~30,000

   ’    Table 6.1 (cont.)

Stage

International HRM 2006–2010

Talent Management 2011–2016

Number of employees (approx.)

~61,909– 110,000

140,000– 170,000

Main challenges

Main changes

 Cultivate talented employees

 Introduce HAY to established model for leadership training  Establish Huawei University

 Achieve global operation

 Establish language reform team  Integrate different culture

 Break down explicit hierarchy

 Assign random employee number

 Develop leadership capability of TMT

 Implement rotating CEO

 Increase Innovative capability

 Create new basic R&D centers around the world  Hire reputable scientists

 Increase flexibility and talent of workforce

 Build strategic reserve force

 Incentivize foreign and new employees

 Implement time unit profit sharing plan

      

 Chen, H. (2014). Speech at the Learning, Technology, and Talents Development Conference. http://wenku.baidu.com/link?url=WnE6jIFWK0c3iulizl3l6Wm5Xz NeIMkUo0uzqZv6yd0uvi3-pcKsbx4oBNcJXJp5NPfNSfwpMhF8eWuQxaJCFC 3457zAMUX0evcE3bx7zPe (accessed October 29, 2016). De Cremer D. & Tian, T. (2015). Huawei: A case study of when profit sharing works[J]. Harvard Business Review. https://hbr.org/2015/09/huawei-a-casestudy-of-when-profit-sharing-works (accessed October 30, 2016). Huang, W. (2016). Dedication: The Foundation of Huawei’s Human Resources Management. London: LID Publishing. Huawei Annual Report. (2010). www.Huawei.com/en/about-Huawei/annual-report (accessed May 21, 2016). Huawei. (2016). Milestone. www.Huawei.com/en/about-Huawei/milestone (accessed May 21, 2016). Peterson, S. J., Walumbwa, F. O., Byron, K., & Myrowitz, J. (2009). CEO positive psychological traits, transformational leadership, and firm performance in hightechnology start-up and established firms. Journal of Management, 35(2), 348–368. Ren, Z. (1998). Do not be a flash in the pan. http://dy.qq.com/article.htm?id= 20151225A00NMH00 (accessed May 31, 2016). Ren, Z. (2011). Speech for the first batch of TMT trainees in Huawei University. http://wenku.baidu.com/link?url=giZCiie9vUhx0kZeMabNGMF_Pzo8tI-f8BNoQxu8C04Ifi7BgE_U7570iBPiTWCtj0Qthna57k86nKyr9va9l8UT_JB8g8SmGTLK buJTXm (accessed October 29, 2016). Ren, Z. (2012). The goods and the ills will never stop and the spring water rushing to the east. Speech regarding publishing 2011 annual report and announcing rotating CEO system. http://xinsheng.huawei.com/cn/index.php?app=forum&mod= Detail&act=index&id=561865 (accessed October 29, 2016). Ren, Z. (2014). A cup of coffee could absorb the universal energy. Speech for experts in Shanghai research center. http://xinsheng.huawei.com/cn/index.php?app= forum&mod=Detail&act=index&id=1935701 (accessed October 29, 2016). Ren, Z. (2015). Speech on transformation of strategic reserve force and the building process of the force. http://xinsheng.huawei.com/cn/index.php?app=forum& mod=Detail&act=index&id=2425669 (accessed October 23, 2016). Ren, Z. (2016). Huawei should keep promoting organizational mobility continuously and permanently and enhance the enabling process for outstanding leaders and experts. Speech on reporting the building process of strategic reserve force.

   ’    http://xinsheng.huawei.com/cn/index.php?app=forum&mod=Detail&act=index& id=3197297 (accessed October 23, 2016). Song, H. (2016). Interviewed by Can Huang and Hongqi Xu via telephone, October 12. Tang, J. (2016). Interviewed by Can Huang and Hongqi Xu via telephone, May 11. Tian, T. (2016). Explaining the innovation and success of Huawei. www.huxiu.com/ article/145154/1.html (accessed October 29, 2016). Tichy, N. M. (1989). GE’s crotonville: A staging ground for corporate revolution[J]. The Academy of Management Executive, 3(2), 99–106. Welch, J. & Welch, S. (2013). Winning (Enhanced Edition). New York: HarperCollins. Wen, L. & Zhang, J. (2012). The Human Resource Management in Huawei. Shenzhen: Haitian Press. Wu, J. (2015). Why the implementation of simply TUP is not easy? www.builast.com/ zhuanyewenzhang-195321-15879-item-108269.html (accessed October 29, 2016). Zhang, J. & Wen, L. (2015). The Human Resource Management in Huawei (Practice Version). Shenzen: Haitian Press. Zhang, L. (2012). Huawei R&D. Beijing: China Machine Press.

Commentary on Chapter 6 Katherine R. Xin China Europe International Business School (CEIBS), Shanghai, China

In my commentary on “The Transformation of Huawei’s HR System,” I will first summarize what I think are key characteristics of this transformation. Next, I will place Huawei’s development on the larger canvas of Chinese firms and offer my evaluation how common Huawei’s practices are among large and small firms in China. I will suggest that while many other leading Chinese firms developed similarly sophisticated HR practices, many small- and medium-sized firms still lack Huawei’s advanced HR practices and can learn from the example of Huawei. At the end, I will offer suggestions what research could be done on Huawei’s HR system in the future to provide even deeper insights into how Huawei uses HR systems to gain competitive advantage. The chapter describes three distinctive characteristics of the transformation of Huawei’s HR system: (1) While the changes of Huawei’s HR system have always been driven by its strategic goals and business development needs, some of the HR initiatives did demonstrate the foresight of Mr. Ren Zhengfei and his top management team. (a) An internal stock sharing plan was implemented in as early as 1991 when Huawei had less than twenty employees and few Chinese companies even had an incentive program. This stock sharing plan highlighted for the first time Huawei’s HR management philosophy – rewarding employees who work hard to help Huawei achieve its business and strategic goals. This practice had a far-reaching impact on Huawei’s ability to attract and retain talent to satisfy its business and strategic needs; (b) a competency-based hiring and promotion scheme rather than seniority-based, which were widely practiced in 1996 distinguished Huawei’s HR management from what was common practice in most Chinese companies at the time. This practice at that time helped shape Huawei’s corporate culture – “wolves culture” (i.e., team-oriented and results-driven); (c) an innovative system combining national vocation qualification (NVQ) and the matched function-wage system for executive/management rank for selection and promotion was implemented in 1998. This system of evaluating not only the overall business



   ’    competencies of potential leaders but also their identification with Huawei and its corporate culture laid the foundation and direction for Huawei’s leadership development. (2) The evolution of Huawei’s management philosophy that reflected in the five stages of transformation of Huawei’s HR system witnesses the changing focus of Huawei’s HR practices from performance driven (internal stock sharing plan, function-wage, personal quality test model, NVQ system, inferior performance elimination mechanism, etc.) to talent-oriented HR philosophy and strategy. In 1997 (the beginning of stage three), Huawei hired more than 800 R&D engineers, nearly doubling the size of its research staff. This move indicates that talent attraction and development became the priority of its HR management. During stage three of its HR transformation, Huawei rolled out a set of new HR practices covering several important dimensions of talent development. It is widely considered that effective talent development consists of five key elements: corporate culture, staffing and team-building, knowledge sharing, performance management, and organizational development (Xin, 2013). If we use these five dimensions to examine Huawei’s talent development practices, we can see that Huawei adopted distinctive practices help strengthen its talent development. Corporate culture: A mentorship program and Huawei University play a very important role in passing on the corporate culture to new employees and employees at all levels. Staff and team building: Huawei used the personal quality test model, NVQ system for talent selection, a dual-path career development policy, a regular job rotation system, and a customized in-house leadership training programs at Huawei University for talent development and for building up the capabilities of the team. Knowledge sharing: Huawei University is of great importance in knowledge sharing within Huawei. Successful practices and cases inside Huawei are broadly shared using Huawei University as platform for dissemination. Engineers and executives alike are all invited to share at Huawei university their experience, insights, and learnings. Performance management: A rigorous and relevant performance management system had long been in place inside Huawei. Rank ordering of performance of all employees, weeding out lower ranked performers, an effective feedback system (coaching), and a mentorship program for motivating senior employees were well in place for many years.

       Organizational development: This key element includes three important elements: organizational design/redesign, change management, and leadership development. In Huawei’s case, it hired a consulting company to help design the organizational structure and launched a rotating COO and later CEO system. A tailor-made leadership programs and job rotation at different levels for executives and high potentials are important ways for leadership development at Huawei. The rotating CEO system is the high note to demonstrate this point. The above-mentioned talent development practices enabled Huawei to achieve its strategic goals and sustain its growth during stage three of its HR transformation. (3) Huawei regards its HR management as one of its source of competitive advantage and places significant resources on and executive attention to this. (a) In 1997, Huawei engaged Hay Group, a top global management consulting firm to provide systematic evaluation and help regarding its people strategy, especially in transforming its compensation system when Huawei’s employee number was just over 1000. Huawei’s HR function started to shift from personnel management toward HR management. (b) During the third stage of its HR transformation, Huawei employed another consulting company to help redesign its organizational structure and developed the rotating leadership mechanism (including rotating CEO system). With the relatively well-rounded HR system built during this relative early stage of its business development, Huawei grow into the leading telecom company in China by 2004. (c) In 2005, Huawei hired Hay Group once more for leadership developing and established Huawei University, which marks a milestone for Huawei’s HR management and laid solid foundation for Huawei’s globalization efforts. (d) The building up of strategic reserve force might be the most noteworthy initiative underlines Huawei’s unique positioning of its HR management. Mr. Ren Zhengfei serves as the chairman of the steering committee of the strategic reserve force. Three rotating CEOs and the head of the HR department are the members of the steering committee. The strategic reserve force has independent budget and has the right to recommend talents to be appointed by HR department as managers.

I now want to come to the important question of whether Huawei’s HR practices described in the chapter are common in China? The answer is “Yes” for large companies, especially of the large industry leaders. Let me offer three prominent examples: (1) Haier, the bellwether manufacturer of household appliances, had rotating CEO system, though the system ended at the end of 2016. It had a

   ’    performance-oriented HR management system during its early stage of development. Later on, it focused on both performance and talent attraction and development. It is one of the first batch of companies in China that established its corporate university system, Haier University to train and develop its employees and executives. With the change of its business orientation, Haier’s organizational structure has been transformed fundamentally from a “triangle” into an “inverted triangle” and been further flattened into a network with independently operated business units (IOBUs) as the basic innovation unit. Similar to Huawei, Haier’s HR management also went through the process of initially building the basics of an HR system and later focusing on developing talent and leadership in alignment with its strategic needs, supporting its ongoing globalization efforts. (2) Alibaba, the biggest e-commerce platform company, had a unique HR management system and practice from the very beginning. Practicing Alibaba’s cultural values played a very important role in its performance management system and process. It accounts for more than 50 percent of its KPI which is very unusual for companies in the world. Their key corporate values include passion, integrity, conscientiousness, teamwork, embracing change, and customercentric service. Identification with the company and its core values is one of the most important criteria for employee selection. It also has a global recruitment system to hire talents from across the world. (3) Industrial and Commercial Bank of China (ICBC), the largest bank in the world by total assets and market capitalization, attaches great importance to talent development. For the past ten years, it has been sending 100 employees with high potential abroad every year for a one-year full time study abroad program (six months of schooling and six months of internship in the financial sector outside of China). This practice enabled ICBC to form a pool and critical mass of managers who have global views with capabilities to manage global operations. This talent practice alone contributed greatly to its current and future globalization strategy.

Although these types of strategic HR practices and systems are common to industry leaders as well and large size companies in China, HR systems of many small- and medium-sized companies especially those with shorter history in China are still at the stage of basic personnel management. In many small- and medium-sized companies, HR management remains purely an administrative role than one of systematically developing talent in line with the firm’s overall strategy. These companies would benefit from studying the practices of Huawei to other leading companies to upgrade their own HR practices.

       At the end of my commentary, I would like to articulate interesting avenues for future research on Huawei’s HR practices. Huawei has grown into a huge multinational company during stage four and stage five of its HR management transformation. As a reader who is interested in Huawei’s current HR practices, I would like to know more about (1) the transformation of Huawei’s HR management and practices during its globalization process and (2) Huawei’s HR management system for global R&D function, given the fact that proprietary intellectual property is one of Huawei’s core competence. Either of the topics are not fully explored in this chapter and offer excellent topics for future scholarship on Huawei. Specifically, I think many people would like to know more about how Huawei’s HR practices to address typical management challenges faced by global companies. (1) How does Huawei facilitate local responsiveness in the host countries through implementing localization and understanding diversity? (2) How does Huawei bring about global coordination through multi-dimensional structures (under which managers not only are responsible for achieving results for their own units), but also have shared accountability for successful strategy implementation across units), lateral steering leadership (such as project managers or program managers, responsible for decisions in a specific domain, which they implement through coordination across different units. They execute their role with little formal authority, since authority remains with the line organization) and cross-border teams? (3) How can locals as subsidiary leaders enable mutual knowledge sharing with the headquarters while keeping the subsidiary on a profitable growth path? (4) How does Huawei develop global leaders? (5) How does Huawei implement global performance management? (6) What HR management and talent management strategies pertinent to R&D function enable Huawei to access, attract, train, develop, evaluate, and retain local talent as well as develop leadership in critical overseas operations? (7) How does the effectiveness of talent management practices vary across subsidiaries pursuing different strategic objectives?

It is worth noting that, according to the Ministry of Commerce of China and the National Bureau of Statistics of China, China’s outbound foreign direct investment (OFDI) increased from 2.70 billion USD in 2002 to 145.7 billion USD in 2015. In 2014, China’s outflow of investment surpassed inflow of investment for the first time in history, making China a net exporter of capital. Increasingly more Chinese companies go global, through greenfield

   ’    investments, global alliances or cross-border M&As. How Huawei’s HR system, talent management and leadership development support and satisfy the company’s ambitious strategic goals will be very interesting to these Chinese companies. Pucik et al. (2016) asserted that HR management in multinational companies usually goes through three stages. The first stage is building HR management, focusing on building up basic and solid HR management foundations. The chapter depicts this stage of Huawei’s HR management in detail. In the second stage Pucik et al. (2016) claimed that major shifts in markets, technologies, and sociopolitical contexts compel major changes of company strategies. To explore and develop new capabilities, the company needs to realign HR management and reconfigure HR practices. Furthermore, multinational companies face many dualities, for example, centralization and decentralization, short-term and long-term, unit performance and corporate performance, to name just a few. The dualities can never be reconciled once and for all while any organization cannot go through constant realignment. The tensions created must be managed. This is where stage three of HR management comes in, steering between dualities. We could use these three stages of development as suggested by Pucik et al. (2016) to reexamine Huawei’s HR development and transformation to further explore Huawei’s HR management in the course of its globalization efforts.

 Pucik, V., Evans, P., Bjorkman, I. , & Morris, S. (2016). The Global Challenge: International Human Resource Management. (3rd ed.). Chicago, IL: Chicago Business Press. Xin, K. R. (2013). Five-Star Model of Talent Development. Beijing: China Machine Press.

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Huawei’s Internationalization Journey Wen (Helena) Li, Xiaoran Chang, and Bin Guo

.

’   

In 1995, Huawei’s product diversification was increasing, and Huawei was ranked 26th among China’s top 100 electronic companies (Xiang, 2006). At that time, the domestic communications equipment market was ascendant, and Huawei’s market position and industry influence were burgeoning. However, competition in the Chinese communications market had changed dramatically in three years since 1995. On the one hand, owing to the depression of the international market, the world’s major telecom equipment manufacturers competed more aggressively in the Chinese market to compensate for their losses in other markets (Liu, 2010). On the other hand, more than 400 domestic equipment manufacturers including state-owned enterprises, private enterprises, and enterprises with multi-ownership had developed in the middle-to-late 1980s (Tian and Wu, 2012). At that time, China’s telecom market at a crossroads. Huawei not only faced fierce competition from foreign companies but also confronted a serious surplus of telecommunication products. Huawei therefore was facing major difficulties, such as the increasingly saturated domestic market, its large underused manufacturing capacity, and high research and development (R&D) costs. Under such circumstances, Huawei began its internationalization journey to enhance its chances of “survival.” In addition to the fierce market environment at home, the reason that Huawei began its internationalization journey is connected to Ren Zhengfei’s strategic vision. In 1994, Ren said that “In the next ten years, there will be three main players dominating global 

’    telecommunications markets. Huawei will be one of them” (Tian and Wu, 2012). In 1998, “Huawei will be a world-class leading enterprise” was written into “Huawei Basic Law,” which stated that, “The pursuit of Huawei is to realize the customers’ dream in the field of electronic information, and Huawei is to become a world-class leading enterprise, namely, the world’s first-class equipment suppliers through relying on the dribs and drabs and the perseverance of hard pursuit.” From the perspective of cultivating the people at Huawei, Huawei’s internationalization can promote Huawei employees’ ability to withstand risks and control a crisis. Additionally, Ren thought that a huge country with 1.3 billion people must have its own communication manufacturing industry. The above statements explain the motivations for Huawei to go abroad, but the success of Huawei’s internationalization relied on the following preconditions. First, they needed success in the domestic market. In 1998, Huawei’s core products had already been sold in all developed provinces and major cities in China, and Huawei had basically achieved the strategic target of “rural areas that encircle the cities and eventually win cities.” Based on these achievements, Huawei had already become the largest domestic telecommunication equipment enterprise at that time (Liu, 2010). The success in the domestic market generated large cash flow supporting the quick expansion in international markets (Wu, 2014). The second precondition was preparation in management. Beginning in 1995, Huawei successively introduced many advanced foreign management systems to make enterprise management reach the international level. For example, Huawei invested 10 million RMB in introducing a set of MRPII software and invested 2 billion RMB to introduce an advanced IBM management mode, including integrated product development, integrative supply chain management, integrated financial services, and others projects (Biao, 2016). Third, they needed intellectual property rights (IPR) management. In 1995, Huawei established its intellectual property department and allocated two to five full-time/part-time patent management personnel to every R&D product line and sales department

  () ,  ,    to make IP work permeate every process of product development. Senior technical experts developed an appropriate IPR strategy for each product and market, and R&D personnel and IP personnel analyzed the patent risk and made timely applications for patents. Currently, intellectual property divisions have been set up in Germany, Sweden, and other countries. Huawei not only attached great importance to the cultivation of talent but also to the development of an IP management system. For example, Huawei organized regular meetings on IPR matters, performed IPR performance examinations, and improved its IP information utilization capability, technology contract management, IP appraisal, and confidentiality. Through these systems, Huawei gradually strengthened the accumulation, management, protection, and application of IPR. Huawei started its international expansion with switching and transmission equipment sales in 1996, and in 1999, its overseas sales only accounted for under 4 percent of total sales. By 2002, Huawei’s foreign sales were 552 million USD, and they soon doubled to 1.05 billion USD in 2003, more than 27 percent of total sales. In 2005, Huawei’s foreign sales first surpassed its domestic sales (Chen, 2012). Then, in 2013, Huawei became the largest equipment manufacturer worldwide in terms of sales and net profit (Huawei, 2014). In 2018, Huawei achieved 105.2 billion USD in global sales with foreign sales accounting for 48.4 percent of total sales (Huawei, 2019). According to Fortune 2018, Huawei ranks seventy-second out of the top 500 companies around the word (Fortune China, 2018). Currently, Huawei’s product sales cover over 170 countries. The trend in overseas sales and total sales is shown in Figure 7.1. Rome was not built in a day. The same is true for Huawei. In going from a fledgling Chinese start-up to well-known worldwide corporation, Huawei has experienced a difficult journey to becoming a global giant over the years. Indeed, Huawei’s success has been achieved through repeated failures, difficult struggles, and constant learning by doing. During the long journey of internationalization, Huawei has continuously faced new challenges in its different stages.

’   

 . The trend in overseas sales and total sales

This chapter will analyze the challenges Huawei faced in its process of internationalization and discuss the ways in which Huawei overcame them. The three-stage process and related challenges are shown in Figure 7.2. The period from 1996 to 2004 was the initial stage of Huawei’s expansion abroad. In the beginning, Huawei was a nonentity on the foreign markets. It was in a disadvantageous position compared to large Western companies such as Ericsson, Cisco, and Nokia. Huawei had to seek out every possible market opportunity that it could find. In this period, Huawei’s internationalization was focused on major efforts to attract foreign customers and perform a quick expansion by overcoming the liability of foreignness. Huawei entered Russia in 1996, India in 1998, the Middle East and Africa in 2000, and the European market in 2001. Starting in 2003, the Huawei brand was becoming increasingly known to international telephone operators. Following its swift expansion around the world, the next challenge for Huawei was the management of the complexities associated with global operations to achieve global synergy. At this stage, a milestone incident for Huawei was achieved when its foreign sales first surpassed its domestic sales. Since then, the international market

Stage 2: 2006–2012 Managing complexity to achieve synergy from a global perspective

Stage 1:1996–2005 Overcoming liability of foreignness – Take value sensitive segment as the first foothold –Enhance brand image to target customers –Serve customers with special valueadded –Think and act like locals do

– Leverage global resources to achieve synergy –Go fast by moving slowly –Balance efficiency and responsiveness in constructing management system Build organizational coherence in a culturally diverse context Stage 3: 2013 –Manage public image proactively

Changing mindset from a latecomer to a global leader

Internationalization of Huawei

 . Huawei’s internationalization process

–Follow a symbiotic philosophy in international expansion –Adjust market entry strategies according to the environment dynamics – Be more open and inclusive in management

’    has become a major part of Huawei’s development. On the one hand, from 2005 to 2012, Huawei had to build the procedures and mechanisms needed to gain efficiency from a global perspective. On the other hand, due to fluctuations in the global economy, Huawei had to adjust or even slow its pace of international expansion and build strong technological competences to enable it to compete more vigorously with other major players. In 2013, Huawei surpassed Ericsson as the world leader in terms of sales revenue and net profit (Huawei, 2014). Since that year, Huawei has needed to shift its mindset from that of a latecomer to that of a global leader to achieve sustainable growth.

Stage I: Overcoming the Liability of Foreignness When firms decide to go abroad, they have difficulty determining how to begin. Generally, they face the higher costs that arise from a lack of familiarity with the environment; from cultural, institutional, and economic differences; and from the need to coordinate across diverse geographic distances. The liability of foreignness is an additional cost that a firm operating in an overseas market incurs while a local firm does not (Hymer, 1976; Zaheer, 1995). Overcoming the liability of foreignness was the biggest challenge for Huawei in its initial stage of internationalization (1996–2005). When Ren made his ambitious decision to expand abroad in 1995, Huawei was still unknown to the rest of the world. Because it lacked international talent, the rule of selecting managers and employees to send abroad in the early stages was business first rather than language first; expatriate managers had rich experience in domestic business development. Huawei motivated its domestic talent through career, social and financial incentives. It advocated dispatching the best people abroad to ensure Huawei’s future. When employees recalled their overseas lives, they did not regret such a challenging and special experience because Huawei provided a rare opportunity for them to display their talents and realize their dreams (Tian and Yin, 2016). Additionally, employees with long-term stock ownership

  () ,  ,    incentives understood that internationalization was of great importance for Huawei’s future development and their career path. However, Huawei’s managers and employees, who had experience in the domestic market, still felt helpless and nervous as they were suddenly dispatched to the international market and were forced to adapt to that cultural shock. At that time, many employees were young and did not have any international experience. They only knew the name of the country they were scheduled to enter but did not know what the country looked like. Even in 2001, Huawei was still suffering considerably from language problems because domestic employees were not qualified in English-speaking communication and foreign employees were occasionally frustrated over the fact that most manuals for customers only had a version in Chinese (Ren, 2001). Clearly, Huawei’s initial internationalization path was more challenging than expected. Huawei did not have the time to equip itself with enough tools for early internationalization. However, even with inferior technologies and no real international management experience, the company still pushed its employees to jump into global competition. Ren once told his employees, “We cannot wait until there are no questions to aggressively enter into the international market. We should learn from the foreign market, win the international market and develop our international teams during internationalization over time” (Ren, 2001).

Take the Value-Sensitive Segment as the First Foothold As a new multinational from an emerging market and without any advantages such as advanced technology or expertise in internationalization, all Huawei knew to do was survive and find its initial customers. Every time Huawei’s personnel went abroad, they did not have an exact idea of where their customers were. Thus, Huawei adopted a “sowing seeds” strategy worldwide both in developing countries and developed countries. The implication was that Huawei dispatched only one or two people to a host country and expected them to explore the market and locate every possible potential customer. Their efforts

’    eventually paid off. They gradually established an excellent expertise in seeking the unmet needs of foreign markets and offering tailormade products and services to niche markets. In addition to its increasing understanding of the overseas market, Huawei then began to focus its internationalization on developing countries and emerging markets. Company executives knew that they still could not persuade large operators in developed countries such as Germany or France to accept their products and directly compete with large multinational companies in this initial stage. However, the telecommunications equipment markets in developing countries and emerging markets were mostly ignored by large multinational competitors at that time. Thus, Huawei decided to explore the markets in developing countries and then gradually move into developed markets. As Ren once said, “When we planned to open our international market, all the fertile lands we could see were occupied by Western companies. Only in those places that were remote, barren and uncultivated could we have an opportunity to expand.” One salesperson from Congo recalled that “although Congo is chaotic, it was easier for Huawei to make money because Western companies would have to pay very high compensation to their employees if they sent their employees to this market, which might make this market unattractive and unprofitable” (Chen and Liu, 2007). In this manner, Huawei entered the Russian market in 1996, the Latin American market in 1997, the African market in 1998, and the Asian market in 2000. Additionally, these markets were similar to the domestic market to a certain extent due to their low degree of market maturity. Local customers in such markets are generally pricesensitive, and their expectations concerning products are not as high as those of customers in developed markets. Thus, Huawei could efficiently transfer domestic products to these emerging markets without any significant changes. Even in developed markets, Huawei often began with niche markets and small customers who were ignored by the existing major competitors. In its early years in the European market, Huawei played

  () ,  ,    the role of supporting actor for a long period of time and focused on serving a few small telecommunications companies. Huawei was very active in finding small customers’ most urgent but unsatisfied needs and then trying its best to provide them with good-enough products at a lower price. An example is Evoxus, a small telecommunications operator in England. To survive competition with large competitors such as British Telecom, Evoxus needed to lower its service price by saving investment costs. Evoxus was under major pressure to buy Ericsson’s expensive equipment and after-sales service. In this case, Huawei went to Evoxus and provided the company with lower cost equipment and free upgrading system services. Considering the lower cost and the product functions’ similarity to Ericsson’s equipment, Evoxus chose Huawei and was very satisfied with its products and service.

Enhance Brand Image to Target Customers To telecommunications operators, equipment investment is always a long-term consideration. Thus, customers only trust suppliers who have high-quality products and good after-sales services. Building initial trust with local customers is always a difficult challenge for newcomers. Ren knew that foreign customers were very suspicious of the quality of Huawei’s products. Therefore, Huawei tried its best to demonstrate its competence in providing adequate products. In doing so, Huawei invested a large amount of money in research and development (R&D), amounting to more than 10 percent of sales over the past three decades. The company believed that “high inputs result in high outputs” (Ren, 1995). In the Russian market, Ren’s persistence in R&D investment won praise from Russian experts at the Eighth Moscow Internationalization Communication Exhibition in 1996. In fact, the Russian officials initially did not believe that Chinese companies could have technology and expertise in telecommunications equipment. When they found that Huawei’s products were beyond their expectations, they asked to meet Ren personally. They asked him, “Did you get help from Western countries?” Ren confidently

’    stated that Huawei had not received any help from Western countries, and instead, all innovations were performed by the company itself (Ren, 1996). Huawei also did much to enhance its brand image for target customers. At the beginning of its internationalization drive, Huawei was a stranger to foreign customers. In the mind of foreigners, China was considered a laggard and underdeveloped. A Huawei employee from the South American marketing department once said that, “You cannot imagine how they think about China. They even think that Chinese people still wear robes and gowns today. We once invited customers to visit China; they looked for related books everywhere, and they ultimately decided to read The Last Emperor.” With this type of image, Huawei could not successfully sell its high-tech equipment to foreign customers who believed that Chinese firms were only good at making inexpensive shoes instead of high-tech products. To reverse this obsolete impression of Chinese firms, Huawei needed to make significant efforts to promote itself to its potential customers. For example, Huawei paid all travel costs to invite potential customers to its headquarters in China. Huawei also prepared bundles of exquisite brochures about the company and sent them as a gift to potential customers. Additionally, Huawei designed a “New Silk Road” for its customers to visit at its Beijing, Shanghai, Shenzhen, and Hong Kong branches. In this manner, foreign customers could witness China’s transformation themselves and gain a deep, in-person understanding of Huawei. Huawei also exploited opportunities at every possible exhibition to show its products and capabilities to potential clients. In 2002, Huawei invited over 1500 potential customers to visit the Huawei Hong Kong branch and Huawei headquarters during the Hong Kong Telecommunications Exhibition.

Serve Customers with Special Value Added From the start, Ren was acutely aware that the product would not be the first reason for customers to choose Huawei’s products in its early years. Thus, Huawei needed to look for alternative methods of

  () ,  ,    attracting customers. From his perspective, doing so could only be achieved by offering extra value to their potential customers. Huawei engaged in the following practices to offer this extra value. The first was to provide free trial products to build initial trust concerning product quality from local customers. In 2001, France’s Neuf Telecom had made decisions concerning supplier bidding, and Huawei was not on the list. Huawei executives asked CEO Michel Paulin to let them join this bidding competition. Paulin was very skeptical about Huawei’s product reliability. Thus, Huawei decided to offer a contract that agreed to build a test network for Neuf in three months for free. If Paulin was satisfied with the test results on product functionality and quality, Huawei would earn the chance to join in the bidding. For Paulin, having a free trial was convenient and he accepted the offer. Huawei the delivered test network in less than three months, and Paulin was very satisfied with the test results. Considering the low price of Huawei’s products, which could greatly help Neuf in reducing its investment and operational costs, Paulin finally chose Huawei as a partner supplier. In fact, price was not the only weapon that attracted foreign customers, especially for European customers who cared about the quality of the products they purchased. Huawei established an “R&D demand” (Yan Fa Xu Qiu Bu Men) department that enabled frequent communication between customers and engineers and helped engineers design customized solutions for customers. In some cases, Huawei even dispatched twelve engineers as a team to work together with customers to develop the most suitable products, whereas its competitors dispatched only four or five engineers (Chen and Liu, 2007). A quick response to the local market requirements was the second type of value added to fulfill the customer-centric strategy. As one executive of a large European telecommunications operator noted, “What we are afraid of most is, after we use the equipment for several years, the equipment supplier is out of business, and then, no one can help us maintain and update our systems. Thus, we only

’    choose a supplier that provides good products with reliable service.” Huawei’s people made a great deal of effort to provide reliable services to their customers. Regardless of how difficult the onsite service environment was, Huawei’s engineers always worked on the front line to efficiently deliver products and services to customers. The Huawei People’s Newspaper told an interesting story in 2001 about this point. There was a project in Ethiopia to upgrade equipment. When it started, local operators did not believe that Huawei could complete the upgrading task on time. However, Huawei completed all the tests and the upgrading plan in a very short period of time because it demonstrated total dedication to getting the job completed under adverse conditions and tight deadlines. In the execution stage, Huawei engineers needed to check all the station points within two weeks. One station called Meda, located in the Mehal area, was over 100 kilometers from Ethiopia’s capital, Addis, and had an altitude of over 4,000 meters. It was extremely cold compared to the temperature in the rest of Ethiopia, which is over fifty degrees. Huawei’s people walked along a rough road for over eight hours, and it was 7:00 p.m. when they finally arrived at Mehal. At that time, the local restaurant in the little town was closed, and they only satisfied their hunger with an egg. At night, they also suffered from extreme cold. Early the next morning, they had to move to the next station without extra rest. In the same vein, Huawei engineers persistently worked from one station to another in these adverse working condition for one and a half months, spending all their time either on the road moving to the next station or working in equipment rooms to finish the job. Ultimately, Huawei successfully delivered its products and services to its customers on time. The local operator was very surprised given that Huawei’s workload was the largest in this project, and this helped Huawei develop a great reputation. Another case happened in Lilongwe and Blantyre (cities in Malawi). In order to respond to customers’ demands instantly, Huawei’s employee at one point had to drive over 600 kilometers three times every week, which meant that in total, they traveled over

  () ,  ,    100,000 kilometers in a year (Tian and Yin, 2016). Even if the equipment problem was not Huawei’s responsibility, Huawei abided by the following policy: Fix it first and discuss the responsibility and fees later.

Think and Act Like Locals Do Different countries may have different institutional environments, such as regulatory rules, cultures, and business codes. For Huawei, the lack of international experience could lead to cultural conflicts and legal violations, which would be harmful to its business development. Hence, it had to think and act like local firms to gain legitimacy from local stakeholders. In doing so, Huawei has gradually developed a legal service that is responsible for giving the necessary legal support to its overseas subsidiaries. In 1998, Huawei established the international marketing department, which was initially responsible for legal support. In 1999, the legal affairs office was created with three subunits, namely, the intellectual property department, the investment legal department, and the integrated legal department. Then, the legal service spent over two years preparing the release of a guidebook about legal affairs in foreign countries; it covered 100 countries’ regulatory environments, taxation policies, local customs, and other sensitive contents that needed to be observed when conducting business abroad. Every expatriate had to learn this guidebook and pass an examination before going abroad. This work laid a foundation for Huawei’s initial internationalization. Ren particularly emphasized that obeying the local laws, especially paying taxes to local governments, was a very important obligation. Huawei also adopted an open and inclusive approach to addressing diverse cultural environments. Culture is often embodied in informal and implicit details. Thus, in the early years, it was very difficult for Huawei to deeply understand and adapt in a short period of time. For example, in the Middle East branch, one Chinese employee of Huawei patted the buttocks of local people when he made a joke.

’    However, doing so is prohibited in Muslim regions where a man’s body cannot be touched. In such sensitive regions, Huawei soon provided cultural training classes for employees. A training program entitled “Islamic culture” was organized, and disks were distributed to Chinese employees to learn. Through such dedicated training, Chinese employees became much more cosmopolitan and professional. Such practices notably promoted friendly relationships with the local people. For example, local employees in Saudi Arabia surprisingly felt that Huawei’s representative office there should not have the “wolf” culture that is typical in the headquarters in China. Saudis’ family ties are strong, and they do not treat work as the entirety of life. Huawei respects their values, and local employees can work after they finish praying each day. In another interesting example, when Huawei intended to enter Brazil, local customers did not show any interest in Huawei’s products. After suffering several rejections from customers, Frank Fan (the director of the South America sales department) decided to learn the local Samba dance and the local culture. Subsequently, Fan danced the Samba with his customers before they discussed business. After his efforts to demonstrate Huawei’s respect for its targeted customers, he successfully gained the first business order in Brazil. Here, we see that this type of active adaptation to local customs is a key ingredient to Huawei’s success at conducting business in local markets. Aggressively hiring local people is also an approach Huawei came to use when conducting business abroad after initially trying to run things with a mostly expatriate staff. Through trial and error, Huawei gradually learned that using Chinese people to sell in overseas markets simply did not work well. To accelerate its internationalization, Huawei emphasized hiring local people as a large portion of its employees. Employing locals is much less expensive than dispatching employees from headquarters. Local employees are more familiar with the local culture, institutions, and local needs. They can help Huawei conduct business in a local manner. Additionally, hiring local people is the best way to demonstrate the firm’s commitment to the

  () ,  ,    local government and local community given that employment is highly connected to government goals. Yu (2012), currently the BG director for customer business at Huawei, summarized his international experience by saying, “Going abroad for Chinese firms not only is about setting up new subsidiaries but also needs to be about doing as local firms do and create jobs for local people.” Doing things in this manner contributes to the local economy and reduces the pressure of unemployment on the local government, which in turn will improve trust and legitimacy from the local government. In Huawei’s largest R&D center in India, 80 percent of the employees are Indian. Overall, Huawei has hired 70 percent local people in the Asia-Pacific area, 70 percent in Korea and Hong Kong, 50 percent in the Middle East and North Africa, 80 percent in the Commonwealth of the Independent States, 50 percent in Africa, and 73 percent in Latin America. Local employees have helped Huawei efficiently adapt to the local environment and reduce the potential barriers to conducting business in foreign countries.

Stage II: Managing Complexity to Achieve Synergy from a Global Perspective By 2005, Huawei had expanded into diverse countries and areas and established many subsidiaries around the world. The next strategic question to be addressed by Huawei was the following: Do all the footprints of Huawei around the world work in an efficient manner, and how can a global synergy be achieved? As such, each outward investment could not be managed as a discrete footprint but had to be treated as one in a portfolio to achieve global efficiency.

Leverage Global Resources to Achieve Synergy Huawei is very active in improving innovation efficiency through open innovation around the world. The telecommunications industry is often said to be the “club of the rich,” which means that if Huawei does not possess sufficient patents and core technologies, then it cannot compete with Western multinational companies. Thus,

’    Huawei invests considerable effort into establishing its global R&D network. Currently, Huawei has established sixteen research centers worldwide, twenty-eight joint research centers, and more than 200 collaborative programs with universities (Tian, 2014). Managing its diverse R&D centers around the world has become a great challenge for Huawei. Huawei had a clear plan in establishing its global R&D centers. Aside from sometimes considering their proximity to competitors when choosing locations (i.e., the Netherlands, Finland, and Sweden), one major role of overseas R&D centers is to support the development and improvement of Huawei’s main products and technologies. The location choice of R&D centers is based on the proximity and accessibility of technological advantages and talent in each country or region. For example, Huawei established the Bangalore R&D center in India because India has strong capabilities in software development and project management. Huawei also established an R&D center in Russia for algorithm solutions because of the number of skilled Russian mathematicians. In Sweden, Huawei established an R&D center focused on wireless development because many leading researchers in this field live there. Additionally, Huawei also established a global design center in London, a miniature design and quality control center in Japan, and a big data operating system and chip center in the United States. Recently, Huawei has established an aesthetic R&D center in Paris because Paris is sensitive to fashion and specializes in design. These R&D centers’ responsibilities are clearly defined to prevent redundancy and ensure only synergistic effects among them around the world. In this manner, Huawei is successfully exposed to diverse knowledge, which is a very important ingredient for potential innovation. The IT infrastructure inside this giant company contributes considerably to the management of its complex R&D process across diverse locations. As with the establishment of more R&D centers around the world, Huawei undeniably faces another challenge in managing every node of the global R&D network to ensure that it

  () ,  ,    works as a coherent entity supporting Huawei’s competitiveness. Huawei has introduced a global IT-based system to manage its globally distributed resources. In this IT system, although every R&D center may have different tasks and demands, the scientists and engineers can easily share their ideas and link with each other whenever they open their computers. Based in Huawei’s cloud center, all the information is available to employees everywhere, just as though they were working together in one office. In this mode, all R&D centers in every corner of the world can simultaneously cooperate with each other for one large development project. Huawei has also developed expertise in combining its homebased advantages with its host-country advantages to achieve greater global operational efficiency. Huawei can exploit the cost advantages of international expansion through its strong manufacturing capabilities at home. Then, when Huawei has accumulated a certain level of international experience, it successfully benefits from redeploying host-country advantages to the home market. One typical example is the successful application of 3G in the Chinese market. Initially, 3G technology was not recognized or accepted in the Chinese market. Huawei originally applied it outside of China, particularly in the European market. In long-term operations abroad, Huawei accumulated rich experience in the commercial deployment of 3G and saw it become stable against the strictest test from the top global operators in developed countries. In 2008, during a period of economic downturn, Huawei was still able to successfully develop its 3G business in the Chinese market, which accounted for over 30 percent of the total Chinese market share.

Go Fast by Moving Slowly Generally, two paths are widely used for fast expansion. One path is through organic growth, and the other is through serial acquisitions. Cisco is undeniably the most successful acquirer in the world, whereas Huawei’s strategy for growth shows a different pattern for becoming a global giant. In high-tech industries, product lifecycles are

’    becoming shorter and shorter. To respond to the changing business environment, Cisco has performed over 150 acquisitions over the last twenty years. One-third of Cisco’s technologies come from acquisitions. The CEO of Cisco, John Chambers, believes that the benefits of acquisition are that thousands of companies around the world can become potential R&D centers for Cisco. For example, Cisco quickly occupied the home network equipment market by acquiring Linksys. In 1993, its LAN switch business was built by acquiring Crescendo. However, unlike Cisco, Huawei’s top management team does not like to engage in acquisitions. It believes that although firms can quickly respond to the market demand by performing acquisitions, they still cannot truly control the ownership of the technology. In addition, if a firm does not have sufficient absorptive capacity, it still cannot efficiently combine the acquired technology with existing technologies. Firm acquirers also always face financial and management integration problems in addressing acquisitions. Thus, even when it was innovating relatively slowly in its early stage, Huawei insisted on being dedicated to competence building step by step. It is cautious with regard to performing acquisitions because it believes that it may benefit in the short term, but many affiliated problems such as culture conflicts, over-diversification and management integration could hinder Huawei’s development in the long term.

