Please help with a TOWS Matrix ,Diagnosis and Competitor Profile Matrix for the following case Study

HUAWEI ENTERS THE UNITED STATES

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Tim Simpson wrote this case under the supervision of Professor Ilan Alon solely to provide material for class discussion. The

authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised

certain names and other identifying information to protect confidentiality.

Huawei Technologies Corporation had a company vision to become not only a global technology leader,

but also an international giant, competing with such telecommunication equipment firms as Cisco

Systems. To make this a reality, Huawei needed to increase its presence in one of the largest markets for

telecommunications equipment products and services, the United States. Ren Zhengfei, CEO of Huawei,

led Huawei in its transformation from a company focused on the domestic Chinese market into an

international competitor involved in partnerships with all the major European operators, with the majority

of its sales coming from international contracts. Huawei had established four R&D centers in the United

States by 2001 and formed the joint venture H3C with American electronics manufacturer 3Com in

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2003. However, Huawei was running into resistance in the U.S. market, and its presence in the market

was small compared to its relative international success. The U.S. Committee on Foreign Investment in

the United States (CFIUS)3 had blocked deals involving Huawei on the grounds that Huawei had possible

ties to the Chinese government, and the strategic nature of the telecommunications industry made such

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deals potential threats to national safety and security.

In May 2010, Huawei bought assets of the American server technology company, 3Leaf, but did not file

the acquisition with CFIUS until November of that year.5 In February 2011, CFIUS recommended that

Huawei voluntarily deconstruct its purchase of 3Leaf assets. This would cause Huawei to incur some

financial costs for canceling the deal, but more importantly, Huawei executives felt it was a major blow to

their reputation as a trustworthy international company. Huawei had been in the process of transforming

into an international company for over a decade but was running into a ceiling in the U.S. market.

Questions arose as to whether they could ignore the recommendation by CFIUS or whether there was

something that they could do as a company to gain approval from the U.S. authorities. Huawei executives

needed to decide how to respond to the recommendation by CFIUS and the possible outcomes for the

future of their company.

HUAWEI FROM 1987 TO 2000

In less than two decades, the privately held company grew from an importer of basic telecommunications

equipment into a telecommunications giant, supplying equipment and services to millions of people

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across the globe and applying for a total of 10,650 patents under the Patent Cooperation Treaty (PCT) by

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2011.

Zhengfei founded Huawei in the city of Shenzhen after the Engineering Corps of the People's Liberation

Army, in which he was a deputy director, was disbanded in 1987.7 He used RMB21,0008 (equal to $4,400

at that time) of his own money to begin importing basic telecommunications equipment from Hong Kong

and sell it to vendors in China9. When that business became saturated with competitors, Huawei began to

develop and manufacture its own equipment. Choosing to design and manufacture products without a

relationship or joint venture with a foreign multinational partner was unique for a homegrown Chinese

company. Huawei's first focus was on the rapidly expanding domestic market, where telephone

subscriptions grew 15.5 times from 1992 to 2000 and mobile phone subscriptions grew 500 times over the

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same time period. There is little doubt that during this time, Zhengfei's guanxi network, which likely

reached deep into the Chinese military and Chinese Communist Party hierarchy, was an invaluable asset

to the company for winning large state contracts and obtaining cheap financial support from state-owned

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banks. However, Zhengfei was a particularly reclusive CEO, never granting interviews or making

public appearances, which did not help Huawei when rumors about ties to the military and the Party

started to spread in later years.

In early 2000, sensing an imminent end to sustained growth in China, Huawei's vision evolved as it

focused on becoming an international competitor. Huawei's internationalization strategy was very

successful, first winning international contracts from neighbouring Asian countries, and then moving into

developing markets in the African and Latin American regions. Huawei's main advantage was its ability

to provide quality equipment and service for about 30 per cent less than its global competitors. This

advantage was largely due to the abundance of Chinese engineers, who could be paid much less than their

foreign counterparts. Huawei recognized this comparative advantage early on and made R&D a

cornerstone of its marketing strategy, with a standard company policy to invest no less than 10 per cent of

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annual revenue in R&D (see Exhibit 1 for financial highlights).

THE TELECOMMUNICATIONS INDUSTRY FROM 1960 TO 2000

The telecommunications industry is one of the most important industries to emerge over the last four

decades, as it accounts for a major share of the global economic growth and technological innovation.

