HONG KONG (Reuters) - Its history is peppered with cloak-and-dagger stories which fostered a reputation for winning technology by hook or by crook. But today Huawei Technologies’ disciplined growth strategy is a beacon to many emerging markets firms.
China computer leader Lenovo’s (0992.HK) fraught purchase of IBM’s PC business four years ago has become a symbol of the clumsier aspects of China’s attempts at overseas expansion. But the telecoms group founded in 1987 by a former Chinese military researcher to sell pre-digital telecoms switches to Hong Kong has built its business patiently, even, at times, stealthily.
Huawei has arguably become China’s most successful company on the global stage. The Shenzhen-based firm has achieved international success that other major Chinese corporations, such as Haier in consumer electronics, Geely in autos and ICBC in banking, can only dream of.
Today global communications network operators from Dubai to Nigeria to Latin America look beyond the tales of military ties and corporate espionage to do big business with Huawei. Business partners include Vodafone, Deutsche Telekom and security software leader Symantec Corp, which runs a joint venture with the company.
In its biggest success to date, the company recently beat out a top global rival, Ericsson (ERICb.ST), in its own backyard: in December, 2009, Huawei won deals to build next-generation networks for major mobile carriers in Norway and Sweden.
Such operational gains propelled the firm from obscurity to the world’s No. 2 telecoms equipment maker last year, surpassing the likes of Alcatel Lucent ALUA.PA and Nokia Siemens Networks NOKI.UL to rank behind only Ericsson.
Both Huawei and ZTE Corp (0763.HK), whose main focus is on emerging markets, have had an organic growth strategy, shunning acquisitions in favor of a build-it-themselves approach.
Product development has been a cornerstone of the company since its founding by Ren Zhengfei, a media-shy former engineer with the People’s Liberation Army, who struck out on his own.
That contrasts sharply with Lenovo’s purchase of the pioneering IBM PC franchise in 2005. This ground-breaking acquisition by a Chinese company of a major U.S. brand name proved to be overreaching on several fronts.
The biggest issue was merging two fundamentally different cultures: Huawei was built to sell PCs in fast-growing Asian consumer and small-business markets while the IBM PC operation had evolved into a high-end laptop business mostly aimed at professionals working for multinational firms.
First, though, the Lenovo-IBM deal had to face down U.S. national security concerns thrown up by opponents. Resistance was only overcome by creating an unwieldy co-CEO structure to run the company from both Beijing and just outside New York City, among other measures.
By contrast, Huawei has so far avoided M&A, despite a failed attempt by the Chinese powerhouse to buy fading U.S. network supplier 3Com COMS.O. Going it alone works for companies like Huawei as their products aren’t designed for mass consumers, said JP Morgan analyst Charles Guo.
“ZTE and Huawei are making equipment for operators, so it’s not facing consumers directly,” he said. “If you face consumers you need to have branding, you need to have marketing, you need to build up your brand name.”
Of course with China as a hinterland, Huawei and ZTE could easily afford a home-grown, gradual approach.
Analysts and industry watchers attribute much of Huawei’s early ascent to prices thought to be as much as 20-30 percent below global rivals as it has drawn on China’s vast pool of cheap labor.
Many competitors complain Huawei and ZTE have also ridden on the back of heavy subsidies from Beijing, which considers telecoms a vital bet on the country’s future global role. Its growing market share means Huawei no longer needs to charge bargain-basement prices for new products.
“Telecoms is strategically important,” said JP Morgan’s Guo. “The Chinese government definitely places a lot of importance on telecoms. That’s been a huge difference.”
Huge is right.
A second factor working in favor of Huawei and ZTE is government support in a home telecoms market where the two major state-run operators, China Mobile (0941.HK) and China Unicom (0762.HK), have spent tens of billions of dollars to build second-generation mobile networks.
Lately, the Chinese pair has stood to benefit more from an even larger $60 billion spending spree by China Mobile and Unicom, joined by new rival China Telecom (0728.HK), on 3G networks in China.
“In China all three operators have their own networks they don’t share. This created a good home market for Huawei and ZTE to grow internally first,” said Joseph Ho, an analyst at Daiwa Securities. “Eventually they were able to leverage their expertise and grow in overseas markets.”
Similar market developments fostered the great U.S. and European national communications equipment suppliers over the past century — this time, it’s been compressed into the space of a decade.
As the company becomes more media-savvy, the tales of corporate espionage that have cropped up — along with efforts by detractors to smear the company by linking it to the Chinese military — are receding.
Earlier this decade, Huawei got tangled up in a long-running dispute with its most formidable rival, Cisco Systems (CSCO.O): the world’s largest maker of computer routers and switches accused it of stealing some of its designs.
A Huawei employee was also accused by Fujitsu in 2004 of trying to steal information about the Japanese company’s products at a Chicago trade show.
There is an aspect of these aggressive business practices that may mark a willingness to take short cuts to fulfill the ambition of becoming a global player.
But such accusations are also common smokescreens thrown up by established players seeking to fend off new competition, as shown by the legal battles now shaping up between Nokia and new market entrant Apple over mobile phone patents.
Efforts by rivals to besmirch Huawei’s business and technology successes may have failed to derail its growth, but Huawei has discovered that venturing overseas exposes it to the global economic cycle. Sales growth slowed sharply in 2009, to just 17.5 percent from a heady 43 percent the year before.
“The decline in their business outside of China in 2009 shows that they face the same market reality as other infrastructure providers — and clearly get a significant benefit from their preferential treatment in the China market,” said Barry French, head of marketing and communications at rival Nokia Siemens Networks.
Additional reporting by Tarmo Virki in Helsinki; Editing by Eric Auchard and Sara Ledwith