Balance Efficiency and Responsiveness in Constructing the Management System To counter the centralization tendencies that accompanied Huawei’s rapid growth, the company carried out a unique bottom-up organizational change. In other words, Huawei’s front line supports management headquarters through a bottom-up control mode to mobilize resources, thereby responding to customers’ needs quickly. To facilitate Huawei’s rapid development, resources and power tended to become centralized among top managers and functional departments that could be somewhat removed from the “business battlefield” (Ren, 2009). Thus, front-line workers often complained that they spent

  () ,  ,    almost 70 percent of their time knowing the situation of goods and the mobilization of resources (Ren, 2009). For example, in August 2006, Huawei’s representative office in Sudan unexpectedly failed in obtaining Sudan telecom’s bid after working hard for two months, which was a huge blow. The fundamental reason for this was that the customer’s demand had been responded to passively and thus had not been met because of the traditional operational mode in which employees in different departments only focus on their own business rather than communicating with each other (for instance, the employees from the accounting department did not know about delivery and price, whereas those from the delivery department did not know about customers and products) (Hu, 2015). With international expansion, Huawei needed to run operations in many markets. Therefore, responding to customers’ demands in a timely manner became an impending challenge for Huawei. However, supporting the day-to-day business of 150,000 employees in more than 140 countries with more than 900 million e-mails every year and tens of millions of online meetings was also a great challenge in improving the efficiency of the process and employees’ work efficiency (Fu, 2012). Therefore, Huawei performed a reformation plan aimed at balancing efficiency and responsiveness in management and operations together with the improvement of the IT system. As early as 2009, Ren realized that, “Once frontline workers find targets and business opportunities, Huawei’s advanced equipment and high-quality resources should be mobilized and used in a timely manner to provide effective support instead of initiating and directing the war by resource owners.” This led to the following idea for new organizational reformation: “Let the people who can hear gunfire call for gunfire” (Ren, 2009). In this case, according to authorization rules, front-line teams were granted decision-making power, whereas the rear supports the decisions initiated by the front line and safeguards the implementation process. This reformation was inspired by the primary customer-oriented “Iron Triangle” combat mode adopted by Huawei’s representative office in Sudan in 2006.

’   

The roles for expanding projects

FR

Sponsor

SR

AR The “iron triangle”  . The project-based “Iron Triangle”

Since 2009, the “Iron Triangle” system has been established and strengthened throughout Huawei. This system includes project-level and system department-level components (see Figures 7.3 and 7.4) with the latter being the support system for the former (Hu, 2015). The basic unit, a working group engaging customers on the front line, was composed of AR (account responsibility), SR (solution responsibility), and FR (fulfillment responsibility). This working mode differs from the original mode in which an AR faces customers on the front line and then routinely calls for SR and FR. In this system, AR and SR first present solutions to the customers; FR also attends this process to fulfill delivery issues, which can improve the feasibility of solutions and the delivery of products. Then, FR installs the products. Because FR attends the early formulation of solutions and can immediately request help from AR and SR to quickly solve the problems that occurred in the process of operation, it is easy to operate this product. If all these groups are

  () ,  ,    Project A Sponsor SR,AR,FR

Project-based “Iron Triangle”

Sponsor SR,AR,FR

Delivery & service DP

Sale business DP

Solution DP

System departmentbased “Iron Triangle”

Project group B

XX system department Global solution sale DP Sale management DP Solution DP .......

Delivery & service support DP Project delivery management DP Human resources DP ......

The platform in representative office and region DP

CEO in representative office andregion DP

 . The support system: the system department-based “Iron Triangle,” the representative office and the regional department (DP: department)

unable to solve certain problems, they can seek help from the local offices, regional offices, or headquarters, and they can immediately obtain resources and other staff’s support. The “Iron Triangle” system is a flexible operation team in which members support each other by timely responding to customers’ problems (Fan, 2016b). The essence of this mode is “focus on the frontline, then break the functional barriers and simplify management, thereby improving communication efficiency, moving decisions forward and controlling risk” (Hu, 2015). To achieve the change goals described above and improve operational efficiency, the corresponding process must be optimized by

’    streamlining unnecessary personnel and procedures for the sake of the front line and consumer demand (Ren, 2009). Compared to the previous centralized system in which the organization and operation were “pushed” by the central authority and unnecessary procedures and personnel were invisible, in this decentralized system, the “pull” mechanism forms gradually and unnecessary procedures and personnel can be easily found and removed in a timely manner (Ren, 2009). In other words, centering on the requirement of the front line, requires the supporting teams to meet them accurately and in a timely manner with fewer involved departments, less internal coordination, and higher business synthesis. However, the front line must have strong skills in product introduction, price negotiations, and project development, as well as some authorization to call for resources. The functioning process of the above operational mode is as follows. First, Huawei gives the authorization documents on the clause, contract, and price to this working group with the conditions in terms of gross profit and cash flow. The working group can directly call for resources within the scope of its authority (Ren, 2009). However, if the resource requirement is beyond the range limit, it must obtain approval in accordance with some pre-set procedures (Ren, 2009). Meanwhile, if it cannot obtain a timely response, then it can initiate the corresponding complaint mechanism. Second, a system to refine the responsibilities set for the front line is the key to reducing coordination between the front line and the rear department. In particular, AR has a comprehensive ability on four marketing elements (customer relations, the solution, financing and payment collection, and delivery). Third, to respond to customers’ demands in a timely manner, Huawei has built an IT-based demand management system (Fan, 2016a) in which the demand from customers and the front line can be detected, filtered, and prioritized. This system ensures a strong execution ability to meet the needs of customers and to address complaints from the front line. Additionally, the balance between efficiency and responsiveness has been incorporated into the IT system design in Huawei.

  () ,  ,    Huawei spends 1 percent of its business turnover on the IT system every year (Fu, 2012). The construction of the IT system has achieved global deployment based on a unified architecture during the 2008–2012 period (Bai, 2012). In this IT system, the standardization in the main applications improves system efficiency, whereas the localized patches in different areas are helps adaptation to local conditions. For example, Huawei has adopted a strategy of “3 unifications and 1 decentralization” (unified management, unified implementation methodology and output template, the overall scheme and dispersed implementation) to achieve enterprise resource planning (ERP) global coverage (Bai, 2012). At this stage, Huawei completed the change in the main process, which first meets the requirement of global control. Huawei became a global vertical management IT organization by adopting the method of centralized control of scattered resources, centrally managing the IT infrastructure and application platform with unified processes. Then, Huawei built a global work collaboration platform. In 2012, 65,000 employees were working on this platform. Meanwhile, Huawei also built the global mobile OA platform eSpace (Zhong, 2012). By 2015, there were 200,000 users on eSpace, and 20,000 meetings were held every day. Moreover, employees and managers from different departments can use the unified communications services and mail services to communicate and collaborate, acquire and subscribe to industry information relevant to their roles, address their personal to-do list clearly, and find work-related content via a personal collection function. In 2012, Huawei established a data center in Shenzhen, a backup data center in Nanjing, eight sub-data centers in Europe, Asia, and the United States, and thirty-five VPN gateways that provide access to all offices. Huawei’s internal internet system covers more than 140 countries and connects 687 offices. This horizontal setting ensures that the time delay of communication among employees in different countries is within 0.1 seconds (Fu, 2012). Since 2009, with the development of Huawei’s global business, its internal management and control mode has begun to shift to a

’    mode in which the front line supports management headquarters with a bottom-up control mode. Subsequently, some adjustments have been made to the Huawei IT system to help front-line employees quickly obtain the information that they need. After 2015, the improved IT system basically achieved the above goal by setting more than twenty points of information (POIs). Through these POIs, the front-line workers could know the all the order information, including the products’ arrival status, installation, and so on, and the rear-end workers actively provided this information. Meanwhile, the front-line workers transferred some information back to the rear end after they finished the installation. Meanwhile, all employees had mobile phones with unified communications functions, and front-line employees were able to have meetings with backend employees at any time (Zhong, 2012). In addition, all matters that require approval are displayed in an interface for centralized approval, which significantly saves time.

Build Organizational Coherence in a Culturally Diverse Context By the end of 2012, Huawei had 150,000 employees from 156 countries. Thus, the way to build organizational coherence had to be carefully addressed, especially when the localization ratio of employees is more than 70 percent (Huawei, 2013). Overseas employees were not able to participate in the employee stock ownership plan (ESOP), which created a sense of unfairness. Additionally, they generally lack the strong sense of organizational belonging that exists in China. Thus, when Huawei initially disseminated “Huawei Culture” to overseas employees, local employees objected, asking why they should learn the “Huawei Culture” program (Fan, 2016a). However, Huawei believed that the implementation of core values throughout the entirety of the company is the foundation of organizational coherence. Therefore, Huawei took some steps to transplant the core values throughout the entirety of the company. For foreign employees, Huawei adopted a “generic understanding of core values” policy. For example, Huawei used “professional

  () ,  ,    spirit” to encourage employees’ dedication to work, which was easy for overseas employees to accept (Fan, 2016a). For example, during the period of the “3.11” Fukushima nuclear accident in 2011, Ericsson’s after-sales service left Japan, whereas Huawei workers still actively worked in the disaster area. This hardworking move and its professional spirit touched Japanese customers, and Huawei received its rewards. In 2013, sales revenue in Japan reached almost 2 billion USD, which was four times the amount in 2011 (Lan, 2015). In addition, to improve local employees’ sense of fairness and belonging, the differentiated talent development plan, the compensation system, the social security system, and the bonus system were enacted according to local market situations and the work environment, and a unified career promotion channel and performance appraisal system were employed for all employees from different cultures (Fan, 2016a). Additionally, in the overseas department, management meetings were equally opened to domestic and overseas employees who were in the same positions (Fan, 2016a).

Proactively Manage the Public Image Exposed to an increasingly diverse institutional context, Huawei’s overseas operations involve external stakeholders other than customers, such as government agents, the local community, and local competitors. Huawei has become more proactive in managing relationships with local legitimating actors and engaging in socially responsible activities. In fact, Western countries’ concerns over “national security” are a global problem for Huawei (Ku, 2012). For example, in the Indian market, Huawei has always faced security reviews from governments and in May 2010, was asked to disclose all the details of company ownership within a month. Additionally, Huawei was once regarded as a vicious competitor, and a number of investment projects were rejected in the name of “national security” by the Indian, Australian, and American governments. To eliminate these doubts among Western governments, Huawei is becoming increasingly open.

’    First, Huawei has opened its source codes for embedded software to British security agencies by jointly establishing a Security Authentication Center with the British government and British Telecom in England in November 2010. This center is used to test hardware and software, ensuring that the product can resist network security threats. Moreover, as a global network security officer, the former British chief information officer John Suffolk acts as executive director and oversees Huawei’s network security strategy and management, supervising implementation. This center is like a glass room that is open and transparent to regulators and customers (Frieslaar, 2010). The establishment of this center marks Huawei’s efforts to win trust and a sense of honesty in the field of telecommunications network security. It also embodies Huawei’s promise of a high-quality and reliable communication network to British customers. Second, in the Indian market, Huawei has demonstrated its sincerity to the Indian government. For example, in 2010, a representative from Huawei said that according to generally recognized international industry practice, Huawei could provide the source codes to the authorities, and Huawei announced this open attitude to the Indian government. In 2012, in an interview with the Economic Times, John Suffolk, Huawei’s global chief security officer, said that Huawei was willing to release its network system source code and cooperate with the Indian government to assuage their concerns (Li, 2012). This open attitude mitigated the Indian government’s worries. Additionally, in the Australian market, the first overseas board was established in Australia in June 2011 (China Economic Net, 2011). On this overseas board, three former Australian officials act as independent directors, including a former Australian foreign minister, Alexander Downer; the former governor of Victoria, John Brumby; and Australian retired admiral John Lord. These former Australian officials can help Huawei ease political barriers through communication with the local government. Huawei is also actively involved in social responsibility activities worldwide. In doing so, the company has initiated the IT training

  () ,  ,    center plan and “the future communication seeds” project. In June 2012, the first overseas global IT training center was established in Malaysia, and Huawei signed agreements with ten local universities to establish a training laboratory at every university to train 10,000 local people in five years (Wen, 2012). By the end of 2012, Huawei had established thirty-six training centers all around the world (e.g., in India, Nigeria, Kenya, and Egypt) (Huawei, 2013). “The future communication seeds” project aims to provide students from all over the world with ICT practice training, scholarships, work experience, and internship opportunities. Since 2008, this project has been performed in fourteen countries (e.g., Australia, France, Germany, Ghana, Indonesia, Kenya, Morocco, Norway, and Spain), and by the end of 2012, thousands of students from more than fifty colleges and universities had benefited from it (Huawei, 2013). Huawei has also provided numerous donations all over the world. For example, in 2007, to provide broadband access services for online meetings, Huawei donated telecommunications equipment valued at 130,000 USD to the Rwandan government. The “Pay Attention to India” fund to help Indian girls finish their academic studies was established in New Delhi in 2007. Huawei initiated many similar projects, such as donating medical supplies to Guinea and Comoros, donating to the Zambian First Lady foundation and Mali UNICEF (Huawei, 2008). In 2011, to support the “Employ Young People” policy in Guinea, Huawei donated a phone booth and mobile phone repair tools and provided training (Huawei, 2012).

Stage III: Changing from a Latecomer Mindset to One of a Global Leader By the end of 2014, approximately 70 percent of Huawei’s revenues came from overseas business (Meng, 2015), and Huawei had 160,000 employees and served 3 billion people in more than 170 countries and regions around the world (Huawei, 2014). In 2013, Huawei surpassed Ericsson in terms of business income, becoming the largest telecommunications equipment maker worldwide (Liu, 2014). Huawei

’    has become a global leader in this industry, which has brought about a change in its management philosophy, mindset, and strategic orientation.

Follow a Symbiotic Philosophy in International Expansion In seeking industry leadership, Huawei attempts to build a value ecosystem with suppliers, other partners, and competitors through which the company can maximize value creation for the entire industry value chain by leveraging external resources and capabilities. With this shift in management thinking, in December 2013, Ren Zhengfei said that Huawei should become the maintainer of industry rules but not the destroyer (Ren, 2013); in other words, to keep a reasonable profit margin for all industry players, Huawei would not participate in any future price wars. Huawei started this type of practice some time ago. According to the “market pricing, competitive pricing” marketing strategy, Huawei provides products and solutions that have the lowest comprehensive cost, and the highest customer value, while the price is not always the lowest (Fan, 2016b). In 2014, Huawei had more than 3,500 partners and cultivated more than 5,000 Huawei certified network engineers in China (Ma, 2014). Following the principle of open innovation and win-win strategy, Huawei introduced the harmonious and healthy “Great Service” ecosystem with “one platform + three modes” at the 2014 China Enterprise Business Service Partner Conference (Sun, 2014). “One platform” refers to creating a unified customer-oriented service platform with a customer service center, spare parts, process IT, knowledge base, case base, talent alliance, channel elite club, and other service capabilities by strengthening partners’ cultivation, motivation, and support. The “three modes” stand for authentication service partners, authorized service partners, and joint service solutions. In this ecosystem, Huawei can provide “great service” solutions for the entire lifecycle, covering the planning, design, implementation, operation, improvement, and all other phases around “infrastructure assurance, service-enabled, innovation guidance, and talent

  () ,  ,    alliance” as its four value-sharing mainlines. This ecosystem allows Huawei and its partners with different and complementary assets to optimize their own benefit. The former embodies value contribution and capacity sharing, and the latter allows a smooth process and business operation (Sun, 2014). At the 2015 Huawei Cloud Computing Conference (HCC) and 2015 Huawei Network Conference (HNC), Huawei presented its plans to build an “open, collaborative and win-win” cloud ecosystem and an open agile network ecosystem with partners, respectively (Xu, 2015; Zhang, 2015). At the First Chinese Wisdom Industry Exhibition (2015), Huawei announced its plan to build a Smart City ecosystem with its partners. At the 2016 China Partner Conference, Huawei announced that it would construct a solution ecosystem with independent software vendors (ISV) by investing 200 million RMB to build a hierarchical support system for ISV partners (Cai, 2016). In constructing these ecosystems, Huawei has adopted a “focused strategy” to first define its market position and advantageous business portfolio and then seek strategic partners in other business fields (Cai, 2016; Xu, 2015; Zhang, 2015). For example, in building the cloud ecosystem, Huawei explicitly emphasizes the following development idea: “industry first, cooperation to win” and “don’t touch upstream application and downstream data” (Zheng, 2015). Additionally, Huawei follows a “strategy of being integrated” to first identify core partners and then open its platform to provide market opportunities for these partners. Moreover, in recent years, Huawei has initiated a series of cooperative activities to develop the next generation of telecommunications technology, 5G. The R&D of 5G aims to achieve the connectivity of all things, which means that 5G is a shareable platform network and infrastructure for all of society (Hu, 2015a). In particular, the ability of 5G to be used on a large scale depends on whether the 5G technology standards can meet personalized demand (Hu, 2015b). Therefore, the R&D of 5G requires deep cooperation among all parties, including cross-industry cooperation. Since 2009, when Huawei built

’    the first 5G R&D group, Huawei has developed numerous close cooperation relationships with more than twenty universities (e.g., New York University, Harvard University, Stanford University, the University of Cambridge, and the Hong Kong University of Science and Technology), more than twenty operators (e.g., Deutsche Telekom, Vodafone, NTT DOCOMO, Telefonica, TeliaSonera, and Etisalat), some leading companies in other industries (e.g., the leading car companies such as BMW, Volkswagen, and Volvo and the leading internet of things companies such as Siemens and Bosch), and more than ten 5G global industry institutions (e.g., European Mobile and Wireless Communications Enablers for the 2020 Information Society [METIS]). In addition, Huawei is also a member of some alliance organizations, such as the European 5G Public-Private Partnership Association (5GPPP), 5GMF in Japan, the 5G Forum in Korea, ITU, IMT-2020, and 3GPP in China (Hu, 2015a).

Adjust Market Entry Strategies according to Environment Dynamics Since 2001, when Huawei first attempted to enter the American market, the company has experienced many difficulties and barriers, such as a lawsuit by Cisco and objections by the US government to acquisitions (e.g., 3Com, 2Wire, MOTO’s mobile network) and transactions (e.g., the transaction with Sprint, with Verizon and AT&T, with 3Leaf ). In 2012, Huawei’s sales in the United States were only 1.3 billion USD, whereas its total sales were approximately 35 billion USD (Wang, 2013). In particular, a report by the US Congress in 2012 stated that Huawei’s telecommunications products would threaten American national security (Rogers and Ruppersberger, 2012). Moreover, as one of the largest global mobile phone markets, the American market is the last one unoccupied by Huawei. Therefore, for further global expansion, Huawei must change its entry strategy. To do so, Huawei is trying to penetrate the US market by selling smartphones and wearable devices instead of the telecommunications network products questioned by the American government. In

  () ,  ,    Table 7.1 Some examples of cooperation with partners Partners

Cooperation Contents

5G Innovation Center (5GIC) at the University of Surrey

Huawei is one of the funding members. In November 2014, they jointly launched the first 5G testbed all over the world.

5GPPP

Huawei is a member of its board.

MegaFon (Russia)

They will be jointly used in the 2018 World Cup in Russia.

Etisalat

They will jointly provide 5G internet for the 2020 EXPO Building

Ericsson (Sweden) and Qualcomm (USA)

The cooperation focuses on the R&D of C Band. They jointly published one report about the advantage of C Band in August 2015.

LGU+ (Korea)

They will jointly open the 5G precommercial internet at the 2018 Winter Olympics to verify the key technology in 5G new radio (NR).

KT (Korea)

Cooperated in the field of 4.5G and 5G to prepare for the deployment of 5G and made several first global application cases, such as the LTE-U Smart Building and Massive MIMO.

Soft Bank (Japan)

They are planning to first introduce the 4.5G TDD+ solution in some places that have substantial flow, such as Tokyo, Nagoya, and Osaka.

NTT Docomo (Japan)

Cooperation focuses on the field testing of 5G. They opened the first global 5G multiuser field testing, which means that the R&D of 5G entered the field validation phase from the laboratory phase in 2015. They will start the second phase: comprehensive field testing.

’    December 2014, a high-profile advertisement for Glory 6 Plus was launched in Times Square in New York, which indicated the coming of new things. At the Mobile World Congress (MWC) 2015 in Barcelona, Huawei released its first type of smart watch, which it planned to sell in more than twenty countries and regions, including the United States. Additionally, the market awareness of the Huawei brand in the US mobile phone market, which is almost monopolized by Apple and Samsung, remains low. At the same time, this market is dominated by operators such as Verizon, AT&T, Sprint, and T-Mobile (Shao, 2015). Therefore, Huawei is now focusing more on marketing and branding. Huawei has adopted a “multi-channels” strategy in selling consumer products, i.e., sales through operators and e-commerce channels (e.g., the Amazon (US) e-business platform and a self-establishing B2C website, www.gethuawei.com) (Shao, 2015). Huawei also cooperates with Google as an OEM, producing the Nexus 6P high-end mobile phone for Google, which can contribute to enhancing Huawei’s brand awareness (Li, 2015). In March 2016, Huawei’s smart phone P9 (model: FCC ID QISEVA - L09) obtained a US Federal Communications Commission Certification, which indicates great progress in the upscale market (Xie, 2016).

Be More Open and Inclusive in Management Huawei has become more open and inclusive in managing and motivating its employees. This is a result of the fact that Huawei needs to recruit top talent and senior executives with international experience all over the world to compete globally (Guo, 2015). For example, in the critical period of rapid growth in consumer business, Nokia’s former president of the Chinese market and former global executive vice president (EVP), Colin Giles, returned to Huawei in December 2015 as EVP of Huawei’s consumer business; he is responsible for the global sales of end products. In fact, in recent years, Huawei has recruited a variety of excellent talent like Giles, including the global internet security director, John Suffolk (the former UK government chief information

  () ,  ,    officer); the president of the integrated delivery department in consumer business, Laine-Ylijoki Tommi (the former senior executive in global supply chain management in Nokia, Sony and Ericsson); the financial expert, CT Johnson (a former senior executive in Ericsson); the chief user experience designers of consumers at BG, Abigail Sarah Brody (the former design director in Apple); and vice president of mobile phone design, Joonsuh Kim (the former creative director in Samsung). Additionally, the member structure in Huawei’s UK board is also a symbolic case that signals Huawei’s increasingly open and inclusive attitude. On Huawei’s UK board, there are three British Knights (Lord John Brown, Dame Helen Alexander, and Sir Andrew Cahn) and three Huawei senior executives with Lord John Brown acting as the independent nonexecutive chairman (Huawei, 2015). However, Huawei realizes that the existing employee stock option plan (ESOP) cannot ensure long-term incentives for foreign employees because currently, foreign employees cannot enjoy this incentive plan due to legal and regulatory restrictions in China. In addition, the ESOP may be unfair to grass-roots staff because the rewards are gradually concentrated among high-level employees (Lan, 2016; Wu, 2015). This obviously deviates from Huawei’s “striverbased” core values. Thus, aiming to solve the above problems, Huawei is adopting a new profit-sharing system, i.e., the aforementioned time unit plan (TUP).

.



As we discussed above, Huawei follows an incremental strategy in penetrating overseas markets. This incremental strategy involves (1) a customer target dimension in which Huawei first was only able to sell to small carriers, then to local mainstream operators, and finally to multinational company clients; (2) a product dimension in which Huawei first uses a “most-wanted” product as the penetrating point, then expands to diversify into multiple product lines and customized products, and finally manages to increase the market share of its highvalue products.

’    To implement such an internationalization strategy, firms must make substantial changes to adapt to the challenging demands of the external environment. The whole process of the internationalization of Huawei described in the chapter can be viewed as a process with continuous routinization and de-routinization activities. Routinization refers to Huawei efficiently transferring its home-based practices overseas, while de-routinization refers to the extent to which existing routines are broken and changes are made to adapt to the demand of foreign countries. From home country to host country, Huawei transfers its homebased practice, such as its R&D process and management procedures, to host countries in an early stage. When Huawei realized the differences between home country and host country, it broke its homebased routines. In doing so, Huawei’s flexibility transformed its subsidiaries into truly local firms, obeying local laws and culture and doing business in a local way. With the development and growth of Huawei, a large routine-based, top–down system with many procedures and process control points was established. However, this management system could not respond to customers’ demands efficiently. To solve such problems, Huawei de-routinized practices and developed new ones under the label of the “Iron Triangle” operation system to, “Let the people who can hear gunfire call for gunfire,” which was a bottom-up system. Additionally, the ESOP led to a problem of unfairness among employees. To overcome this problem, Huawei broke existing routines in dealing with foreign employees to make room for the TUP incentive system, which incentivizes foreign employees. Throughout the whole internationalization journey, Huawei had to continuously change its strategic focus to overcome new challenges, first to overcome the liability of foreignness, then to manage complexity to achieve synergy from a global perspective and finally to change its mindset from that of a latecomer to a global leader. Huawei had to surrender old routines it had set and comply with new challenges ahead to sustain competitiveness abroad.

  () ,  ,    Huawei also embraced influences from host countries on the home country and tried its best to de-routinize existing management practices to keep updated. As described in many of the other chapters in this book, Huawei learned standardized management procedures from developed countries. In the case of forming a relationship with British Telecom (BT), BT’s certification of Huawei covers thirteen dimensions of Huawei’s business management, from its business plan, customer relationship management, internal communication management within organizations to requirement elicitation, development and productions, install and delivery, and even ethical sourcing (Tian and Yin, 2016). To be a supplier for large European operators such as BT, Huawei had to de-routinize its own practices to be consistent with their requirements. During the time doing business with these operators, Huawei has learned to de-routinize their domestic organizations to be more standardized across the world (Fan, 2016b). For example, after 2005, domestic representatives in twenty-nine provinces in China were replaced by managers who have international operation experience. These international returnees brought back advanced management practices and applied them in their home country operations. During the process of routinization and de-routinization, Huawei’s international journey provides multinational enterprises with several lessons. These lessons are particularly valuable for multinational enterprises (MNEs) from emerging countries that possess inferior technology, inferior resources such as managerial expertise or brands (Li, 2007; Luo and Tung, 2007). They offer guidance on how such MNEs should successfully address the relationship between routinization and de-routinization to meet challenges when going abroad. First, it should be noted that the top management team (TMT) in Huawei with the long-term vision for internationalization plays an important role in Huawei’s success. Huawei is not a publicly listed company, and hence, the TMT is not subjected to the impatience and short-term behavior of its shareholders when making strategic decisions. This is especially important for overseas business development, in which the break even in foreign markets needs a long period

’    of investment and waiting. For example, Huawei obtained the first order in Russia ten years after entering the Russian market; it began to turn a profit in Brazil eighteen years after making its first entry. Such long waits are also supported by the success of domestic markets and other developing countries in Africa. In this way, we can clearly see the interrelationships between different foreign markets and the importance of making strategic decisions from a global perspective rather than from the perspective of a specific country. Second, there are numerous specific issues with organizational transformation that occur against the backdrop of globalization. There may be a degree of tension between home-country organizational transformation and host-country organizational transformation. Traditional thinking on organizational transformation always focuses on the home-country side and ignores the influence on organizational transformation from host countries. However, MNEs will confront different institutional environments and pressures from home and host countries. It is important to treat multinational companies as a total entity and reconsider the bilateral influences and potential tensions between the units in the home country and in the host countries when performing organizational transformation. Here, Huawei serves a good example. It implemented different strategies to motivate domestic employees and overseas employees. For domestic employees, it offered a profit-sharing system to motivate them, whereas it later also designed the time unit plan for overseas employees. In doing so, this transformation is more flexible and efficient in achieving the common goals of Huawei. In the context of globalization, the complexity of organizational transformation increases. Complexity arises from managing diverse cultures and institutional requirements around the world Huawei established R&D centers with clearly defined tasks and an IT platform for converging knowledge around the world to improve innovation. Third, Huawei also can serve as a model for MNEs to overcome the liability of foreignness. Once firms decide to operate outside their home country, they inevitably face significant disadvantages relative

  () ,  ,    to local firms in host countries owing to the liability of foreignness (Zaheer, 1995). At the beginning of its internationalization journey, Huawei was no exception. As we observed in the case of Huawei, the liability of foreignness arises from three main sources, namely, unfamiliarity hazards, discrimination hazards and relational hazards (Eden and Miller, 2004). To survive in a global market, MNEs must find ways to overcome these hazards. With regards to unfamiliarity hazards, which reflect a lack of knowledge of or experience in the host country, Huawei accumulated its international experience by entering into the markets and winning contracts first in developing countries and later in developed countries. Even when Huawei had a difficult time at the beginning, it insisted on trying its best to capture every opportunity. It also leveraged its existing linkages in the home country to gain information about local markets and institutions (Mathews, 2006). In many instances, Huawei was not welcomed with open arms by host governments, consumers or the general public in the host country (Balabanis, 2001; Henisz and Williamson, 1999). In response, Huawei had to build local trust with local suppliers, provide valuable products for customers, and hire local employees. In particular, Huawei always thought and acted as locals did, respecting local values, norms and customs and obeying local rules of law. Additionally, Huawei also faced relational hazards due to managing the relationships between the parties involved in conducting business abroad, such as the difficulties of managing employees at a distance or from diverse cultures (Buckley and Casson, 1998). Huawei implemented the idea of being customer-oriented to organize people around the world and set certain procedures, as well as the IT-based platform, to ensure efficient communication between firms. Finally, internationalization is a dynamic process along with new challenges that emerge over time (Andersen, 1993; Bilkey and Tesar, 1977; Jackson and Deeg, 2008; Johanson and Vahlne, 1977; Welch and Luostarinen, 1988). Therefore, in response to a dynamic and complicated environment, MNEs should flexibly adjust their transformation focus accordingly at different stages (Teece, Pisano,

’    and Shuen, 1997). In the case of Huawei, we have observed that at the initial stage, the liability of foreignness is the biggest challenge for MNEs, and how to overcome it and gain trust and popularity is the key purpose of organizational transformation. However, after an incremental development of internationalization, how to manage complexity to achieve management efficiency becomes the biggest challenge at the next stage. Hence, building a more efficient organizational structure and IT system is the key to organizational transformation at this stage. When becoming the global leader, MNEs must change their mindset from competition to cooperation so that the focus of organizational transformation falls on building the ecosystem through an open platform. We can clearly observe that MNEs must flexibly adjust their transformation strategies to cope with the different challenges caused by the different stages of internationalization. In addition, it is worth noting that the above linear stages can also be treated as a cyclic process. The implication is not that the challenges that Huawei faced at every stage will not occur at other stages. Instead, there are some overlaps among the three stages that we have identified, but the firm’s main challenge at every stage is clear and focused according to the degree of internationalization of MNEs. For instance, to overcome the liability of foreignness, Huawei introduced Australian former officials into the board of directors for the Australian business even though this was in the second stage that we defined. Therefore, we suggest an iterative thinking of the entire process of internationalization for MNEs.

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Commentary on Chapter 7 Carl F. Fey Aalto University

.



The authors should be congratulated for writing a very interesting and informative chapter about Huawei’s internationalization. The chapter, which is packed with many interesting facts that are not widely known about Huawei, one of China’s real success stories in internationalization, is an interesting read. The chapter identifies three key stages of Huawei’s internationalization that I think are relevant: overcoming the liability of foreignness, measuring complexity to achieve synergy from a global perspective, and changing from a latecomer mindset to one of a global leader. Here I will suggest and expand on several key learnings from this chapter and several areas which I think are fruitful for further study.

.

    

As the chapter points out many factors contributed to Huawei’s success in internationalizing. Several key factors mentioned in the chapter will be highlighted here. Huawei did many things to be responsive to the client, provide high service, and act quickly. Their concept of an “Iron Triangle” that was initially developed by their subsidiary in Sudan in 2006 and spread around the firm is an interesting and unique approach that other firms can learn from. In the iron triangle people who were account responsible, solutions responsible, and fulfillment responsible all three visited customers together from the first meeting as opposed to initially just the account responsible making visits as is often done. This allowed Huawei to be more responsive to customers and gave more decision-making power to front-line employees in the field “who heard the gunfire” to ensure important opportunities were not missed by a large organization, which due to its size would have a tendency toward centralization of decision-making. It is also noteworthy that Huawei managed to pick up this best practice from its Sudan subsidiary and spread it around the world. I would be keen to know more about how this process took place as good things done at one subsidiary at the periphery are often not picked up on and spread around an MNC.



’    Second, this chapter points out that Huawei realized it could not attract customers only due to lower price. Future research could explore when this is the case. As a result, one strategy to attract business, which Huawei used very effectively was being willing to adapt products on offer much more than other firms. Huawei could afford to do this due to its lower engineering/R&D costs. This was a smart way to use a cost advantage. Third, the chapter discusses a number of useful strategies that Huawei used to help overcome the problem of potential customers being unsure about Huawei’s quality. These strategies included installing a sample network for free, paying for customers to come to see their factories in China, and partnering with foreign government agencies on security research. Fourth, Huawei is one of the firms that has successfully changed the most in a short period of time. It is interesting to reflect how it managed to do this. An important part of the answer is Huawei’s ability to keep key goals in employees’ minds (like the importance of becoming open to change, world class, developing R&D capacity, providing good customer service, and becoming more international), which kept different parts of a large firm moving in the same direction while at the same time showing great flexibility to adapt significantly as an entire firm and at the subsidiary level. For example, Huawei’s ability to have a strong hard work wolf culture, but recognition that it needed to adapt to allow employees in a Saudi Arabia to go home for evening prayer and then work more since in Saudi Arabia family and prayer are central and work is not as important as in China. Fifth, the article shows the importance of firms adapting to different stages of their internationalization something many firms fail to do. A key to Huawei’s success is that it realized the need to rapidly adapt as it evolved from the phase of overcoming the liability of foreignness to the phase of managing complexity to achieve synergy from a global perspective to the phase of changing from a latecomer mindset to that of a global leader. Few firms have managed to adapt so much in such a short period of time and it is interesting that most employees in the firm seemed to adapt since the adaption was encouraged so strongly and centrally. Often this is not the case and only a small percentage of employees adapt initially. The key role that Huawei’s leader Ren Zhengfei played in being a constant promoter of the importance of internationalization and adaption to different stages as the internationalization progressed is important not to overlook. Indeed,

  () ,  ,    Ren Zhengfei continually stressed that we must learn from the best and become world class to succeed abroad and at home. This, combined with his extensive engagement of leading consulting firms (Huawei worked with IBM for product development and supply chain, Mercer for organizational transformation, PwC for financial management, Hay Group for HRM, and FhG for quality control), was very helpful to Huawei’s internationalization. An example of benefits Huawei obtained from the above consulting are that IBM pointed out issues such as Huawei’s lack of an accurate and forwardlooking assessment of customer’s needs, insufficient coordination between departments, and too much dependence on people rather than procedures. IBM worked with Huawei to improve their performance in these areas which helped to increase Huawei’s efficiency and effectiveness.

.

    

One single chapter cannot cover everything. Thus, there are several key topics for further study emerge when reflecting on the chapter. First, Huawei is surely one of the most successful Chinese firms in terms of internationalization. However, it has largely grown organically rather than via using acquisitions like many other firms. It would be interesting to systematically explore if there is a general rule or under what circumstances acquisitions are most effective for firms internationalizing from large emerging economies like China and under what circumstances firms are better off pursuing organic growth like Huawei did. Research on the internationalization of firms from emerging economies is not only useful for developing a better understanding of firms in emerging economies, but also so that we can test how generalizable extant internationalization theories developed based primarily on samples of western firms are. As such, future studies would benefit from explicit comparisons between firms from emerging and developed economies. Second, one item that often causes challenges for firms trying to internationalize is the challenge of attracting quality employees who have worked for the firm in its home country to work abroad. While one can hire many employees locally some employees from the home country are needed to spread the company’s ways of doing things and provide links back to headquarters. One item that helped Huawei in its internationalization in my opinion is that it managed to develop a system that made quality employees want to work abroad. Future studies would benefit from comparing this

’    system to systems used by other firms for this purpose and the resultant outcomes. The Huawei system motivated people to go aboard by making it much easier for an employee to get a job of a higher job class when they went abroad. For example, the director of marketing for Russia had the same job class as the director of marketing for China despite the Chinese market being much larger. This system resulted not only in higher compensation when abroad, but also since the company tried to keep employees working at the same level when they returned home it was the key way for people to get a higher-level job back in China. As a result, it implicitly became important to work abroad if you wanted to progress up the managerial hierarchy in China. Huawei HR also spent much effort to arrange good jobs for employees returning home to avoid the problem that when you are away from headquarters as an expat for a number of years, your connections decrease and you are often overlooked for good jobs back home. Employees at Huawei also receive a benefits package when working abroad including a hardship allowance which is greater for less-attractive locations like Africa than Japan to motivate employees to go to diverse locations. Third, one point that is often overlooked is that there are fewer truly national firms in China than one would think due to various barriers Chinese firms encounter when they start to try to operate outside of their home province. Indeed, some Chinese firms expand internationally because they find it easier to expand to other countries, which have similar characteristics than to expand domestically. This is also due to the fact that for some firms in China costs associated with doing business in China such as overland transportation, distribution, and market research can be higher than in other countries. This combined with the decreasing costs of doing business abroad such as trade barriers decreasing due to efforts such as the World Trade Organization, transportation costs decreasing, and information technology advances decreasing communication costs make it easier and cheaper (and maybe even less expensive than doing business domestically) for firms to expand abroad today than in the days past when many Western firms started their internationalization journeys and well-known models of internationalization such as the Uppsala model were developed. Huawei is a firm that has managed to be truly national and international. As such, it would be interesting to compare strategies that successful Chinese firms have used to expand nationally and internationally.

  () ,  ,    Fourth, when internationalizing firms are often concerned about their foreign subsidiaries. This is undoubtedly important, but Huawei understood that internationalization also requires some fundamental changes in how the organization is organized and run back home if it is to be successful. Future research would benefit from exploring more about what changes are needed to be made at home to effectively support foreign operations and the relative importance of these changes compared to design of foreign subsidiaries. Fifth, it is normally suggested that firms need to have competitive advantages to be able to successfully expand abroad. And, it has often been suggested that most firms from emerging markets (including Huawei at the start of its internationalization journey) lack traditional competitive advantages such as the ownership advantages Western firms have used to expand abroad such as high technology or strong brands. However, the case of Huawei shows that firms from emerging markets can leverage different competitive advantages such the ability to make simple durable products that function well in rough environments and open up new market segments in emerging economies and developed economies alike due to being less expensive, the ability to be highly customer-focused (which is facilitated by the comparative advantage of lower labor costs due to being able to invest more manpower time per customer), extremely devoted and hardworking personnel, and the ability to make products and services at low cost. Future studies are urged to systematically explore the extent that firms from emerging and developed economies use the same or different strategies today to gain competitive advantage when expanding internationally. Sixth, in a recent article (Fey et al., 2016) comparing the internationalization of six firms from each from China, Russia, and India (eighteen in total) my coauthors and I proposed a five M framework (motivation, mode, market, methods, and management) as five key areas that senior managers leading internationalization efforts of firms from large emerging economies such as China need to focus on. The current chapter paid less attention to the management and mode dimensions of this model and did not really provide some sort of overarching framework for their analysis, which makes it more difficult for the reader to remember their key takeaways from the article and understand how they fit together. Future research would benefit from considering

’    exploring mode choice and management practices that facilitate internationalization in more detail as well as trying to use or develop an overarching framework.

 Fey, C.F., Nayak, A.K.J.R., Wu, C., & Zhou, A. (2016). Internationalization strategies of emerging market multinationals: A five M framework. Journal of Leadership and Organizational Studies, 23(2), 128–143.



Huawei’s R&D Management Transformation Lanhua Li, Bin Guo, Johann Peter Murmann, and Dong Wu

.