Globalization has also played a major role in the rapidly evolving make-up of the industry. In the 1960s

and 1970s, the telecommunications industry had few equipment suppliers. Most suppliers specialized in a

single product category and supply chains were decentralized, serving regional markets with regional

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subsidiary suppliers. But in the 1980s, digital technology changed the industry. Product lines became

much more diverse, and global organizations started to form with integrated, centralized supply chains

that increased production volume and decreased unit costs. By the 1990s, network equipment suppliers

evolved into providers of entirely integrated telecommunication systems. The market for global

networking products went from $15 billion in 1995 to $50 billion in 2000. Although the dot-com bubble

would result in a cooling down of the telecom industry, it did not prevent the emergence of new

technology that would continue to drive the industry.

Foreign multinational telecom firms had been in China since the 1980s. Most foreign multinationals had

to form joint ventures with local Chinese companies in order to enter the potentially massive Chinese

market. Foreign multinational telecom firms not only added to the growth of China's telecommunications

infrastructure during this time, but also contributed to the growth of domestic manufacturers. The

presence of foreign multinational firms greatly accelerated the evolution of domestic telecom

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manufacturers, from positions far behind industry competitors in the early 1980s into positions where

they were domestically competitive in the switch industry by the early 1990s; by the late 1990s, they were

in positions as major domestic players, beginning to go abroad in a wide variety of product categories. In

2001, the leading firms in the global telecom equipment industry were Ericson, Nortel, Nokia, Lucent,

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Cisco, Siemens, Motorola and Alcatel (see Exhibit 2). In 2011, the leading firms in the global telecom

equipment industry were Ericsson, Huawei, Alcatel-Lucent, Nokia Siemens Networks, ZTE, Cisco and

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Motorola (see Exhibit 3).

The landscape and the players in the telecom industry changed quite dramatically between 2000 and

2011, which led to a new set of issues for telecom industry players to manage. Prices became more

competitive as accessibility to cheaper R&D skill became more available. The market for

telecommunications equipment shifted toward major investments into the construction of wireless

networks, with major profits being made in software and services.17 Consumers demanded high-quality

products and services as well as leading-edge technology, which opened up new markets and room for

expansion. The growing perception of cyber-security and the possible threats to information systems

challenged the reputations of individual companies, as well as the industry as a whole, because of the

interdependence of global supply chains.

Both the Chinese and U.S. governments indicated that the telecommunications sector played a critical role

in national and security interests. Some members of the media were critical of the fact that the Communist

Party of China "ensured that 'national champions' dominate through a combination of market

protectionism, cheap loans, tax and subsidy programs, and diplomatic support in the case of offshore

markets."18 Other members of the media criticized the U.S. telecom industry as being a "good old boys"

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network that catered to incumbent relationships and kept new players out. International trade followers

described the issue of telecommunications in foreign and international trade policy as "the mother of all

cases" because of the huge commercial and strategic value of the industry (see Exhibit 4 and Exhibit 5).20

CFIUS

The Committee on Foreign Investment in the United States is an inter-agency committee composed of the

heads of the Department of Commerce, the Department of Homeland Security, the Department of Justice,

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the Department of Defense and five other departments and offices. The committee is authorized to

review transactions that could result in control of a U.S. company involved in interstate commerce by a

foreign entity or foreign persons. This is not limited to transactions involving majority shares, but any

transactions that result in controlling power of any sort. The process involves a voluntary filing by a U.S.

company that is looking to sell equity or to be acquired. The filing includes a description of business

lines, which includes clear and detailed accounts of each company's products and services, and a

description of the transaction, which includes clear descriptions of all entities involved and the nature and

structure of the transaction. CFIUS also suggests submitting organizational charts showing the control

and ownership interests of the foreign persons who are party to the transaction, as well as information

related to the foreign persons and their parents.

Each notice of transaction is reviewed, and further investigation may occur based on the buyer's country

of origin and the industry in which the purchase is involved, such as the banking, transportation,

infrastructure or technology industries (see Exhibit 6 and Exhibit 7 for transaction details).

Ninety-three notices of transactions were filed with CFIUS in 2010, of which CFIUS conducted

subsequent investigations with respect to 35.22 Twelve of the notices were withdrawn (see Exhibit 8). In

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five of these cases, the parties filed a new notice. In five other cases, the parties abandoned their

transactions. In two cases, the parties withdrew and re-filed in 2011. If a transaction occurs without a

notice being filed to CFIUS, the committee can intervene at any time and undo the deal.

