Made in China
In Shenzhen the skyscrapers lie in every direction the eye can see. Beneath these towers of glass lies a hodgepodge grid of traffic with stores stacked on top of stores, vertical malls covered in neon, and plasma screens competing with street stalls for customers. Unlike the other giant cities of China, Shenzhen's legacy is a modern one. It doesn't have the centuries-old imperial history of the capital Beijing, or the colonial past of China's financial center, Shanghai. In fact, before 1979, Shenzhen was little more than a fishing village overlooking the Shenzhen River to neighboring British colony Hong Kong. That year the Chinese government awarded it special economic zone statue with the aim of countering Hong Kong's industrial might. Almost overnight, people flooded into the city from all over China to work at its new port in the booming construction industry and in manufacturing and tech industries that landed there with the government's blessing. In just 25 years, the population grew 32 times its original size. New buildings seem to pop up daily, as do new companies, and more and more Chinese and foreign citizens pour in to work for them.
In the middle of all this chaos is the enormous corporate campus of Huawei, a loose cluster of low glass-and-steel buildings that look as if they belong in a suburban business park in Northern California rather than in the middle of a city of 10 million. Despite the relative serenity of Huawei's headquarters in the bustle of Shenzhen, Huawei the company is much like the city it calls its home.
The name Huawei means “achievement” or “magnificent act,” a moniker bald-faced in its audacity, especially in a global industry that seems to prefer subtlety in branding. Then again, Huawei, or any of its Chinese counterparts for that matter, have never really been known for understatement. And no one could argue the company hasn't lived up to the promise of its name. Started by Chinese entrepreneur and People's Liberation Army officer Ren Zhengfei in 1988, the company began as little more than a distributor of imported PBX products. But with the release of its first telco switch, a behemoth that had a 10,000-circuit capacity, it spread throughout China and eventually overseas, adding different technologies to its product platform at a feverish rate. By 1997 it had released its first GSM platform, and an infrastructure giant was born.
In less than a decade, Huawei has penetrated almost every major world infrastructure market and has invested enormously in its business and technology lines. It claims 44,000 employees worldwide — focused in Shenzhen, but spread throughout China, Europe, India and North America. More than 21,000, or almost half of those employees, work in R&D. And although much of its success has been in developing markets, Huawei snapped the 3G stranglehold in Europe held by European vendors, landing Dutch provider Telfort's UMTS network contract in the Netherlands. In 2005 it broke into the highest level of global service providers, securing a future global UMTS infrastructure commitment from Vodafone and a specific deployment contract for its networks in Spain. Last year Vodafone rewarded Huawei with a sweetheart of a handset deal. Huawei became a supplier of Vodafone-branded UMTS handsets sold in 21 countries for the next five years.
Huawei's meteoric rise in the infrastructure and handset space strikes many in the industry as an enigma. In news story after new story, analyst report after analyst report, Huawei was pigeonholing in a decades-old global business paradigm: A Chinese company with low overhead throws massive amounts of low-cost labor at an established technology and aggressively sells its products on the cheap.
That “made in China” perception is something Huawei is trying desperately to dispel. Huawei isn't making plastic action figures or using its manufacturing plants to press farmed-out silicon. It's making some of the most sophisticated equipment in the world, and according to Huawei, it's not making it cheaper — it's making it better.
Sitting in a conference room in the executive building of Huawei's main Shenzhen campus, Lin Bin, vice director of wireless branding, didn't need the help of his translator to drive that point across. He acknowledged that Huawei is aggressive, and it competes on price — but what vendor doesn't? Huawei's competitiveness hasn't come from underbidding its competitors, but from building optimized and custom-built solutions that focus on particular carrier needs, Li said.
“We are not a company that provides cheap solutions,” Li said. “We just listen.”
Every vendor listens to its customers, but there is evidence that Huawei listens more than most. In its Vodafone deal, Huawei isn't providing high-end multimedia phones on par with Nokia N series, but rather mid-range and entry-level 3G phones intended to get the masses involved with mobile data. That may seem to contradict Huawei's claim of not competing on price, but according to M:Metrics analyst John Jackson, the deciding factor wasn't a question of who made the more inexpensive phone, but rather which was willing to make an inexpensive phone, period.