In 2012, Huawei overtook Ericsson and became the largest telecommunications equipment manufacturer in the world. Its strong technological capabilities, which allowed it to attain this leading position, did not come about quickly but were built through long-term investments and continually evolving R&D management structures and practices. Five years after it was founded in 1987, Huawei started to place an emphasis on conducting R&D, and it began to invest at least 10 percent of its annual sales revenue R&D every year (in most years, more than 10 percent). This strategy was also enshrined in the constitution of the firm, which was enacted in 1998 as the Huawei Basic Law and has been in effect ever since. Huawei’s R&D expenses totaled 101,509 million CNY in 2018, accounting for 14.1 percent of the company’s annual revenue. In terms of its workforce, Huawei continually allocates no less than 43 percent of total employment to R&D positions, which emphasizes how important R&D is to the firm. In 2018, the number of R&D personnel was more than 80,000, accounting for around 45 percent of its total employees (Huawei, 2019). When the rival firm Cisco sued Huawei for infringing on a Cisco patent in 2003, Huawei realized even more the need to develop its own intellectual property through R&D. As the scale of R&D efforts increased, Huawei continually encountered problems with its organization of R&D and felt that it was necessary to transform how it conducts R&D. This chapter focuses on the transformation of Huawei’s R&D management, which underwent three major accomplished transformations from 1991 to 

’ &   

Before 1991: Initial background

1991–1994: Informal R&D Management

1995–1998: Formal R&D management system

1999–2004: Huawei’s IPD system

2005–Now: Ongoing transformation towards global leadership

 . The five stages of Huawei’s R&D management transformation

2004, as described in Figure 8.1. We also sketch the initial background of R&D management transformation before 1991 and discuss the ongoing transformation since 2005. In the third transformation, Huawei created an integrated product development (IPD) process, which was the most important transformation because it fundamentally reshaped how Huawei conducted R&D. Our goal is to analyze why and how Huawei implemented changes using a four-step transformation management framework as our theoretical guide. In the end, we summarize the analysis and attempt to determine some of the implications of Huawei’s R&D management transformation cases.

.

    

To survive and gain sustainable competitiveness in a highly dynamic business world, it is crucial for firms to manage organizational changes successfully. As defined by Moran et al. (2000), transformation management is “the process of continually renewing an organization’s direction, structure, and capabilities to serve the everchanging needs of external and internal customers.” In some cases, although firms undertake tremendous efforts in organizational changes, they fail. Why do such failures of organizational transformation occur again and again? Scholars have attributed failures of transformations to ill-defined transformation goals, potential conflicts of interest, lack of necessary transformation management skills, and insufficient involvement of top managers. Kotter (1995) argued

  ,  ,   ,    that companies that fail in organizational transformation often underestimate the difficulties of changing and thus do not have a powerful guiding coalition consisting of senior executives and other members. He also stated that without a sensible and clear goal, transformation efforts can easily become confusing and incompatible projects that can lead the organization in the wrong direction or nowhere. Hannan and Freeman (1984) argued that structural inertia, including internal and external constraints, could generate resistance to organizational transformations; in particular, if stable routines form the foundation of reliable performance, then the risk of failing in organizational transformations is increased. Given that conflicts are inevitable, they can disrupt change implementation, especially if the scope of the change has impacts on roles, boundaries, and resource allocation (Raza, 2011). Due to the importance of organizational transformation, its management greatly requires managerial skills (Senior, 2002). Anderson (2000) suggested that organizational transformations usually fail when a whole-system approach is lacking, and the need for inner shifts in consciousness and culture is overlooked. Although Pettigrew et al. (1993) argued that there are no universally applicable methods for transformation management, several scholars have proposed models for firms to manage changes in multiple steps. For example, Kotter (1995) suggested an eight-step model for transformation: (1) establishing a sense of urgency, (2) creating a powerful guiding coalition, (3) developing a vision and strategy; (4) communicating the change vision, (5) empowering others to act on the vision, (6) planning for and creating short-term wins, (7) consolidating improvements and producing more change, and (8) institutionalizing new approaches. Despite the significant academic influence of this model, Kotter’s eight-step model still has some limitations. First, Kotter argued that the eight steps should be implemented in sequence, and each step is a prerequisite for the next (Appelbaum, 2012). However, in the real business world, these proposed steps sometimes do not occur strictly in such a sequence;

’ &    instead, these steps often occur in parallel, and some steps are even embedded in other steps to improve the efficiency of transformation. This fact can be demonstrated well by Huawei’s R&D management transformation cases, in which steps one and three in Kotter’s model often occur simultaneously because the need for transformation and the vision of change are verified mutually. Thus, it has been criticized that some transformations do not need to or cannot undergo all eight steps (Appelbaum, 2012), such as establishing new functional departments. In addition, although Kotter’s model considers communicating the change vision, it merely relies on the viewpoint of executives for how to lead transformation and thereby fails to provide help for when companies face many difficulties in implementing transformations. In particular, the telecommunication industry in which Huawei operates is a highly dynamic industry with some unique features, demonstrating the importance of particular stages, such as dynamically improving the transformation process based on evaluations and feedback. In this chapter, we purposefully employ a four-step, processbased model as the theoretical framework to analyze different R&D management transformations that have occurred in Huawei’s development history, as illustrated in Figure 8.2. This process-based

 . Theoretic framework for transformation management

  ,  ,   ,    model consists of four steps: (1) identify the need for transformation, (2) initiate the transformation, (3) make feedback-based adjustments, and (4) systematize changes. The first step is to sense, identify, and seek the motivation for transformation, which could be a response to crises, a failure, or substantial opportunities in the external business environment and internal organizational context. The need for transformation can be divided into external triggers (such as business environment turbulence, technological changes, and government regulations) and internal triggers (such as strategic shifts and internal crises). Since the need for transformation usually arises unpredictably, it seems to be discontinuous, reactive, and mostly driven by organizational crisis (Burnes, 2004). Importantly, this need should be understood to help to create a sense of urgency so that transformation can be initiated under sufficient authority and credibility (Kotter, 1995). The second step is to initiate the transformation, with a focus on attempting to find a starting point and establishing the target of transformation. The starting point of transformation can be a pilot area or the whole system, indicating that changes can be made in one step if the managers are rather confident in good results that the changes will cause. However, to avoid the risk of failure and to mitigate organizational resistance to change, they can choose an incremental manner, starting from a pilot area, such as the periphery of the system, and then spreading to other units (Luecke, 2003). The third step is to make the necessary adjustments after receiving feedback from staff and relevant departments. After making changes in structure and process, managers can proactively monitor the transformation process and receive feedback from relevant departments. This feedback tests whether the changes have achieved the expected results (Ford et al., 2008) and can facilitate the making of further adjustments. This step is important for firms in highly dynamic environments because they should continually align the transformation with actual conditions.

’ &    The final step is to institutionalize the changes and extend them from the pilot area to other possible areas of the company. Institutionalization can be achieved through policies, procedures, systems, routines, and structures to consolidate the success of pilot experiments (Luecke, 2003). The last three steps often involve continual routinization and de-routinization. De-routinization is the process of breaking up long, preexisting routines, while routinization is the process of experimenting with and establishing new routines. Established routines can be considered a source of resistance to organizational transformation (Edmondson et al., 2001). Changing routines usually require authority structures to coordinate an implementation project (Edmondson et al., 2001). Therefore, we emphasize the role of executive management teams in the transformation model, especially for steps 2 and 4. It is worth noting that steps 3 and 4 are not always implemented. For example, firms implementing transformations directly at the level of the whole system do not need to include step 4, and firms that do not need to make improvements after initiating transformation can also skip step 3. The theoretical framework outlined above will be utilized to analyze three major R&D management transformations. We will articulate how Huawei conducted organizational changes step by step. To elucidate the initial background of the transformations, we will first examine the early years of Huawei.

.

 

Initial Background of R&D Management Transformation For the first four years after its formation, Huawei did not have an organizational unit dedicated to R&D. We first describe these early years as a prequel to subsequent R&D management transformations and articulate the problems that Huawei encountered, gradually leading to the establishment of a dedicated R&D unit.

  ,  ,   ,   

Starting as a Simple Agent Business In 1987, as a small agent, Huawei started to sell business PBX (private branch exchange) produced by a Hong Kong company. China was less open at that point, and the telecommunications market presented enormous potential because it lacked a well-development telecommunications system, as described in Chapter 1. Entrepreneurs who were able to procure PBX products from more developed places such as Hong Kong, mostly through the back door, could earn large profits by selling these products on the Chinese inland market, where major international telecommunications equipment providers were not active. In this manner, Huawei accumulated some capital over several years. In years two and three, Huawei expanded its business and established a nationwide sales network. However, simply buying and selling telecommunications equipment did not require strong technological capabilities. Many other firms entered the market, and Huawei soon faced fierce market competition. Zhang reported that, in Shenzhen alone, there were a large number of start-ups within one month (Zhang, 2012, p. 8). Huawei also bore substantial risks in its business. It bore financial risks because it had to prepare orders with Hong Kong-based manufacturers, and the equipment often had long delivery periods. Furthermore, prompt customer service could not be guaranteed due to the lack of spare parts. Since private branch exchanges (PBXs) used in business, such as hotels, became very popular products, the production of manufacturers could not keep pace with the market demand. Therefore, Hong Kong-based manufacturing companies more frequently could not make timely deliveries after receiving deposits (Zhang, 2012).

A Struggle for Survival To address these supply chain problems, in 1990, Huawei produced its first self-branded product, the BH01, by merely assembling products with components bought from Chinese state-owned companies. This

’ &    process enabled the company to ensure the supply of spare parts, improving technical responsiveness and the quality of customer service, while it also helped to reduce the company’s working capital requirements. With its own branded and self-produced products, Huawei did not need to spend money to acquire a dealer license from the Hong Kong company or to prepay deposits when fulfilling orders. By developing domestic agencies and charging agents’ fees, Huawei could also improve its cash flow. Although Huawei’s products were not superior to what other competitors offered, its superior customer service and lower prices made the BH01 a very popular product on the market. Ren summarized that although Huawei relied on advanced technologies in later years, in the early days, it lacked advanced technologies, and product quality was not high. It was a responsive network consisting of thirtythree customer service centers that compensated for the deficiency in technological sophistication (Cai, 2009). However, these advantages also observably created hazards for Huawei. The competitive price offered by Huawei attracted far more customers than the company had ever predicted, and the abundant orders immediately overwhelmed the company (Ru-chy, 2015). Unfortunately, because the component suppliers also manufactured and sold their own products, Huawei’s supply often could not be met on a timely basis. Subsequently, the supplier’s back orders took a heavy toll on Huawei’s deliveries to customers, which created another dilemma. Sometimes, Huawei received money from customers when they ordered products, but the company could not provide products to them. In the meantime, tightened government policies on credit and equipment importation increased Huawei’s capital chain risks. The company was faced with a real financial deficit and even money received as advance payment had also run out. If it could not deliver goods on time, the company would go bankrupt. Because Huawei could not rely on its component suppliers to survive, the only way to fix this critical situation was for the company to develop every component itself and to produce its own products, achieving

  ,  ,   ,    breakthroughs in the shortest time possible; otherwise, customers would contact them and ask to be reimbursed. In late 1990, Huawei initiated its first product development project. At that time, there was no R&D department – only one product development team supported by six engineers. Due to nearzero technological capabilities, the only feasible method of achieving this goal was reverse engineering the product. A Huawei team extracted knowledge and design information from the components of the BH01 (the circuit diagram and software) to design a new product with the company’s own components. At that stage, Huawei’s office was a combination of a product development laboratory and production workshop that was responsible for development of software and hardware, manufacturing and testing. After nearly a year of continuous 24/7 struggle, Huawei ultimately launched its first self-developed product, the BH-03, in 1991, with a network access license from the Ministry of Posts and Telecommunication. In the next year, sales revenue generated from this new product exceeded 72 million RMB, giving Huawei hope for survival (Huawei people, 2006).

.

–

Informal R&D Management Starting in 1991, Huawei gradually initiated R&D projects; however, all of the R&D projects were controlled by the manufacturing department in the early stages. As technological complexity increased over time, various problems emerged during the “informal” R&D management stage. In 1993, Huawei established a digital unit and employed a new organizational structure to manage part of the R&D projects.

Identifying the Need for Transformation Due to fierce market competition in the agent business and tightened government policies on credit and equipment importation, Huawei realized it could not succeed in the agent business. Therefore, the

’ &    company started the independent development of telecommunications equipment, focusing its strategy on a market segment with low technical barriers: the telecommunication switch market. Although with great difficulty Huawei developed its first product by reverse engineering the components of suppliers, Huawei wanted to become more systematic in its approach. As one of Huawei’s former executives, Li Yigai (2016), confirmed in an interview, once Huawei realized the importance of R&D, it strongly and persistently defended R&D’s central and strategic role in the company. Even in 1992, Deng Xiaoping’s tour of the south suddenly cast a national spotlight on Shenzhen’s stock market and real estate development. Many hightech firms, rather than focusing their resources on technology development, bought shares of other companies on the stock market and diversified into real estate. Huawei, in contrast, with 100 million CNY of assets, resisted the temptation and consistently devoted itself to the telecommunications industry. Nevertheless, due to the lack of technological capabilities, it was difficult for Huawei to make sustainable progress with its independent R&D. Under these circumstances, Ren actively contacted the top universities in China, inviting professors and top students to visit the company to seek opportunities in technological collaboration. An increasing number of young graduates with technical talent joined Huawei, some of whom became top managers, such as vice president Zheng Baoyong. The number of total employees increased from 200 in 1992 to 1,000 in 1994, almost quintupling. History proved that this concentration strategy was the correct path for Huawei, under which the annual Huawei’s revenue increased from 71.69 million CNY in 1992 to 577 million CNY in 1994. Moreover, its technological capabilities significantly improved during this period. In 1991, Huawei launched its first switches using spacedivision technology – the HJD48 (also called the BH03U, and the previous product, the BH03, which was renamed the BH03K), which greatly improved the level of integration by utilizing the space of circuits more effectively. Soon thereafter, in 1992, the HJD48 brought

  ,  ,   ,    sales revenues to approximately 72 million CNY, boosting the morale and confidence of the entire company. Subsequently, Huawei planned to expand its business from private branch switches to telecommunication operator switches, and it started the JK1000 project in 1992 and the C&C08 project in 1993. Although it seemed that Huawei grew at an unprecedented pace during this period, there were some hidden problems. Switches for telecommunication operators require much more complicated functions and better overall performance than private branch switches because they must be able to serve thousands of users simultaneously, whereas private branch exchanges can only serve approximately fifty users at the same time. Therefore, the technological complexity increased significantly. Given the increasing technical complexity of new projects and the much larger staff sizes required, Huawei’s early R&D management capabilities were no longer adequate. Moreover, R&D management did not play a decisive role at the time. Product development almost entirely depended on the capabilities and performance of several “masters,” who constantly switched from one product to the next to move all projects forward because the majority of R&D personnel were inexperienced graduates from the School of Computing who had little knowledge of telecommunications equipment. Most of them had not even seen a telephone exchange before (Hu, 2009). Normally, they began a difficult process of learning by doing after managers gave them a dozen documents and a brief introduction to the project. When Huawei started to develop the C&C08 switch, all of the R&D staff had to study a red-covered book about domestic standards for program-controlled switches. Due to weak R&D capabilities in both hardware and software, sometimes the employees did not know how to proceed and so had to use trial and error to develop the basic function of making phone calls. However, the implication of this type of informal R&D process was that the senior R&D engineers were always in a hurry to solve the most urgent problems. Second, the management of rapidly changing product versions was chaotic. Sometimes, after receiving urgent feedback from

’ &    customers, a single engineer needed to solve a problem and update the temporary product version on the spot, without the involvement of the whole project team. Because the project schedule and plans did not actually work, the “firefighter” who could solve pressing issues earned more respect than the project managers did. Under these circumstances, a variety of technical problems suddenly occurred. For example, in humid areas, such as Guangdong province, painting with moisture-proof lacquer was not listed in the hardware documents and as a result was forgotten by workers, which caused damage to the products. Consequently, the company urged engineers to paint all of the products themselves.

Initiating Transformation R&D Structure Goes beyond the Manufacturing Department Both the BH01 and the BH03 projects belonged to the manufacturing department before 1993. Due to the small number of shipments, only after the company delivered one product did it begin to produce the next product. As shown in Figure 8.3, there was no clear structural division between R&D and manufacturing. With the rise of the mobile telephone, telecommunications equipment increasingly switched from analog to digital technology. When Huawei initiated the C&C08 project, the first digital programcontrolled switch, which became one of its early standout products, was still based on the project in the manufacturing department. However, this plan did not work well because both the team size and the technological complexity of the C&C08 were much greater than those of any of the previous projects. In terms of technology and personnel, the management of the C&C08 project far exceeded Huawei’s former R&D management experience. Specifically, nearly 300 R&D people participated in more than fifty subprojects that were conducted simultaneously under the C&C08 project (Zhang, 2012, p. 47). In 1993, Zheng Baoyong, who previously led the General Engineering Office, which was responsible for product planning and design,

Huawei Organizaonal Structure in 1992

Headquarters

Process Engineering Division

BH03U Project

BH03K Project

Sales Dept.

JK1000 Project

Manufacturing Dept.

Assembly Secon

Chief Engineer Office

Power Supply Secon

 . Huawei organizational structure in 1992 (Zhang, 2012, p. 121)

Printed Circuit Board Secon

Equipment for R&D Office

Mechanics for R&D Office

’ &    moved the C&C08 project from the manufacturing department with the approval of the CEO and established the digital unit in parallel with the manufacturing department (Zhang, 2012, p. 121).

Change in Process In addition to the structural change, Huawei also gradually built an approach of integrating modules after theoretically decomposing products. In the early stage, advanced switch technologies were mostly controlled by foreign companies. If Huawei attempted to make new products, in most cases, managers with solid technical backgrounds would lead the project teams. Starting from theoretical analysis, they would first segment the whole product to be designed into many technical modules. They would build the individual modules. Then, they would test these modules technically by performing experiments one by one. Finally, they integrated these modules into a complete product. For example, when developing the challenging C&C08 product, Zheng Baoyong broke the whole product into seven core technical modules. By theoretically breaking it down into different functions and layers, he was able turn a big complex problem into many smaller ones that were much easier to solve. After validating that each module would work and determining a difficult integration process, they finally obtained the original product and later received feedback from customers so that further improvements could be made. In general, the R&D process was informal and not institutionalized, ensuring only the completion of product development. In terms of R&D management, Huawei adopted a straightforward method to manage R&D at this stage, in which a project manager led several engineers. The managers were responsible not only for all technical tasks but also for project management, which requires both high technical capabilities and comprehensive management capacity. To facilitate knowledge sharing and R&D personnel training, Huawei also employed some informal team learning mechanisms. For example, due to weak technological capabilities, the engineers did not

  ,  ,   ,    have professional testing instruments when product development failure occurred, so they simply used multimeters and oscilloscopes to test telecommunication switches. Later, for convenience, the manager of the hardware department wrote a guideline specifically to educate other new R&D staff in how to use multimeters and oscilloscopes in switch testing and maintenance (Zhang, 2012, p. 42). To criticize suboptimal work performance in the informal R&D process, the company convened an “anti-naive behavior” meeting. Every core engineer was awarded a special ironic souvenir made of waste materials mistakenly accumulated in the R&D process, such as scrapped boards caused by incorrect design. Management also collected all of the airfare ticket stubs that were the results of the need to engage in “firefighting” missions in the field, and they publicly displayed them as a reminder to R&D engineers to be more diligent in the product development stage.

Making Feedback-Based Adjustments The success of the C&C08 project proved that the establishment of the digital unit was effective for the R&D management of complex projects. In May 1993, Zheng Baoyong made some major further changes in the digital unit, adopting a structural model similar to the C&C08 project with hierarchical control (see Figure 8.4). A general technology team was responsible for producing the overall plan, technology assessment and technology coordination. There were seven general teams for different technology domains and a number of different project teams. Specifically, the general teams were responsible for technology, including technology trends and technology planning, whereas the managers of the underlying project teams were responsible for project progress, including managing the crews and project scheduling. With regard to project operations, managers attempted to achieve the overall goals by finely subdividing the projects. Two or three engineers were placed on each team because it was believed that these small teams were easier to manage and that they helped to motivate each member (Zhang, 2012, p. 122).

 . Huawei’s organizational structure after the transformation of the digital unit (Zhang, 2012, p. 122)

  ,  ,   ,    Although the operation was more complex, it proved to be the best form of organizing large-scale and technologically complex product R&D. Because it emphasized the layered organizational structure of the overall technology planning and was also aligned with the pursued objective, it enhanced overall product development efficiency. In 1994, the scale of the digital unit significantly expanded, with a total of more than fifty subproject groups across the seven teams (Zhang, 2012, p. 122). This new R&D management structure, which ensured the efficiency of the R&D system, successfully adapted Huawei to the increasing scale of R&D. Huawei also built a mechanism of personnel mobility into the R&D process. When new products were developed by a project team, a project manager would also go to the manufacturing department to follow its production and would then transfer to the sales department (the literal translation of the Chinese name is “marketing department”) to take charge of product sales. In 1994, Huawei began to prepare for the large-scale production and selling of C&C08 switches, so R&D staff members who constructively participated in this project were distributed to other departments, such as the sales, manufacturing, and sourcing departments. For example, the project manager of the C&C08, Mao Shengjiang, was transferred to lead the manufacturing department and was later placed in charge of the sales department. Personnel mobility circulated managers who had technical backgrounds across different departments and avoided talent shortages, contributing to Huawei’s development in the early period.

.

–

Establishing a Formal R&D Management System To optimize R&D management, Huawei established the central R&D department in 1995, integrating all of the project teams into a largescale, formal R&D team. Furthermore, Huawei established the pilot production department in 1995 and the strategy planning office in 1996 to build a formal R&D system.

’ &   

Identifying the Need for Transformation After several years of pioneering work, Huawei experienced rapid growth, with sales revenue reaching 885 million CNY in 1995 and more than 1,200 employees in that year. However, the growth of the domestic telecommunications equipment market slowed at this stage. Especially for traditional program-controlled switches, profit margins had been squeezed tightly because unprecedented competition led to price decreases, and while market demand started to diversify, network service and mobile communications became more important markets. Across the industry, most of the multinational telecommunication equipment vendors transformed their market roles from switch product providers to comprehensive telecommunications solution providers (Cai, 2009). To remain competitive, Huawei began to change its product development strategy from a concentration on switches to the horizontal integration of diverse emerging products. With the growing number of Huawei’s R&D projects, the R&D management complexity rapidly increased. In 1995, based on the technical success of the C&C08 product, Huawei started some new product development projects, such as the C&C08 smart platform, the C&C08-Q ISDN queuing equipment and the EAST8000 digital SPC switch. Moreover, Huawei initiated R&D projects for intelligent platforms, wireless access products and IC design, and these new projects could not be incorporated into the digital unit or the manufacturing department because they belonged to new technology domains, such as wireless telecommunications, and these complex projects could not be managed well in the manufacturing department. Thus, Zheng Baoyong became the busiest manager, responsible for approximately 10 projects simultaneously (Zhang, 2012, p. 123). The challenge was that these projects were not organized in the same manner. Although some were well controlled under the digital unit, early projects still belonged to the manufacturing department (as shown in Figure 8.3), and even emerging projects could not find their appropriate places in the R&D system.

  ,  ,   ,    Another existing problem was the lack of technology sharing and collaboration. R&D activities used to be performed by particular product teams, among which there was little communication. Consequently, the same technical problem that arose and was resolved by efforts in product A and soon arose in product B or C, and it cost time and energy to overcome it. Sometimes, the same modules or functions were developed in different products, which decreased the efficiency of R&D. In addition, Huawei’s technological capabilities in different domains varied. In 1995, the strongest domain was switches; however, its technological capabilities in new fields, such as wireless, were somewhat weak. In terms of the development of wireless products, there were several problems. Due to the lack of technology accumulation and experienced engineers, it was difficult to achieve breakthroughs in core technology or wireless products. The teams remained reluctant to use the system software and hardware of the mature switch product because they aggressively prioritized the originality of their products. Overall, wireless product development teams did not perform well in aspects of project management, system design and testing, which led to slow R&D progress.

Initiating Transformation Establishing the Central R&D Department In 1995, Huawei reorganized all of the project teams into a large-scale, formal R&D organization and further established the central R&D department in March 1995, optimizing R&D management by integrating the R&D resources of the entire company. The structure of the central R&D department is shown in Figure 8.5. The central R&D department was divided into the aggregate technology planning office, the personnel division, the material planning division, the basic research division, and four business divisions. One of the principles of dividing the business divisions was whether the division created mature products that already were in production, such as the C&C08 switches in the switch business division and the

Central R&D Department

Personnel Division

Basic Research Division

Switch Business Division

Intelligent Business Wireless Business Division Division

New Business Division

Technology Planning Office

General Technology Team

General Technology Team

General Technology Team

General Technology Team

General Technology Team

Material Planning Division

Product team

Common technology platform

Common technology platform

Product teams

Transmission Business Division

2,000 users switch

Queuing machine

Software Engineering Division

10,000 users switch

 . Structure of the central R&D department in 1995 (Zhang, 2012, p. 124)

Multimedia Business Division Data Communication Business Division

  ,  ,   ,    C&C08 intelligent platform in the intelligent business division. New business divisions mainly focused on developing new products. Another principle was the technical relatedness of different products, especially the relatedness of the core technologies underlying the products. Each business division was responsible for its products’ successes and had to conduct research on forward-looking technology to keep its technology in the leading industrial position in the respective technical domain. Then, R&D for each business division was broken into one general technology team and several different product teams. The product teams took charge of different product development projects. What was unique was the general technology team, which could be considered secondary technology planning in a particular business division. A common technology platform develops a platform or common technology that can be shared within a business division, which avoids R&D overlaps of functions or modules in different products, such as conducting signaling management research under the switch business division. Moreover, it introduces technology sharing among multiple products, which enables R&D personnel to generate multiple products based on one common technology platform, thus making R&D for new products more controllable and reusable. To improve the capabilities of software development, in 1994, Li Yi, the software project manager of the C&C08 2000 project team, proposed enacting software coding standards and placing a greater emphasis on software testing, but few people supported this proposal (Zhang, 2012, p. 127). The reason was that every team was more concerned about product output than product quality. Even if problems occurred, by firefighting, they could receive more attention from company leaders. However, to their surprise, the CEO and founder Ren greatly valued the proposal on software testing. During one business trip, Ren unexpectedly appointed Li Yi to direct software engineering. Therefore, the software engineering division was established under the central R&D department in 1995, and it was responsible for coding standards and software quality control.

’ &    The personnel division is the specialized human resource department under the central R&D department, and it is responsible for the recruitment, training and promotion of R&D staff and design of salary incentive mechanisms. Since the scale of R&D staff increased significantly over time and the management of these people requires different skills and is more complicated, it was necessary to build a personnel division focusing on the R&D function. For example, the salaries of R&D engineers are generally higher than those of other employees and might sometimes even be higher than those of department managers. People who work full time in the personnel division are selected from the technical leaders in each business divisions. The establishment of the central R&D department marked a new era in Huawei’s R&D management. As product lines expanded, not only technological improvement but also the need to enhance technical management capabilities were required. This type of enhancement was embodied in three aspects. (1) Decentralization by delegating more decision rights to each business division and authorizing each division to perform its own technology planning and not simply blindly complying with aggregate technology planning (2) Hierarchical control and a clear organizational structure: From top to bottom, the R&D process was divided into three layers: planning, management and control, and implementation. (3) Transferring knowledge and expertise from the central R&D department to other parts of the company: The central R&D department became the heart of Huawei’s global R&D, supporting product development in other dispersed regions. Turning technologies into saleable products often began in the central R&D department in Shenzhen and then spread to other R&D centers. In addition, the project managers and administrative staff of these centers were also supplied by the central R&D department. Similarly, all of the organizational transformations began in Shenzhen as experimental fields, and they were then implemented in other centers after stabilization.

  ,  ,   ,    After the establishment of the central R&D department, intersector mobility was also improved. Managers could organize all R&D resources in a unified manner and further balance the technological capabilities across different technology domains. To support the development of the wireless business division, the leader of the central R&D department decided to transfer some of the best technical experts in the switch business division to the wireless business division. The managers of the central R&D department also required the wireless division to use the software and hardware developed by the exchange sector fully and to enhance the project management by learning from strong divisions. The central R&D department was good at promoting the operating experience of mature business divisions and projects, based on which the wireless division rapidly developed.

Product Quality was Ensured by Pilot Production and Testing The other significant R&D management transformation in this period was the establishment of the pilot production department. In the early stage, after the development of a product, engineers tested it by themselves, and if there did not seem to be any problems, then the product would be rushed to the production unit. However, the engineers mainly concentrated on new product development rather than testing, and many problems emerged in the mass production stage, resulting in a low first-pass rate of products, which resulted in a high rate of waste. Small problems caused a much larger set of failures that were not anticipated in the product development process. When problems were discovered during the production stage, R&D personnel hurried to solve urgent problems in the production line, turning the production line before delivery into a laboratory to resolve problems. Thus, in 1995, Huawei established the pilot production department, the purpose of which was to ensure the quality of products and to accelerate the maturity of R&D output. The pilot production department was divided into the trial manufacturing division and

’ &    the testing center, which consisted of hardware testing division, software testing division and testing laboratory, with a total of approximately thirty staff in 1995 (Hu, 2009). There were numerous undergraduates performing R&D in the central R&D department, whereas the pilot production department employed many PhDs to ensure product quality, which made the pilot production department the department with the largest number of PhDs.

Changes in Processes Before the establishment of the central R&D department, everyday R&D management placed high demands on project managers’ capabilities. As Huawei’s R&D projects became increasingly complex and large in scale, project managers were more likely to be distracted and sometimes could not concentrate on crucial technical details. Existing flaws in their management methods often remained unaddressed, causing problems such as schedule delays or out-ofcontrol costs. In addition, to some extent, this type of management hampered communication and technical cooperation between different projects. Things improved after Huawei established a dedicated R&D department and used matrix management principles for the R&D operations (see Figure 8.6). Each business division in the column was responsible for product development and its market success, while R&D supporting divisions in the row undertook efforts in both improving overall efficiency and reducing R&D costs (see Figure 8.7). When business divisions received customer demands and feedback from the sales department or requirements of product design improvements from the pilot production department, they first sought resource support from divisions in the rows. Since these businesses’ supporting divisions brought different technical demands or management demand from each business division, they would form professional teams and common technological blocs to assist business divisions in resolving specific difficulties. This type of matrix management in the central

Intelligent Business Division

Wireless Business Division

New Business Division

Technology Planning Office

Chief engineer of Switch Business General Team

Chief engineer of Intelligent Business General Team

Chief engineer of Wireless Business General Team

Chief engineer of New Business General Team

Personnel Division

Manager of Switch Business Personnel Division

Manager of Intelligent Business Personnel Division

Manager of Wireless Business Personnel Division

Manager of New Business Personnel Division

Material Planning Division

Manager of Switch Business Material Planning Division

Manager of Intelligent Business Material Planning Division

Manager of Wireless Business Material Planning Division

Manager of New Business Material Planning Division

Hardware Division

Manager of Switch Business Hardware Division

Manager of Intelligent Business Hardware Division

Manager of Wireless Business Hardware Division

Manager of New Business Hardware Division

Process Orientation: Responsible for human resource, material, planning and process  . Matrix management in the central R&D department (Zhang, 2012, p. 238)

Business Orientation: Responsible for product success, project management

Switch Business Division

’ &    R&D department accelerated communication and collaboration and also strengthened organizational adaptive capability. For important projects that required the joint efforts of different business divisions, the central R&D department would transfer staff from relevant departments to participate in the project. Normally, this staff reported to direct department leaders, but when it came to joint projects, they would be led by the particular project leader. In 1996, as new market opportunities in access networks emerged, Huawei quickly sensed these opportunities and soon formed a specialized project team focused on access network technology by integrating core technical experts from the multimedia division, transmission division, switch division, wireless division, etc. After only three months, Huawei mastered crucial technical problems and developed new access network applications that beat other products in sales in terms of both function and cost (Zhang, 2012, p. 151). However, many firms failed to implement matrix management due to conflicts arising in cross-department collaboration. There are two formal lines of authority in the matrix structure, which could induce overlapping leadership. Furthermore, the project manager was responsible for the project’s success but lacked the corresponding resources. This imbalance in the distribution of rights and liabilities increased the uncertainty of project operation and assessment. To avoid these potential problems, Huawei enacted special institutions for cross-department project collaboration. First, it established an effective top coordination organization. Since matrix management caused many more coordination problems, Huawei innovatively established an oversight and coordination organization at the top management level for cross-department projects, which was called the leading group and consisted of the president of the central R&D department and managers from each involved underlying division. A project team was created at the same level of each functional department, and both of them were supervised by the leading group. In the access network project, for

  ,  ,   ,    example, the president of the central R&D department was the head of the leading group, while group members included the manager of the access network project and leaders from related departments such as the hardware division and switch business division. If conflicts arose in project collaboration, the project leader could directly report to the president, and the whole leading group would later discuss the issue to resolve it. Second, Huawei considered both project schedules and daily operation routines when undertaking overall time planning and setting priorities for conflicting tasks. Then, it could assess the progress and completion of projects according to planning. Thus, a third fair and sound system of performance assessment was created. For people working in the same functional departments, those who participated in important projects and performed well would be rewarded by higher bonuses and would be promoted more rapidly. The distribution of bonuses would be based on both overall project performance and individual performance. Therefore, it created incentives to participate actively in joint projects. Despite the above measures, conflicts in matrix management could not be resolved completely, so Huawei promoted a team spirit as part of its organizational culture and assessed the team spirit of manager aspects as an important part of its performance appraisal (see also the chapter on the transformation of HR). To improve project management, in 1996, Huawei hired 1,000 graduates with management backgrounds, and most of the management graduates joined the central R&D department. These management-trained employees soon helped to build the foundation of Huawei’s project management team, and they collaborated with technical experts. They focused on professional management methods, while purely technical experts shared their experiences from practice. This process embodied Huawei’s management philosophy of injecting entirely different elements into the original system to maintain balance between different groups and to achieve higher capabilities, referred to as “mixing sand.”

’ &   

Making Feedback-Based Adjustments As Huawei learned more about the effects of its organizational changes, it made further adjustments by undertaking these actions.

Expanding the Pilot Production Department to Ensure Manufacturing Quality In 1996, the pilot production department expanded in scale to approximately 300 people, while at the time, there were approximately 600 people in the central R&D department. Although Huawei created preliminary methods and processes for pilot production, the main function of the pilot production department at this time was to resolve the most pressing product quality problems. In general, there still existed many problems, and one significant problem consisted of manufacturing quality issues that occurred during the mass production stage. Huawei realized that in addition to design quality, it also had to improve manufacturing quality. Therefore, in 1996, four new departments were established under the pilot production department: a process testing center, responsible for the process design of new products, focusing on electrical-machining processes and assembly processes; a machine and tools development center, responsible for the development, introduction and integration of automated assembly line; a material quality testing center, supporting mass production with qualified raw materials; and a bill of materials (BOM) center and technical documentation center. The BOM is the basis of purchasing and production, as well as a credible reference for product pricing. Previously, technical documents including the BOM were determined and generated by the central R&D department, and they changed frequently, for example, by adding new components. These changes not only increased the likelihood of mistakes, but they also decreased the efficiency of the purchasing department, the pricing department, and the manufacturing department such that everyone had to follow every change in the BOM accordingly. Once the new BOM Center was established, a BOM would be issued and rigorously

  ,  ,   ,    examined by a specialized department; therefore, some potential problems were even discovered and fixed. Moreover, to promote the management level, the BOM center developed institutions to punish R&D staff who did not take the BOM seriously. After the establishment and expansion of the pilot production department, the quality of Huawei’s products significantly improved. Statistical analysis (Zhang, 2012, p. 201) performed by Huawei in 1998 showed that waste materials and products resulting from a large amount of product data errors had cost up to 40 million CNY (0.45 percent of the sales revenue in 1998). The shipping errors caused by incorrect product data also resulted in very large economic losses. In November 1998, Huawei established a data management center in the pilot production department. The product data were the records of the product development process and results, and they became important basic data for diverse enterprise IT systems. By the end of 1998, the number of employees in the pilot production department had increased to approximately 700, compared with 1,800 in the central R&D department (Hu, 2009).

Creating a Formal R&D System In 1996, Huawei systematically established the strategy planning office, in parallel with the central R&D department and the pilot production department, as one of the three most important functions of the R&D system. The strategy planning office, which was responsible for research and the output of the overall product strategy, guided the product development direction for the central R&D department. Its aim was to answer the question “What product are we going to develop?” to avoid developing products that the market did not want. The central R&D department was the main locus of product development. Its goal was to “develop products” and to avoid failure in delivering products to the market on time. Once the potential of a product was identified, the central research department would exert every possible effort. The pilot production department existed to

’ &    ensure the quality of products. These three departments together represented the early formal R&D system at Huawei.

Early Moves toward Long-Term R&D Identifying the major technical trends in telecommunications always involves making risky bets due to the long development cycle, large investments, and powerful competitors. Huawei seized the main opportunities, investing in C&C08 switches, intelligent networks, transmission, and access networks during the 1993–1997 period to achieve high returns. However, each year, the company also invested in many technologies that failed. During this period, the development of new products was typically decided by the company’s leaders, without careful evaluations of technologies and their market potentials. The question of what product to develop was simply answered by the strategic planning office. However, merely looking toward the next product was not sufficient for long-term development. In addition, in 1998, Huawei’s annual revenue had reached 5.96 billion CNY, it had 8,000 employees, and its business was spread over the main cities in China. As it grew larger, Huawei also attempted to enter the international market and established the international product department in 1998 (see the chapter on Huawei’s internationalization). As its market position changed from that of a follower to that of an industry leader, Huawei needed to look further, identifying technological opportunities in the next five years or more. In contrast, in the past, Huawei merely followed the path of catching up and could not influence major shifts in technological standards of industry. In 1993, when Huawei was developing the C&C08 and the GSM, it exerted great efforts in studying technical standards because it was worried about whether its products perfectly complied with these standards. As Huawei became stronger, it naturally wanted to make a greater impact and exert more control over standard creation, especially with regard to domestic telecommunication standards, to build its long-term market power.

  ,  ,   ,    In late 1998, Huawei established the fuzzy front-end department, a subdivision of the central R&D department, which was responsible for research on state-of-the-art, core and forward-looking technologies. Here, “fuzzy front-end” refers to the first steps of the product innovation process, consisting of strategic planning, idea generation, project evaluation, etc. (Murphy and Kumar, 1997). Huawei mandates that funds for fuzzy front-end must account for at least 10 percent of the total R&D expenditures and, accordingly, that personnel account for 10 percent of the total number of R&D staff (Hu, 2009). Huawei spends at least 20 million CNY on fuzzy front-end for new product development each year. In terms of this type of costly long-term investment, Ren (2012) has said, “If one leader cannot properly address the tradeoff between short-term investing and long-term benefits, he is actually not a general. A general must have strategic vision.” The fuzzy front-end department accepted two types of responsibilities. First, it prepared solid technological capabilities in advance. If the technology has not been tested before product development, the entire development process will be less controllable and more prone to quality risks. The other purpose was to generate more patents and standards, which became a more central strategic goal after the IP lawsuits with Cisco in 2003. People in the fuzzy front-end department extensively participated in international technology forums, related technology associations, and standards organizations to obtain the latest technological information from competitors and to play an active role in discussing and determining standards. Researchers vigorously participated in the process of creating standards, achieving a higher R&D level and moving from being passive users of standards to active shapers of new telecommunication standards. Establishing a strong fuzzy front-end system significantly benefited Huawei’s innovation and application of new technology; for example, the industry had not yet commercialized 3G networks, whereas Huawei had already begun research on 4G and 5G networks. As is the case with Western technology firms, such as Intel, Google, Microsoft, or its direct competitor, Ericsson, Huawei’s fuzzy front-end

’ &    could be regarded as a sort of risk control technique because in the fuzzy front-end phase, it has conducted a thorough analysis of the technologies involved, the partners and the commercial prospects to reduce technological and market uncertainty. Then, the mature output of fuzzy front-end goes to the aggregate technology planning office, a division of the central R&D department that is responsible for organizing technology development. The establishment of the fuzzy front-end system has greatly improved the success rate of new products. To put it simply, the R&D process in Huawei starts from the fuzzy front end and goes to the technology development of technology and product when the company approves and launches the formal development of the concept. As the process goes further, the maturity of projects improves. In 2009, more than 80 percent of personnel were performing projects that stemmed from the fuzzy front-end department, and others were performing projects that were driven by market feedback. It is not easy to evaluate fuzzy front-end work; thus, the company specifies that the transfer proportion of fuzzy front-end achievements should remain constant at the 70–80 percent level (proportion of total input). A low transfer proportion indicates that the research is too far from the market, while a high transfer proportion might indicate that the fuzzy front-end is too conservative, tending to miss potential technology directions (Zhang, 2012, p. 197). What types of employees can go to the fuzzy front-end department? In Huawei, only excellent technicians who have been project managers on a mature product team can play a role in the fuzzy front-end department. Inexperienced people without much product development experience are unlikely to obtain a position in the fuzzy front-end department.