HUAWEI IN INTERNATIONAL MARKETS

By 2005, Huawei had captured 30 per cent of China's domestic market, had international contracts

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exceeding domestic sales and was employing 30,000 people worldwide. Huawei brought in world-class

management consultants from IBM, PriceWaterhouseCooper, Intel and Microsoft to bring the company

up to modern and efficient global management standards. The company expanded into developed

European markets, first winning contracts from budget-constrained operators, but eventually winning

contracts from a number of major operators. By the end of 2007, Huawei had a partnership with all the

top European operators, such as France Telecom, Vodafone and the BT Group.

Huawei formed a joint venture, H3C, with the American electronics manufacturer 3Com in 2003, but it

still had little presence in the United States market relative to its international success. H3C would raise

the profile of Huawei in the U.S. market, and 3Com found the joint venture successful enough to buy out

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Huawei's 51 per cent share in 2006. However, when Huawei teamed up with Bain Capital to purchase

3Com in 2008, security concerns at CFIUS about the acquisition led to the termination of the deal. A Bain

Capital press release stated that they were informed that CFIUS intended to take action to prohibit the sale

if the deal was to continue. The U.S. Department of Defense had used 3Com products for cyber security

intrusiondetection,whichwasamajorredflagforU.S.policymakers.

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The reclusiveness of Ren Zhengfei, who had never released more than a 200-word biography or granted

an interview, as well as the lack of transparent corporate governance or transparent company ownership

and the lack of a single non-Chinese member in the "inner-management sanctum," made it very hard to

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see the inner-workings of Huawei. However, Xinhua News, the vehicle of the Communist Party of

China, described the problems as the struggle of a highly competitive, non-Western company with the

"rising protectionist sentiments in the United States," which were possibly planted by the hometown

favorite, Cisco Systems.28

In 2010, Huawei had $22 billion in sales and was becoming one of the world's top three sellers of telecom

equipment. 29 Huawei partnered with a newly formed consulting company, Amerilink Telecom Corp.,

which could have been a way for Huawei to win business from Sprint. Amerilink was located in Sprint's

hometown and was composed of a former vice-chairman of the U.S. Joint Chiefs of Staff and former

Sprint executives. However, Huawei and fellow Chinese telecom supplier ZTE were excluded from the

$5 billion contract to build a 4G network for Sprint Nextel Corporation. Several U.S. senators had sent

letters to the Obama administration expressing their concerns about Huawei potentially gaining access to

and undermining the critical U.S. telecom infrastructure. The U.S. Commerce Secretary, Gary Locke, also

personally called Sprint's CEO, Dan Hesse, to discuss concerns about awarding the contract to a Chinese

firm. Both Huawei and ZTE submitted bids that were lower than those of the other competitors.30

A LESSON

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In the summer of 2011, Huawei was the world-leading ICT provider, providing services to one-third of

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the world's population with operations in 140 countries. Huawei was popularly labeled as China's most

successful privately held company and one of China's "national champions." However, the overly private

nature for which the company had become known and its popularly assigned title as a Chinese National

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Champion seemed to be impediments to further expansion of its global business, particularly in the U.S.

market.32

In February 2011, CFIUS recommended that Huawei voluntarily deconstruct its purchase of assets in the

American computer company, 3Leaf Systems. Huawei had not immediately disclosed the purchase to

CFIUS in the spring of 2010, which some cite as the cause of the deal's failure. Teng Bingsheng, a

Cheung Kong Graduate School of Business (CKGSB) professor of strategy, saw the ordeal as a lesson for

Huawei, courtesy of the U.S. Government; if Huawei wanted to operate in the U.S. market, it had to play

by the rules and respect the authorities.33 Xinhua News saw this as the U.S. government again interfering

with its "valued fair market system" by preventing beneficial business that would bring much-needed

jobs, investment and spending to a slowing U.S. economy.34 Xinhua News also noted the "very dangerous

market-distorting policy precedent" the U.S. government was setting and the possible consequential

dangers to U.S. companies operating overseas. Other than the lost financial costs of canceling the deal

with 3Leaf, Huawei executives felt that abandoning the 3Leaf purchase was a major blow to their

reputation and brand image.35 Huawei could follow CFIUS's recommendation to withdraw its purchase

agreement with 3Leaf or Huawei could decline CFIUS's recommendation and force their application to

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be decided by President Barack Obama, which at the time was an unprecedented action. Zengfei and his

executives needed to determine how they would lead their company in order to ameliorate their current

troubles in the U.S. market.