“One of the reasons Vodafone went with Huawei was because Huawei was flexible,” Jackson said. “Vodafone was clamoring for cheap phones, but Nokia and the others have failed to produce them because they want to protect their margins.”
Huawei claims that flexibility extends not just to the bottom of the market but to the top. It's going head-to-head against Ericsson and Nokia in the global wireless marketplace. Although its European deals may not be the exclusive ones it's signing with carriers in developing markets, it is often dislodging one of the incumbents, said Peter Jarich, wireless infrastructure analyst for Current Analysis. While Jarich doesn't buy completely Huawei's claims that it is not undercutting the competition on price, he said price is certainly no longer the only factor. Huawei has established an international presence and a reputation as a Tier I vendor, Jarich said — if anything, it's forcing the Ericssons and Nokias to undercut Huawei.
“We're starting to see deals with an Ericsson and a Huawei as opposed to an Ericsson and a Nokia,” Jarich said. “Huawei's competitors are well beyond the point of saying, ‘That Huawei stuff is cheap, but you'll pay the price later because it's not good quality.’ The quality has been established. Now they have to compete on price.”
That cost pressure may have been evident in T-Mobile's recent award of its U.S. 3G contracts after winning spectrum in the Advanced Wireless Services (AWS) auction last year. Huawei claimed that its UMTS/high-speed downlink packet access (HSDPA) kit went to the final round of consideration with T-Mobile only to find it undercut in price by Ericsson and Nokia.
Regardless of whether Huawei's success is coming at the expense of other carriers or just an expanding global market, it's seeing success nonetheless. A look at the limited financial data the company provides shows the vendor growing at an enormous clip. One of the oddest aspects of Huawei is that, for a company its size, it is still a private corporation. Its lack of financial transparency makes the company a bit of an enigma to industry analysts, even though it releases some data and employs KPMG as an outside auditor to help offset those concerns as well. Huawei reported $8.2 billion in sales in 2005, making it still relatively small in the global vendor community. In comparison, Alcatel and Ericsson reported $24 billion and $21 billion in revenues in 2005, respectively. Its fellow countryman, ZTE, is even smaller with $2.7 billion in sales in 2005, even though it is traded on the Hong Kong exchange.
Huawei's current size, however, isn't the big concern for its global competitors; it's how fast it appears to be growing. According to Huawei's own numbers, from 2004 to 2005, revenues jumped an astonishing 47% from $5.6 billion. The previous year's growth was just as impressive, increasing 46% over 2003's revenues of $3.8 billion. And of its $8.2 billion in 2005 sales, Huawei said 58% were international sales, signaling it is weaning itself from dependence on contracts with its own government and domestic carriers. Though it hasn't yet released revenue numbers for 2006, Huawei said it recorded $11 billion in contract sales last year, 65% of which were outside of China. It claims to have deals or strategic relationships for wireless, wireline and networking infrastructure with more than half of the top 50 carriers, as well as 31 commercial UMTS and 20 CDMA 1X EV-DO built since 2004.
Charlie Chen, Huawei's U.S. vice president of marketing, said those deals were all hard-fought and represent years of research and development that Huawei has poured into its infrastructure line, as well as building up trust with its customers. Huawei can throw more engineers at a product or project than other vendors because of its low payroll costs in China, and it enjoys cheaper manufacturing in its home market. But according to Chen, Huawei isn't merely reverse-engineering already commercial products or simply pumping out cheaper Chinese versions of other vendor's gear. It's funneling those cost-savings and additional resources into innovations that will set its wireless platform above the competition, he said. For instance, Huawei has designed a Node B UMTS base station with digital power amplification technology that transmits at the same range and capacity as its competitors' base stations, but consumes a third less power. It designed its UMTS architecture on an all-IP platform, cutting down on transport costs and shunting outdated elements from the network.
“You can't just consider the box — you have to sell the solution,” Chen said. “There is total ownership of solution, capex and opex and the quality of the product. Just low price isn't going to win the contract. Price is just a small part of it. Our customers aren't just looking for a vendor to sell them a box. They're looking for a business partner.