.

–

Huawei’s IPD System As Huawei rapidly expanded, more problems arose in Huawei’s R&D system. In 1999, Huawei started the IPD transformation and built an

  ,  ,   ,    IT support system as part of its attempts to address these problems. Undertaking such a transformation is not easy because many conflicting pressures must be balanced. (Note to the reader: Because this IPD transformation was the first major transformation that Huawei undertook, it is also covered in Chapter 3).

Identifying the Need for Transformation During this stage, Huawei expanded both in the depth and breadth of the markets in which it operated. It diversified its product portfolio from fixed line telecommunications equipment to wireless products, intelligent networks, data communications, and transmission products. Huawei also broadened its market coverage over time, reaching a large customer base of multiple domestic and foreign telecom operators, rather than a single operator as in the past. Overall, Huawei grew stably, catching up with its competitors. In 1998, its annual revenue reached 5.96 billion CNY, which increased to 7.7 billion CNY the following year. The total number of employees also rose from 8,000 in 1998 to 12,000 in 1999. Especially in terms of the scale of R&D, in 1997, Huawei recruited 4,000 R&D personnel. This sudden expansion made the management of R&D teams more challenging than ever. Specifically, the rapid expansion in scale led to three major problem areas. (1) Serial development slowed the process: Until 1997, product R&D, dominated by the central R&D department, operated in the traditional manner, from design and development by engineers to feedback from users and improvements. For example, from 1993 to 1997, Huawei launched more than ten formal versions of the C&C08. Although it seemed that Huawei’s development speed was fast, it also reflected that new versions lacked foresight and planning (Zhang, 2012, p. 230). R&D personnel merely emphasized functions but ignored operability and maintainability. When the product was delivered to customers, it was found that the maintenance of the product was inconvenient, not only affecting machine operation

’ &    but also demanding time to fix the product, which in the long term damaged the image of the company’s products. (2) A long product line reduces market responsiveness: R&D is often passively constrained by the requirements of the market. If the product could not meet the customers’ initial requirements, engineers were repeatedly asked to modify it. Moreover, once customers required the addition of a new functionality, the engineers had to work overtime to realize it. As the product line expanded, by 1997, there were hundreds of products being developed simultaneously, which eroded the ability to deliver products quickly to the market. (3) Due to the rapid expansion of the R&D system, many young students fresh out of universities became core technical engineers, who believed that research achievements were much more important than focusing on effective commercialization. In other words, their awareness of the cost, efficiency, and profitability of many R&D projects was weak, hurting the economic performance of Huawei (Zhang, 2012, pp. 230–231). At the end of 1997, Ren visited IBM and was deeply impressed by IBM’s recent transformation. Combining this experience with Huawei’s internal crisis, Ren published a famous article in the company newspaper, entitled ‘What can we learn from Americans?’, to address management crises when Huawei expanded quickly (Ren, 2003). This article was read and discussed widely, helping to build up support for the coming transformation.

Initiating Transformation Testing by Pilot Projects In February 1999, Huawei formally invited IBM to be a consultant in undertaking an IPD consulting project. The essence of the IPD project was that product development had to be focused on market signals. As a result, product development would not only be driven by the technology department

  ,  ,   ,    but also be influenced by market signals, such as feedback and demand from customers. After one year of research and training, Huawei chose three pilot projects to test the new integrated R&D system – wireless products, broadband products and transmission products – and attempted to build three cross-department PDTs (product development teams). It employed a new matrix-type structure to manage PDTs, as shown in Figure 8.7. As we discussed in the last section, the R&D department used to take charge of product development, and most product managers came from the R&D department. Departments in the rows all belonged to the central R&D department in the previous matrix, while in the new matrix, departments in parallel with the central R&D department

Broadband PDT

Transmission PDT

R&D Department

Representatives of R&D Department in Wireless PDT

Representatives of R&D Department in Broadband PDT

Representatives of R&D Department in Transmission PDT

Sales Department

Representatives of Sales Department in Wireless PDT

Representatives of Sales Department in Broadband PDT

Representatives of Sales Department in Transmission PDT

Manufacturing Department

Representatives of Manufacturing Department in Wireless PDT

Representatives of Manufacturing Department in Broadband PDT

Representatives of Manufacturing Department in Transmission PDT

Customer Service Department

Representatives of Customer Service Department in Wireless PDT

Representatives of Customer Service Department in Broadband PDT

Representatives of Customer Service Department in Transmission PDT

Pilot Production Department

Representatives of Pilot Production Department in Wireless PDT

Representatives of Pilot Production Department in Broadband PDT

Representatives of Pilot Production Department in Transmission PDT

Supply Chain Department

Representatives of Supply Chain Department in Wireless PDT

Representatives of Supply Chain Department in Broadband PDT

Representatives of Supply Chain Department in Transmission PDT

Purchasing Department

Representatives of Purchasing Department in Wireless PDT

Representatives of Purchasing Representatives of Purchasing Department in Transmission Department in Broadband PDT PDT

Legal Department

Representatives of Legal Department in Wireless PDT

Representatives of Legal Representatives of Legal Department in Transmission Department in Broadband PDT PDT

Financial Department

Representatives of Financial Department in Wireless PDT

Representatives of Financial Representatives of Financial Department in Transmission Department in Broadband PDT PDT

Resource line: Responsible for human and technology development

 . New matrix management in the IPD system (Zhang, 2012, p. 238)

Product line: Responsible for market success

Wireless PDT

’ &   

product concept

develop product definition and plan

develop and verify

qualify and certify

ramp up and launch

life cycle management

 . The six phases of R&D in IPD

became involved in the R&D process to build a streamlined R&D system. In May 2000, a wireless PDT was formally established, and the manager of this team had both sales experience and an R&D background (Zhang, 2012, p. 238). Later, in the second pilot PDT, sales staff without any R&D experience held the position of team manager. In the IPD system, the R&D process is divided into six stages. The first two stages are the concept and planning phases, which aim to clarify market demand to ensure that product development is driven by the market and that it is profitable. The other phases are presented in the following figure.

R&D Resource Sharing with Better IT Support Systems As a part of the IPD project, the construction of an IT support system for R&D greatly facilitates R&D resource sharing, which is well organized and has a unified interface. Inexperienced engineers used to follow one experienced engineer; thus, the experience inheritance and help-seeking process mostly relied on “word of mouth,” which was random and spontaneous. If new staff members had questions, they could only consult people with whom they were familiar. In addition, from the perspective of masters, they were sometimes reluctant to guide their apprentices without reservations because of the hidden threat that the apprentices might someday replace them (Zhang, 2012, p. 243). The establishment of the IT support system improved the situation in two manners.

  ,  ,   ,    (1) It improved the help-seeking and help-providing processes. Newly recruited employees need to learn many things, such as how to use the R&D platform and related tools. With the aid of the IT support system for R&D, they could rapidly obtain the help of experts from all aspects of Huawei. The system provides support for employees at three levels. First, experts on duty answer them online in a timely manner. However, if the questions are very complicated and difficult, exceeding their personal ability, the next step is undertaken. They are handed off to a specific group of experts, and their problem is solved by group intelligence. Ultimately, if questions cannot be answered in the second round, they transferred to the external technical support system, and the questions are solved or confirmed outside the company. In general, the IT support system solved 95 percent of questions (Zhang, 2012, p. 244). (2) Another subject of the system is R&D experience sharing. Support experts must summarize the questions that they regularly confront and compile guidebooks based on common questions. The gathered information is carefully organized and stored in a database for convenient access. This process helps to form an atmosphere of technical study and exchange by encouraging people to share their own valuable experiences. Scattered questions are transformed into structural information, which saves everyone time when seeking solutions.

Making Feedback-Based Adjustments Before the pilot projects, people were skeptical of the benefits that IPD projects would bring to Huawei’s R&D system. Many people thought that IPD simply complicated the entire R&D process. R&D staff resisted IPD because, at many points, they needed to attend meetings with people from other departments, prepare more materials, and write many more documents, significantly increasing their workloads, and even distracting them from their core R&D activities. However, to some extent, the introduction of IPD indeed resolved the problem of rapidly changing product versions because R&D staff

’ &    now needed to check and fix things at every stage of the product development and delivery process. Moreover, product information could be tracked through sound documents and records, helping to ensure product quality (Sun, 2016). Initially, these improvements were not apparent, and salespeople held different opinions about the issue. Before IPD transformation, one version would be brought to market within one month, but after IPD transformation, the time frame lengthened to half a year or even more than one year, which reduced market responsiveness and did not clearly improve product quality. Indeed, IPD would only shorten the time to market over the long term because IPD emphasizes the principle of “get things done right the first time,” that is, preparing well when performing R&D rather than quickly rushing to the R&D stage and then following up with continual fixing and reworking. During three pilot projects, products became increasingly stable, and there were no longer rapid version updates and frequent product recalls, which proved the overall benefit of the IPD system.

Systematizing Changes After nearly one year of testing, the IPD system yielded remarkable effects on three pilot projects. Led by an IBM consulting team, the IPD system was expected to be implemented across the whole R&D system, but Huawei only rolled it out incrementally across the organization. The IPD system was first employed in 50 percent of all R&D projects, and the number then increased to 80 percent and finally to 100 percent in 2003. Huawei established a product line management team, and each product has its corresponding PDT (product development team), which incorporates representatives from different departments, including the R&D, sales, finance, purchasing, production and customer service departments, and PDT managers typically come from the sales department. Thus, every PDT can be regarded as a micro start-up company, and it is responsible for the market success of the product.

  ,  ,   ,    Huawei faced a significant management challenge at this point: How could the previous long-standing R&D routines, which had been in place for nearly ten years, be broken in a short period of time? In the past, salespeople were not blamed for the functionality problems of products that were caused by the R&D department. Now, they were reluctant to accept more shared responsibility with the R&D department because they might be blamed for problems with products. Regarding the R&D department, it used to hold the inherent idea that R&D is the most important department, based on its previous track record of success and because people considered that the products it developed earned profits for the entire company. In addition, the decision-making process and the work of reporting on product development were both controlled by the R&D department. Under these circumstances, the department would not simply accept the new system, and it needed to be taught how to develop products with staff from other non-technical departments. R&D personnel needed to report to representatives from sales, finance, and other departments, and the next step of product development could be undertaken only after approval from these representatives. Therefore, the power of the R&D department was decreased and reallocated across other departments. Although conflicts of interest naturally arose in IPD transformation, Huawei attempted to address them proactively. To minimize the impact of conflicts, the CEO gave sufficient authority to the IBM consulting team (Hu, 2009). Ren indicated, “We must break down the barriers between different departments! If anyone, especially department leaders, publicly or secretly object to the IPD project or do not take it seriously, then they should be punished or even directly fired.” Under strict rules, the vast majority of the participants gave up resistance to the implementation of IPD, and they gradually became supporters as the benefits became more visible over time. Senior Vice President He Tingbo recalled that in the past, the R&D strategy relied more on individuals and the availability of funds, while the new IPD system placed great emphasis on formal decision-making processes, which were rather inconsistent with the intrinsic beliefs of the R&D

’ &    staff. In the software and IC department that she led, some core R&D staff members (approximately 30 percent) were reluctant to compromise on the new system and left the company (Qiu, 2006). In 2001, Huawei launched the first version of the IPD system, followed by a second version in 2002. Over the course of five years, the IPD system was rolled out to all product development-related departments. While product quality depended on ex post control in the past, it now improved because of a systematic effort to build it into every stage of the development process. Since every activity of the pilot production department had been integrated into the IPD process, it was no longer necessary to establish an independent department. Therefore, Huawei decided to dissolve the pilot production department in 2003 and further distributed its activities across related departments (Hu, 2009). Moreover, Huawei’s R&D capabilities were significantly strengthened. The average time to market decreased from 84 weeks in 2003 to 54.5 weeks in 2007 (Ouyang, 2015). In addition to enhanced technological capabilities, the R&D management capabilities were also clearly improved. Several years ago, Xu Zhijun, the vice president of the company, said that before IPD, Huawei could not effectively manage an R&D workforce of 3,000 people, but now, after the IPD reforms, Huawei could manage an R&D staff of 70,000 with ease (Tian, 2015). Because the IPD process caused the organization to operate according to relational decision-making, it is less reliant on individuals.

.

–

Ongoing Transformation Toward Global Leadership Integrating Global Resources by Establishing Worldwide Research Centers Over the decades, Huawei’s role in the industry has gradually shifted from a follower to an international player. In 2005, sales in the international market accounted for 58 percent of total contract sales,

  ,  ,   ,    USD in billions 18 16

16 14 12

11

11.5

10 8.2

8 5.58

6 4 2 0

2.67 0.55 2002

3.83 1.05 2003

7.15

4.8

2.28

2004

2005

2006

2007

 . Huawei’s sales from 2002 to 2007

surpassing domestic sales for the first time. As shown in Figure 8.9, international sales have been increasing over time, and they have also become the major driver of sales growth. Under such circumstances, how to maintain consistent growth and further enhance its technological capabilities in the global context have become challenging new issues for Huawei. In 1991, Huawei started strategically to locate R&D centers around the world, such as in the United States, Europe, and India. By 2016, Huawei had established fifteen R&D centers and centers worldwide (Huawei, 2016). These global R&D centers help Huawei to track the latest technology advancements globally. More importantly, Huawei can take advantage of the highest quality global human and technological resources in this manner. In a similar way of locating domestic R&D centers as close to talent pools as possible, rather than close to the company’s HQ, Huawei also considers the expertise of the country when establishing international research centers, which is evident when we examine the most important international research centers (Ya, 2016) shown in Figure 10.

’ &   

France Russia Japan India

•Mathematic Research Center •Aesthetics Research Center •Home Terminal, Wireless Standards R&D Centers

•Non-linear Competence Center •Algorithm Engineering Competence Center •Optimization Competence Center

Design and Art Mathematic

Mathematic

•Other four Competence Center

•Material Research Center Material

•R&D center focusing on software delivery Software

 . Main international research centers

In March 2015, Huawei unveiled the Aesthetics Research Center in Paris, one of the leading cities in global design. To date, ten designers actively work on Huawei’s brand-new bracelets and watches, composing a small but productive R&D team (Xing, 2015). For mathematical research, Huawei has hired approximately ten world-class mathematicians in Russian research centers, and they have achieved algorithm breakthroughs in 2G and 3G technology, including SingleRAN (single radio access network) technology, which offers significant savings for mobile operators struggling with multiple technologies and services on their networks (Tian, 2015). The core is that all of the R&D centers, both domestically and abroad, should be arranged in line with business needs, indicating that R&D centers as resource departments should serve business units. Huawei also actively embraces open innovation by establishing joint innovation centers. In October 2006, Huawei launched the first mobile innovation center (MIC) with its famous customer, Vodafone Group in Spain. Huawei had cooperated with its major clients through

  ,  ,   ,    36 joint innovation centers worldwide by 2016 (Huawei, 2016). With more than 100 innovation topics, Huawei’s Joint Innovation Center network has emerged as a key platform for enhancing both sides of any strategic partnership.

Building Noah’s Ark to Embrace Future Challenges History shows that incumbents can be beaten by new entrants, especially those who introduce disruptive innovation. Although Huawei’s innovation capabilities have become strong over the decades, it has generated much more incremental innovation than disruptive innovation. Despite its substantial number of patents, Huawei still must rely on American firms with regard to core technology, such as chips, operating systems and some core components (Tian, 2015). For large firms, there are few precedents of achieving success through disruptive innovation. Success in the past has hindered the transformation of the culture and business model in large organizations. Upon facing dramatic changes in the mobile Internet era, Facebook and Google have also perceived a great crisis. Although previous fuzzy front-end systems also focused on future technology, top managers at Huawei believe that doing so was not sufficient to withstand future challenges. Thus, new changes are under way inside the company. Under these circumstances, Huawei has placed a greater emphasis on the fuzzy front-end department and has transformed it into a firm-level department, the “2012 Laboratories” in 2011, independent of the central R&D department (Sun, 2016). It is said that the “2012 Laboratories” were named by Ren Zhengfei after he watched the movie 2012, and he has said that in the future, information will explode in a flood; therefore, Huawei must build its own Noah’s Ark to survive (Zhang, 2012, p. 198). To achieve distinct competitiveness in the future, this new R&D platform functions as the innovation, research, and platform technology development arm of the company. It focuses on long-term research on future technologies, such as machine learning, natural language processing, the fifth generation of communications technology, and new materials. It is run fully

’ &    separate from the existing R&D system to nurture disruptive innovation or breakthroughs. Without this separation, management fears that R&D engineers will use previous research as a foundation to create innovative research in the traditional R&D system and will never achieve truly disruptive technologies. The unit is led by Li Yingtao and reports directly to the CEO. In an interview, Ren disclosed that there are currently more than 700 high-level scientists who work in or collaborate with the 2012 Laboratories and that this number will exceed 1,400 by the end of 2016 (Xinhuanet, 2016). Ren has also strongly encouraged top scientists in Huawei to spend at least one-third or even half of their working time sharing ideas with prominent figures in foreign universities, technology forums, and academic conferences (Tian, 2015). If the “businessman” culture of engineers has contributed to Huawei’s enormous commercial success in recent years, then we believe that scientists and engineers jointly construct the strategic blueprint of the future, guiding Huawei to become a global leader.

.



In this chapter, we developed a four-step model to analyze three major R&D management transformations in Huawei’s long history of developing R&D systems. The first transformation, from 1991 to 1995, helped Huawei to establish an informal R&D system from scratch; then, the second transformation from 1995 to 1998 caused the informal R&D management system develop into a formal system with clear structures and processes; and finally, the third transformation greatly changed Huawei into a process-oriented, high-performing organization. We summarize the triggers, motivation, changes and outcomes for each transformation in Table 8.1. We found that all of the transformations were closely aligned with the firm’s market position and its strategic shifts. Huawei in the early stage was forced to make changes to survive fierce market competition. As Huawei gradually grew into an industrial leader with strong technological capabilities, it proactively sought to improve its

 Table 8.1 Content summary of three R&D management transformations First Transformation (1991–1994)

Second Transformation (1995–1998)

Third Transformation (1999–2005)

External triggers

fierce market competition in the agent business; tightened government policies on import and credit

technology changed to mobile telecommunication

technology shifted to newly filed, such as wireless, intelligent networks, etc.

Internal triggers

strategic shift from an agent to an independent developer of products; lack of R&D experience and technological capabilities; obvious problems, such as frequent ‘firefighting’ actions

strategic shift from concentration on switches to horizontal integration of diverse emerging products; R&D management complexity rapidly increased; lack of technology sharing and collaboration

expansion in scale led to many problems that decreased the efficiency of the R&D system

Change in function of R&D department

responsible for the development of products from C&C08 products to most new products

responsible for the success of all R&D projects

only responsible for part of the integrated product development

Change in structure

established digital unit in 1993 (step 2); made major changes in digital unit and adopted a hierarchical structure (step 3)

established the central R&D department in 1995 (step 2); established the pilot production department in 1995 (step 2); expanded the pilot production department in 1996 (step 3); established the strategy planning office in 1996 (step 3); established the fuzzy front-end department in 1998 (step 3)

dissolved the pilot production department in 2003 (step 4)

Change in process

invented a product development approach to integrating after theoretically decomposing (step 2); adopted a straight-line method of managing R&D, in which project managers led engineers (step 2)

employed matrix R&D management within the central R&D department (step 2); established a leading group to ensure cross-department collaboration (step 2)

employed new matrix R&D management that required the participation of all functional departments (step 2); built an IT support system to facilitate R&D resource sharing

Outcomes

created an informal R&D management system from no R&D status

established a formal R&D management system

employed an IPD system to manage R&D activities



  ,  ,   ,    R&D system and to learn from advanced business peers. For example, in a recent ongoing transformation, Huawei has even attempted to integrate global resources and place a greater emphasis on long-term R&D to gain sustainable competitiveness. In addition, we found that the transformations gradually shifted the focus of Huawei from structural changes to process changes. Specifically, the R&D management system evolved from a functional system to a more complicated matrix system and then to a processoriented system with a focus on the balance between efficiency and flexibility. The characteristics of the four steps in transformation management can be summarized as in Table 8.2. As a whole, the first two transformations were not implemented very formally, and most of the changes in these two transformations were associated with structure. In contrast, with the help of an external professional consulting team, the third transformation was implemented in a more systematic manner. Regarding the triggers of transformation, in step 1, the need for transformation was raised by Ren with the intention to evoke a sense of urgency and to help people understand the necessity of transformation. Then, substantial process changes were implemented in the pilot areas, and the feedback from pilot projects convinced people who once had skeptical attitudes toward the transformation. These changes are consistent with the point advocated in our model that starting from a pilot area, such as the periphery of the system, can help to mitigate resistance to change. Routines that capture changes help us to understand organizational transformation on the microlevel (Nelson and Winter, 1982). Defined as a “repetitive, recognizable pattern of interdependent actions, involving multiple actors” (Feldman and Pentland, 2003), routines are established to improve efficiency and performance (Luecke, 2003), which manifest their roles in organizational stability and resistance to change. Among the three transformations, different authority structures were employed to coordinate the process of changing routines. In the first transformation, core managers, such

Table 8.2 Summary of characteristics of four steps in each transformation Step in transformation

First transformation (1991–1994)

Second transformation (1995–1998)

Third transformation (1999–2005)

Step 1: Identify the need for transformation

the need was urgent, which mattered to the survival of the company

transformation was required for the enhancement of technological capabilities and healthy corporate growth

driven by internal crisis; proactively learned from a successful foreign company by transformation; need was addressed publicly by the CEO

Step 2: Initiate transformation

core managers led changes directly; significant structural changes and minor process changes

significant structural changes and non-trivial process changes; used the authority structure to facilitate the routinization of matrix management

substantial process changes in the pilot areas

Step 3: Make feedback-based adjustments

adjusted the structure after gaining operating experience from successful projects

continual adjustments to optimize the structural setting

feedback from pilot projects convinced people with skeptical attitudes

Step 4: Systematize changes

/

/

expanded to the whole system step by step; granted sufficient authority to the consulting team to resolve conflicts



  ,  ,   ,    as Zheng Baoyong, led the transformation. Zheng was designated as the head of the digital unit, aiming to increase the authority of the newly established department. In the second transformation, Huawei creatively established a leading group to ensure cross-department collaboration under a matrix management structure. Further, in the IPD transformation, the CEO ensured that sufficient authority would be allocated to the IBM consulting team. However, conflicts were not perfectly resolved in this type of “hard” way, and Huawei eventually paid the price of losing much of its core R&D staff. Changing routines requires suitable authority structures to coordinate an implementation project (Edmondson et al., 2001), and forcibly punishing or firing people who resist changes is a cost that must be borne if an organization wants to change. Some of the principles for managing routine dynamics during Huawei’s R&D management transformations have generalizable implications for other organizations, although these principles were created within the transformation history of Huawei. Specifically, when planning and implementing transformations, concrete accountabilities and working processes should be jointly discussed among senior managers and newly promoted managers, while the establishing and abolishing of centers should be dynamically reviewed to ensure that the process is implemented in a scientific and harmonious manner. Managers who are responsible for the transformation must establish new centers and processes before disposing of old ones, aiming to replace the so-called organizational vacuum and to avoid chaos and confusion in organizations, which is why founder and CEO Ren always insists that it would be better to improve incrementally rather than aggressively to introduce a radical earth-shaking transformation. Huawei’s experience with organizational transformation also highlights the importance of building routines for change management. Prior studies might have argued that organizations that undertake frequent organizational transformations would be less efficient in operations and would even encounter chaos in management (Rieley and Clarkson, 2001). However, as Huawei underwent three major

’ &    transformations, it changed its routines of R&D management dramatically and greatly improved its efficiency in technology and product development. This result can be largely attributed to Huawei having purposely established an institutionalized process and strong abilities to renew its organization and core systems without management chaos. As advocated by Luecke (2003), a state of continuous change itself can become a routine. Especially since the IPD transformation, Huawei established a specialized project to initiate and implement the transformation, instead of implementing changes at the will of the top leaders. From passive to proactive and from intuitive to institutional, the way to implement R&D management transformations in Huawei can be regarded as a consequence of the routinization of transformation management. These routines as the repositories of organizational capabilities can prepare organizations for future learning and development (Winter, 2000).

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Commentary on the Chapter 8 Frans Greidanus Zhejiang University

It is impressive to read how Huawei succeeded in transforming itself several times to become a leading global telecommunication company. The chapter titled “Huawei’s R&D Management Transformation” clearly illustrates the key role R&D has played and still plays in the successful growth of the company. The authors of this chapter distinguish five stages of the management transformation of Huawei’s R&D. The first three stages are mostly characterized by substantial organizational changes whereas the fourth stage in particular, i.e., the implementation of the IPD system, is mostly characterized by a different way of working. It is not unusual that the R&D organization in growing and expanding companies goes through similar transformational changes. What is very specific for and impressive about Huawei though is the short time span in which all these transitions took place, combined with exceptionally high growth numbers of R&D staff. According to the authors of the chapter, Huawei built an R&D community, which in 2015 amounted to 79,000 employees, i.e., about 45 percent of the total workforce of the company in a relatively short period of time. Even if part of these employees in the common way of counting R&D staff would not qualify as R&D but as technical support engineers, the number is still impressive. So, Huawei must have recruited massive numbers of fresh and experienced engineers and researchers year after year. This must have been a formidable task. The difficulty is not only identifying so many suitable candidates in the labor market, but even more difficult is to educate new staff, equip them with the right skills and integrate them in the existing workforce. In the chapter titled “The Transformation of Huawei’s HR System” it is explained how Huawei installed a mentorship program to facilitate the integration of new staff. However, this cannot be the full story. A corner of the veil may be lifted by the mix of R&D personnel Huawei has been hiring. In 1996, for example, Huawei hired 1,000 graduates with a management background. This would enable them to quickly build up complete organizational units without the need to internally grow managers from engineers and researchers without any management experience. This enabled



’ &    Huawei to hire another 4,000 engineers in 1997 and quickly educate and integrate them. As described in this chapter, overtime the transformation of the Huawei R&D organization changed from structure-focused to processfocused. Its success can largely be attributed to rigorous execution and senior management ownership. The strong support of Huawei’s CEO Mr. Ren Zhengfei himself was essential. The driving force of the transformation was the fierce market competition Huawei was facing. This necessitated a continuous strategic shift of the company and reorientation and reorganization of the R&D organization and its way of working. Although the chapter in general takes a high-level approach in the description of the various stages of the transformation process, at some points interesting details are revealed about the R&D organization and its way of working. An example of this is what happened in 1994 when Huawei started to prepare for the large-scale production and sale of C&C08 switches. When this started, selected R&D staff were transferred to other departments like manufacturing, sourcing and even sales. This proved to be an effective way of solving talent shortages and created strong connections between the various organizations along the business chain. This is a prime example of creating career opportunities for R&D staff as well as building bridges across the various organizations. Although this practice of job transfer and rotation is implemented by some other high-performance companies it is certainly not a widespread approach. An important question about the R&D organization, which remains mostly unanswered in the chapter, is about the programming and funding of the R&D organization. How did Huawei implement portfolio management and how does it ensure that at every moment in time the R&D portfolio is linked to the plans of the businesses and the strategic direction of the company? The answer to this question cannot be the implementation of the IPD process, as this mostly deals with the execution of the project portfolio, not its generation. High-quality portfolio management is key to the success of an R&D organization and the ability to turn R&D projects into successful products. Given the success of Huawei in the market they must have a very effective product portfolio management process in place. It would be interesting to learn more about it. A related question is where the budgets for the R&D organizations come from. Do the individual businesses decide on the R&D funding level and also decide on the R&D portfolio for their business?

  ,  ,   ,    Or are the R&D budgets decided at corporate level? Or does Huawei use a mixture of the two approaches? The last transformation towards global leadership is particularly interesting. Whereas many multinational companies, forced by a continuously rapidly changing environment and strong focus on the bottom line, abandon long-term research or shift it to universities, Huawei seems to take the opposite approach. This is evidenced by the creation of the “2012 Laboratories.” To safeguard its long-term orientation, the “2012 Laboratories” are a separate corporate organization independent of the central R&D department. Apparently Huawei is satisfied with the performance of the “2012 Laboratories” so far. Recently Ren Zhengfei disclosed in an interview that the 700 basic scientists in the “2012 Laboratories” will be increased to over 1400 basic scientists by year end 2016. It will be interesting to see what the impact of the “2012 Laboratories” will be on Huawei’s performance in the years to come. In the last phase of the R&D transformation process Huawei also started to expand its global footprint. In 2015, Huawei had already established sixteen R&D centers around the world, including centers in India, Russia, Europe, Japan, and the United States. This also raises the question about the governance of the R&D centers at different locations. Are these R&D centers satellites of the central R&D department? Or do they belong to the “2012 Laboratories.” And how are the R&D portfolios at the different locations managed? Is this done centrally or does the local management have authority to decide which projects to run? And do the R&D centers around the world focus their R&D on global or local products? To conclude: The chapter on Huawei’s management transformation gives the reader an unprecedented insight in the way Huawei manages its R&D and the changes that have taken place over the years. At the same time, it is clear that it is not possible to give answers to all the questions that arise while reading this chapter. Some of the questions raised in this commentary are interesting topics for further research. But one thing is very clear. The way Huawei manages its R&D and transformed it over time to keep supporting the strategic direction of the company and its businesses is impressive and provided the basis for its commercial success.



Huawei’s Intellectual Property Management Transformation Johann Peter Murmann, Can Huang, and Haoyu Zhang*

.



Previous chapters in this book described the transformations of how Huawei organized product development (Chapter 3) and R&D (Chapter 8) more generally. As these chapters showed, to become an innovator rather than imitator, Huawei – from 1998 onward – committed itself in its basic law to spend at least 10 percent of sales on R&D efforts (see Appendix D, Article 26). Because Huawei’s sales were growing rapidly (see Appendix A at the end this book), Huawei dramatically increased the amount of financial resources it dedicated to R&D from 558 million USD in 2004 to 14.8 billion USD in 2018 (see Figure 9.1). Just because a firm invests heavily in R&D does not mean that the firm –rather than other players – can capture the value from these investments. Teece (1986) has developed an influential line of thought arguing that to profit from their technological innovations, firms need complementary assets in marketing, distribution, manufacturing, etc. Jacobides et al. (2006) extended this line of reasoning, noting that when an entire industry is growing rapidly, firms may be better off focusing their innovation activities in parts of the value chain, not trying to internalize all parts, but instead increasing their bargaining power over other parts of the industry value chain. In essence, Jacobides et al. (2006) recommend that firms carefully think through how they can participate in shaping the architecture of industry that helps not only to capture value but also to grow value. The logic of the

* We would like to thank Richard Nelson and David Teece for comments on earlier versions of this chapter. The views expressed here should not be construed as their views but ours alone.



   ,  ,    16,000

14,806 13,751

14,000 12,000

11,000

10,000

9,174

8,000 6,592 6,000

4,831 5,064 3,764

4,000 2,000

558 826 850

1,284 1,532

1,954

2,506

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

 . Total R&D Investment of Huawei, 2004–2018 (in million USD) Source: Huawei Annual Reports 2004–2018

argument is simple: Capturing a smaller share of a much larger pie may lead to more profits than a larger share of a much smaller pie. In their empirical examples, both Teece (1986) and Jacobides et al. (2006) focus on Western and Japanese firms. In this chapter, we extend their analyses to the context of emerging economies. As we investigated the development of Huawei from a small local trader of telecom equipment to a globally operating firm, we discovered that Huawei initially struggled with developing the organizational capabilities that are taken for granted in Western firms. The most striking example is the organizational capabilities to analyze competitor IPs, and to file, achieve, and protect intellectual property (IP) rights springing from its R&D efforts (For the different motives of manufacturing firms to patent, see Cohen et al. (2000)). But after 2003, sixteen years after it was founded, Huawei made a concerted effort to build up its ability to generate and protect IP. This chapter will first give an overview of Huawei IP assets from its foundation in 1987 to current times by comparing patents

’     of Huawei and some of its chief competitors (Ericsson, Nokia, and ZTE). The data show clearly that Huawei did not have any IP assets for the first eight years (1987–1994) when it was focused on selling in China. But as the firm gradually internationalized starting from 1996 (see Chapter 7 for details on its internationalization), it developed a large portfolio of IP. In 2015, Huawei was the largest patent cooperation treaty patent filer in the world (Huawei, 2016). Next, we will try to explain why Huawei changed its patent strategies over time. We argue that Huawei’s strategies can only be understood in the context of changes in IP laws and protection in China (Huang, 2017; Kenney, 2017; Peng et al. 2017). We will see IP strategy is driven to a significant extent by the overall strategy of Huawei. But the history of Huawei also shows the IP strategy did not automatically come about when top management made decisions about what product and technological markets to enter. Huawei’s management needed to ensure that administrative processes were developed that aligned the vision of the company to become more innovative with actual organizational processes that ensured that researchers would document innovative work. Before we begin the analysis of Huawei’s IP strategy, it is useful to give a brief explanation of the nature of patents in the telecommunications industry. In the telecommunications sector, firms participate in a standardization process organized by standard-setting organizations to ensure interconnectivity and interoperability, which in other words means that any telephone can communicate with any other telephone all over the world. Most of the standard setting organizations define their intellectual property rights policies by consensus between their members. An important part of these policies is that the participating companies must commit to licensing their standard essential patents either on fair, reasonable, and nondiscriminatory (FRAND) terms or royalty-free terms. FRAND commitments can be considered as voluntary contracts between standard essential patent holders and standard-setting organizations (Ménière, 2015).

   ,  ,    When a new generation of telecommunication is developed such as LTE (4G) technology, companies try to propose their technical solutions to be incorporated into the emerging standard (Leiponen, 2008). But when a patent becomes an essential component of the new standards, a so-called standard-essential-patent (SEP), the owner of the patent is required to cross-license the patent in FRAND terms (AlAali and Teece, 2013; Grindley and Teece, 1997). Table 9.1 shows annouced LET (4G) rates and the number of SEPs declared for LTE owned by various firms in the telecommunication sector in 2010. Qualcomm is the leader, with almost twice as many (350 versus 182) SEPs as Huawei. The “announced LTE rates” are the officially announced license fees as a percentage of its sale price of a piece of equipment using the patents would have to pay. What happens in practice is that companies negotiate with each other how much they will pay to obtain licenses to the SEPs portfolio of other firms. When you add up the individual company rates in Table 9.1, the sum adds up 13.80 percent of the sales price of a piece of equipment. This means if Apple sells a new iPhone for 1,000 USD, according to the officially announced rates, not accounting for the royalty caps (of 400 USD Table 9.1 Number of essential LTE (4G) patents by firm and total royalty rates

Company 1. Qualcomm 2. Huawei 3. Ericsson 4. Nokia 5. Nortel 6. Nokia Siemens Networks 7. Motorola 8. Alcatel Total Source: Stasik (2010)

Announced LTE rates (%)

No. of essential LTE patents declared by 2010

3.25 1.5 1.5 1.5 1.0 0.8 2.25 2.0 13.80

350 182 146 142 46 32 16 9 923

’     retail price announced by certain licensors), cross-licensing, or any other licensing negotiations to reduce rates, Apple would pay a maximum of 138 USD in SEP license fees to the major holders of LTE (4G) SEP patents. In reality, the royalty rates are negotiated down from here. According to several other third-party estimates, Apple and other companies pay an aggregate royalty rate of below 5 percent of the average retail price of their devices (Galetovic, Haber, and Zaretzki, 2018; Mallinson, 2015; Sidak, 2016). What constitutes fair and reasonable and nondiscriminatory licensing rates is hotly debated in and out of the courts. Companies sometimes sue each other when they disagree on licensing terms. For example, Apple and Qualcomm are currently in a dispute related to the licensing terms of Qualcomm’s patent portfolio (Mickle, 2017). In the course of 2017, both the companies sued each other in various locations (Mickle, 2017). In the same year, Nokia sued Apple for patent infringement, and while the settlement terms were not publicized, Nokia received a 2 billion USD cash settlement from Apple (Dillet, 2017). Sometimes governments utilize antitrust regulations to protect local firms from paying what they deem excessive royalty fees. In 2015, Qualcomm paid a 975 million USD fine imposed by one Chinese antitrust authority, the NDRC, for allegedly “abusing its dominance” by charging unfairly high royalty fees, bundling SEPs with non-SEPs and imposing unfair conditions on the sales of its baseband chips for managing mobile handset radio functions (Clark, 2015). In December 2016, South Korean antitrust authorities, possibly agitated by their own domestic champion Samsung, fined Qualcomm 873 million USD for anticompetitive practices (Mickle, 2017). Qualcomm challenged the ruling all the way to the Korean supreme court and the appeal at the Korean supreme court is pending. The U.S. Federal Trade Commission has now brought a similar lawsuit against Qualcomm in January 2017 (Mickle, 2017). (For a discussion of the challenges of appropriate antitrust policy in the context highly innovative industries, see Jorde and Teece [1992]; Sidak and Teece [2009]).

   ,  ,    In short, disputes about what constitutes fair and reasonable licensing fees and practices have increased in recent years as the FRAND commitments are ambiguous, the compeition has become global and intensified, and the market for telecommunication equipment has grown dramatically with increased use of smart phones all over the world. In Section 8.4 we will see how Huawei built up administrative capabilities to handle such suits.

.

         

To get an overview of how the patenting behavior of Huawei was similar to or different from the other main players in the telecommunication equipment field, we compared the patent portfolio of Huawei and other leading firms. Figure 9.2 compares the number of patent application filed in China by ZTE, a Chinese state-affiliated enterprise, and Huawei. Even though ZTE (which just like Huawei was founded in Shenzhen near Hong Kong) started filing patents earlier than Huawei (1986 versus 1995), Huawei expanded its patent applications in China faster. In addition, Huawei each year (with the exception of 2009 to 2011) filed slightly more patents. Yet the trends for both companies until 2009 are very similar. As Figure 9.2 shows, subsequently, however, there is a noticeable decline of patent filings for ZTE in China. Figures 9.3 and 9.4 present the number of patent applications in the United States (Figure 9.3) and in Europe (Figure 9.4) of these two Chinese companies along with two key rivals in developing new telecommunications equipment, the aforementioned US company Qualcomm and the Swedish company Ericsson. The relative decline of patent filings by ZTE in recent years is also clearly visible in the United States and in Europe. Huawei most recently is filing double the number of patents of ZTE. The most straightforward reason for ZTE’s relative decline in patent applications is that ZTE’s overall growth declined. This is evident in Figure 9.5, which compares the number of employees of

,

,

,

,

,

,

,

 . Yearly number of Chinese patent applications by Huawei and ZTE, 1985–2013

 . Yearly number of US patent applications by Huawei and key competitors, 1980–2013

’    

 . Yearly number of patent applications in the European Patent Office by Huawei and key competitors, 1980–2013

ZTE and Huawei from 2010 to 2016 as a proxy for growth. ZTE’s number declined slightly from 85,232 to 81,468, whereas Huawei’s increased from 110,000 to 180,000. This growth allowed Huawei to even overtake Qualcomm in the patent applications in the European Patent Office (see Figure 9.4) even though it trails Qualcomm in patent applications in United States, which is Qualcomm’s home market (see Figure 9.3). The rise of Huawei as an innovator rather than an imitator of telecommunications technology is illustrated by comparing the role in contributing SEPs in 3G technology (Figure 9.6), the later 4G technology (Figures 9.7 and 9.8) and the 5G technology (Tables 9.2 and 9.3). The most notable feature of Figure 9.6 is that it shows Huawei not contributing even a single SEP to 3G technology, a standard that was developed roughly between 1985 and 2000. Qualcomm was the leader in 3G followed by the Swedish firm Ericsson, Interdigital, a US-based research and development company, and Nokia. Although patent counts has long been discredited in the academic literature as any measure of patent value (Hall et al., 2005) they do indicate effort. Huawei’s role in the subsequent generation

   ,  ,   

 . Number of employees at ZTE and Huawei, 2010–2018 Source: Corporate Annual Reports

of telecommunications technology, 4G (LTE), is very different. As research by the Taiwan Intellectual Property Office (2016) shows, Huawei contributed 5 percent of SEP in 4G, putting it in the middle of fifteen leading companies, based on patent counts. The most dramatic improvement in SEP share between 3G and 4G was made by the Korean firm Samsung, which increased its share from 2.19 percent of SEPs to 13 percent. Verbergt (2017) updates this analysis for two more years (2014 and 2015) for four key companies, Ericsson, Huawei, Nokia, and Alcatel-Lucent (see Figure 9.8). In 2015, Huawei had almost caught up with Ericsson and had left Nokia far behind. Because Nokia subsequently bought Alcatel-Lucent, Nokia’s 4G portfolio position has now improved not by internal growth, as in the case of Huawei, but through the acquisition of a major competitor.

