Leading multinationals around the globe are anxious to exploit Chinas potential as the worlds largest and most exciting market. However, a number of leading Chinese corporations are now positioning themselves to compete with the multinationals on their own terrain. Competition on a global scale has created unexpected pitfalls. Not the least of these is the fact that business can often be trumped by political sensitivities and xenophobia that are as endemic in the west as they are in China. Chinas advantage in this high-stress, fast-paced environment is the extraordinary flexibility and creativity of its entrepreneurs, whose instincts have been honed by the cut-throat competition of the free market resulting from the reforms that began with Deng Xiaoping.

No one questions that China now handles the lions share of the worlds low-end manufacturing. According to various sources, at least 86% of the bicycles sold in the US are made in China, as are more than 70% of the worlds toys and Christmas tree ornaments. Roughly 60% of the worlds watches, clocks and shoes are made in China, along with 55% of the worlds cement and half of the worlds cameras and microwave ovens.

Until recently, however, the premium top end of the market has largely belonged to the multinational giants. That situation is already changing dramatically. Competition is driving the multinational giants, which had previously focused on high-end, top quality goods at premium prices, to begin moving down the market in China to exploit the segment characterized by no-frill goods that are less expensive and for which basic, but dependable quality is considered good enough. Competition from the top western firms in this previously Chinese-dominated market sector is combining with market saturation to force Chinas homegrown industries to reach out to international markets formerly considered the preserve of the multinationals.

Huaweis successes on the global stage

The change that is taking place in China is exemplified by the electronics giant Huawei, which was launched with a complement of 14 employees in 1988. Huaweis founder is Ren Zhengfei, a former army colonel, who had previously been director of the Peoples Liberation Armys Information Engineering Academy, and had retired from government service four years earlier. Despite its name (Huawei translates as China is great), the company began with fairly modest ambitions. It initially imported telephone switching equipment and PBXs to China from Hong Kong. When other distributors began to compete, Huawei was forced to begin manufacturing its own equipment and Ren sought a competitive advantage in developing new technology. His master-stroke was to produce a new telephone exchange system capable of handling 10,000 switchboardsfive times as many as his competitors. The new switching system gave Ren a competitive edge, but instead of immediately competing head-on with multinationals, Ren focused on provincial markets that were being ignored by foreign companies. When Ericsson sent only three or four salesmen to sell switching equipment in Heilongjinag Province, Ren sent 200.[1] By 2005, Ren had captured 30% of Chinas domestic market, and Huawei had 30,000 employees worldwide.

In 2002, telecom companies were bottoming out after the dotcom bust of 2,000, and Huawei marked its first downturn in the companys history. Domestic sales were $2.2 billion, but Huaweis market in China was shrinking by 21% a year. International sales were only half a billion, just 18% of total sales.[2] It was obvious that Chinas internal market was becoming saturated and Huawei had to expand internationally if it was going to survive.

By 2004, international business accounted for 40% of Huaweis revenues the company was providing telecom and internet switching equipment to more than 30 of the worlds top 50 telecommunications companies. Huaweis sales still only added up to 17% of Cisco, the market leader, but Cisco had clearly begun to see Huawei as a threat. Huaweis engineers were paid a fifth as much as the salaries of their US counterparts, and the equipment they were turning out was of equal if not better quality. Jean-Charles Doineau of Ovum consulting observed: Huaweis reputation as a low cost vendor is only the visible part of the iceberg. Below the waterline, the company has high technical standards.[3]

Franois Paulus, who headed the network division at Neuf Telecom, a Huawei client in France, noted: When we first saw Huawei, we couldnt believe that a Chinese company could match an occidental onewe were wrong. Their technology was better and they were 30% cheaper.[4] And Huawei was getting stronger. The company regularly invested 10% of its revenues in R&D, and it was submitting up to three new patent applications a day. It had set up 12 R&D centers around the world.

Only 3% of Huaweis sales were in the US, but Cisco recognized the company as an emerging threat in its other world markets. In 2003, Ren, anxious to secure an internationally recognized brand, attempted to engineer a merger with 3Com, a Cisco competitor that had fallen on hard times. The deal almost fell through when Cisco tried to sue Huawei for alleged intellectual property violations. The suit was settled out of court and finally dropped, but it signaled the fact that Huawei had caught Ciscos attention, and that it was henceforth considered a force to be reckoned with.

The story of Huawei illustrates the necessity for multinational companies to adjust their outlook. Multinationals often view their fellow multinationals as their top competition. While large corporates by and large think and act alike, it is the Huaweis of the world, with their aspiration, determination, and flexibility, operating in a new business model and setting the new rules of the game, which pose a significant threat to MNCs. This trend will only be exacerbated in China as some Chinese companies continue to utilize its low cost manufacturing base, leverage its huge domestic market while focusing on investing in technology. In this game, the size does matter. It is the abundance of low-cost knowledge professionals or skilled workers that will determine the future competition. The National Science Foundation reports that the US awards diplomas to just over 30,000 undergraduates in engineering a year,[5] while China graduates 500,000 a year.[6] The companies like Huawei challenge the fundamental assumption on which MNCs build their business models. The MNCs need to think differently. It is no longer business as usual.

Winter Nie is Professor of Operations and Service Management at IMD, the leading global business school based in Switzerland. She teaches on the Program for Executive Development, among other programs. This article is based on her forthcoming book, Going global: China competes with the multinationals, written in collaboration with Abraham Lu and William Dowell. The book explores in detail the strengths and weaknesses of Chinas most successful companies as they begin to compete, head-to-head, with the worlds leading multinationals, albeit with varying degrees of success.

Please answer:

1. Why Huawei choose to expand internationally?

2. What are Huaweis competitive advantages and to what extent can Huawei continue to compete successfully in the international market ? Can you think of any threat to Huawei's global strategy?