”Huawei hasn't had any trouble finding business partners. Its willingness to partner with nearly anybody has garnered it controversy. In 1999, Huawei defied United Nations sanctions by selling telecommunications equipment to Iraq — a deal Huawei later said it did not go through with. But in 2001, several news reports cited U.S. intelligence officials' claims that Huawei was laying fiber optic cable at Iraqi air defense bases. And while Huawei partners with numerous other equipment vendors — from purchasing computing equipment from IBM to forming joint ventures with Motorola and 3Com — its vendor relationships haven't always been so cordial. In 2003, Huawei got into a row with Cisco Systems, which sued the vendor, accusing it of stealing its source code and violating patents on its router technology. Cisco dropped the lawsuit when it was determined the infringement came from a few rogue engineers at Huawei and was not a corporate plan.
Those incidents were embarrassing, and while they didn't impede its phenomenal growth, they may have hindered Huawei's quest for global recognition as a vendor of the highest caliber. Whatever knocks Huawei took to its reputation, it seems to have recovered — deals with Vodafone and Telefonica certainly add to one's credibility. But Huawei still has one obstacle to overcome if it wants to reach that global pinnacle of Tier 1 vendors: It has to break into the U.S.
North America hasn't warmed as quickly to Huawei as the rest of the world, particularly on the wireless side. Huawei has won a few smaller contracts in the U.S., most notably to build a CDMA 1X network for Leap Wireless in a few western markets. It also won a deal with ClearTalk to Wireless to build out its five-state rural network, but ZTE mysteriously replaced Huawei as ClearTalk's network vendor in December. In fact, the two rivals appear to be going head-to-head for smaller carrier contracts, and though the Leap deal is significant for Huawei, ZTE seems to be picking up more momentum. In addition to other small CDMA deals with Copper Valley Wireless in Alaska, Oceanic Digital Jamaica and HaiTel in Haiti, ZTE became the first of the two to win a Tier 1 carrier deal, selling EV-DO cards to Telus in Canada.
Lance Cornish, ZTE USA vice president of marketing, said it's of vital importance for any global company to claim a stake in the U.S., Chinese vendor or otherwise. The Americas may be the last major market that both Huawei and ZTE are entering, but it's also one of the most difficult to penetrate. And regardless of a tendency for ZTE to think of its compatriot Huawei as the competition, its competition is really every other global vendor that wants to shut them both out of the market, Cornish said.
“One of the mistakes we've seen in the past is vendors taking what has been successful in their home markets to the U.S. and expecting people to beat a path their door — it simply doesn't work that way,” Cornish said. “The challenge of breaking into the U.S. market is less of being a Chinese company coming into the U.S. It's about being a non-U.S. company coming into the U.S.”
As ZTE is picking off small CDMA contracts, Huawei seems to be focusing on landing the big deal with a UMTS carrier, said Current Analysis' Jarich. It's been public about its attempts to land a deal with T-Mobile for its UMTS build. The problem with that strategy is there are far more CDMA carriers in North America than GSM providers. The U.S. in particular is littered with regional and rural CDMA providers, many of which are firing up their expansion engines after winning spectrum in recent auctions.
“Huawei will say they are not going to ignore those CDMA customers, but Huawei is focusing on growing their global market,” Jarich said. “They're going to go where the money is.”
On the GSM side, there's T-Mobile and Cingular, both of which have named their primary 3G vendors. Huawei is likely backing off on some of its U.S. efforts after losing out to Ericsson and Nokia on the T-Mobile deal, Jarich said, but he added that the vendor still could pick up a supplementary deal down the road. Nortel Networks lost out on Cingular's big 3G build, but it redeemed itself a year later when it was named the primary core switch vendor for the new network. And just like Nortel, Jarich said Huawei has a lot more in its portfolio than just radio access equipment.
For Huawei's U.S. marketing chief, losing the T-Mobile contract certainly isn't the end of the world. While it may delay Huawei's emergence in this all-too-critical market, Chen said Huawei will find its entrance point. For now, it will continue to plug away at the major carriers, convincing them step-by-step to throw their lot in with the Chinese powerhouse.“In the U.S. market, we are not just talking about this year or 2008,” Chen said. “We're talking about 10 years from now. We're here for the long term.”
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