’    

Qualcomm Ericsson Interdigital Nokia Motorola NEC Philips Matsushita Siemens Samsung Toshiba Nortelnetworks Total of all 12 firms All Patentees

208 155 94 48 44 22 22 18 18 16 14 13 672 732

28.42% 21.17% 12.84% 6.56% 6.01% 3.01% 3.01% 2.46% 2.46% 2.19% 1.91% 1.78% 91.80% 100.00%

 . 3G W-CDMA number and share standard essential patents Source: Adapted from Bekkers, Bongard, and Nuvolari (2011)

Presently the first phase of setting 5G standards is in progress, and a list of which patents are deemed essential to the technology will be released in 2019 to meet the 2020 timeline of finishing the 5G standard (IMT-2020).1 Since 2009, Huawei has been active in R&D on

1

Details on the timeline can be found here: http://bit.ly/2q56els

   ,  ,   

Samsung Qualcomm InterDigital Nokia LG Ericsson Huawei NTT DocoMo NEC Sharp Panasonic Motorola Mobility Apple Innovative Sonic ZTE All firms on this list All patentees

905 894 708 686 578 458 365 253 170 169 166 143 135 128 111 5869 6746

13% 13% 10% 10% 8% 7% 5% 4% 3% 3% 3% 2% 2% 2% 2% 87% 100%

 . Number and share of declared essential patents for the LTE standard (as of 2013) Source: Taiwan Intellectual Property Office (2016). Please note that the number for Nokia in this figure has integrated both Siemens networks and Alcatel/ Lucent.

5G and in the key standards-setting bodies (e.g., ITU and 3GPP) (Lee and Chau, 2017), aiming to have a sizable share of its patents declared SEP. Zhong (2018) reports that Huawei has invested 600 million USD in 5G research since 2009, and will invest an additional 800 million USD in 2018 on 5G, showing how committed Huawei is to being a key player in

’    

 . Number of contributions to the LTE (4G) standard *Nokia acquired Alcatel-Lucent in 2016. Source: Verbergt (2017)

standards that will be agreed upon in the next two years. The statistics released by (IPlytics, 2019) in early 2019 shows Huawei’s leading position in the 5G technology development (Tables 9.2 and 9.3). As part of our research into the IP strategies of Huawei, we wanted to know whether Huawei had a very different technology strategy than key Western competitors. For this purpose, we compared the top ten technological classes in which Ericsson and Huawei patented in three jurisdictions – China, United States, and Europe – during the period from 2001 to 2014. We were somewhat surprised to find that Huawei, even though its number of patents initially is much lower than that of Ericsson, shows no significant differences from Ericsson in terms the key technological classes it patented in and the relative frequency in which it patented in those classes.2 To catch

2

The data for this conclusion is available from the authors upon request. The most important classes that Huawei patented in the United States are h04l, h04w, h04q, g06f, h04b, h04m, h04n, h04j, h01q, and g10l.

   ,  ,    Table 9.2 Top 5G SEP owners

Company

Number of SEPs declared by companies

Huawei Nokia Samsung ZTE Ericsson Qualcomm LG Electronics Intel China Academy of Telecommunications Technology Oppo

1,529 1,397 1,296 1,208 812 787 744 550 545 468

Source: IPlytics (2019)

up with leading Western telecommunication firms, Huawei invested in the same key technologies.

.

 ’  

In this section, we want to explain the key observations we have made about the development of Huawei’s patent strategies, namely (a) that it did not patent significantly for its first eighteen years, (b) it subsequently became a leading patent filer in the world and (c) that its patent portfolio after 2001 looks very similar to the key telecommunication equipment rivals such as Ericsson.

Context of China Huawei’s IP strategy mirrors to a considerable extent the larger developments in China, where the country went from not protecting intellectual property to increasingly strengthening the IP right of patent holders and encouraging firms to file for patents. Between 1948 and 1978, China modeled its economy after the centrally planned economy of the Soviet Union. In a socialist

’     Table 9.3 Top companies making technical contributions to the 5G standard

Company Huawei Ericsson Hisilicon Nokia Qualcomm Samsung ZTE Intel LG Electronics China Academy of Telecommunications Technology NTT DOCOMO MediaTek NEC

Number of 5G standard contributions per company 1,1423 1,0351 7,248 6,878 4,493 4,083 3,738 3,502 2,909 2,316

2,135 1,482 1,346

Source: IPlytics (2019)

economy with no private ownership of the means of production, the concept of a giving a patent makes little sense because state-owned enterprises were supposed to share their know-how rather keep it from other firms by claiming intellectual property. A powerful illustration of this can be found in the development of the Chinese synthetic dye industry (Jiang, 2013; Jiang and Murmann, 2012). Chemists and chemical engineers at the state-owned firm Shanghai Organic Chemical Industry Company put together a book (Shanghai Organic Chemical Industry Company, 1976) with all the recipes the firm was using for producing the various colors and intermediate chemicals. This book was shared with all other state-owned dye firms in China to improve the performance of the overall industry (Jiang, 2013, p. 122). This is the exact opposite of the spirit of filing for patents. By filing a patent, a firm

   ,  ,    obtains the right to prevent others using its novel idea without permission and achieve private gains for the duration of the patent. Then China embarked upon well-known economic reforms that gradually reduced central planning and gradually allowed private and foreign enterprises into the Chinese economy (Lewin et al., 2016; Naughton, 2007). Just as policy makers in the United States in the eighteenth century who wanted to import British technology without high licensing fees and German policy makers in the nineteenth who wanted to catch up with Britain (Lerner, 2002; Murmann, 2003; Penrose, 1951), Chinese policy makers initially had very few incentives to protect and enforce intellectual property because most of it was owned by foreign firms (Huang, 2017; Peng et al., 2017). Chinese companies similar to German firms in the early period of German industrialization did not have the capabilities to create innovations to compete with leading foreign firms. For this reason, protecting IP would favor foreign firms at the expense of local firms which were in imitative mode. But when becoming a large exporter, China wanted to become a member of the World Trade Organization (WTO). To become a member of the WTO in 2001, China had to offer a minimal level of IP protection, which is required by the Agreement on trade-related aspects of intellectual property rights that is agreed by all WTO members (Cheng and Huang, 2016). Since 2001, China has increasingly strengthened patent rights and enforcement. Two of us (Murmann and Huang) in 2016 benchmarked China’s strength of patent rights and protection and concluded that on a scale from 0 to 100 (100 being the world leading patent protection) China had reached 63 (Murmann, 2016). And with the reforms in the last two years, we put China’s strength of IP protection at 70.3 The first explanation for the changes and development of Huawei’s patent strategy is the larger macro context of China. It made

3

Details how the calculations for the benchmark were made are available upon request from Johann Peter Murmann.

’     perfect sense for Huawei not to try to build intellectual property for the first ten years, because during that period its home market did not strongly protect its IP. In addition, Huawei was relatively small in size at the time and therefore had not attracted attention from its Western competitors who had large patent holdings. When China strengthened intellectual property rights protection, particularly in response to the requirement of the WTO membership obligations, it made sense for Huawei to start spending 10 percent of sales on R&D and create its own intellectual property. This would reduce its overall license fees obligations when it sold its equipment into the most advanced economies with strong patent right protection, because Huawei could more readily engage in cross-licensing.

Huawei’s Focused Corporate Strategy As we showed earlier, Huawei’s patent applications centered on technologies connected to telecommunication, computing and IT. The second key factor explaining Huawei IP strategy relates to its corporate strategy that has been focused entirely on the aforementioned sectors for the entire lifetime. This focused corporate strategy is markedly different from many other successful companies in China that decided to diversify away from their initial business and move into unrelated sectors that offered great growth potential. Here are some prominent examples from the 500 largest private companies in China’s 2018 ranking.4 The Wanda Group (founded in 1988) diversified from real estate to the “cultural industries” where it is active in theme parks and making films.5 Legend Holding (founded in 1984) has businesses in IT, financial services, innovative consumption and services, agriculture and food, and new materials.6 The Youngor Group (founded in

4 6

5 www.china-10.com/news/508291.html www.wanda-group.com www.legendholdings.com.cn/index_en.aspx

   ,  ,    1979) is active in real estate, clothing, textiles, investments, and trading.7 Huawei once, in its early years, considered also diversifying into real estate, but decided against it and from 1998 enshrined in its basic law that it will focus on the ICT industry (see Appendix D, Article 1 and Article 21). It has not wavered from its focused corporate strategy. Huawei has gone a little bit broader than conceived in the Article 1 of its basic law where the corporation promised itself that “In order to make Huawei a top global ICT equipment provider, we will never step into the information service industry (see Appendix D). Huawei now is very active in cloud services, for example, but compared to many other Chinese corporations it remains focused.

Switching from Imitator to Innovator Strategy As mentioned previously, Huawei filed no patents during its first eight years from 1987 to 1994. The firm then started to try to differentiate itself from local Chinese competitors by engaging in significant product development (see Chapters 3 and 7). Huawei’s strategy was clearly to move from imitator to innovator in its product strategy. Article 10 of the Basic Law of 1998 states, “Our goal is to develop a cutting-edge ICT support system with Huawei’s proprietary intellectual property rights” (see Appendix D). To implement this strategy consistently, a commitment to funding significant R&D was also put into the Basic Law. Article 26 states that “We guarantee that we will invest 10% of the sales in R&D, and will increase such investment if necessary and possible.” As Huawei’s sales grew dramatically every year after 1998, the actual amount of R&D increased dramatically as we illustrated earlier in Figure 9.1.

The Cisco Case As we documented earlier, IP disputes are very common in the telecommunications industry. But in the history of Huawei, the IP 7

www.youngor.com/index.html

’     infringement lawsuit brought by Cisco was clearly a watershed event and dramatically changed the firm’s attitude and routines in regard to IP. On January 24, 2003, Cisco Systems, Inc. (hereinafter referred to as Cisco) launched a software and patent infringement lawsuit against Huawei Technologies Co. Ltd. and its US subsidiaries Huawei America Inc. and FutureWei Technologies Inc. (hereinafter referred to as Huawei) in the east Texas federal court.8 This kicked off the so-called first major IPR lawsuit between Chinese and American enterprises, and hence it is important beyond Huawei’s history. To give some context of Huawei’s state of development at the time, its sales revenue in 2003 was 2.69 billion USD, of which 1.05 billion USD was earned from overseas markets. The number of employees stood at 22,000, and Huawei was becoming increasingly ambitious in international markets. Cisco wanted Huawei to stop selling router and switching products in the United States that Cisco believed contained its IP that was offered at a more competitive price by Huawei, in part because Huawei in the eyes of Cisco simply misappropriated their IP and did not even pay licensing fees. Cisco’s indictment (which ran seventy-seve pages), in addition to charging Huawei with plagiarizing Cisco’s IOS source code, technical documents, and command line interface, and infringing at least five router patents, accused Huawei of two copyright infringements, one commercial secrets infringement, one ordinary embezzlement, one false statement that violated trademark law, one illicit competition, one violation against Texas common law, and one violation against federal trademark law, a list that contains nearly all possible cases of violations of intellectual property law. Huawei’s top management realized that the lawsuit could become a serious obstacle for its international expansion. For this reason, it devoted full attention to defending itself against the charges

8

All legal documents associated with the case can be found here: www.plainsite.org/ dockets/k2d4lfj9/texas-eastern-district-court/cisco-systems-inc-et-al-v-huaweitechnologies-et-al/

   ,  ,    (Tian and Wu, 2015). It brought the US firm 3Com, with which Huawei had a joint venture, into the legal proceedings. 3Com supplied local experience and resources to Huawei, giving Huawei support in speech and action and helping it overcome the liability of foreignness. Among the many legal maneuvers, Huawei countersued Cisco and raised the stakes for all parties. After twenty months of legal warfare, Cisco and Huawei reached an out-of-court settlement whose terms were never fully publicly disclosed. On July 28, 2004, the court terminated this lawsuit brought by Cisco against Huawei. Both parties withdrew all their IP lawsuits against each other, and Huawei withdrew from sales the products that Cisco claimed had infringed Cisco’s IP. Both parties paid their own legal fees and declared publicly that they were vindicated. While in the end nothing dramatic happened in the Cisco case, the case nevertheless had a dramatic impact on how Huawei’s leadership conceptualized the topic of IP subsequently. Without doubt, the Cisco suit was a watershed event that transformed the way Huawei approached IP. The leadership recognized that it had to be involved in setting clear expectations about respecting other companies’ IP. At a speech on the topic by the founder and then-CEO makes clear (Ren, 2005), the top managers recognized that developing its own IP, particularly more core patents, was key to the long-term success of Huawei. Ren (2005) highlights in the speech that it takes at least seven to eight years before it will generate economic value for the company and hence a consistent and routine effort into building a portfolio of IP was a crucial strategy.9 The remainder of this chapter will describe in detail how this was implemented.

9

In January 2019, the U.S. Department of Justice announced that it brought criminal charges against Huawei for allegedly stealing trade secrets from T-Mobile USA from 2012 to 2014 and obstructing justice when T-Mobile threatened to sue Huawei in the U.S. District Court in Seattle (U.S. Department of Justice, 2019).

’    

Licensing IP of Competitors In the wake of the Cisco IP dispute, Huawei started to pay significant licensing fees to international competitors. One after another, all the main multinationals in the telecommunication industry came and charged Huawei for patent royalties. According to Song (2015), each of the multinationals asked Huawei’s to pay a 1 to 7 percent of sales revenue licensing fee for their IP. The 7 percent figure might have been the initial request of some companies, but we present below estimates of what proportion of sales Huawei actually paid per year, which puts the overall license fee figure close to 1 percent. Song (2015) also reports that Huawei successfully negotiated with its foreign competitors to reduce their rates. Clearly, Huawei was effective at reducing the percentage of sales it paid as licensing fees. S. Yang (2016) reports that “Starting in the second half of 2003, Huawei signed licensing agreements with Ericsson, Nokia, Siemens, Nortel, and Alcatel, which allowed it to use patented technology on a fee-paying basis.” In 2004, Huawei’s fees for using other companies’ patents came to 30 million USD, but in that same year the company realized 5.6 billion USD in sales [this is 0.53 percent of sales]. In 2008, Huawei spent more than 200 million USD on patent-use fees, but its sales came to more than 20 billion USD [this comes to 1 percent of sales]. Huawei would not have been able to achieve these figures if it had not concluded patent agreements. It certainly would not have been able to grow as swiftly as it did. Tian and Wu (2015) provide details for two years later. They report that, “In 2010, Huawei paid 222 million USD in patent royalties to its Western counterparts [. . .] As huge as these royalties are, they earned Huawei over 20 billion USD worth of contracts (p. 67).” This amounts to 1.11 percent of sales. Another three years later (in 2013), Huawei reported it is now paying about 300 million USD a year for patent licensing, but Huawei said it was in exchange for nearly 40 billion USD [39.463] in annual sales, “it’s a good deal for Huawei” (Huawei, 2015). This means the license fees came down to 0.76 percent of sales.

   ,  ,   

Cross-Licensing IP with Competitors One of the ways that Huawei likely brought the license payments below 1 percent is by dramatically stepping up the development of its own IP, as we showed in Figures 9.1 to 9.7. This allowed Huawei to sign a cross-licensing deal with Nokia 2003 where both companies agreed to cross-license patents for the W-CDMA standard. Both parties cited as a benefit “a very competitive royalty rate” (EE Times, 2003). Huawei then accelerated cross-licensing deals with many companies. By 2011, Huawei had cross-licensing deals with Nokia, NSN, Ericsson, Sony-Ericsson, Siemens, Alcatel-Lucent, Nortel, and Qualcomm. In 2016, it added a cross-license agreement with InterDigital, agreeing to pay Interdigital royalty since InterDigital had more valuable IP (The Patent Investor, 2016). How much the strength of Huawei’s IP portfolio has grown since 2003 is revealed by the terms of some recent cross-licensing agreements. In 2015, Huawei signed a cross-licensing deal with Apple 2015, Huawei licensed 769 patents and Apple offered 98 patents to Huawei. It is reported that Apple pays hundreds of millions of US dollars to Huawei (China.org.cn, 2016). In 2016, Huawei sued Samsung in the United States and in China for not paying enough royalties. One goal of the suit was to force Samsung to do a cross-licensing deal. In 2018, a Chinese court in Shenzhen ruled against Samsung to pay a larger amount of royalties and ordered Samsung to pay 11.6 million USD in damages and stop selling a number of products in China (Locklear, 2018). The US case would show even more how strong Huawei’s case is because the United States is not the home country of Huawei (China) and Samsung (South Korea). The US case is still pending at present. An important conclusion emerges from this discussion. As Huawei’s patent portfolio was growing, the patent royalties to sales revenue ratio decreased for Huawei because the patent licensing deals between Huawei and other standard essential patent holders became more and more cross-licensing deals, with no or much lower payments.

’     This implies that as a firm’s own patent portfolio becomes more valuable, the firm’s net payment to sales revenue ratio can decrease, offering the firm a competitive cost advantage over smaller rivals.

Protecting IP by Turning Software to Hardware One strategy Huawei also used to protect its IP was to turn software into hardware and ship it to a foreign country with strong IP rights, for example, the United States. Software is difficult to patent unless it can be tied to a machine. Modern telecommunications equipment has a tremendous amount of software that creates much of the value of the product. Since software by itself is so difficult to patent, Huawei followed the strategy of translating some of the functionality of software into chips and other electronic circuitry. In a wide-ranging interview with Forbes magazine, the founder of Huawei, Ren, described this strategy. “Actually, we were unable to protect our IPRs [Intellectual Property Rights] in the past, so we divided software into sections and embedded them into chips before sending them to the US for processing. In doing so, we indirectly protected our own IPRs using American laws. We called this strategy making software hardware. To protect our own IPRs in such a roundabout way, we had to employ several thousand more people and pay several hundred million dollars more each year. As a result, our costs were higher than our peers’, but still we couldn’t protect our IPRs at all times” (L. Yang, 2015; S. Yang, 2016). The statement seems to indicate that Huawei used this strategy extensively.

.

       

In the context of the theoretical concerns of entire book, this section of the chapter is most important because we are now detailing the creation of organizational structures and routines that underpinned Huawei’s IP management strategy. Our focus will also be on their changes. As mentioned previously, Huawei did not seek to file patents before 1995 and hence did not need any organizational routines in this domain. For this reason, our discussion starts in year 1995.

   ,  ,   

1995–2003 1995 represents a turning point for Huawei’s IP strategy because it established an IP department for the first time. At this point, the sales revenue of Huawei was 106 million USD, the number of employees had reached approximately 1,200, but the company was still focused on the Chinese rural market and had not yet launched its big internationalization strategy. Huawei’s leadership was conscious of the strategic value of IP much earlier than its local competitors. Because IP protection was underdeveloped in China, as we described earlier, there were no obvious Chinese companies to imitate. For this reason, Huawei’s leadership turned for inspiration to international telecom giants. Since the international competitors had large patent portfolios, Huawei’s leadership had the intuition that Huawei also should accumulate IP if it wanted to become a global player (Ren, 2005). This new IP department was affiliated with the central R&D department because IP was considered as closely related to R&D. In this initial stage, the IP department had only around seven people (Guo, 2015), and, as is so often true for a young company, the department was given more than IP issues. It performed miscellaneous functions including IP, law issue, and merger and acquisitions (Guo, 2015). Guo (2015) recalled that, “After I joined the IP department I just started to write patents and do analysis of existing patents of competitors. It was probably in the whole of China the first patent analysis report on CDMA technology. At that time, the patent analysis was quite simple. When I showed it to the vice president of R&D, he looked particularly happy. He said he had never seen such analysis of the future technology.” This recollection gives a good sense that the initial employees were not given much guidance and invented to a large extent themselves what they should be doing. In 1999, the first reorganization of the IP department took place. At this point Huawei had experienced a dramatic growth to 15,000 people (from 800 people in 1995). The IP department was

’     moved out of the R&D unit and incorporated in the legal department. This took place in the context of Huawei forming the first corporatelevel legal department, the legal affairs office that was supposed to handle the ever-growing legal work for the company. The new legal affairs office had three divisions, namely the investment law division, the general law division and intellectual property division. The IP department now exclusively handled IP issues because the other issues formerly handled by it were assigned to the other two divisions. It turned out that moving the IP department away from the R&D department did not work well at this moment. We will say more about why below. Another two years later, in 2001, when Huawei’s sales had reached over 2 billion USD from 106 million USD in 1995 and 930 million USD in 1999 (Appendix A, we are using sales figures here to indicate the size of the firm because employee numbers are not available for 2001), the legal affairs office was split into three departments: the IP department, the information security department, and the legal department. (The information security department’s role was to prevent employees from taking IP to competitors). Once again, the IP departments were affiliated with the central R&D department. Let us try to offer an interpretation of this early period of the IP department. The intention behind the IP department was very clear: Huawei wanted to consciously develop real intellectual property out of the research and development by filing for patents in China and in major Western countries. The main purpose here was to narrow the huge gap of patent holdings between Huawei and those international giants (Guo, 2015). This early period of organization of creating and securing IP did not work very well. Guo (2015) described the key obstacles. “Since we had so few staff, we originally had to beg engineers to write a patent. But the engineer’s greatest interest is to write code rather than write patent documents. We tried to convince them to spend a few days writing patents along with their R&D work, but they were reluctant to do so. So we started to offer for each patent a

   ,  ,    reward of about one thousand dollars, but they did not care about this money.” Huawei also tried to include patent applications into performance appraisals, but this idea could not be well implemented. In this period, middle managers were all under heavy sales pressure, and engineers were busy with product development. Because top management was focused on high-speed sales growth for the company, they did not pay sufficient attention to creating routines that would hold middle managers responsible for filing sufficient patents even when they were aware that IP was important. As a result, Huawei’s IP department was a “toothless” department with no real power in the company and had to beg engineers for patents (Guo, 2015). The IP gap between Huawei and foreign competitors widened further.

2004–2018 As alluded to earlier, the Cisco lawsuit against Huawei that started in January 2003 and was settled in July 2004 dramatically changed Huawei’s IP strategy. In 2003, Huawei employees had grown to 22,000 from 12,000 in 1999. Sales stood at 3.8 billion USD in 2004 (Appendix A). In 2008, the IP department was incorporated into the legal management office again where it remains in 2018. The back and forth during the growth of Huawei demonstrates that the optimal location of the IP department is not a straightforward organizational choice and depends on a variety of factors including the routines that link R&D work to IP filings. Our interpretation is that the dramatic rise of patent disputes made it expedient to locate IP issues more as a central legal function. As can be seen in Figure 9.9, before 2009 there was just one single case. But from then on, the number of cases rose rapidly, peaking in 2013 at thirty-five. At that point, Huawei had to deal with one IP lawsuit about every ten days. The number of patent filings has increased dramatically. Consistent with our Figures 9.1 and 9.2, Yang (2016) reports: “In 2000,

’     40 35 30 25 20

35

15

24

10

16

5 0

1 2007

0 2008

4

6

2009

2010

13

14

12

2 2011

Huwei as Plainff

2012

2013

2014

2015

2016

Huwei as Defendant

 . Number of Huawei-involved intellectual property cases Source: Authors’ compilation based on data from JUSTIA10

Huawei only submitted one international patent application to the World Intellectual Property Organization. By 2005, the company submitted 249 applications and leapt to 37th in the ranking of global patent submissions. For the first time, it surpassed its old opponent, Cisco. By 2008, Huawei had become the number one patent filer in the world, with 1,737 Patent Cooperation Treaty patent applications.” Filing so many patents requires a lot of staff. In 2010, there were around 300 full-time employees who are responsible for patentrelated activities in the company, up from seven in 1996 (Guo, 2015). After the engineer and inventor finishes the premiere version of technical definition that discloses specific ideas and procedures, the “patent engineer” will join and help the engineer and inventor to write a final official patent report. By 2012, the number of patent engineers had reached 400 (Huawei, 2012). Three important things changed in the organization of IP that explains the dramatic rise of patent filings. (1) IP issues now had the

10

Justia is a website offering comprehensive law and legal information. www.justia.com (accessed on May 19, 2016).

   ,  ,    full attention of the top leadership, (2) Top management became committed to setting clear KPIs for the entire company regarding the filing of patents, (3) Huawei hired IBM consulting to transfer the integrated product development routines (described in detail in Chapter 3) that involved systematically preparing for creating IP at every stage of the product development cycles. (1) How involved the leadership became in IP issues in the wake of the Cisco case is nicely illustrated by what happened even before Cisco filed the lawsuit. In December 2003, the CEO of Huawei met with Cisco representatives who wanted to handle their complaints outside court. Yang (2016) reports: On December 10, 2002, several senior managers from Cisco had an emergency meeting with Ren Zhengfei, Guo Ping, and other senior Huawei people at the Shangri-La Hotel in Shenzhen. Cisco’s team formally declared that Huawei had infringed Cisco’s intellectual property rights. Moreover, they presented certain demands, including that Huawei “admit the infringement, that it pay compensation, and that it stop selling these products.” IP issues had become the top issue of the CEO and the entire leadership team and they took actions in the wake of the Cisco case to ensure that the company would implement a full IP strategy. However, today there are still controversies surrounding Huawei’s IP management. As we alluded to earlier, in January 2019, the US Department of Justice announced that it brought criminal charges against Huawei for allegedly stealing trade secrets from T-Mobile USA from 2012 to 2014 and obstructing justice when T-Mobile threatened to sue Huawei in the US District Court in Seattle (U.S. Department of Justice, 2019). (2) To ensure that Huawei would develop a large patent portfolio, top management set explicit KPIs for the firm. This began with “08 strategy” that aimed to use five years from 2003 onward to build a robust patent portofolio to achieve self-preservation in the face of strong international competiton. So starting in 2003, they determined how many patents Huawei ought to file during each five-year period. Then KPIs for achieving this were cascaded down the organization. For the first five-year plan (2003–2007) Huawei patent applications per year on average were 5,000. (3) The leadership of Huawei paid IBM consulting large amounts of money to transfer efficient product development routines to Huawei (see Chapter 3

’     for a detailed description). Part of these routines had sub-routines to ensure innovations that could be patented were identified and then R&D employees would create the documents to provide the necessary information about it. Guo (2015) described how IP issues were integrated in the production development routines.

“The whole process of product developoment is divided into many steps. In each of the steps, a review with regards to IP needs to be performed. If a pass cannot be obtained in the reviews, the whole process will stop. For example, before starting a new product development project, a feasibilty report needs to be completed, in which an analysis on the competitors’ IP and the potential IP risk needs to be provided. When designing a product, a plan on how to protect the related IP should be offered.” These routines were key for Huawei to execute its strategy of generating a sufficient number of IP rights and establish a robust IP management system that was integrated with its R&D management system.

.

  ’   

In all those industries where possessing patents is a requirement for being successful, Huawei’s experience shows that it is important not only to invest in R&D to become an innovator but also put in place organizational processes that ensure that IP is systematically implemented through developing a series of IP routines. This entails that researchers are being trained in record keeping for their innovative work that can then serve as evidence in court cases if the firm’s IP is challenged. Initially, Huawei’s IP office faced the challenge that R&D workers did not identify all possible IP and develop written documents to help patent applications. It took repeated efforts and experimenting with various incentives and organizational processes to get the innovations that Huawei created patented. Until Huawei faced a serious challenge in US courts alleging that Huawei infringed IP, the firm did not develop elaborate routines to ensure that

   ,  ,    competitor IP was analyzed and taken into consideration when Huawei developed its own products. These routines were in large measure transferred from the West via a consulting company. A second important lesson for firms from emerging economies moving into global markets is that if their global rival firms have key patents in important global markets, it is strategically necessary to develop its own patent portfolio to be able to negotiate reasonable license fees with them. Only if a firm has its own strong IP can it negotiate relatively favorable terms to cross-license IP from competitors that may be necessary to create full products. The third lesson is that staffing IP offices and lawyering up may be absolutely necessary, since other firms may use IP lawsuits as a routine part of corporate strategy. In the ICT industry, patent suits and countersuits are commonplace nowadays, as we have seen early in the chapter. To the extent that firms from emerging markets entering global industries are subject to frequent patent lawsuits, developing their own legal capability with a combination of in-house and external lawyers and IP consulting firms may be a necessary component of a firm’s standard businesses processes.

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   ,  ,    U.S. Department of Justice. (2019). Chinese telecommunications device manufacturer and its U.S. affiliate indicted for theft of trade secrets, wire fraud, and obstruction of justice: Huawei corporate entities conspired to steal trade secret technology and offered bonus to workers who stole confidential information from companies around the world. www.justice.gov/opa/pr/ chinese-telecommunications-device-manufacturer-and-its-us-affiliate-indictedtheft-trade (accessed March 31, 2019). Verbergt, M. (2017, February 26). China’s Huawei battles to own the next generation of wireless technology: To develop 5G, company deploys an R&D staff 80,000-strong, challenging Europe’s dominance. Wall Street Journal. Yang, L. (2015, October 12). A garden chat with Huawei founder Ren Zhengfei. Forbes. Yang, S. (2016). The Huawei Way: Lessons from an International Tech Giant on Driving Growth by Focusing on Never-Ending Innovation. New York: McGraw-Hill Education. Zhong, R. (2018, March 7). China’s Huawei is at center of fight over 5G’s future. The New York Times. www.nytimes.com/2018/03/07/technology/chinahuawei-5g-standards.html

 The Management Transformation of Huawei Concluding Thoughts from a Comparative Perspective Johann Peter Murmann*

.

     

In this final chapter, we want to offer some concluding thoughts from a comparative perspective and place Huawei in the larger context of corporations in China and in a few instances in the context of non-Chinese corporations when such comparisons are particularly instructive. We also identify the contributions the entire study makes to the theory of routines and dynamic capabilities and discuss the challenges Huawei will face in the next ten years to continue to growth at a similar high rate. We asked scholars to comment on individual chapters to help place Huawei in such a larger context and compare Huawei whenever possible to other firms. In their commentary, Lewin, Välikangas, and Zhang (2019) note that Huawei is not unique as a success story from Asia. Matsushita Industrial Company (more widely known as Panasonic) and Kyocera from Japan, Acer from Taiwan, and Haier and Lenovo from China also have achieved what is rare among start-up companies: to grow into a sizable multinational enterprise. Lewin, Välikangas, and Zhang (2019) argue that in all of the cases including Huawei, strategic IQ of a leader (Levine, Bernard, and Nagel, 2017) was crucial for the success of the firm. Examining the leadership style of the Huawei founder and long-term leader Ren Zengfei described throughout this book, Lewin et al. argue that Ren managed to build at * I would like to thank Bin Guo and in particular Can Huang for feedback and suggestions for this concluding chapter.



    Huawei a high-commitment and high-performance culture that early focused on merely importing Western best practices and later experimented with modifying the imported routines to make them work even better in the context of Huawei. Lewin, Välikangas, and Zhang (2019) see the employee profit-sharing mechanism that rewards high performers as a crucial pillar of the firm’s success. But they also highlight that Ren was able to provide an additional motivation for the predominantly Chinese employees by convincing them that by growing Huawei into an industry-leading multinational enterprise, they all participated in a mission to contribute to the building of China. Even though Huawei internationalized widely, in 2017 roughly 77 percent of 180,000 employees continued to be Chinese nationals (Tao, 2018), and can potentially identify with building a leading Chinese global enterprise. In short, Lewin, Välikangas, and Zhang (2019) see Ren’s leadership as a key ingredient why Huawei has been able to adapt to large environmental changes. In her commentary on Chapter 2, Chen (2019) – who is both knowledgeable of Chinese and Western firms – highlights that not just the CEO but the entire management of team of Huawei’s executive team has played an important role in guiding the repeated transformation of the firm. She notes that Huawei has been much better able to adapt changes in the telecommunication industry than the mobile phone pioneering company Motorola that went defunct in 2011 after operating independently for eighty-three years. After repeated attempts to turn the business around after the internet bubble burst in 2001, a large part of Motorola’s business was first sold to Google in 2011 for 12.5 billion USD,1 which in turn sold it the Chinese manufacturer Lenovo for 2.91 billion USD,2 while keeping the valuable portfolio of Motorola patents. Particularly interesting for Western readers, she explains that Huawei’s top management emphasis on 1

2

https://techcrunch.com/2011/08/15/breaking-google-buys-motorola-for-12-5billion/ www.theverge.com/2014/1/29/5358620/lenovo-reportedly-buying-motorolamobility-from-google

       initiating and championing change stands out in the context of Chinese companies. Chen (2019) identifies a number of interesting questions for future research. To make further contribution to the literature on top management teams, we agree that it would be valuable to investigate in more detail what factors stayed stable in the top management and what factors changed. Commenting on Chapter 3, Song (2019) who has written a book about Samsung (Song and Lee, 2014) sees some striking parallels between Huawei and Samsung. Both firms went through long-term corporate transformation over the past thirty years to become global players. Both firms in recent decades also had strong CEOs who acted as important motivators and supporters of the change. Furthermore, both firms benchmarked themselves with the best firms in the West, and this seems to be a winning move for companies that want to catch up with the best companies in the world. But there are important differences in the details: Huawei hired a large number of foreign consultants to imitate exactly IBM’s product development routines, whereas Samsung from the beginning used its in-house think thank to benchmark with the West and then adopt and diffuse those practices that were compatible with Samsung’s existing corporate culture and systems of routines. Huawei only later started to modify routines. Of course, in later transformation efforts of Huawei – as detailed in Chapters 4–8, Huawei gained more confidence to become involved in steering the transformation efforts itself even though it still employed the best Western consultants to transfer know-how. We believe that part of differences between the approaches of the two firms can be explained by the fact that Samsung is almost fifty years older than Huawei, having been founded in 1938. Also, Korea was more developed in the 1990s than China, making it easier to draw on local expertise rather than hiring Western consultants. Song makes the important point that both Samsung and Huawei are outliers in their respective countries. Creating firms that are able to grow to the scale of Samsung and Huawei is a remarkable success, underlining that it is important to study the details as we are doing in this book.

    In his commentary on Chapter 4, the supply chain scholar Shi (2019) notes that many companies mistakenly believe that simply acquiring a computer-oriented management information system (MIS) can improve their business. Companies often fail to analyze exactly what business processes their strategy requires and what organizational routines need to be put in place so the MIS hardware can achieve its positive effect. When Huawei first wanted to improve its supply chain practices (1999–2003) in response to rapid breakneck growth, the leadership recognized that it lacked know-how how put in place an effective new system. Coming to this realization requires some humility that is often scarce among successful start-ups who infer from their success that they can more or less do everything well. Because Huawei developed trust in the quality of IBM consultants in transferring best practices to Huawei with the IPD initiative, Huawei also adopted completely the IBM system of routines in its first transformation effort of supply chain management. Shi himself has studied Huawei’s supply chain processes extensively. Reflecting on this first and the second big initiative to create a global supply chain from 2005, Shi (2019) formulates an interesting generalization: Huawei always seems to implement a new business process first and later tries to modify its organization after the business process is proven to be effective and well-established. It would be very useful to investigate further whether this is as well true of other firms that successfully implemented new supply chain routines. We agree with Shi (2019) that one important area for future research on the global supply chain is how Huawei dealt with the complexity challenges and how one would measure such complexities. An answer to this question would be relevant for most firms, as the global business environment is becoming faster moving and more complex. Commenting on Chapter 5, Mudambi (2019) – a leading scholar of international business and multinational enterprises (MNEs) – helps put Huawei in the larger context of MNEs from emerging economies. He points out that the challenges that Huawei faced in its financial management are typical for latecomer MNEs from

       emerging economies. The desire for rapid growths often leads subsidiaries to implement their own financial standards adapted to their local needs, which makes it difficult for top management to evaluate the relative profitability of the various country subsidiaries. For this reason, financial standardization is a requirement if top management wants to ensure that capital and managerial attention is directed to those subsidiaries that generate the most value and profits. As we have seen with earlier transformation initiatives of Huawei, an effective way to learn world best practices is to hire a competent consulting organization that has helped implement new financial systems with many other companies before and that can guide the client firm on how to implement systems of routines. Mudambi arrives at the key conclusion that merits to be repeated: Although the MNEs are embedded in so many different national contexts and even though managers have limited bandwidth all the information impinging on them, welldesigned organizational routines are able to create transparency and cohesion in a global enterprise. Because of her extensive experience with and her writing on HR practices of many Chinese firms (Xin, 2013, 2019) is able to place Huawei’s HR transformation in context. One of her key messages in her comment on Chapter 6 is that the advanced HR practices of Huawei have also been adopted by other leading companies such as Haier, Alibaba, and Industrial and Commercial Bank of China (ICBC) in China, but that small- and medium-sized companies have not adopted best HR practices and can learn from the example of Huawei. Xin also articulates a number of additional questions for future research on Huawei’s HR practices. Because R&D is so central to Huawei’s success, we agree that it would be useful to investigate further how Huawei’s R&D function manages to access, attract, train, develop, evaluate, and retain local talent as well as develop leadership in critical overseas operations. One question Xin (2019) does not address in her commentary but in our view is also worthy of further investigation given the important role consultants played in transferring best practice to Huawei: Have other Chinese firms such as Haier,

    Alibaba, and ICBC also used international HR consulting firms such as the Hay Group to implement world-class HR practices? Or have they tried to copy other Chinese firms maybe even Huawei, or have they used some Chinese HR consulting firms? The international business scholar Carl Fey comments on Chapter 7, which describes the internationalization process of Huawei that began around 1997. Fey brings to this task extensive knowledge of MNEs in Europe and in China as he spent almost five years (2011 to 2015) in China. Based on this experience, he developed a framework (Fey, Nayak, Wu, and Zhou, 2016) to analyze the internationalization strategies of emerging market multinational enterprises such as Huawei. In his commentary, Fey (2019) observes that few firms have changed so much as Huawei has in such a short period of time. To get a better sense how international Huawei is compared to other prominent companies from China, we put together comparative figure the percentage of the revenues that are not made in China, i.e., international revenues, of both Huawei and Alibaba.3 What Figure 10.1 clearly shows is that over the years 2012–2017, Huawei’s international sales have been much larger than Alibaba’s, giving Huawei a large incentive to learn best practices from different countries around the world. To our surprise, the data also show that the percentage of international sales has dropped for both companies in recent years. It would be useful to study this more systematically for Chinese MNEs because it is such a counterintuitive finding. Fey (2019) also finds it noteworthy that – unlike most documented cases of organizational change where initially only a small number of employees embrace the change (Kotter, 1996) – in the case

3

We were not able to get systematic data for another Chinese internet leader, Tencent Holdings, mainly active in games and services around the ubiquitous Wechat messaging app that now is imitated by Facebook for its success in building an entire ecosystem of personal services (banking, hiring taxis, etc.) around its instant messaging services. We could obtain data for one year. Tencent business revenue in 2016 was 152.35 billion yuan (22.69 billion USD), the revenue from China mainland was 144.37 billion yuan (21.50 billion USD), accounting for 94.77 percent, and the revenue from overseas markets accounted for 5.23 percent.

