We have much respect for competitors like Huawei. (Ericsson CEO Hans Vestberg)
The story of Ren Zhengfei would be an amazing success story in the US. (3Com President Bruce Claflin)
The rise of domestic firms such as Huawei is a disaster for the multination- als. (The Economist)
This company is on the same road as Ericsson toward becoming a global giant. Now all these telecom giants eye Huawei as the most dangerous com- petitor. (Time Magazine)
Some of these remarks may be a bit exaggerative, but no other Chinese company instills fear into foreign players and creates such awe in the European and American markets.
How then has Huawei been able to do this? It is a combination of being in the right place and at the right time. Twenty-five years ago, Huawei was born in a residential building in Shenzhen as a limited com- pany with five or six founders. This fledgling company had a meager CNY20,000 as initial working capital. According to the regulations of the Shenzhen government at the time, a private technology company must have at least CNY20,000 as registered capital and at least five shareholders. Yet, Ren Zhengfei had only CNY3,000. In order to obtain the business license, he looked for partners and pooled enough capital to satisfy regis- tration procedures. Later, after the company boomed, the original part- ners were generously rewarded, and Ren Zhengfei began to implement the shareholding scheme for employees. In early 2012, Huawei had 140,000 employees worldwide in more than 150 countries and regions, serving more than one-third of the world’s population. In addition, Huawei leads the world in international patent applications.
Huawei’s success, in every sense, further proves the success of Deng Xiaoping’s reform and opening-up policy.
Things change. How can changes be implemented and which direc- tion should be taken? In the mid-1980s, policymakers in China had no idea about direction. Without any clear blueprint in mind, Deng Xiaoping proposed the idea of “groping stones while crossing the river” and argued that “It doesn’t matter whether it’s a white cat or a black cat; a cat that catches mice is a good cat.” These are general guidelines, but in that spe- cific political climate, they were not particularly operable. It was therefore difficult for anyone without brash adventurism to make up their mind to “plunge into the sea,” a slogan of that time, meaning to go into business for oneself.
Luckily, Deng Xiaoping supported trial and error, encouraging every- one to unleash their potential to the fullest extent and contribute to the country’s progressive reforms. China has moved from a planned economy to a planned commodity economy, then to a commodity economy, and finally to a market economy. In this process, Chinese entrepreneurs have experienced ups and downs amid changes to systems and regulations. Nevertheless, the goal of China over the past two decades has been clear: implement a market economy.
The twists and turns of the four major telecom equipment manufac- turers exemplify the spiral growth story of China.
In the late 1980s, a group of senior-ranking R&D officials from the PLA founded Great Dragon, which became a shining star in the telecom sector. At the same time, Datang and ZTE were established under two central government ministries, and like Great Dragon, they were the “pets” of the country in the age of a planned economy. The government lavished funding and market support policies on these SOEs and also supplied them with a huge amount of talent. At that time, SOEs were the first choice amid job seekers, a trend that still persists among many today; only an enterprise with close ties to the military was considered an even better choice.
As a private company, Huawei was marginalized, with its chances of success considered slim.
Change is inevitable. Twenty years later, Great Dragon collapsed, and Datang lagged far behind due to the rigidity of its decision process, HR policy, and incentive mechanism, which prevented even the most daring and decisive company leaders from turning things around. Moreover, the telecom industry was becoming more liberal and global, and even cen- tury-old giants in the West began to suffer from inflexibility and eventu- ally began to gradually fade. A company will fall flat if it is incapable of adapting to change and innovate and improve on a flexible platform.
ZTE was an exception. Even though it was an SOE, ZTE was based in Shenzhen, an experimental zone under China’s reform and open- ing-up policy. As a result, ZTE reaped the benefits of both the old and new market systems, benefiting from as much government support and resources as Great Dragon and Datang. In addition, the company reformed to become a state-owned, private-run company, providing itself with strong motivation.
Huawei is a different story. As a marginalized market player, Huawei would not have survived in the 1980s had it not been based in Shenzhen.
Adopting the principle of trial and error is perhaps the wisest deci- sion made by Chinese reformers 30 years ago because it drove institu- tional innovations and led to the establishment of a number of innovative and adventurous pilot zones, such as the city of Shenzhen. This city abandoned the planned economy model and replaced dependence on interpersonal connections. A number of SOEs under central govern- ment ministries began to build their branches in Shenzhen in the hope of reforming their own institutions. An example is ZTE, which belonged to
the former Ministry of Aviation and Aerospace. Private companies, such as Huawei, enjoyed ample freedom in this city.
Huawei’s ambitious equity-sharing program could not have been implemented and applied to thousands of employees if it had not been based in Shenzhen. Even in the early 21st century, such a shareholding plan was still defined as illegal fundraising in some of the inland provinces.
The fate of a country determines the fate of each individual and organization. No entity can steer completely clear of sharing in the trials and tribulations of the country, nor can they grow unrestrained from the entanglements thus created. Before China’s reform, Lenovo founder Liu Chuanzhi was too flexible to confine himself to China’s rigid market system, and the result was a series of frustrations. After the country’s reform program was initiated, Liu Chuanzhi maintained his adventurist spirit and flexibility to transform Lenovo into a business miracle.
Huawei is more an example of a miniature study of the country’s progress. Founded by a former military engineer without any political background or social connections, Huawei has evolved into a world-class company through 25 years of dedication. There are many ingredients in Huawei’s growth story, but the fundamentals are the change of environ- ment and the creativity of people. To some extent, Huawei is a product of China’s institutional reform.