       70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

2011

2012

2013

2014 Alibaba

2015

2016

2017

2018

Huawei

 . Share of foreign sales of Huawei and Alibaba (2011–2018) Source: Our calculations based on data provided by Statista.com

of Huawei most employees of the firm seemed to have embraced the change. This is of course not entirely true, as we documented in the instance of the first change initiative (IPD) that was described in detail in Chapter 3. Especially after the first transformation effort proved to be a demonstrable success, getting employees behind major transformation efforts was easier. It is important to reemphasize that a key reason why large numbers of employees would embrace change was the profit-sharing plan that Huawei developed before the major change initiatives started: Many employees would personally benefit from a better-run organization, so they had great incentives to get on board with such changes. Fey (2019) highlights that Huawei picked up a best practice from its Sudan subsidiary and spread it around the world. This shows that Huawei has a strong culture of learning from wherever the source of new knowledge may reside and that the firm is able to embed this learning into routines. What this shows even more is that Huawei is able to connect international subsidiaries well with the learning processes at the center of the firm in China. One way this happened is through rotating key employees to foreign posts. We agree with Fey

    that it would useful to know more details than presented in Chapter 7 how this process took place, because the literature on MNCs has shown that things done at one subsidiary at the periphery are often not picked up on and spread around an MNC. We also agree with a second recommendation Fey makes for future research. It would be beneficial to explore more what changes needed to be made at headquarters to effectively support foreign operations. Similarly, it would be very useful to investigate the relative importance of these changes compared to getting the design of foreign subsidiaries right. Before becoming a university professor, Frans Greidanus worked at Philips’s R&D organization from 1982 to 2013, holding many managerial jobs including head of Philips Research Asia and CTO Philips Asia. Given his deep knowledge about R&D in a world-class technological company, he can put Huawei’s transformation of its R&D function (Chapter 8) in perspective. Greidanus (2019) notes that it is quite typical that an R&D organization in a growing firm goes through the five transformational changes we identified in the case of Huawei. What is remarkable, in Greidanus’ view, is how quickly Huawei went through the five stages. Phillips (founded in 1891) had 128 years to go through what Huawei (founded in 1987) went through in less than 3 decades. Greidanus also explains that the rapid growth of R&D personnel at Huawei is also unprecedented compared to Western companies that operate in the space of Huawei. He also puts into focus that Huawei is going counter to the trend in Western technology companies that in the past two decades reduced or even cut long-term research, AT&T with its Bell Laboratories being perhaps the most stark example of this development (Gertner, 2012). Greidanus (2019) also raises a number interesting question for further research on Huawei’s R&D organization. How does Huawei manage its portfolio of R&D projects and who decides on the budget of the various research projects? Is it at the business or the corporate level or a mixture beyond the two? Chapter 9 compared the IP strategy of Huawei to one of its key international competitors, Ericsson. We were somewhat surprised to

       find that Huawei, even though its number of patents initially was much lower than that of Ericsson, shows no significant differences from Ericsson in both terms of the key technological classes the firm patented in and the relative frequency with which it patented in those classes. To catch up with leading Western telecommunication firms, Huawei invested in the same key technologies. Chapter 9 also presents detailed data on the share of patents in various generations of mobile technology. Huawei had a small share of patents in 3G technology but substantially increased it share in 4G (LTE) standard essential patents, taking an intermediate position (No. 7) among the leading developers of technology, i.e., Samsung, Qualcomm, InterDigital, Nokia, LG, Ericsson, NTT DocoMo, NEC, Sharp, Panasonic, Motorola Mobility, Apple, Innovative Sonic, and ZTE (companies are listed a decreasing order in terms of total patents). In recent years, Huawei has obtained in 5G technology the largest number of standard essential patents of any company in the world. These data show Huawei transformed itself from an imitator of Western innovation to company that contributed substantially to the creation of 4G and even more so to 5G technology. We pick up this theme one more time at the end of this chapter.

.

      

As we saw in Chapter 8, to upgrade its capabilities Huawei built research centers all over the world to tap into foreign research and development expertise. Huawei tried to build capabilities organically. In this respect, Huawei is different from many other Chinese companies in that it has not acquired major foreign companies to upgrade its capabilities. Chinese firms have been on a spending spree all over the world to buy advanced companies. In 2012, for example, Chinese firms engaged in 457 mergers and acquisitions with a transaction value of 43.4 billion USD (Huang and Sharif, 2015). We will detail five prominent examples. Among the most prominent transactions in recent years was the Geely acquisition of the car maker Volvo from

    Ford Motor company in 2010. Geely’s goal was to acquire advanced car design and technology, and over time transfer some of the Volvo’s capabilities to Geely’s Chinese operations and thereby become more competitive in the huge Chinese car market. (China had already become the largest in the world by sales volume at the time.) Another example is China Aviation Industry General Aircraft (CAIGA), which is the largest aircraft manufacturer in China. In 2011, it bought US-based Cirrus Aircraft, which at the time was second-largest single engine aircraft manufacturer (Huang and Sharif, 2015). The purpose of the acquisition was to use Cirrus’s worldwide sales and marketing capabilities to help CAIGA develop global markets. A year later, in 2012, China’s largest construction equipment company, the Sany Group, acquired the German company Putzmeister. Putzmeister is a maker of high-tech concrete pumps (Huang and Sharif, 2015). The stated purpose of the acquisition was to obtain cutting edge technology. This acquisition also set off some alarms in Germany that the country might lose control of its famous mid-sized hidden champions to China (Klawitter and Wagner, 2012). Since 2003, the Chinese government has pursued the goal to develop a strong wind-energy sector (Chinese Wind Energy Association, 2014). Chinese companies in the wind technology sector have acquired European companies to upgrade their own technological and distribution capabilities. In 2008, Goldwind acquired 70 percent ownership of Vensys Energy, located in Germany. The company is a leader in direct-drive permanent magnet wind turbines. A year later, Huiteng Windpower bought the world leading blade design firm, Composite Technology Center, by acquiring the parent firm CT Holding B.V (Huang and Sharif, 2015). Viewing Huawei in the context of other Chinese companies that obtained their advanced technology by acquisition, it is even more remarkable how Huawei – by only investing consistently more than 10 percent of sales in R&D for more than twenty years, built up cutting edge technological skills particularly in the latest 5G technology, as we described in Chapter 9.

      

.

    - 

Huawei is also different from Chinese state-owned companies (SOEs), which come in many forms. Some of the SOEs are fully owned by the state, while others are even listed on the stock exchange, as is the case the Huawei competitor Datang. All different types of SOEs are controlled by the state, however, and therefore top managers have much less degrees of freedom compared to truly private companies. Huawei, as we have detailed throughout this book, was founded by private individuals who were driven by the desire to create wealth for themselves and later for many employees. The key is founder Ren Zhengfei also set the goal of becoming a leading ICT company in the world by making profits, reinvesting substantial parts of its profits to finance growth, and by motivating employees to work very hard on behalf of Huawei by involving a large portion of profits in profit-sharing. Stateowned companies in China, on other hand, have different fundamental goals. Either they continue to be protected by the state to maintain employment (e.g., the steel industry) or the government has restricted or banned outright private ownership of firms in particular sectors that the government deems crucial for guiding the economy: energy (e.g., SINOPEC, China Energy Corporation), electrical grid (State Grid Corporation of China), telecommunications (e.g., China Telecom, China Unicom and China Mobile), and banking (e.g., Industrial and Commercial Bank of China-ICBC; China Construction Bank-CCB, Bank of China-BOC, and Agricultural Bank of China-ABC). Between 2012 and 2017, the central government merged thirty-four centrally controlled SOEs, bringing them from 196 in 2012 to 98 by 2017. Among the largest 500 Chinese companies, the majority are SOEs (Q. Chen, 2018). But the prominence of SOE among large firms gives the wrong impression about the motor of the Chinese economy since 1978. Non-SOE companies such as Huawei have been the chief engine of economic dynamism and growth in the Chinese economy and not the

    often very protected or at least state-favored SOEs. Consistent with this evaluation, the share of economic activity of SOEs has declined substantially over time. Systematic data on manufacturing and utility sectors are available since 2000 (see Figure 10.1). If one uses a less-restrictive definition of SOEs (including state-owned enterprises, state-owned jointly operated enterprises, wholly state-owned enterprises, and shareholding companies controlled by state-owned enterprises), the share has gone down from 82 percent in the year 2000 to 32 percent in 2017. Using the more restrictive definition of Jefferson, Albert, Xiaojing, and Xiaoyun (2003) (including state-owned enterprises, state-owned jointly operated enterprises, and wholly stateowned enterprises only), the share of SOEs was already only down to 32 percent in 2000 and now has declined to 8 percent of all economic activity. Both time series show clearly that the private sector is propelling China’s catching up with the most advanced economies (Lewin, Kenney, and Murmann, 2016). A comparison of Huawei and the aforementioned Datang Telecom Technology (DTT) company – an SOE and a direct competitor in the telecommunications industry, tells a similar story as Figure 10.2 did for the entire Chinese economy. There are clear benefits of being a privately controlled company. In Chapters 1 and 5, we described in detail that Huawei has a unique ownership structure where a large number of managers and employees share in the profits that Huawei is making. The growth rates of the two companies (see Figure 10.3) over the past twenty years show the motivational benefits when managers and employees see themselves as owners directly benefit from higher growth and profits. Huawei grew dramatically while Datang grew very little. In recent years, Datang incurred great losses and is facing the risk of being delisted from the Shanghai Stock Exchange (Zhang, 2018). We do not want these statements to be construed that we are against state-owned enterprises either in the China or the West. The point we want to highlight, however, is that private enterprise is the motor of much of the innovation and the efficiency gains in the economy and that the direct comparison of

       100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Share of SOEs (Jefferson et al., 2003 classification)

Share of SOEs

 . Share of economic activity in Chinese manufacturing and utility sectors (2000–2017) Source: Our calculations from data provided by National Bureau of Statistics of China

 . Sales growth of Huawei and Datang since 1988 (in million USD) Source: Company Annual Reports

    Huawei and Datang illustrates this point forcefully one more time. Or to put it in another way, an economy only made up of SOEs would never perform as well as an economy that had a large share of private enterprises. The interesting question is when it makes sense for a state to control enterprises. In China, the answer to date has been to maintain control and direct many more business firms than is the case in the West.

.

       

We now want to discuss the contributions our study of the transformation of Huawei made to the literature on routines and dynamic capabilities. Scholars of strategic management view superior firm capabilities (Helfat and Winter, 2011; Teece, Pisano, and Shuen, 1997) as one of the two key sources of competitive advantage – the other being the choice of a product or service market that offers an attractive landscape for avoiding competition (McGahan and Porter, 1997; Porter, 2008). (From here on we will use the term products to refer both to physical products and services, as many products have services built into them [e.g., customer service] and as modern advanced economies are over 80 percent made up of services rather than manufacturing and agriculture [Murmann, 2013]). Firm capabilities, particularly in the case of complex products, are underpinned by a large bundle of routines that finely coordinate the actions of individual employees to create the competitive products (Becker, Lazaric, Nelson, and Winter, 2005; Nelson and Winter, 1982). The concept of a routine, therefore, is a key concept for understanding how firms are able to generate productive collective action reliably on an ongoing basis. In the introduction, we wrote that when we initially examined the development of Huawei, we noticed that the breaking of old routines and the creation of new routines appeared central to how Huawei managed to successfully transform itself. For this reason, we decided to use as our overarching analytic lens the theory of routine-based organizational capabilities (Becker et al., 2005; Murmann, 2003; Nelson and Winter,

       1982; Nigam, Huising, and Golden, 2016; Parmigiani and HowardGrenville, 2011; Szulanski and Jensen, 2008; Winter, 2003). Only a few studies (e.g., Daniel M. G. Raff, 2000; D. M. G. Raff and Scranton, 2017) have examined explicitly both the creation and the change of existing routines. To our knowledge, no study has investigated the creation and change of routines from the start-up phase all the way to becoming a large multinational corporation with 170,000 employees. Most organizations never achieve such growth because they are not able to make the changes to their existing routines and their leadership frames required to bring this about (Witt, 2000). Another feature that makes our study special is that we examine most major functions of an organization. Until now, most studies that examine routines as the building block of organizational capabilities focused on parts of organization, for example, the production system (Fujimoto, 1999), product development (Obstfeld, 2012), total quality management (Rother, 2010), or customer service call centers (Pentland and Rueter, 1994). In Chapters 3 to 9 we have provided a very detailed view of how Huawei in every major functional area of the corporation (management, product development, HR, supply chain, finance, R&D, intellectual property, and international) created routines and after some time broke the routines and created new ones. Pisano (2017) emphasized that such studies are necessary to make advances in the dynamic capabilities theory. In the introduction chapter, we provided a sketch of the metaroutines that governed the change process at Huawei. We wrote in Chapter 1 that, “One can speak about Huawei developing metaroutines that constituted dynamic capabilities (Winter, 2003) to transform itself continuously. These meta-routines involved (1) benchmarking with the best firms in the world, (2) hiring leading Western consultancy firms, which would help close the capability gap with the best foreign firms by transferring templates for best practices, (3) initially copying foreign routines as faithfully as possible, (4) having the CEO and the other top managers deeply involved governing the

    change.” We now want to fill out this sketch with more details, using Teece (2007) on dynamic capabilities as a theoretical frame. In this article, he goes well beyond the pioneering work on the concept on dynamic capabilities (Teece et al., 1997). He integrates a massive amount of literature on the concept (Eisenhardt and Martin, 2000; Helfat et al., 2009; Winter, 2003, to name only a few prominent pieces) and provides some microfoundational ideas, which allow us to assemble evidence that Huawei indeed possessed change routines that amount to a dynamic capability. Teece (2007) distinguishes between three classes of dynamic capabilities, those capabilities that allows a firm to (1) sense new opportunities (e.g., Huawei leadership recognizing in early 1990s that moving to digital telephony would open up great opportunities for selling mobile telephony equipment rather than equipment for fixedline telephone services), (2) seize new opportunities (e.g., Huawei making R&D investments to master digital technology and build equipment for it starting in 1993) (3) transform4 the enterprise (e.g., Huawei engaging in major transformation initiatives analyzed in Chapters 3 to 9).

It is important to stress that our book presented very little about the first two micro foundations of dynamic capabilities – sensing and seizing opportunities. Indeed, we see it as a great opportunity for future research to focus on how Huawei has developed routines for sensing and seizing new opportunities. In this book, we focused almost entirely on the third category, transformational or reconfiguration capabilities. Teece (2007) identifies four major categories of transformational capabilities that he labels as Decentralization and

4

Teece (2007) often uses the term “reconfiguring” instead of “transforming” in the article, but essentially, he means the same thing with both terms. The key point is that this third class of dynamic capabilities is different from sensing or seizing opportunities. All three classes need to be present if a corporation wants to stay adapted to changing environments and increase its likelihood that it will over longer periods of time at least make profits that cover the cost of capital.

      

 . Combination, reconfiguration, and asset protection skills Source: Teece (2007, Figure 10.3)

Near Decomposability, Cospecialization, Governance, and Knowledge Management. Figure 10.4, which is taken directly from Teece, spells out what he regards as some of the elements of these four categories. Throughout our book, we have presented evidence for all the elements in Figure 10.4. To just give one example, Huawei adopted a loosely coupled structure when it created a separate business unit for running consumer business (smart phones, PC, wearables, connected home) and the network business (selling telecommunication equipment to operators like Vodafone or ATT) and the corporate business (Clout, enterprise IT infrastructure). We will not revisit all the examples for the other elements in Figure 10.4. Reflecting, however, on the entire history of Huawei from 1987 to 2018, we believe that change meta-routines deserve a more prominent place in the figure. If one carefully reads his article, it is clear that Teece (2007) recognizes how central top management leadership is to corporate transformations. In the conclusion of his synthesizing article, Teece (2007) writes: “Dynamic capabilities reside in large measure with the enterprise’s top management team, but are impacted by the organizational processes, systems,

    and structures that the enterprise has created to manage its business in the past” (p. 1346). He also invokes the concept of routines several times, and if asked he would almost certainly acknowledge that how the leadership plans and carries out change in a routine way is very important for the success of a transformation. For these reasons, we do not want to give the impression that Teece does not understand the importance of meta-routines for change. Nonetheless, since figures and diagrams are what often counts most in transferring arguments to the readers minds, we believe Teece’s (2007) Figure 10.3 (our Figure 10.4) needs some adjustment to give a more prominent role to change meta routines and supporting values and ideas among top management team members. We believe the change meta routines and supporting values and ideas are at the heart of a transformation capability. To justify the proposed changes to Teece’s Figure 10.3 (our Figure 10.4) let us revisit the key features how the top management team (TMT) of Huawei orchestrated the major transformation projects that changed routines in the various functions of Huawei (for details see Chapter 2). It seems important to separate analytically between values and ideas of the top management team that support these change routines on the one hand and the change routines that coordinate individuals to initiate, monitor and execute major changes on the other. Please note that we structured the information in a form of a table because this makes it easier to show how values and ideas support particular aspects of the change meta routines. The values and ideas were in existence at least since 1998, but they may not all have existed in the first few years, a period which is much less well documented than the period when the Basic Law (see Appendix D) was published. We do not repeat the information of Table 10.1. Therefore, please read all of the information in the table so you can easily follow the arguments afterward. It is important to stress here that Huawei has not hired top management team members from the outside. All TMT members are long-term Huawei employees who have proven that the share

       Table 10.1 Change meta routines at Huawei and their supporting values Values and Ideas

Change Meta Routines

Ensure long-term survival of firm

Constantly implant sense of crisis into the whole company

Constant change is good and necessary for survival

Assign managerial talents to the major change initiatives and only promote them to the top management if they have proven themselves as change managers.

Top management needs to be deeply involved in change and lead by example

Not all functional areas in the firm can be changed at once without creating chaos that would jeopardize survival of the firm.

!

Every major change effort will have an executive steering committee to oversee a change project management office that in turn will orchestrate varies project teams. Founder and head of hired consulting firm will not be chair but are members of the ESC to help make strategic decisions for major change initiatives. Founder will not participate in every meeting of ESC and only participate at stage-gate points and when internal resistance needs to be overcome. One executive director, or senior vice president from the top management team will be appointed as the sponsor of a specific change implementing project. Review all aspects of business and decide which ones constitute the most pressing bottleneck for improving performance.

    Table 10.1 (cont.) Values and Ideas

Change Meta Routines First, roll out changes in one unit and check that they work before rolling the changes routines out to the rest of the organization.

Always be open for and devote substantial time to learning from diverse sources of expertise around the world.

Find a consulting firm in the particular area the firm wants to change that can transfer world’s best practice. When appropriate first copy exactly entire system of routines and later make incremental adjustments.

Always be patient with reaping benefits from major change initiatives and keep a long-term perspective.

Structure open-ended contracts with consultants so they do not make them leave before the new routines are running smoothly. Instruct finance department to pay whatever it costs to have world class consultants on multi-year engagements.

the values of constant change to enhance chances survival of the firm (see Chapter 3, Appendix 1).5 Meta-routines have much less detail than the routines that govern operational areas of a firm (Helfat and Winter, 2011). But as Table 10.1 makes clear, values, and ideas shared by Huawei top management together with change routines that are invoked when

5

In a recent interview (Kharpal, 2019) Ren (the founder of Huawei) made clear that additional profits that the firm is making are not being distributed to employee shareholders but used to fund more basic R&D within Huawei and give funds to universities to enhance Huawei ability to get access to advanced knowledge in universities. Ren apparently sees this as key for enhancing the future survival chances of the firm.

       Decentralization and Near Decomposability Adopting Loosely Coupled Structures; Embracing Open Innovation; Developing Integration and Coordination Skills.

Governance

Cospecialization Managing Strategic Fit So That Asset Combinations Are Value Enhancing. Continuous Alignment and Realignment of Specific Tangible and Intangible Assets.

Knowledge Management Learning; Knowledge Transfer; Know-how Integration; Achieving Know-how and Intellectual Property Protection.

Achieving Incentive Alignment; Minimizing Agency Issues; Checking Strategic Malfeasance; Blocking Rent Dissipation.

Change Meta-Routines & Supporting Shared TMT Values & Ideas

 . Transformation/reconfiguration skills (modified Teece, 2017, Figure 3)

existing operational routines no longer are effective can constitute a dynamic capability that allows a firm to repeatedly recreate fit between a changing environment and the firm’s strategy. As we have shown throughout our book, the meta-routines for change will also be gradually enriched and modified, but this will happen much more infrequently than changes in detailed operational routines that guide each of the functions of the organization.6 Given the importance of developing change meta-routines and supportive shared TMT values and ideas, we think it is important to add this result to Figure 10.4 and create a new Figure 10.5. Huawei, in our view, highlights that developing change-meta routines and supportive values among TMT members is crucial for

6

The description of the change meta-routine is most accurate for the period from 1998 to 2005. The current meta-routine may be slightly different.

    developing a dynamic capability for change. This strikes us as much more important than some of the elements Teece has in his original figure, and hence we also made the causal arrow from this box thicker than those from the original four boxes.

.

   

Huawei faces a number of challenges if it wants to continue to grow at the same speed it did from 2007 to 2017, when sales increased from 12.6 billion USD to 92.5 billion USD (see Appendix A). This represents a 22.5 percent increase in sales per year. As companies become large, further growth becomes more difficult and typically slows down (Murmann, Korn, and Worch, 2014). Simple math explains why: Growing 100 percent from 1,000 employees only required Huawei to add another 1,000 employees. If Huawei wants to grow another 100 percent from its 2017 level of 180,000 employees, it would have to add 180,000 employees, or 180 times as many as when it grew from 1,000 from 2,000 employees. That is a lot of hiring. If Huawei only interviews five people for every job, it would have to interview 900,000 people to fill the 180,000 positions. To train up 180,000 people and imbue them with the values of the firm so they act consistent with what the company wants is a task that it a lot more challenging than doing the same for 1,000 employees. It is not surprising, then, that firms generally find it difficult to maintain their culture and existing routines when a large number of new employees are added quickly (Witt, 2000) and the development of Huawei described in this book clearly has proven this point again. If Huawei wants to stay true to its corporate strategy of operating only in the ICT sector, its growth is limited by the growth of the ICT sector. At present, sales growth for this sector for the next five years is projected to be 6 percent (IDC, 2018a), which is substantially lower than the 22.5 percent Huawei has been growing at over the past decade. Huawei apparently wants to fuel its growth by increasing its consumer business group from 47 billion USD to 150 billion USD by 2023 (Ren, 2019). Unless Huawei is better able to forecast demand

       than IDC, this is a highly optimistic projection, as for example global smartphone sales are only predicted to grow by from 1.46 billion in 2017 to 1.67 billion units in 2022 (IDC, 2018b) and PC and tablet shipments are forecast to decline through 2023 (McGrath, 2019). Hence, the high growth in the consumer sector can with high probability only be achieved if Huawei further takes share from its existing competitors – a strategy that is not without problems as Huawei has recognized since 2002, when Western competitors started to fail. Even if Huawei can continue to grow during the next five years by taking massive share away from other companies in the consumer market, its organic growth will eventually be limited if it stays only in the ICT sector. Many companies, when faced with slowing growth in their core business, venture into unrelated industries that offer better growth options but then often run into trouble because they do not have the capabilities to compete in the new sectors. For this reason, Huawei may face a stark strategic choice in the next decade: to stay focused on the ICT sector and accept lower growth rate or diversify into other sectors with all the risks that an unrelated diversification entail. In a recent interview, Ren acknowledged that the massive investments the company plans to undertake in fundamental research means that, “That future may be closely related to our business, but it also may not be” (Kharpal, 2019). This suggests that he is already toying with the idea of diversification from the core. Whether this will be successful depends not only on the investments Huawei made in broadening its fundamental research portfolio but also on whether other firms have market-specific capabilities in the new markets that Huawei seeks to enter and if these skills are difficult to imitate (see Pisano, 2017, for a good discussion of this point). There is a third challenge to growth resulting from the geopolitical struggle between the United States and China. As we saw in Chapter 9, Huawei’s technological position in 5G technology is much stronger than in previous generations of mobile infrastructure equipment. Huawei now is a technological leader possessing the largest number of standard essential patents. Huawei has pursued for many

    years the strategy to become a significant player in the rollout of 5G technology all over the world. But in 2018, various actors within the US government have stepped up their campaign to persuade other Western governments to ban Huawei equipment from the national 5G infrastructure rollouts (Woo, 2018). What is more, the United States has launched a criminal probe of Huawei in the wake of alleged theft of trade secrets in the United States (Strumpf, Hong, and Viswanatha, 2019). Realizing a threat to Huawei’s future development, the typically media shy founder Ren has granted many interviews. This comes in the wake of Huawei’s CFO’s, Meng Wanzhou arrest in Canada on the request on the United States in December 2018. The United States is accusing Meng of having violated a trade embargo against Iran and having made false statements. Meng also happens to be the daughter of the Huawei founder, and hence her arrest is troubling to Ren well beyond the fact that a top management person of Huawei has been arrested. In a March 2019 interview with the BBC (2019), Ren issued strong fighting statement that Huawei will not accept the US government attack on it and that it will to fight the efforts to undermine the firm. Ren tried to rally all employees, stating confidently that, “The US cannot crush us” (BBC, 2019). A few weeks later, Huawei took the unprecedented step of suing the US government, alleging that parts of the defense policy bill passed in August 2018 that put a ban on Chinese companies are unconstitutional (Strumpf, 2019). The act was passed in part to punish China for claiming control of areas of the South China Sea that the US views as an illegitimate military action in international waters (O’Keeffe and Hughes, 2018). Irrespective of whether Huawei is found guilty in one or more of the US investigations, it is clear that Huawei is being caught in a geopolitical struggle between the United States and China. It is too early to tell whether the US government will be able to persuade many other Western governments aside from Australia to entirely ban Huawei from providing 5G equipment. Germany and the UK have recently stated that they will not fully ban Huawei providing 5G equipment (Nakashima and Fung, 2019). And some experts have

       started to argue that the US government claims about the danger of Huawei’s ability to act as a spy on behalf on the Chinese government when Western telecom companies use Huawei equipment are overblown (The Associated Press, 2019). The Economist (2019) has recently told policy makers that “Banning one of China’s leading firms from operating in the West should be a last resort.” It is difficult for Western policy makers to ask China to allow foreign companies fair access to the Chinese market and at the same time block Huawei completely from Western countries. If one thing is for sure, it is that Huawei will continue to face the challenge to transform itself as it has done throughout its history. When Steve Jobs died, many commentators speculated that Apple under Tim Cook would flounder. This did not happen, and Apple market capitalization grew from 347 billion USD to 922 billion USD in 2018 (Dormehl, 2018). Similar questions have been asked about how Huawei would perform if Ren Zhengfei were no longer at its helm. While Ren undoubtedly played a key role guiding and helping to transform Huawei over the past thirty years, Huawei has developed a culture and routines for change that in our view should provide for substantial continuity. Indeed, the ten years after Ren has fully passed on the torch of leadership at Huawei will provide a unique opportunity to examine how much a firm’s ability to change depends on effective impersonal routines and how much it depends on single powerful individual who is able to get large number of other people to cooperate and move the company in a different direction. If after Ren’s departure the management transformation of Huawei comes to an abrupt end, the analysis we offered in this book would be proven wrong.

 BBC. (2019, February 18). The US cannot crush us, says Huawei founder. BBC.com. www.bbc.com/news/business-47274679 (accessed Febraury 28, 2019). Becker, M. C., Lazaric, N., Nelson, R. R., & Winter, S. G. (2005). Applying organizational routines in understanding organizational change. Industrial and Corporate Change, 14(5), 775–791. doi:10.1093/icc/dth071

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Appendix A Number of Employees and Sales, 1987–2018

Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Employee

14

20 200 400 1,000 1,200 2,400 6,000 8,000 12,000 16,000

22,000 22,000 30,000 61,909 83,609 87,502 95,000 110,000 140,000 150,000 150,000

Revenue (Million USD)

1 2 4 6 13 29 67 106 150 388 720 930 1,915 2,383 2,110 2,694 3,827 5,982 8,504 12,560 18,329 21,800 28,000 32,396 35,353 39,463

Revenue (Million CNY)

3.72 7.53 19.13 31.94 71.69 167 577 885 1,247 3,216 5,961 7,699 15,853 19,724 17,464 22,298 31,675 49,003 67,792 95,506 127,297 149,059 185,176 203,929 220,198 239,025

Revenue (Million CNY) per Employee

0.27

1.60 0.36 0.42 0.58 0.74 0.52 0.54 0.75 0.64 0.99

1.01 1.44 1.63 1.10 1.14 1.45 1.57 1.68 1.46 1.47 1.59



  (cont.)

Year

Employee

Revenue (Million USD)

2014 2015 2016 2017 2018

160,000 170,000 180,000 180,000 188,000

46,515 60,839 75,103 92,549 105,191

Revenue (Million CNY)

Revenue (Million CNY) per Employee

288,197 395,009 521,574 603,621 721,202

1.80 2.32 2.90 3.35 3.84

Note: The sales revenues, from 1987 to 2010 except 2008, in USD are from Hu, Y. (2016). Customer-Driven Management Transformation. Presentations at the Quarterly Huawei Forum organized by the Ruihua Institute for Innovation Management at the School of Management, Zhejiang University. The sales revenues in RMB from 1987 to 2008 are calculated by authors with the annual average exchange rates which are published by the National Bureau of Statistics of China. The rest sales revenues are from the annual reports of the Huawei company. The employee numbers from 1987 to 2005 are from Wu, C. (2016). Huawei Has No Secret. Beijing: CITIC Press and the rest are from the annual reports of the Huawei company.

Appendix B List of Presentations at Ruihua Institute of Innovation Management, Zhejiang University   Tian, Tao. 2014. Modes and Choices: Huawei’s Global Expansion Strategy. Presentations at the 2014 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Fan, Frank. 2014. Regional Strategy of Huawei Globalisation Development: The Case of Latin-America. Presentations at the 2014 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Hu, Saixiong. 2014. The Analysis of Huawei’s Culture and Value System. Presentations at the 2014 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Wang, Ling. 2014. The Cultivation of Generals: Introduction to Huawei’s Manager Management System. Presentations at the 2014 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Liu, Hongge. 2014. The IPD of Huawei: Paths and Lessons. Presentations at the 2014 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Yu, Donghai. 2014. From ISC to GSC: The Construction and Development of Huawei’s Supply Chain. Presentations at the 2014 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.



 

  Tian, Tao. 2015. The Methodology of Transformation: Principles and Practices of Huawei’s Transformation. Presentations at the 2015 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Fan, Frank, Sun, Yelin. 2015. Customer-Centric Transformation. Presentations at the 2015 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Ouyang, Jianhong. 2015. The Transformation of Huawei R&D and Product Line. Presentations at the 2015 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Guo, Shizhan. 2015. Huawei Legal Affairs Department: Strategic Positioning, Value and Organizational Systems. Presentations at the 2015 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Hu, Yanping. 2015. How Does Huawei Improve Organisation Performance? A Perspective of Management System Improvement. Presentations at the 2015 Huawei Summer Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Yu, Donghai. 2015. To Implement Management System, to Improve Organisational Efficiency. Presentations at the 2015 Huawei Summer Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Peng, Zhijun. 2015. The Construction of High Performance Team: A Persepective from Finance. Presentations at the 2015 Huawei Summer Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Hu, Saixiong. 2015. Manager Management and High Performance Team. Presentations at the 2015 Huawei Summer Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Chen, Zhimin. 2015. High Performance Team Construction: Talent Team Construction. Presentations at the 2015 Huawei Summer Forum,

  organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Tian, Tao. 2015. Huawei: Implications of History. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Chen, Zhimin. 2015. Huawei’s Practices on Manager Management. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Li, Jun. 2015. Overseas Manager Management. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Xu, Wenli. 2015. Manager Management of Huawei Marketing System. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. De Cremer, D. 2015. Seven Leadership Lessons of Ren Zhengfei. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Zhang, Huixi. 2015. The Transition of R&D Talents Management. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Xie, Xiaoyun. 2015. The Paradigm Shift of Knowledge-based Talents Team Management: The Fit between Core Value and Strategy. Presentations at the 2015 Huawei Autumn Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Tian, Tao. 2015. Concept Innovation and Organisational Innovation of Huawei. Presentations at the 2015 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Sun, Yelin. 2015. The Development of Innovation Capabilities: Based on Huawei’s Practices. Presentations at the 2015 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Song, Haibing. 2015. Company Transformation and Organisational Innovation. Presentations at the 2015 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Wang, Wenjia. 2015. Customer Needs Management and Open Innovation. Presentations at the 2015 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Tian, Tao. 2016. Customer Needs Management of Huawei. Presentations at the 2016 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Fan, Frank. 2016. How to Recognize and Transform Customers’ Need? Presentations at the 2016 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Murmann, P. 2016. The Challenge of Maintaining Customer Centricity in a Rapidly Growing Firm: Lessons from Huawei. Presentations at the 2016 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Zhu, Xiaojiang. 2016. Using Process and IT to Support Effective Customer Relationship Management. Presentations at the 2016 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Cao, Feilong. 2015. Road of Product Development: How to Transform Needs to Competitive Products. Presentations at the 2016 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Wang, Zhangang. 2016. The Value Realisation of Demands Management: From Product Positioning to Implementation. Presentations at the 2016 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

 

  Tian, Tao. 2016. Cooperation and Sharing: An Institutional experimental Investigation on a Chinese Firm. Presentations at the 2016 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Yao, Weimin. 2016. Chinese Firms Going Abroad and Globalization: The Challenges and Solutions. Presentations at the 2016 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Chen, Zhimin. 2016. Leadership Cultivation in Chinese Firms: Under the Context of Internalization. Presentations at the 2016 Huawei Winter Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Tian, Tao. 2017. The Principle of Rise and Fall: An Organizational Formula. Presentations at the 2017 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Wang, Xingyuan. 2017. The Self Correction Capability of Huawei: Implications from the Telekom Malaysia Affair. Presentations at the 2017 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Zhang, Hui. 2017. Huawei’s Brand Strategy and Practices. Presentations at the 2017 Huawei Spring Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

  Tian, Tao. 2017. Talks in Cambridge: The Leadership of Huawei. Presentations at the 2017 Huawei Summer Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University. Ge, Caifeng. 2017. The Leadership of Huawei’s Managers. Presentations at the 2017 Huawei Summer Forum, organized by the Ruihua

  Institute for Innovation Management, at School of Management, Zhejiang University. Chen, Zhimin. 2017. From Personal Leadership to Organizational Leadership. Presentations at the 2017 Huawei Summer Forum, organized by the Ruihua Institute for Innovation Management, at School of Management, Zhejiang University.

Appendix C Interviews Conducted for the Book Interviewee Position with Huawei

Dates of Interview

Locations of Interviews

Sun, Yelin

Former senior VP of Huawei

2015.08.11 Shenzhen 2015.12.03 Shenzhen 2016.05.06 By telephone

Guo, Shizhan

Former director of Huawei Global Legal Department

2015.08.10 Shenzhen 2015.12.03 Shenzhen

Fan, Frank

Former VP of Huawei Overseas Regional Market

2016.04.11 By telephone 2016.07.05 By telephone

Li, Yigai

Former manager of Huawei IPD 2015.08.10 transformation project 2015.12.04 2016.05.06 2016.07.06

Lou, Peng

Senior Vice President of Huawei 2015.12.04 Hongkong

Tang, Jiyue Former personnel director of Huawei Wireless Products Department

Shenzhen Shenzhen By telephone By telephone

2016.05.10 By telephone 2016.10.10 By telephone

Liu, Hongge

Former manager of Huawei IPD 2015.08.10 Shenzhen transformation project

Peng, Zhijun

Former VP of Huawei Financial Management Department

Yu, Donghai

2016.04.26 By telephone Former director of operation support of Huawei Supply Chain 2016.07.05 By telephone Management Department

Song, Haibing

Former director of personnel of Huawei Financial Management Department Former senior VP of Huawei

Hu, Yanping

2016.04.26 By telephone 2016.07.18 By telephone 2016.10.11 By telephone

2016.10.12 By telephone

2016.11.08 By telephone



Appendix D The Huawei Basic Law (1998) 1998 version Translated from Chinese in November 2016 by Qian Wang, Can Huang, Johan Peter Murmann, and Ziyi Zhao

  –   1 Core Value Article 1: Pursuit As an information and communications technology (ICT) solutions provider, Huawei pursues to help customers’ dreams come true and become a leading world-class enterprise through perseverance and diligence over time. In order to make Huawei a top global ICT equipment provider, we will never step into the information service industry. Our internal mechanism can be kept dynamic without relying on the stimulation from external market pressure.

Article 2: Staff Dedicated and self-disciplined employees are the greatest asset of Huawei. In order to achieve sustainable growth of our business, we expect our staff to value knowledge and individuality and work hard as a group. We will not compromise our principles to anyone even to the employees who have made great contributions to the development of the Company.

Article 3: Technology We should extensively absorb the latest research results in the field of ICT worldwide, and be open-minded in learning from those excellent enterprises at home and abroad. On the basis of independence, we should develop a leading core technology system in an open and cooperative way so as to make our excellent products competitive among the leading ICT solutions providers in the world.



 

Article 4: Spirit Our love for the country, fellow citizens, our career and lives drives us to work together. The awareness of responsibility, innovation, professional ethics and teamwork are the essence of our corporate culture. To be practical and realistic is our code of conduct.

Article 5: Benefits Huawei proposes to share benefits and interests with our customers, staff and partners. We are exploring an internal incentive system, which means how much one gets should be equal to how much he or she contributes to the company. We appreciate hard-working employees and promise that they will be paid off with reasonable benefits.

Article 6: Culture Resources on the planet will be used up one day, but culture will last forever. All industrial products are created by human wisdom. For Huawei, we don’t have natural resources to rely on. What we possess is our wisdom, the “natural resources” in our brains. We believe that wisdom and culture can create wealth. “Culture” here contains not only knowledge, technology, management and feelings, but also all kinds of intangible elements that drive productivity and development.

Article 7: Social Responsibility Huawei’s mission is to serve the country through industrial development and help prosper the country with science and education. We are delighted to contribute to the local communities where we operate. We will also make unremitting efforts for the prosperity of China, the revitalization of the Chinese nation and the wellbeing of ourselves and our families.

2 Basic Objectives Article 8: Quality Our objective is to meet increasing demands of customers through excellent products, reliable quality, an unparalleled cost-benefit ratio and effective service. We pride ourselves on our quality.

 

Article 9: Human Capital We stress that the growth of human capital is prioritized over the increase of financial capital.

Article 10:

Core Technology

Our goal is to develop a cutting-edge ICT support system with Huawei’s proprietary intellectual property rights.

Article 11:

Profit

We will set a reasonable profit margin and profit target for each period according to our requirements of sustainable business development. Profit maximization is by no means our only pursuit.

3 Our Growth Article 12:

Growth Sector

When we are in a new growth sector, it’s supposed to help improve our core technology, take full advantage of our resources and drive the overall expansion of the company. If we follow the general trends of technology advancement, market changes and social development, we can avoid major risks. Only when we seize opportunities at the right time and have new ideas and something unique to offer customers in a well-established market will we step into this new and vast market.

Article 13:

Driving forces for Growth

Opportunities, personnel, technology, and products are the main driving forces for growth of the company. These four forces interact with one another. Opportunities attract talents, talents develop technology, technology sustains products, and products create bigger opportunities. If we strengthen these forces and allow them to drive in a positive manner, we can accelerate the growth of Huawei.

Article 14:

Growth Speed

We pursue maximization of growth based on a certain level of profit margin. We have to achieve and maintain our growth speed above the average level in the industry and the speed of our main competitors, so as to invigorate the company, attract the best talents and to realize the optimal allocation of all

  kinds of business resources. In the ICT industry, we will either be a leader or be a loser, there’s no other way.

Article 15:

Growth Management

We are not simply pursuing the expansion in scale, but to make ourselves more excellent. Therefore, our executives must be alert to the latent problems that result from long-term high-speed growth, and maintain effective management of the growth. When we are growing into a major global enterprise, we must make greater management efforts to promote the organization to be more flexible and effective. We should strike a balance between establishing a strong public profile and solid work.

4 Distribution of Value Article 16:

Value Creation

We believe that labor, knowledge, entrepreneurs and capital have created the entire value of the company.

Article 17:

Capitalization of Knowledge

We convert labor, knowledge, entrepreneurs’ management and risks into capital and reward those who contribute; through the equity arrangement, we develop the backbone of our staff and maintain effective control of the company to ensure sustainable development. We keep exploring capitalization of knowledge and a dynamic property right system that can adapt to technological and social changes. We carry out an employee stock ownership plan (ESOP). On the one hand, we can form a community with shared interests and destiny with role model employees by sharing benefits; and on the other hand, we will constantly promote the most responsible and capable people as the backbone of the company.

Article 18:

Way of Value Distribution

The value that can be distributed by Huawei are mainly organizational power and economic benefits; they are distributed in the following ways: opportunity, authority, salary, bonus, secure pension, medical insurance, equity, dividends and other welfares. We implement a combination method of distribution according to one’s performance and one’s investment into the Company’s capital.

 

Article 19:

Principle of Value Distribution

Our basic principle of value distribution is that efficiency comes first, equality follows and sustainable development matters. As to the performance-based distribution, it is about one’s ability, responsibility, contribution and work attitude. Such distribution should reflect big differences, but the income distribution curve should be continuous without any inflection point.1 As to the equity distribution, it focuses on one’s sustainable contribution, outstanding talent and moral qualities as well as risk-taking. The distribution should favor the core and backbone of the work force, and the equity structure should be dynamic but also reasonable. The proportion of the value distributed according to one’s performance to the value distributed according to one’s investment in the Company’s capital should be appropriate, and the increase and decrease of the amount and proportion should be driven by the sustainable development needs of to the company.

Article 20:

Rationality of Value Distribution

As we follow the law of value and respect facts, we introduce external market pressure and a fair competition mechanism into the company, build a fair and objective value evaluation system and make continuous improvement to it, in order to maintain a basically reasonable value distribution system. The ultimate criterion of measuring the rationality of value distribution is the competitiveness and achievement of the company, together with the esprit de corps of the staff and their attachment to the company.

  –    1 Core of Operation Article 21:

Business Focus

In the short and medium-term, our operational focus is to enhance the technology and quality of our telecommunication products. We strive to make 1

Translators’ note: The income distribution curve here described is similar to the Lorenz Curve, in which the percentage of household of a country is plotted on the x-axis, the percentage of their income is on the y-axis and the curve show the bottom x% of households possess y% of the total income of the country. The curve is continuous but without inflection point means that the income of Huawei employee should be differentiated but the income for the positions at two neighboring levels should not be drastically different. Otherwise, there will be inflection point in the income distribution curve.

  milestone breakthroughs, set up leading systems, jump out of the passive competition situation in low-end market and develop relevant ICT products. Huawei will prioritize those projects with shared resource, and the diversification of product or business should be closely related to resource sharing. In order to pool the limited resources and capital, we won’t consider other projects, however attractive they are. Our success in the past has shown that only a big market can nurture a big enterprise. Selecting big markets remains one of the basic principles in the future. However, past success doesn’t necessarily lead us to the future. We should be very careful and prudent when we are ready to expand in a new sector. For those unplanned small projects, we encourage our staff to participate in the intrapreneurship program and will allocate certain resources to support them to convert their excellent ideas into products needed by customers.

Article 22:

Operational Model

Our operational model is to seize opportunities, take the leading position in terms of product technology and cost efficiency by heavy investment in R&D, develop well within the shortest possible time through extensive marketing campaigns, and fully obtain the excess profit generated by the “window of opportunity.” We continuously optimize the mature products, navigate the price competition in the market, and consolidate the leading position in the strategic market. We will build our organization structure and talent pool, and constantly improve the overall operating capability of the company under the guidance of this operational model. Our advantages in technology, quality, cost and service built up in the design process ensure us to be competitive. Low cost Japanese products, stable German products and advanced American products are what we should compete with and overtake.

Article 23:

Resource Allocation

We adhere to the “Principle of Pressure.” On the key success factors and the strategic points of choice, we will allocate more intensive resources than our main competitors. Once we decide to do a thing, we will go all out with extensive human, material and financial resources to achieve major breakthroughs. We should allocate the resources reasonably and make effective use of them. We realize that the allocation of talent comes first, followed by the allocation of material and financial resources. Our guideline is

  to empower the best talent with full authority and necessary resources to get their job done.

Article 24:

Strategic Partnerships

We value extensive peer cooperation and strategic partnerships, and actively explore diversified forms of external cooperation on the basis of mutual benefit.

Article 25:

Service Network

Huawei commits to provide customers with lifelong product service. We are building an impeccable service network to provide customers with professional and standardized service. To survive and grow, we must meet the customer’s demand. We should build up our team to fulfill the objective of providing good service, and measure all our work with customer satisfaction.

2 Research and Development Article 26:

R&D Policy

We develop products in accordance with the trends of customer value. The principle of our product development is extensive cooperation on the basis of independent development When selecting the research and development projects, we should have the courage to break the routine and do something unusual. We should make good use of moderate chaos, and endeavor to make research breakthroughs in the unknown areas; we should improve our procedures to allow competition and selection in the product development process to ensure successful development. We guarantee that we will invest 10% of the sales in R&D, and will increase such investment if necessary and possible.

Article 27:

R&D System

We should build three parallel research systems which comply with the strategy of a big company, namely the research system for strategic planning of product development, the product R&D system and the product pilot test system. With the development of the company, we will also set up local research institutes in domestic and overseas regions with talent and resource advantages. In relevant fields of basic technology, we should cultivate top talent specialized in basic technology, particularly in some narrow fields. In

  product R&D, we should cultivate a group of interdisciplinary experts on system integration. The research of basic technology is a part of the circulation process of R&D staff. Without the in-depth basic technology research, a high standard of system integration is impossible; and without the guidance of the market and system integration, basic technology research will not be on the right track.

Article 28:

Pilot Test

We highly value the research on quality certification and testing methods of new products, devices and processes. It is necessary to build a state-of-the-art product pilot test center equipped with advanced testing methods and a galaxy of excellent engineers with broad background knowledge and diverse skill. This large center is the one and only that we’ve built all over the world, because we want our pilot test talent and equipment to lead the world. We select new products and devices through a collective strict screening process, improve product reliability through constant quality certification, continuously run tolerance design tests to improve techniques and reduce cost, and expedite the commercial process of research findings.

3 Marketing Article 29:

Market Position

Huawei is positioned to become the best equipment provider in the industry. Establishing a strong market position is the core objective of marketing. We are not complacent with the growth of overall sales. We have to be clear about the market share of every knock-out product in the company and how much it could expand. Especially for new products and emerging markets, market share and sales quota are more important. Branding, sales networks, service and market share are the key elements to sustain our market position.

Article 30:

Market Expansion

The top priority of marketing is to fight for strategic markets and explore markets with huge potential. We should rapidly seize the opportunity to penetrate and expand emerging product markets, and at the same time, push forward the expansion of mature products in both traditional and emerging markets, so as to secure an absolutely dominant market position. As a network equipment provider, our market strategy is to gain the competitive

  advantage, and have the upper hand of market domination. Since market expansion is an overall operation of the company, we should constantly improve our general responsiveness by influencing the motivation of every employee to deliver what the market pressure demands.

Article 31:

Sales Network

As for the structure of marketing system, we build a customer-oriented sales system and establish a product-based marketing system to form a twodimensional matrix network.

Article 32:

Marketing Team Building

We make great efforts to develop a team of highly-competent sales engineer and marketing managers who are good team players, and we also keep identifying and preparing strategic marketing management talent and international marketing talent. We should build our marketing team to meet the long-term objective, and motivate and drive it to fulfill responsibility, pursue career and gain recognition.

Article 33:

Resource Sharing

Given the unpredictable changes in the market, the fragmented market landscape and diversified product portfolio, our marketing team needs to provide real-time powerful and comprehensive support, which requires us to rapidly deploy and organize vast resources to capture market opportunities and gain advantages in the region. Therefore, the marketing department must operate flexibly, and achieve dynamic optimal allocation and sharing of resources through pre-planning and on-site assistance.

4 Production Model Article 34:

Production Strategy

Our product strategy is to build an agile production system on the basis of super-large sales scale. We adopt the state-of-the-art manufacturing technology and management methods according to local conditions, make continuous improvement for higher quality and lower cost, shorten the delivery time and enhance the manufacturing flexibility, so that we can maintain world-class manufacturing and production.

 

Article 35:

Production Distribution

In the future, we will diversify our businesses and make large presence across the world, as such, we will manufacture key basic pieces centrally and assemble final products separately based on the principle of scale economy, comparative cost and proximity to customers. We will also reasonably plan the domestic and international production distribution and optimize the supply chain.

5 Finance and Investment Article 36:

Financing Strategy

We strive to diversify the financing methods, and continue to promote the debt management steadily. Through opening up capital sources, controlling capital cost and accelerating capital turnover, we can gradually establish the financing partnership that will sustain our long-term development to ensure the realization of our strategic goals.

Article 37:

Investment Strategy

Our medium- and short-term investment strategies are mainly about product investment, a bid to pool resources to the fullest extent, and rapidly enhance our technology strength, market position and management capability. When it comes to making crucial investment decisions, we don’t necessarily have to pursue high profit projects at the moment. Rather, we should also focus on those growth opportunities of emerging markets and new products with huge potential. We will never engage in diversified yet irrelevant businesses operations that disperse corporate resources and distract the senior management.

Article 38:

Capital Management

We explore capital management on the basis of the success of product management, and allocate resources more extensively through the property right mechanism. It is shown that this transformation can’t be realized without the support of our technical prowess, marketing efforts, management expertise and good timing. If we want to expand, we have to be strong enough; if we want to capture opportunity, we have to be well prepared. The knowledge-based capital is the key to speed up the virtuous circle of capital management. In the process of capital expansion, we will first select strategic

  partners who should be a technology holder, a market player and a good complement to us, and next thing we consider is financial capital. Capital management and external expansion should be beneficial to the growth of potential and benefit, and also the harmony of the organization and its culture. If we would list our company, it would have to be good for us to consolidate the existing foundation of value distribution system.

  –    1 Basic Principle Article 39:

Guideline to Establish the Organization

A robust organization of Huawei should be beneficial to: (i) strengthening responsibility and guaranteeing the realization of corporate objectives and strategies, (ii) streamlining the process and quickly responding to customer demands and market changes, (iii) improving collaboration efficiency and reducing management cost, (iv) communicating information and helping innovative and excellent talent stand out, and (v) cultivating future leaders to ensure the sustainable development of the company.

Article 40:

Principle to Set Up Organization Structure

Huawei will always remain an integrated entity, which requires us to have the control in any forms of cooperation involving Huawei’s logo or trademark. Our basic principle for the organization is that structure is determined by strategy. In order to ensure sound development of key and new businesses of strategic significance, we should set up corresponding responsible units, as an integral part of the company organization. The organization structure doesn’t evolve spontaneously, but stage by stage. If our organization structure is relatively stable over a period of time, it will help us maintain stable policy and management team, upgrade management level, and improve efficiency and results.

Article 41:

Principle to Set up Positions

Management positions are set up to reflect proper function and business process, and based on a regular work essential for the realization of organization objectives. The working scope should be large enough so as to make the person in this role to assume more responsibilities, do less coordination in work and feel a greater sense of achievement entailed by

  bigger challenge. The authority of such position should be centralized. The purpose, scope of work, affiliation, responsibility, authority and qualifications for any management position should be clearly defined.

Article 42:

Responsibilities of Managers

The basic responsibilities of managers are to actively and responsibly carry out the work in line with the aim of the company, so as to deliver good performance, help team members accomplish the work and create a promising future for the company. How well managers fulfill these basic responsibilities will determine how well they are recognized by their subordinates.

Article 43:

Expansion of the Organization

Expansion is a must if an organization wants to grow and diversify its business. In this regard, opportunity matters. Whether we can seize the opportunity and to what extent the organization can expand will depend on the quality of the management team and the capability of management and of control. When expansion can’t effectively improve its efficiency and results, the company will slow down its pace of expansion, and focus on the improving the management capability.

2 Organizational Structure Article 44:

Basic Organizational Structure

The basic organizational structure is two-dimensional: business units (BUs) by strategic business and regional companies by areas. BUs are responsible for the development, manufacturing, sales and customer service within the business scope defined by the company; and regional companies should efficiently utilize the company’s resources to develop in regional markets defined by the company. As profit centers, both BUs and regional companies have the responsibility to generate actual profit.

Article 45:

Major Structure

We follow the principle of functional specialization to establish management departments. This principle also applies to dividing departments in the business activity fields for the purpose of improving the efficiency and strengthening control. The management resources, research resources, pilot test resources, certification resources, production management resources,

  market resources, financial resources, human resources and information resources are all common resources of the company. In order to improve the efficiency of the common resources, audit is a must. Relevant departments should be organized according to the principle of functional specialization, forming the major structure of the company.

Article 46:

Business Units

We follow the target-specific principle to establish new BUs. BUs are divided either by product area or by technical process. The BUs established based on product are expansion-oriented; and the ones established based on process are service-oriented. Expansion-oriented BUs are actually profit centers, which carry out centralized policies and but are managed in a decentralized fashion. Based on the principle of effective control, we should design essential functions for them to run independently, granting full authority with strict supervision. If a product or business area with a relatively independent market and a certain scale of operation will benefit from independent operation for expanding and strengthening the final result responsibility, we should select an organizational form that is more beneficial to its development in time.

Article 47:

Regional Companies

Regional companies, which are designed as a separate legal person, are the subsidiaries that are divided by region, wholly owned or controlled by the parent company. In the defined regional market and business area, each regional company will fully utilize the resources allocated by the company and try to mobilize the common resources of the company to seek development. Each regional company is fully responsible for its own profit. In the regional market where the regional company operates, the parent company and all the BUs will refrain from competing with it. If any BU needs to expand its business, it can choose to collaborate with or support the regional company.

Article 48:

Evolution of the Matrix Structure

When departments divided by function have crossover operations with departments divided by specific targets, the matrix structure will be formed in the organization. The matrix structure of the company organization is a dynamic evolution process that continuously adapts to changing strategy and

  environment. In this process, balance is disturbed and restored. If we do not upset a balance, we cannot create opportunities for rapid growth; and if we do not strike a new balance, we may bring long-term uncertainty to our operation and weaken the basis for responsibility system. In order to safeguard the principle of centralized leadership and conformity of rights and duties, and reduce uncertainty and improve efficiency of the organization, we have to strengthen management by: (i) building an effective senior management organization, (ii) granting full authority combined with enhanced supervision, (iii) enhancing the consistency and authority of the planning exercise, (iv) improving the evaluation system, and (v) developing teamwork.

Article 49:

Help Network

We should properly introduce across-departments and bottom-up communication mechanisms into the company’s vertical hierarchical structure, in order to activate the whole organization, and utilize and share the resources to the fullest. We need to guarantee the functioning of the regular communication and decision making mechanism and the smooth implementation of decisions, and also respond immediately and flexibly to the requests arising horizontally from one department to another and from bottom up. In this way, those highly responsible grassroots supervisors and staff who are closest to customers and the first to identify changes and opportunities can get the support from the organization in time and make distinctive contributions to the organization.

Article 50:

Hierarchy of Organization

Our basic guiding principle is to streamline the organization to improve its flexibility. To achieve this, we should both streamline departments and positions as well.

3 Senior Management Organization Article 51:

Senior Management Organization

The basic structure of the senior management organization is composed of three parts: the corporate Executive Board, executive committees and corporate functional departments. Executive committees include the Strategic & Development Committee, the Human Resources Committee, and the Finance Committee.

 

Article 52:

Responsibilities of Senior Management

The corporate Executive Board is responsible for defining the mission, strategies and goals for the company, making decisions on major issues, and ensuring the sustainable growth of the company. Senior management committees are composed of experienced professionals who provide advice for the company. These committees are responsible for preparing strategic plans and basic policies, reviewing budgets and major investment projects, as well as checking plans, basic policies and the performance of budget. The reviewed results have to be approved by the CEO office meeting before execution. Corporate functional departments manage the common resources, supervise and direct all the BUs, subsidiaries and business departments on behalf of the CEO. Corporate functional departments should be set up centrally to avoid overlapping leadership. The task for senior management should be fulfilled in the form of projects. Once senior management’s projects are completed, specific job and system will be formed and incorporated into the responsibilities of specific functional departments.

Article 53:

Decision System

We follow the principle of democratic decision-making and authoritative management. Major decisions by the senior management should be fully discussed by senior management committees. Decisions shall be made in compliance with the mission, goal and basic policies of the company; in principle, we will only take wise and insightful advice before any decisionmaking. Truth is always on the side of the few, but we should encourage different voices. Once a resolution is formed, senior management committees shall make collective decision and department heads shall convene office meeting. Our policy is to provide enough room for the senior management to give full play to their wisdom; strengthen the execution at the grass-roots level, and ensure every responsibility to be performed. All department heads are affiliated with respective committees, and these committees are responsible for discussion instead of administration, they have the right to supervise resolutions to prevent one-man management. Department heads should make daily management decisions following the principles confirmed at their office meetings, and they should be held accountable for the consequences of the decisions. The minutes of these office meetings at all levels should be reported to a higher level. There must be over two-thirds of the full members’ signatures on the report which should contain different

  opinions at the meeting. The CEO is the final decision-maker, should solicit opinions extensively when exercising this power.

Article 54:

Code of Conduct for Executives

Executives are expected to: (i) remain aggressive and proactive, take risk for the company’s future and major operation decisions on their own; (ii) prioritize the company’s interests instead of departments and individuals; (iii) listen to different opinions and unite with all the people that can be united; (iv) strengthen the training of moral qualities, stay upright and selfdisciplined; (v) keep learning.

  –     1 Principle of HR Management Article 55:

Primary Purpose

The sustainable growth of Huawei fundamentally relies on the development of the organization and its culture. Therefore, the primary purpose of HR management is to build a large team that is highly professional, dedicated and cohesive and to create a self-motivating, self-disciplinary mechanism that can help the talent stand out from the crowd, in order to provide guarantee for the rapid growth and effective operation of the company.

Article 56:

Basic Principle

All the staff at Huawei should be treated equally with respect and dignity regardless of their positions. The basic principle of HR management is to be just, fair and open.

Article 57:

Justice

A shared vision is the criterion to make fair evaluations of our staff; a clear assignment of challenging tasks and goals for every employee is the foundation to make fair evaluations of his or her performance improvement. The ability and potential displayed by the staff in their work is more important than their education background when they are being evaluated.

Article 58:

Fairness

Huawei pursues the principle of giving priority to efficiency with due consideration to fairness. We encourage every employee to compete on the

  basis of sincere cooperation and responsibility; and we provide all employees with fair opportunities and a level playing field to develop. All employees are expected to strive for the opportunity provided by the company with their own talents and abilities; to improve their competence through working and selflearning; and to fulfill themselves by completing and improving their own jobs in a creative way. We veto any shortsightedness, comparisons and equalitarianism in the evaluation and rewards allocation processes.

Article 59:

Openness

We believe that maintaining openness is the prerequisite to guarantee the justice and fairness of HR management. To make major corporate policies and systems, we will seek for opinions and consult adequately. By curbing opportunism and clarifying praise and criticism, we increase transparency in the implementation of systems. We reject individualistic behaviors that amount to anarchy and indiscipline.

Article 60:

HR Management System

We don’t have a life-time employment system in Huawei, but you can still work for your whole life here. We advocate at-will employment while taking China’s reality into account.

Article 61:

Internal Labor Market

By building an internal labor market, we have introduced a competition and selection mechanism to HR management. And the swapping between internal and external labor markets can help us select the best talent, realize reasonable allocation of human resources and infuse new blood to the company. In this way, we can have the right people for the right positions.

Article 62:

People Responsible for HR Management

HR management is a job not only for the HR department but for the entire leadership. Managers of all departments are responsible for recording, directing, supporting, encouraging and evaluating reasonably the work of their subordinates, and they should also help subordinates with their career development. Performance of subordinates and promotion of talent is the key to determine the promotion and remuneration of the managers.

 

2 Employees’ Duties and Rights Article 63:

Employees’ Duties

We encourage employees to develop proactive attitude and take actions towards the company goals in their daily work. Every employee makes contribution to the company goals mainly by doing a good job. On one hand, they are expected to broaden their horizons, gain a better understanding of their roles in promoting the corporate goals, and develop an altruistic way of thinking to improve their teamwork ability and techniques. On the other hand, employees should act within their restricted duties to avoid interfering with others’ affairs, and prudently reveal the administrative vulnerability and problems covered by overlapping responsibilities. They should also bypass their line managers and report directly to the higher levels about actual shortcomings and mistakes in management. And the employees are allowed to act as they see fit in emergencies, so as to seize opportunities to protect the company from risks and prevent disaster. However, the employees under the foregoing circumstances shall be responsible for their moves and consequences. All employees must comply with the company’s confidentiality rules.

Article 64:

Employees’ Rights

Every employee has the following basic rights: right to consult, right to make suggestions, right of petition and right to reserve judgments. As long as daily routines and smooth business operation are maintained, employees have the right to consult the managers, and the managers have the duty to give reasonable explanations. Employees have the right to make rational suggestions for improving management and operations. They also have the right to lodge an appeal to the superior of their line manager for any treatment they deem unfair. The appeal must be based on facts and in written form, and must not affect the daily work or interrupt the proper functioning of the organization. Managers at all levels must respond to the subordinates’ appeals at their earliest convenience. Employees have the right of reserving judgement, which should not affect their work though. And the superiors should never discriminate against those who disagree with them.

3 Assessment System Article 65:

Basic Assumption

The Employee Assessment System of Huawei is based on the following assumptions. First, most employees at Huawei are responsible and

  cooperative, and have strong self-esteem and ambitions. Second, as every bean has its black spots, the people with outstanding advantages usually have obvious drawbacks. Third, work attitude and ability should be reflected in the improvement of performance. Fourth, failure paves the way to success, but this shouldn’t be the excuse for making the same mistakes repeatedly. Fifth, managers will be held partially responsible for their subordinates who fail to meet the requirements of the evaluation standards. The performance of employees constitutes the performance of managers.

Article 66:

Assessment Method

To build an objective and fair evaluation system is a long-term task for Huawei HR management. The assessment will be carried out regularly for every employee and manager of their performance, attitude and ability based on clear aims and requirements. The assessment of performance should focus on the improvement to it, and it should be done intensively; the assessment of work attitude and ability should focus on the long-term performance, and it should be done extensively. The assessment results should be properly recorded, and the assessment indicators should vary as the company develops, highlighting different priorities in different periods. A regular reporting system should be built to facilitate good communication between managers and subordinates at all levels and strengthen mutual understanding and trust. Communication, as an indicator, will be included in the assessment of managers. The assessment of the employees and the leadership will be carried out in an interactive and comprehensive manner. Meanwhile, the assessed have the right of appeal.

4 Main Norms of HR Management Article 67:

Recruitment and Employment

With its unique corporate culture and strong reputation in the industry as well as the opportunities, policies and remuneration it offers, Huawei attracts and recruits top talent. In recruitment, we pay attention to applicants’ competence, potential, moral qualities, educational background and experiences. Following the principle of two-way selection, we make objective and equivalent commitment on the usage, training and development of talents. We will set up reasonable staffing structure to align with corporate strategies and goals in different periods.

 

Article 68:

Dismissal

We will build a routine dismissal procedure based on an internal competition and elimination mechanism. Employees who bring severe losses to the company due to violation of corporate disciplines and seeking personal gains will be must be dismissed following the relevant rules.

Article 69:

Remuneration and Welfare

We offer favorable remuneration and welfare for excellent employees. Payment distribution is based on merits; allocation of bonus is linked with the performance improvement of the individual and the entire department; the pension and other welfare are allocated according to the assessment results of work attitude; and with regard to medical insurance, we offer different treatments for executives and senior professionals from that of ordinary employees, which means executives and senior professionals will receive healthcare services based on their contributions to the company in addition to medical insurance. We will not pursue the maximization of short-term benefit distribution for employees at the cost of long-term interests of the company. But the company guarantees that during boom times and during periods of sustained growth, the average annual income of employees will be higher than the top level in the local industry.

Article 70:

Automatic Pay Cut

In the economic downturn and during temporary setbacks of business growth, or as needed for corporate development, the company will automatically initiate the pay cut mechanism to pull through while avoiding excessive layoffs and outflow of talents.

Article 71:

Promotion and Demotion

Through hard work and ability improvement, every employee has a chance of promotion. Correspondingly, the company maintains the fair competition mechanism in the workplace and firmly pushes forward the flexible leadership system. The company obeys the rule of growing talent, and appoints the most competent person to the most important roles in accordance with impartial assessment results. We won’t merely refer to the seniority and level in appointment. Based on the requirement of the corporate goals and development as well as the mandatory screening procedure, we will offer exceptional promotion for those who have outstanding performance and make

  special contributions. However, we prefer to develop and promote people in a natural and well-paced way.

Article 72:

Job Rotation and Expertise Training

We adopt a job rotation policy for intermediate and senior managers. People without working experience in relevant positions cannot be the department head. People without experiences at grass-roots cannot be a section-level leader or a higher role. At Huawei, we have relatively fixed positions for managers, professionals and operating personnel at basic levels. You choose a job because you love it; and if you do a job, do it well. First of all, one needs to pass the recruitment exam to get a job and then pass the in-service performance assessment to keep the job.

Article 73:

HR Development and Training

Continuous HR management is essential to reach the goal of adding value to HR. At Huawei, we combine on-the-job training with off-job training, and selfdevelopment with educational development. In order to review the results of HR development, we need to build an input-output evaluation system.

  –    1 Management Control Policy Article 74:

Policy

We establish and improve our management control system and other necessary regulations to ensure the consistency of corporate strategies, policies and culture. On this basis, we can adequately empower managers at all levels to create an active, efficient and stable environment that is not only driven by goals and interests but also directed by procedures and regulations.

Article 75:

Goals

We have set short and medium goals for the further improvement of the corporate management system. Specifically, we will develop and improve the budget control system, cost control system, quality management and assurance system, the business procedure system, the audit supervision system, the documentation system and the project management system. In addition, we will take effective control of the fields that are vital to the

  survival and prosperity of the company so as to set up standard operation procedures that a major company should be equipped with.

Article 76:

Principles

In management control, Huawei adopts the following four principles. First is the Principle of Hierarchy. Management control must be structured hierarchically, since excessive control beyond one’s authority will be detrimental to the responsibility basis, on which management control is developed. Second is the Principle of Exception. Daily routine activities should be delegated to subordinates who should deal with them according to the established guidelines. Superiors mainly handle exceptional or extraordinary events. Third is the Principle of Role-specific Control. It varies due to the nature of different roles and tasks. We exercise target-oriented performance evaluation for the middle and senior management; impose quantity-based accountability on the operation department at grass-roots; and apply task-based appraisal to the functional and administrative personnel. Fourth is the Result-oriented Principle. By evaluating the department performance with the management control system, we expect to help department heads make decisions with the overall benefit maximization in mind. We firmly believe in reinforcing management control. But meanwhile, we understand that it is not necessarily incorrect to vary from the budget (or standard) and that it is not a panacea to simply cut down expenses. We encourage employees and department heads to take active and responsible actions towards corporate aims when coping with issues uncovered in the management control system or when the environment and condition have changed. Under such circumstances, those who suffer a setback in the executing process even after careful research and planning should be encouraged and should not be blamed for the failure.

Article 77:

Continuous Improvement

The performance evaluation of the departments and of employees focuses on performance improvement. The corporate strategic objective and customer satisfaction are the two starting points to build the assessment index system for performance improvement. We will break down the strategic objectives to set goals for every department, and measure customer satisfaction to set goals for each position. The assessment index system for performance improvement ought to play a leading role, so that every department and every employee

  makes efforts for the common goal. It must also be measurable with priority. The index of the system should also be progressive and challenging. Continuous improvement allows us to get closer to the ideal goal of high quality, low cost and high efficiency.

2 Quality Management and Quality Assurance Systems Article 78:

Quality Control

Key to the competitiveness of a product are excellent performance and reliable quality. We believe that the quality is manifested in the entire product life cycle including research, design, pilot testing, manufacturing, distribution, service and usage. Therefore, all factors that affect the product quality in this process must always be under control. We must carry out total quality management (TQM) that covers the whole procedure and involves all employees, enabling the company to provide products that meet quality standards and satisfy customer needs. Our quality policies include: 1. Build a corporate image of premium quality and provide great customer service; 2. Consider quality in the product design; 3. Produce in accordance with the contract specifications; 4. Cooperate with qualified suppliers; 5. Provide safe working environment; 6. Ensure that quality system meets ISO-9001 requirements.

Article 79:

Quality Objectives

Our quality objectives are as follows: 1. Keep pace with the global trend in technology; 2. Creatively design and manufacture products that have the best cost performance; 3. Achieve failure-free operation of products for 2,000 days on average; 4. Be detail-oriented to cater to customers’ needs in every aspect; 5. Provide accurate delivery, perfect after-sale services, thoughtful user training and sincere reception of orders and return of defective products We comply with the ISO-9001 requirements and pass the international accreditation review regularly to build and improve the Quality Management and Quality Assurance Systems across the company and align with international standards.

 

3 Comprehensive Budget Control Article 80:

Nature and Task

A comprehensive budget is the basis of the annual operation activities of the company. And it is also an important approach to keep the uncertainty in the outer environment at bay, reduce reckless and arbitrary decision-making and improve the overall performance and management of the company. With a comprehensive budget, we mainly aim to achieve the following goals. First, coordinate activities and goals in all departments. Second, anticipate the financial results of annual business plan and its impact on cash flow. Third, optimize resource allocation. Fourth, identify the managerial responsibility of each responsibility unit. And fifth, provide the basis for cost control and performance evaluation of all departments. The company develops a multi-level budget control system, to which the income and expense of every responsibility unit should be included.

Article 81:

Management Responsibility

The planned budget and actual budget at corporate level are reviewed by the Finance Committee and approved by the CEO/Rotating CEOs. The financial department is responsible for preparing the corporate-level budget, supervising its execution and appraising the results. With regard to lower level budgets, their preparation and modification must be conducted according to the regulations. In preparation of budgets, the revenue and profit centers should set the expenses reasonably in favor of potential and economic growth; and the cost center should follow the make-ends-meet policy. Huawei’s BUs and the financial departments of subsidiaries should submit analytic reports regarding the budget execution to the Finance Committee. Their performance in budget preparation and budget control will be examined and reviewed according to how well the budget goals are met.

4 Cost Control Article 82:

Focus

Cost is the key winning factor in a competitive market. And when it comes to cost control, we should develop a control strategy rationally after weighing the comprehensive input-output benefit from the view point of product value chain. The main cost drivers that must be controlled tightly include: design

  cost; procurement and outsourcing cost; quality cost, especially the maintenance cost caused by problems in product quality and craftsmanship; inventory cost, especially the dead stock due to the version upgrade; and waste of the period expense.

Article 83:

Control Mechanism

The premise of cost control is correct calculation of the cost and expenditure of products and projects. And the payment should be reasonably apportioned based on the characteristics of businesses in the company. The company adopts target cost control in product cost and exercises cost veto in product approval and design. The target cost of the product is determined in light of its competitive market price. Indicators of cost reduction must be included in the performance evaluation system of all departments and associated with the vital interests of managers and employees so as to motivate them to reduce cost consciously.

5 Restructuring of Business Processes Article 84:

Guideline

By restructuring business processes, we intend to respond to the customer needs more swiftly, expand the routine management while reducing management by exception, improve efficiency and stop up loopholes. The guideline for business process restructuring is the ISO-9001 standard and we should combine it with the construction of Management Information System, thus providing effective and simple procedures and operational standards for all the key businesses activities. Afterwards, it is necessary to rationalize the relationship of various minor business processes. On that basis, we need to define the responsibility for every department and different positions, continuously optimize and simplify the procedures for approval and improve management systematically to create a replicable management system.

Article 85:

Process Management

Process management is a type of horizontal management according to the standardized business process, which is under the authorization of both the vertical linear management system and the (vertical) functional management system. It is task- and customer-oriented management driven by people in

  charge. Regardless of their rank, the heads in the business process should exercise their power and undertake their responsibilities as required, conform to rules of process and ensure the quality and efficiency of the operation by taking the perspective of a customer. To build and improve a statistics and evaluation indicator system is the key to identifying the responsibility for final results and strengthening process management. And customer satisfaction is the core to develop this system. It is a long-term task for us to improve the workflow and the ability in information integration in terms of process management, always adapt to the requirement of the market change and the expansion of BUs, and to simplify and improve previous business process system.

Article 86:

Management Information System

The Management Information System is a supportive platform and a useful tool for corporate operation and management control. We use it to improve the efficiency of operation and functional control, increase our competitiveness, develop and utilize the information resource, and facilitate the management decision. To build this system, we opt to employ advanced and mature technology and products and insist on in-house development with minimum cost.

6 Project Management Article 87:

Necessity

As a high-tech company with a rapid growth goal, it is a must for Huawei to constantly launch new projects with regard to new technology, new products, new markets and new fields. However, it is hardly possible to complete these existing projects that have a bearing on its survival and development if managed under the current functional management system in an ordinary way. Instead, we have to rely on trans-department cooperation and project management. Therefore, project management should be integrated into the basic management model along with functional management.

Article 88:

Management Focus

Project management is systematic supervision of the entire project life cycle. We should develop a complete and formal project management system using

  the most advanced management models in the world. And we need to make improvement in several key aspects, namely approval for project initiation and change, budget control, process control and record-keeping. The sunset rule is applied to project management.2 By controlling the number of projects, we can leverage our resources effectively and improve the overall operation system. Once a project is accepted, it will be shifted to the ordinary management system and follow standard operating procedures.

7 Audit System Article 89:

Function

At Huawei, internal audit is a supervisory activity that involves investigating its departments, BUs and subsidiaries for the authenticity, legitimacy and effectiveness of their business activities and reviewing its internal control systems to evaluate whether they are scientific and effective. Apart from the basic internal audit functions such as financial audit, project audit, contract audit and departure audit, the Audit Department is also required to audit plans, key business processes, major management systems and other important tasks relating to corporate goals, playing an active role in improving internal management.

Article 90:

System

At Huawei, we exercise a process-centered audit system. By establishing several monitoring and audit points in the process. We clarify the supervisory responsibility of managers at all levels and achieve automatic audit. We promote and continuously improve an optimal regeneration system where the Planning, Statistics and Audit functions operate independently and form a closed cycle in the meantime. This triangular cycle involves all departments and every activity. Numerous small cycles form a medium cycle which in turn links with each other to form the bigger cycle. Such a closed process can allow the company to establish a managerial mechanism of check and balance, and keep self-optimizing. Besides, the flow of auditors will spread audit methods and improve audit quality. We strive to create a more

2

Translators’ note: The sunset rule in project management means that a deadline is set for reviewing a project. The authority will examine the effect of the project and determine whether it should be continuously carried on after the deadline.

  transparent and open audit system to serve and safeguard the effective functioning of the company.

Article 91:

Limits of Authority

The audit departments of Huawei have the following basic authorities: first, it is directly responsible for and reports to the CEO/Rotating CEOs without interfere by other departments or individuals; and second, it is granted with all necessary authorities to perform audit functions.

8 Control of Business Units Article 92:

Policy

The management policies of BUs are favorable to: (i) the growth potential, (ii) the increase of efficiency, and (iii) the coherence of the organization and culture of the company.

Article 93:

Performance Evaluation

As profit centers, BUs run independently within the business scope defined by the company and are responsible for expansion, profit and asset. The main indicators in the assessment of BUs include sales revenue, growth rate of sales revenue, market share and profit under management. To examine sales indicators is intended to encourage the expansion of BUs; and to examine profit management is intended to keep in balance of the expansion, profit and asset responsibilities. As the different growth requirements for BUs, Huawei will affect the operation activities of BUs by adjusting the profit distribution coefficients respectively related to the sales revenue, growth rate of sales revenue and profit under management of the BUs. All profits of BUs will be allocated by the company according to its strategy and goals.

Article 94:

Decision-making Power

According to our policy, BUs will be properly empowered only if they meet the requirements of the “Three Favorable” principle in Article 92. The decisionmaking power of General Managers of BUs covers the right to determine the expenditure in budget, the right to dispose of the owned business resources, and the right to make managerial and personnel decisions and to distribute benefits under the guidance of the corporate policy.

 

Article 95:

Control and Audit

Huawei controls and audits BUs mainly in the following aspects. First, it appoints and dismisses the General Managers, Financial Directors, HR Directors and Audit Directors of BUs. Second, it controls the total income and expenditure of BUs according to the approved budget. Third, it raises funds collectively and BUs use the funds but have to pay the interest. Fourth, it manages cash collectively and BUs are responsible for the balance of its own cash flow. Fifth, BUs submit financial reports to the Finance Committee regularly. And sixth, its Audit Department audits BUs.

Article 96:

Service-oriented BUs

The role of service-oriented BUs is to provide internal services at low cost to promote the overall expansion. And a simulated market mechanism will be applied in internal operation.

Article 97:

Profit-related Compensation System

BUs carry out a compensation system that includes virtual profits as part of payment calculation. On that basis, the company offer remuneration equivalent to risks and efficiency.

9 Crisis Management Article 98:

Crisis Awareness

As the refresh cycle of the high-tech is increasingly shorter, all the high-tech firms face crises on the road ahead. As a successful company growing stronger and bigger, Huawei also encounters more and more major crises. We should be aware that opportunity comes along with crisis. The very goal of crisis management is to turn challenge into opportunities, helping the company overcome obstacles and enter a new growth stage.

Article 99:

Early Warning and Disaster Relief

It is necessary to build an early warning system and a quick response mechanism so that we can vigilantly predict and perceive minor yet significant external changes caused by competitors, customers, suppliers and policies & regulations, and deal with major emergencies that damage the corporate image due to unexpected events of the executives and product problems.

 

  –        Article 100: Inheritance and Development Over years of development, Huawei has accumulated a valuable asset – its management method and experience, which shall be inherited and developed by managers at all levels. Development is impossible without inheritance; and tiny changes over time will eventually make the difference. We should inherit what we have owned and continue to forge ahead, which is fundamental to a flourishing future of Huawei.

Article 101: Requirement for Successors One of the differences between a leader and a role model is that the former recommends talent while the latter works hard to be one. Only those who can recommend talent and continuously cultivate successors can be leaders and become the successors of positions at all levels in the company. The most important qualification for executives and managers is whether they can recommend and prepare qualified successors. If they fail to do so, they should resign in the next term of office. It’s not enough to be excellent alone, in fact, they are expected to develop even more excellent successors for the company. We should make rules to prevent the third, fourth and future generations of successors from being corrupt, self-centered and indolent. Should some of our top leaders have sought personal gains by abusing their powers, our leader selection system and management method are at stake. If we don’t see through things and fail to find the root cause, we are doomed one day.

Article 102: Selection of Successors Successors of Huawei are leaders naturally selected from the staff and managers at all levels who are good players and strong performers in their teams. We have created favorable conditions for potential leaders, such as challenging opportunities accompanied by the fast growth of the company, as well as the democratic decision-making system and culture of joint efforts in a group; all the committees and the department head office meetings at all levels serve as a good manifestation of the democratic system with our senior management, and a cradle of future successors. We should cultivate, select and evaluate talents in practice. Those incompetent but sophisticated people should not be appointed in important positions. We should steadfastly learn

  from the first and second generation of entrepreneurs who inspire us to work hard, boldly exploring the unknown; to be collaborative and open-minded, upholding and continuously improving our fair and reasonable evaluation system; to be aggressive and responsible, motivating ourselves with high goals; to be practical and realistic, developing a vision of philosophy, sociology and history and a meticulous work attitude. Going global and accomplishing our mission are the definite tasks for Huawei’s successors from generation to generation.

Article 103: Modification to The Huawei Basic Law The Basic Law is modified every ten years. In the process of modification, we will follow the truth instead of blind conformity. First, 10% staff will be elected from managers, technical and business backbone and grassroots leaders to review the modification and prepare a clear draft proposal. Then, 20% will be elected from the previous 10% to review and polish the proposal together with the Board of Directors and the Executive Committee. The final proposal will be published to solicit opinions from the general staff. Lastly, the final approval will be made by the representatives composed of the Board of Directors, the Executive Committee and excellent staff in equal amount. As the guideline for the macro management of the company, The Huawei Basic Law provide measurements to deal with the unity of opposites in major relationships in the company’s development. One of its purposes is to develop leaders. Senior and middle management must learn The Huawei Basic Law carefully to comprehend its essence and master the way of thinking.

Index

Abbe, Ernst, 29–30 Accenture, 20 Account Responsibility (AR), 263 accounting, 115–116 Acer, 52–53, 381–382 acquisition, 198–201, 260–261, 389–390 adaptation, 52–53, 57–58, 128–129, 287 adjustments, 296 administrative leadership, 99 Advanced Planning and Scheduling (APS), 147–149, 159 advanced switch technologies, 305 Aesthetics Research Center, 333 Africa, 247, 251 Agreement on Trade-Related Aspects of Intellectual Property Rights, 362 Albert, G. Z., 392 Alcatel, 5–7, 179–180, 207, 356 Alibaba, 10–11, 97–98, 241, 385–386 foreign sales, 387–407 Amoeba Management, 52–53 The Analysis of Huawei’s Culture and Value System (Hu Saixiong), 413 Anderson, B., 294 Android OS, 8 anti-naive behavior, 306 antitrust regulations, 351 “$APPEALS” framework, 122 Apple, 8, 275, 351 APS. See Advanced Planning and Scheduling AR. See Account Responsibility artificial intelligence, 60 Ashby’s Law, 56 Asia Pacific, 137–138 assessment, 437–438 asset management, 187 asset protection, 397 ATP. See Available-to-Promise AT&T, 5–6, 275 audit system, 446–447 Augier, M., 347–348

Australia, 269, 281, 404 authorization, 188 Available-to-Promise (ATP), 141–142, 159 back orders, 146 Basic Research Division, 310–312 BBC, 404 Bell Labs, 20 BH01, 303 BH03, 300, 303 Bill of Materials (BOM), 142, 319–320 Bjorkman, I., 243 Blue Army, 27, 57 BMT. See business management team BOM. See Bill of Materials brand image, 252–253 Brazil, 156, 160–161, 257, 279 British Telecom (BT), 89–90, 137, 182–183, 251–252, 269, 278 Brody, Abigail Sarah, 275–276 Brumby, John, 269 BT. See British Telecom BTF. See build to forecast BTO. See build to order budget control, 442–443 build to forecast (BTF), 152 build to order (BTO), 147, 152 Burgelman, Robert, 3 BUs. See Business Units business department, 181 business development, 140, 164 domestic, 249 early stage, 169 business management team (BMT), 120 business model, 108 business plans, 118, 145–146 business processes, 444–445 business trip reimbursement policy, 175 Business Units (BUs), 90–92, 118, 432 control of, 447–448 businesses practices, 36–37



  C theory, xvi–xvii CAIGA. See China Aviation Industry General Aircraft Cao Feilong, 416 capital chain risks, 299–300 career development, 219 Carrier Network Business Group, 216 C&C08, 303, 305–306, 309 production of, 345 C&C08 2000, 312 C&C08-Q ISDN, 309 CEG. See component expert group cell division, 156–157 Central R&D Department, 38–39, 308, 320–321, 324–325 establishing, 310–318 IP and, 370 matrix management in, 315–317 president of, 317–318 structure of, 311 centralization, 85, 261–262 collective, 90 decentralization and, 99–100 CEO influence, 54–55, 89 The Challenge of Maintaining Customer Centricity in a Rapidly Growing Firm (Murmann), 416 Chambers, John, 260–261 change, 73–77, 99, 107–108, 287 bottom-up organizational, 261–262 embracing, 241 management, 188 in routines, 29, 34–35 stability and, 109 structural, 305 systematizing, 329–331 in vision, 294–295 Changsha, 177 Charter of the Anshan Iron and Steel Company, xiii Chen Zhimin, 414–415, 417–418 Chief Operating Officer (COO), 33, 84–85 China, context of, 360–363 China Aviation Industry General Aircraft (CAIGA), 389–390 China Enterprise Business Service Partner Conference, 271–272 Chinese Communist Party, 21, 23 Chinese economy, xiv–xv

Chinese Firms Going Abroad and Globalization (Yao), 417 Chinese government, 4–5, 390 US and, 403–405 Chinese law, 37 Chinese market, 110–111 Chinese National Academy of Sciences, 52–53 Chinese Wisdom Industry Exhibition, 272 Chunbo Wu, 2–3, 11–12, 15, 25, 40–57, 367 Cirrus Aircraft, 389–390 Cisco, 7–8, 138–139, 247, 260–261, 364–366, 372 IP lawsuits with, 322, 374 clear direction, 99 clients, 116–117 cloud ecosystem, 272 Cohen, W. M., 348 collective action, 394–395 collective resignations, 60, 76–77, 213, 228–229 combination, 397 communication, barriers of, 120–121, 227–228 communication equipment, 86 Company Transformation and Organisational Innovation (Song Haibing), 415–416 competition, 36–37, 244, 300–301 competitive advantages, 290 competitive prices, 299–300 complexity, 258 component expert group (CEG), 142 compradors, xiii Concept Innovation and Organisational Innovation of Huawei (Tian), 415 conflict, 178–179 of interest, 330–331 Confucian Merchants, xv Confucianism, 59, 62 Congo, 251 conscientiousness, 241 The Construction of High Performance Team (Peng Zhijun), 414 consumer business, 397 consumer product sector, 168, 403 contract management, 147 COO. See Chief Operating Officer Cook, Tim, 405 cooperation, 273–274

  Cooperation and Sharing (Tian), 417 coordination between departments, 288 coping exactly, 78–80, 124–128, 134–135 core products, 86 core technology, 334 corporate business, 397 corporate culture, 239 corporate strategy, 363–364 corruption, 175 cospecialization, 396–397 cost control, 443–444 Crescendo, 260–261 crisis, 82, 296, 334, 448 crisis-of-control, 176–177 criticism, 24 CRM. See Customer Relationship Management cross-department collaboration, 338–340 cross-functional teams, 114, 119–121 CTO Philips Asia, 388 The Cultivation of Generals (Wang), 413 cultural differences, 226–228 cultural environments, 256–257 cultural shock, 249–250 cultural value, 84, 96–97 consistent, 100 influence of, 98 culture of Huawei, features of, 10–27, 227–228 hierarchical, 37 customer centricity, 12, 14–15, 31, 41, 241 core value of, 83 efficiency and, 112–114 Huawei Basic Law and, 95–96 routinization of, 83–84 Customer Needs Management and Open Innovation (Wang Wenjia), 415–416 Customer Needs Management of Huawei (Tian), 415–416 Customer Relationship Management (CRM), 72–73, 83, 143, 147–149 customer service, 111–112, 139–141, 299 Customer-Centric Transformation (Fan), 414 customers, 184–186 number of, 112–113 orientation, 112–113, 116–119 potential, 287 requirements, 154–155 satisfaction, 31, 150

data, 188 centers, 266 financial, 194–195 management, 320 silo problem, 143 transparency, 53–54 Datang Telecom Technology (DTT), 391–393 Days of Sales Outstanding (DSO), 194 DCPs. See decision check points De Cremer, D., 415 decentralization, 87–89, 313, 396–397 centralization and, 99–100 problem of, 176–177 decision check points (DCPs), 121 decision making, 16–17, 33, 262–263 collective, 11–12, 41, 85–86, 96, 99–100 power, 92, 447 dedication, 12, 15–16, 210 dedicators, 216–217 delivery, 147 Delivery Supporting Platform, 90–91 Dell, Michael, 18 demand management system, 265 Deng Xiaoping, 4–5, 10–11, 17–20, 300–301 Department of Global Technology Service, 60 de-routinization, 72, 80, 85–86, 98–100, 277 continual, 297 MNEs and, 278 developed markets, 251–252 developing countries, 251 development capability, 146–147 The Development of Innovation Capabilities (Sun Yelin), 415–416 development trajectory, 71 Digital Unit, 300, 303–306, 338–340 scale of, 308 direct investment, 128–129 division mechanism, 87–89 The Doctrine of the Mean (Zhong), 62–63 domestic sales, 246 domestic telecommunication standards, 321 donations, 270 Downer, Alexander, 269 Drucker, Peter, 14 DSO. See Days of Sales Outstanding DTT. See Datang Telecom Technology dual-path policy, 219 Dubai, 95–96 dynamic capabilities theory, 395–396

  The Economist (magazine), 405 EDI. See Electronic Data Interchange efficiency, 142, 261–267 customer centricity and, 112–114 Electronic Data Interchange (EDI), 153 emerging economies, 376 emerging economy multinational enterprises (EMNEs), 206, 208 “Employ Young People” policy in Guinea, 270 Employee Share Ownership Plan (ESOP), 61, 96, 196–197, 207, 230–231, 267, 276 Employee Shareholding Scheme, 172 employees, 16, 56, 58–61, 82, 86, 221, 436–437 attitude of, 127 dedication of, 210 domestic, 279 evaluation of, 127 front-line, 75–76, 91–92, 164–165 local, 257–258 motivation, 196–197, 275–276 non-Chinese, 39–40 overseas, 279 ownership, 16, 37 Ren and, 61 sales revenue and, 411–412 at ZTE, 356 employment, 61 EMT. See Executive Management Team end-to-end global supply networks, 169 engineering projects, 181 English, 227 Enterprise Resource Planning (ERP), 137–138, 141, 147–149, 153–155 development of, 164 difficulty in using, 176 global coverage, 265–266 implementation of, 156–157 overseas, 155–156 profitability and, 180 promotion of, 160 entrepreneurs, 71 environment dynamics, 273–275 equilibrium, vii–xvi equity financing, 172 Ericsson, 1, 5–7, 247, 249, 270–271, 322–323, 356, 359, 368 ERP. See Enterprise Resource Planning ESC. See Executive Steering Committee

ESOP. See Employee Share Ownership Plan Ethiopia, 255 Europe, 332 European 5G Public-Private Partnership Association (5GPPP), 272–273 European Patent Office, 352–355 Evans, P., 243 Evoxus, 251–252 Executive Management Team (EMT), 25, 33, 71, 84–85, 89–92 background of members of, 103–107 collective centralization and, 90 implementation of, 163 Ren and, 221–222 transformation steering committee and, 152 Executive Policy Group, 65–66 Executive Steering Committee (ESC), 73–74 experience inheritance, 327 Facebook, 334 Fairchild Semiconductor, 107 family governance, 64 Fan, Frank, 256–257, 413–416 Federal Communications Commission Certification, 275 Federal Trade Commission, US, 351 feedback, 296, 306–308, 315–317, 319–323 adjustments based on, 328–329 financial data, 194–195 financial efficiency, 182–183 financial management, 173, 195 capability, 172–173, 190–191 Four Standardizations and, 174–179 importance of, 173–174 problems, 202 financial processes, 176 financial risks, 298 Financial Transformation Steering Committee, 192–193 financing, 196–198, 429–430 firm capabilities, 394–395 five M framework, 290 5G mobile technology, 2–4, 67, 272–273, 352–360, 388–389 rollout of, 403–405 SEP and, 357–359 5GPPP. See European 5G Public-Private Partnership Association

  flexibility, 52–53, 57–58, 111 Forbes (magazine), 369 foreign sales, 246, 387–407 foreign subsidiaries, 290 foreignness, 249–250, 277, 279–280 founding of Huawei, 5–6 four spheres of living, 61 Four Standardizations, 36, 171–172, 183–184, 206–207 financial management and, 174–179 goals of, 207 Ren and, 178 4G. See LTE FR. See Fulfillment Responsibility France, 251 FRAND commitments, 352 Fraunhofer, 20 Freeman, J., 293–294 Friedman, Milton, 13 From ISC to GSC (Yu Donghai), 413 From Personal Leadership to Organizational Leadership (Chen), 418 front-line employees, 75–76, 91–92, 164–165 Fujitsu, 5–6 Fulfillment Responsibility (FR), 263 Functional Units (FUs), 90–91 Fung Yu-Lan, 61 future challenges, 334–335, 402–405 future communication seeds, 269–270 Fuzzy Front-End Department, 321–323, 334–335 Gates, Bill, 24–25 GE. See General Electric Ge Caifeng, 417–418 General Electric (GE), 13–16, 222 General Engineering Office, 303–305 general ledger, 187 General Motors, xv General Technology Team, 312 geopolitical struggle, 403–405 Germany, 251, 362 Gerstner, Louis, 14–15, 20, 139 Giles, Colin, 275–276 global order management, 159 global performance management, 242 global resources, 331–334 global supply chain (GSC), 136–137, 154–164 establishment of, 164–165, 168 opportunities for research on, 169

globalization, 225–227, 279 Goldwind, 390 Google, 19, 275, 322–323, 334, 382–383 Gou Shizhan, 414 governance, 396–397 grayness, xv–xvi Great Iron and Steel Production Movement, xiii Great Leap Forward Movement, xiii growth, 3, 68, 99–100 challenges to future, 402–405 continuous, 233, 332 of Huawei, 7–10, 422–423 unprecedented pace of, 302 organic, 389–390 sales, 7 by self-reflection, 192 sustainable, 249 GSC. See global supply chain Guangdong, 303 guerrilla fighters, 22–23, 56 Guinea, 270 Guo Ping, 65–66, 74, 84–85, 96, 149–150, 192–193, 374 Haier Company, 52–53, 240–241, 381–382, 385–386 Haier University, 240–241 Hannan, M. T., 293–294 hardware, 369 Hardware Testing Division, 314–315 HAY Group, 20, 214, 217–218, 222, 240, 385–386 HCC. See Huawei Cloud Computing Conference help-seeking, 328 Heraclitus, 107 High Performance Team Construction (Chen Zhimin), 414 hiring, 257–258, 402 history of Huawei, 32, 52–54, 79, 295–296 early years, 54–58 HJD48, 301–302 HNC. See Huawei Network Conference Hong Kong, 4–5, 298 host-country advantages, 260 How Does Huawei Improve Organisation Performance? (Hu Yanping), 414 How to Recognize and Transform Customers’ Need? (Fan), 415–416

  HP, 20–21 HR. See Human Resources HRM. See human resource management HTC, 6 Hu, Ken, 65–66 Hu Houkun, 84–85, 96, 192–193 Hu Saixiong, 413–414 Hu Yanping, xvii, 414 Huawei (Tian), 414–415 Huawei Basic Law, 14–15, 29–30, 72, 117–118, 244–245, 292, 364 customer centricity and, 95–96 division mechanism and, 87–89 entirety of, 420–450 Four Standardizations and, 36 IPD transformation and, 125 revision of, 32, 40–41 unity created by, 86 Huawei Certified Network Engineers, 271–272 Huawei Cloud Computing Conference (HCC), 272 Huawei Legal Affairs Department (Gou), 414 Huawei morality committee, 62 Huawei Network Conference (HNC), 272 Huawei People’s Newspaper, 255 The Huawei Story (Tian and Wu), 2–3 Huawei University, 222–225, 232, 239 Huawei’s Brand Strategy and Practices (Zhang Hui), 417 Huawei’s Practices on Manager Management (Chen Zhimin), 414–415 Huiteng Windpower, 390 human resource management (HRM), 209–214, 233 Human Resources (HR), 31, 37, 209–210, 232–234, 238–240, 385–386, 435–436 Alibaba and, 241 avenues for research on, 241–242 development, 440 rotating CEO and, 240 human resources management (HRM), 210–211, 243 IBM, xv, 11–12, 20, 34 consultants from, 36–37, 123–124, 129, 136–137, 140–141, 174, 330–331, 384 employee evaluation and, 127

inefficiency and, 113–114 IPD and, 110–111 operational management practices at, 121–122 Ren and, 123–124, 126, 139, 183–184 ICBC. See Industrial and Commercial Bank of China ICT. See information and communication technology industries; Information and Communications Technology ID numbers, 29 IELTS, 227 IFS. See Integrated Financial Services; International Financial Services IHRM. See international human resource management IKEA, 64 Inamori, Kazuo, 52–53 inclusivity, 275–276 incrementalism, 19–20, 78–79 Independent Software Vendors (ISV), 272 Independently Operated Business Units (IOBUs), 240–241 India, 247, 268–269, 332 individual heroes, 111 Industrial and Commercial Bank of China (ICBC), 241, 385–386 Industrial Civilization, xiii industrialization, 362 industry rules, 271 inefficiency, 113–114, 130 information and communication technology industries (ICT), 2–3, 6, 363–364 equipment, 8 Information and Communications Technology (ICT), 171, 402–403, 420 information system integration, 136 information technology (IT), 187, 265–266 demand management system and, 265 infrastructure, 259–260 POIs, 266–267 support systems, 327–328 systems, 78, 83, 141, 147–149 integrated, 164–165 tools, 193, 202 training center, 269–270 Information Technology Strategy and Plan (ITS&P), 113–114, 139

  inheritance, 449 innocent sphere, 61–63 innovation, 19, 40–41, 347–348, 364 disruptive, 334 market-oriented, 125 institutionalization, 297 Integrated Financial Services (IFS), 171–173, 198–202, 206–208, 245–246 benefits of, 194–195 IDS I, 183–189 IDS II, 183–184, 189–191 promotion of, 191–194 Ren and, 192 Integrated Legal Department, 256 integrated portfolio management team (IPMT), 18–19, 119–121, 126–127 establishment of, 128 jurisdiction of, 127 meetings of, 129 Integrated Product Development (IPD), 18, 20, 34, 42, 72–73, 75–76, 119–121, 171, 245–246, 386–387 from 1999 to 2004, 323–331 conflicts of interest and, 330–331 core ideas of, 117–119 direct investment in, 128–129 evaluation of, 128 Huawei Basic Law and, 125 implementation of, 116, 123–130, 192, 344–345 importance of, 293 introduction of, 328–329 matrix management in, 326 phases of R&D, 327 Pilot Production Department and, 331 significance of, 110–111 success of, 130–131, 139–140 templates and, 114–115 testing, 329 transformation of, 111–112 Integrated Supply Chain (ISC), 35–36, 72–73, 113–114, 136–154, 164–165, 171 direct investment in, 128–129 framework and logic of, 163–164 management, 32 phases of, 167–168 integrated technology management teams (ITMTs), 120 Integrative Supply Chain Management, 245–246

integrity, 241 Intel, xv, 3, 34, 107, 322–323 intellectual property (IP), 38–39, 375–376, 388–389 cases involving, 372–373 Central R&D Department and, 370 Cisco and, 364–366, 374 cross-licensing, 368–369 lawsuits, 322 licensing, 367 organization of, 373–375 protection of, 348–349, 362–363, 369 routines, 369–375 Intellectual Property Department, 256 intellectual property rights (IPR), 245–246 InterDigital, 355–357, 368 inter-firm collaborative networks, 167 internal audit, 188 internal capital market transparency, 207 internal control, 188 internal requisite variety, 58 International Financial Services (IFS), 72–73 international human resource management (IHRM), 209–210, 225–229, 233 International Marketing Department, 256 International Product Department, 321 international sales, 386–387 internationalization, 39–40, 89–90, 173, 244–251, 277, 349, 370 brand image and, 252–253 challenge of, 250 dynamics of, 280–281 future research on, 288–291 importance of, 249–250 initial stage of, 182–183 local employees and, 257–258 process of, 247 Ren and, 244–245, 287 stages of, 286–287 symbiotic philosophy in, 271–273 value added, 253–256 vision for, 278–279 inter-organization collaboration, 136 inter-sector mobility, 314 inventory management, 147 inventory turnover, 140 Inventory Turnover Days (ITO), 194 investment, 197–198 Investment Legal Department, 256 Investment Review Board, 90

  investment review board (IRB), 119 IOBUs. See Independently Operated Business Units IP. See intellectual property IPD. See Integrated Product Development The IPD of Huawei (Liu Hongge), 413 IPMT. See integrated portfolio management team IPR. See intellectual property rights i-Procument, 147–149 IRB. See investment review board Iron Triangle, 262–264, 277, 286 ISC. See Integrated Supply Chain Islam, 225–226 ISV. See Independent Software Vendors IT. See information technology ITMTs. See integrated technology management teams ITO. See Inventory Turnover Days ITS&P. See Information Technology Strategy and Plan Jacobides, M. G., 347–348 Jaeyong Song, 133 Japan, 267–268 Japanese manufacturing companies, 133 Jefferson, G., 392 Jiang, H., 6, 66 Jiangnan Manufacturing Bureau, xiii JIT. See Just in Time job transfer, 345 Jobs, Steve, 405 Johnson, CT, 275–276 Joint Innovation Center, 333–334 Joonsuh Kim, 275–276 Jorde, T. M., 351 Just in Time (JIT), 153 Kamprad, Ingvar, 64 Kelleher, Herb, 13 key performance indicator (KPI), 116, 150, 241, 373–375 Klepper, S., 6 Klynveld Peat Marwick Goerdeler (KPMG), 36, 174–175, 183–184, 198–202, 206–207 knowledge management, 396–397 knowledge sharing, 239, 305–306 Knudsen, T., 347–348 Konosuke Matsushita, 52–53

Kotter, J. P., 24, 293–295 KPI. See key performance indicator KPMG. See Klynveld Peat Marwick Goerdeler Kyocera, 52–53, 381–382 labor laws, 60, 228 latecomer mindset, 270–271, 286 lateral steering leadership, 242 Latin America, 251 leader department, 216, 229–230 leadership, 54, 56–57, 60–63, 66–68 administrative, 99 global, 331–335, 346 lateral steering, 242 in significant transformation milestones, 72–73 structure, 86–87 Leadership Cultivation in Chinese Firms (Chen), 417 The Leadership of Huawei’s Managers (Ge), 417–418 Learning from Industrial Daqing Movement, xiii Lee Kun-Hee, 133–134 Legal Affairs Office, 38–39, 83, 256, 371 divisions of, 370–371 Legend Company, 52–53 Legend Holding, 363–364 Lenovo, 6, 8, 97–98, 381–382 Letter of Resignation (Ren), 73 Lewin, A. Y., 58, 381–382 Li Jun, 415 Li Yi, 312 Li Yigai, 300–301 Li Yingtao, 334–335 Liang Hua, 192–193 licensing fees, 352, 362 Lindbloom, C., 11 linguistic problems, 226–227 Liu Chuanzhi, 52–53 Liu Hongge, 413 local market requirements, 254–255 local supply chain practices, 160–162 localization, 242 locals, 256–258 logistics, 141, 147, 152, 159–160 logistics management, 142 long-term orientation, 18, 100 long-term stock ownership incentives, 249–250

  long-term strategy, 221 Lord, John, 269 Lotus Notes, 154 LTE (4G) technology, 350–351, 355–356, 388–389 contributions to, 359 patents for, 358 Lucent, 6–7, 11–12, 207, 356 Lucent Technologies, 179–180, 182 Machine & Tools Development Center, 319–320 Malawi, 255–256 Malaysia, 186–204, 269–270 Mali UNICEF, 270 Management and Organization Review (journal), 40–41 management control system, 31–32 management information system (MIS), 167–168, 384 management philosophy of Huawei, features of, 10–27, 98 management practices, xiv Manager Management and High Performance Team (Hu Saixiong), 414 Manager Management of Huawei Marketing System (Xu Wenli), 415 managerial power, 86 managerial skills, 294 managers, 30–31, 82 manufacturing, 141, 143, 260, 393 Chinese, 169 Japanese, companies, 133 quality, 319–320 R&D and, 303–305 manufacturing department, 114, 152, 309 Manufacturing Resource Planning (MRP II), 142, 147, 153 Mao Shengjiang, 308 Mao Zedong, 3–21, 24 March, James, 41 market entry strategies, 273–275 market maturity, 251 market responsiveness, 325 Market Units (MUs), 90–91 marketing, 34–35, 116, 212, 289, 308, 427–428 market-oriented evaluation systems, 115–116

market-oriented innovations, 125 Mars, Frank C., 64 Mars Company, 64 master scheduling, 141 Material Planning Division, 310–312 Material Quality Testing Center, 319–320 Material Requirements Planning (MRP), 142, 153 matrix management, 315–317, 326, 338 conflicts in, 318 matrix structure, 90–93, 432–433 Matsushita Industrial Company, 52–53, 381–382 mattress culture, 15–16 MDU. See Minimum Delivery Unit Meng Wanzhou, 75–76, 403–405 Mercer, 20 The Methodology of Transformation (Tian), 413–414 Mexico Telecommunications, 182–183 MIC. See Mobile Innovation Center microeconomics, xvi Microsoft, 19–21, 24–25, 113–114, 322–323 Middle East, 247, 256–257 military culture, 21–22 Minimum Delivery Unit (MDU), 185–186 Minimum Payment Unit (MPU), 185–186 Ministry of Posts and Telecommunication, 300 MIS. See management information system MNEs. See Multinational Enterprises Mobile Innovation Center (MIC), 333–334 mobile telephony, 303 Modes and Choices (Tian), 413 Moore, Gordon, 107 Moore’s Law, 107 moral sphere, 61–63 Moran J. W., 293–294 Morris, S., 243 Moscow Internationalization Communication Exhibition, 252 motivation for transformation, 296 Motorola, 107, 222, 382–383 MPU. See Minimum Payment Unit MRP. See Material Requirements Planning MRP II. See Manufacturing Resource Planning Multinational Enterprises (MNEs), 173, 197, 206, 278–281, 384–385 Multitech International, 52–53

  Murmann, Johann Peter, 6, 416 MUs. See Market Units National Capitalism, xiii national security, 3–4, 268, 273 National Vocation Qualification (NVQ), 217–219, 238–239 near decomposability, 396–397 NEC, 5–6 Nelson, R. R., 348 nepotism, 63–64 network applications, 317 network business, 397 Neuf Telecom, 254 New Management Initiative, 133–134 New Silk Road, 253 Nexus 6P, 275 Nigeria, 155–156, 160–162 Nokia, 1, 6–7, 107, 247, 275–276, 352–356 Apple and, 351 cross-licensing and, 368 Siemens and, 180, 207 Nokia and Siemens Networks, 180 non-Chinese employees, 39–40 Nortel, 368 North African Region, 91–92 Northern Telecom, 5–6 NSN, 368 NVQ. See National Vocation Qualification OEM. See original equipment manufacturer OFDI. See outbound foreign direct investment one mighty leader, 86–89 openness, 19–20 operating profit margin, 183 operation risks, 180–182 operational management practices, 121–122 operational processes, 136–137, 144 opportunism, 67 opportunity, 396 Opportunity to Cash (OTC), 184–186 oppositional voices, 27, 57 Oracle, 143 ordering, 144–145 organizational change, 149–150 organizational coherence, 267–268 organizational design and strategy, 54–55 organizational development, 240 organizational problems, 23

organizational structures, 37–38, 143–144, 150, 307, 430–431 clear, 313 freedom in, 176–177 IP, 369–375 original equipment manufacturer (OEM), 210, 275 Osaka Electric Light Company, 52–53 OTC. See Opportunity to Cash outbound foreign direct investment (OFDI), 242–243 Ouyang Jianhong, 414 overland transportation, 289 Overseas Manager Management (Li Jun), 415 overseas market, 251 overseas sales, 247 PAC. See Preliminary Acceptance Certificate Palmisano, Samuel, 183–184 Panasonic, 52–53 The Paradigm Shift of Knowledge-based Talents Team Management (Xie), 415 Pareto, xvi parochialism, 207 passion, 241 Patent Cooperation Treaty, 349 patents, 38–39, 349–360 applications, 363, 372 engineers, 372–373 European Patent Office, 352–355 filings, 373–375 infringement, 351 for LTE (4G) technology, 358 royalties, 367 socialist economy and, 360–362 strategies, 360–369 US, applications in, 354 ZTE, applications of, 354 paternalism, 63–64 Paulin, Michel, 254 “Pay attention to India” fund, 270 payment, 188 PBX. See Private Branch Exchange PDT. See product development team peer evaluation, 115 Peng, M. W., 66 Peng Zhijun, 414 performance appraisals, 372

  performance management, 239 personal development programs, 223 Personal Handy-Phone System technique, 89 personal quality test model, 215–216 Personnel Division, 310–313 personnel management (PM), 209–211, 233 Pettigrew, A. M., 294–295 PFM. See Project Financial Management Philips Research Asia, 388 Pilot Production Department, 308, 314–315, 320–321 expanding, 319–320 feedback from, 315–317 IPD and, 331 pilot projects, 155–156, 177, 186–204, 325–329 Pisano, G. P., 395 planning and scheduling, 141, 152 PM. See personnel management PMO. See Project Management Office points of information (POIs), 266–267 POIs. See points of information policy and process, 188 Preliminary Acceptance Certificate (PAC), 181–182 price negotiations, 265 PriceWaterhouseCoopers, 20 The Principle of Rise and Fall (Tian), 417 Private Branch Exchange (PBX), 171, 298 private business ownership, 64 private enterprises, 244 Private Program Exchanger, 211 process control points, 91 Process Testing Center, 319–320 procurement, 141, 152 cycle, 142 process, 175 Procurement to Payment (PTP), 186 product development, 34–35, 117–119, 300, 320–321, 364 cycle, 116–117 lack of standard processes in, 111–112 responsibility for, 119–121 sales revenue and, 138–139 Samsung and, 134 technology development and, 111 product development team (PDT), 120–122, 329 establishment of, 128 experimental, 127

product diversification, 244 product failure rate, 117 product introduction, 265 product lifecycles, 260–261 product quality, 314–315, 328–329 product roadmap, 118 product version numbers, 112–113 production model, 428–429 professional teams, 75 profitability, 180, 197–198 profits, 400 program-controlled switches, 309 Project Financial Management (PFM), 190–191 project management, 442–446 Project Management Office (PMO), 73–74, 188, 192–193 project schedules, 318 promotion, 188–189, 216–217, 220, 439–440 qualification system for, 217 property rights, 10–11 PTP. See Procurement to Payment public image, 268–270 Pucik, V., 243 Putzmeister, 389–390 Qingdao Refrigerator Company, 52–53 Qualcomm, 20–21, 68, 351–355, 368 qualifications authority department, 219 quality assurance, 146–147, 442 quality first, 82–83, 109 routinization of, 83–84 Quarterly Huawei Forum, 412 Quinn, James Brian, 11 RA. See Reporting Analytics R&D. See Research and Development reconfiguration, 397 skills, 401 reconstruction, 72, 85–86, 98–100 record-keeping, 29 recruitment, 313, 438 Red Army, 27 Redding, Gordon, 63–64 redundant functions, 177–178 refining, 80, 124–128 Reform and Opening-up, xiii, xv regional departments, 264 Regional Strategy of Huawei Globalisation Development: The Case of LatinAmerica (Fan), 413

  Ren Zhengfei, xv, 2, 4–5, 17, 40–57, 64–65 BBC interview with, 404 on clear direction, 99 collective decision making and, 11–12, 85–86 collective resignations and, 77 Confucianism and, 59 daughter of, 65–66 departure of, 405 Dubai and, 95–96 employee ownership and, 61 EMT and, 221–222 Four Standardizations and, 178 Gates and, 24–25 goals of, 18 on history of Huawei, 32 HRM and, 210–211 IBM and, 123–124, 126, 139, 183–184 IFS and, 192 influence of, 73 on innovation, 40–41 internationalization and, 244–245, 287 leadership of, 56–57, 61–63, 66–68 Letter of Resignation, 73 Mao and, 3–21, 24 New Management Initiative and, 133–134 overburdened, 25 on profits, 400 speeches by, 81–82 stock ownership of, 17–18 strategic reserve force and, 232–233 strategy of, 11 tolerance, 26–27 Union of Huawei Investment & Holding Co., Ltd and, 172 Renmin University, 30, 67 Reporting Analytics (RA), 189–190 research activity, 115, 230 Research and Development (R&D), 1, 19, 33–35, 90–91, 230, 252, 335–336, 426–427. See also Central R&D Department activities, 121–122 capability, 67, 171, 302–303, 331 complex product, 308 costs, 244, 287, 347 demand, 254 emphasis on, 292–293 expansion of, 325

five stages of management transformation of, 293–298 formal management of, 308–310 global network of, 258–260 independent, 211, 301 informal management of, 300, 306, 338 investment in, 348 IRB and, 119 KPI of, 116 long-term, 321–323 manufacturing and, 303–305 organization, 345–346 personnel training, 305–306 phases of, 327 projects, growing number of, 309 resource sharing, 327–328 routines, 330, 340–341 staff, 328–329, 344–345 structural changes to, 37–38 talent management strategies and, 242 technical problems and, 111 templates in, 111–112 reserve work force, 60 responsiveness, 261–267 revenue recognition, 181–182 risk control, 322–323 Road of Product Development (Cao), 416 rotating CEO, 92–98, 221–222, 229–230 HR and, 240 routines, 3, 28, 178–179, 338–340 broken, 33, 57–58 change in, 29, 34–35 creation of, 395 dynamics, 340 foreign, 40 initial, 33–34 IP management, 369–375 meta, 40, 395–398 lack of details of, 400–401 supporting values of, 398 R&D, 330, 340–341 standardized, 29–30 routinization, 72, 80, 85–86, 98–100, 108 continual, 297 of customer centricity, 83–84 gene of, 81–84, 99 MNEs and, 278 of quality first, 83–84 of transformation mechanism, 78 of working processes, 114–115

  royalties, 367 Ruihua Institute for Innovation Management, 2–4, 412 rural market, 370 Russia, 247, 251–252, 259, 279, 289 Russian Region, 89–90 salary incentive mechanisms, 313 Sales and Operations Planning (S&OP), 145–146 Sales Department, 76, 212 feedback from, 315–317 sales growth, 7 sales orders, 141 sales revenue, 138–139, 221, 267–268 employees and, 411–412 Samsung, 8, 133, 275, 351, 368, 383 affiliate companies of, 135 product development and, 134 Toyota and, 133 Samsung Advanced Institute of Technology, 134 Samsung Economic Research Institute (SERI), 134–135 “The Samsung Way” (Jaeyong), 133 Sany Group, 389–390 Saudi Arabia, 160–161, 225–226, 256–257, 287 scheduling, 141 SCM. See supply chain management SCOR. See Supply Chain Operations Reference secrecy, 2 Security Authentication Center, 269 The Self Correction Capability of Huawei (Wang Xingyuan), 417 self-criticism, 24 self-organizing, 52–53 self-reflection, 80 Self-Reliance Plan, xiii Self-Strengthening Movement, xiii senior management organization, 433–434 seniority payment system, 77 sense-making, 81, 83–84 SEP. See standard-essential-patent SERI. See Samsung Economic Research Institute serial development, 324–325 Seven Leadership Lessons of Ren Zhengfei (De Cremer), 415

seven rules of against, 97 seven-code system, 175–176 Shanghai, 213–214 Shanghai Organic Chemical Industry Company, 360–362 Shanghai Stock Exchange, 392–394 shared services center, 186–204 Shenzhen, 1, 4–5, 154, 177 development of, 5 short-term training, 224 SHRM. See strategic human resource management Siemens, 5–7, 20–21, 368 Nokia and, 180, 207 simple agent business, 298 single radio access network (SingleRAN), 333 smartphones, 8, 168 predicted sales of, 402–403 social responsibility, 269–270, 421 socialist economy, 360–362 SOEs. See state-owned companies software, 369 Software Engineering Division, 312 Software Testing Division, 314–315 solidifying, 124–128 Solution Responsibility (SR), 263 Song, J., 367 Song Haibing, 415–416 Sony, 368 Sony-Ericsson, 368 S&OP. See Sales and Operations Planning; strict sales and operations planning source codes, 269, 365 sourcing, 146–147 South China Sea, 404 Southwest Airlines, 13 Soviet Union, 360–362 experts from, xiii spare parts, 298–299 special economic zone, 4–5 Sprint, 275 SR. See Solution Responsibility stability, 99 change and, 109 staff building, 239 stakeholders, 97–98 Stan Shih Chen Jung, 52–53 standard processes, 121–123

  standard-essential-patent (SEP), 350–356, 368–369, 388–389 5G SEP Owners, 357–359 starting point of transformation, 296 startups, 15, 33–34, 53 state-owned companies (SOEs), 21–22, 244, 391–393 Stewardship, 66 stock ownership, 17–18 strategic consistency, 95–98 strategic direction, 96 strategic human resource management (SHRM), 209–210, 215–225, 233 strategic IQ, 53–54, 57–58, 64–65 strategic management, 394–395 Strategic Planning Office, 321 strategic reserve force, 231–232, 240 Ren and, 232–233 Strategy and Customer Standing Committee, 90, 96–97 Strategy and Development Committee, 96–97 Strategy and Marketing, 90–91 Strategy Planning Office, 308, 320–321 strict sales and operations planning (S&OP), 142 strivers, 59–60, 62, 276 structural inertia, 293–294 structure requirement analysis, 122 succession, 63–66, 96, 449–450 Sudan, 261–262, 387–388 Suffolk, John, 269, 275–276 Sun Yafang, 76–77, 84, 123 Sun Yelin, 415–416 suppliers, 175 supply centers, 159 supply chain, 83, 164–165. See also Integrated Supply Chain costs, 139–140 improvement of, 136–137 local, 160–162 practices, 384 problems, 298–299 supply chain management (SCM), 150, 155–156, 167 Supply Chain Management Department, 150–151 Supply Chain Operations Reference (SCOR), 144–145 supporting values, 398, 401–402

Symantec, 20–21 symbiotic philosophy, 271–273 synergy, 258–260, 286 tablets, 402–403 Taiwan Intellectual Property Office, 355–356 talent management (TM), 209–210, 229–233, 242 talent pools, 332 Talks in Cambridge (Tian), 417 Tang Jiyue, 216 taxes, 256 TDTs. See technology development teams team building, 239 teamwork, 241 technical capability, 146–147 technical problems, 317 technological capabilities, 215, 310, 332 technological developments, 230 technology development, 322–323 product development and, 111 technology development teams (TDTs), 120 technology management system, 115 technology management team (TMT), 107–108, 120 role of, 109 Technology Planning Office, 310–312 technology reviews (TRs), 121 technology roadmap, 118 technology sharing, 310 Teece, David, 347–348, 351, 386–398 Telecom Italia, 182–183 telecommunication equipment, 179–180 telecommunication infrastructure, 1 telecommunication operator switches, 301–302 telecommunications equipment, 5–7, 39–40 donation of, 270 telecommunications industry, 12, 107, 179–180, 222, 229 competition in, 36–37, 139–140 patents and, 349 telecommunications infrastructure, 5 templates, 114–115, 121–123 in R&D, 111–112 Tencent, 10–11 Testing Laboratory, 314–315 Texas Instruments, 20–21

  theoretic framework for transformation management, 293–297 3Com, 20–21, 365–366 3G technology, 260, 333, 352–360 W-CDMA, 355–357 three-level transformation team, 75–93 Tian Tao, xv–xvii, 2–3, 11–12, 15, 25, 40–57, 367 Concept Innovation and Organisational Innovation of Huawei, 415 Cooperation and Sharing, 417 Customer Needs Management of Huawei, 415–416 Huawei, 414–415 The Methodology of Transformation, 413–414 Modes and Choices, 413 The Principle of Rise and Fall, 417 Talks in Cambridge, 417 Tiao Tao, xv–xvi Time Unit Plan (TUP), 37, 61, 67–68, 230–231, 276 timely delivery, 36 TM. See talent management T-Mobile, 275, 366 TMT. See technology management team To Implement Management System, to Improve Organisational Efficiency (Yu Donghai), 414 TOEFL, 227 TOEIC, 227 tolerance, 26–27 Tommi, Laine-Ylijoki, 275–276 top management team, 71–72, 278–279 as catalyst of change, 73–77 ideas of, 398 members of, 398–400 supportive values among, 398, 401–402 transformation of, 84–85 Total Quality Management (TQM), 153 Toyota, 133 TQM. See Total Quality Management trade sanctions, 3–4 transcendent sphere, 61–63 transformation cycle, 78–81 transformation implementation, 99 transformation initiatives, 43 functional interdependence of, 42 transformation milestones, 72–73

The Transformation of Huawei R&D and Product Line (Ouyang), 414 Transformation Project Team, 73–74 transformation steering committee, 152 The Transition of R&D Talents Management (Zhang Huixi), 415 The Treaties on the Nature of Man (Fung), 61 Trial Manufacturing Division, 314–315 TRs. See technology reviews TUP. See Time Unit Plan 2012 Laboratories, 334–335, 346 2G technology, 333 UK. See United Kingdom Union of Huawei Investment & Holding Co., Ltd, 17–18, 172 United Arab Emirates, 186–204 United Kingdom (UK), xiii, 275–276 United States (US), 273–275, 332, 364–366 Chinese government and, 403–405 patent applications in, 354 US. See United States user-friendliness, 113 Using Process and IT to Support Effective Customer Relationship Management (Zhu Xiaojiang), 416 utilitarian sphere, 61–63 utility sector, 393 Välikangas, L., 381–382 value added, 253–256 value creation, 271, 423 value distribution, 423–424 The Value Realisation of Demands Management (Wang Zhangang), 416 value-sensitive segments, 250–252 Vensys Energy, 390 Verbergt, M., 356 Verizon, 275 vision, 99 change in, 294–295 Vivo, 161 Vodafone, 137, 333–334 Walsh, J. P., 348 Wanda Group, 363–364 Wang Ling, 413 Wang Wenjia, 415–416 Wang Xingyuan, 417

  Wang Zhangang, 416 wealth, 63–64 Welsh, Jack, 13–14 “Who Says Elephants Can’t Dance?” (Gerstner), 14–15 Williamson, Peter, 10–11, 54–56 wind turbines, 390 wolves culture, 213 working capital requirements, 298–299 working conditions, 56 working processes, 114–115 work-related skills, 220 World Class Finance, 174–175 World Intellectual Property Organization, 372–373 World Trade Organization, 289, 362 World War II, 20, 59 worldwide research centers, 331–334, 346 Xi’an, 177 Xiaojing, G., 392 Xiaomi, 6 Xiaoyun, Y., 392 Xie Xiaoyun, 415 Xinjiang, 213–214 Xu, Eric, 65–66 Xu Wenli, 415 Xu Zhijun, 84–85, 96

Yang, L., 12, 372–374 Yang, S., 367 Yao Weimin, 417 Yin and Yang, xv, 40–41 Youngor Group, 363–364 Yu Chengdong, 257–258 Yu Donghai, 413–414 Zambian First Lady foundation, 270 Zeiss Company, 29–30, 32 Zhang, Y., 381–382 Zhang Hui, 417 Zhang Huixi, 415 Zhang Ruimin, 52–53, 298 Zhao Ziyi, 412 Zhejiang University School of Management, xv–xvi, 2–3, 412 Zheng Baoyong, 303–306, 309, 338–340 Zhong Yong, 62–63 Zhou Yanfang, 155–156 Zhu Rongji, 60 Zhu Tong, 161–162 Zhu Xiaojiang, 416 ZTE, 352–353 decline of, 352–355 employees at, 356