Huawei Technologies Ltd_Case Study Analysis (Tyler Anton)

Huawei Technologies Ltd. Case Study Analysis:
Telecommunications Industry & Market Analysis
Tyler Anton
AMBA 660
May 26, 2016
Professor Ezz
University of Maryland University College

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Huawei Technologies Ltd. Case Study Analysis
Table of Contents:
Introduction……………………………………………………………………………….. 2
PESTEL Framework: External Environment………………………………………….. 2
Political……………………………………………………………………………………… 2
Economic, Social, & Environmental…………………………………………………….. 3
Technological……………………………………………………………………………….. 5
Legal…………………………………………………………………………………………. 5
Porter’s 5 Forces – Canada’s Telecommunications Industry………………………….. 6
1 – Barriers to Entry……………………………………………………………………….. 6
2 – Bargaining Power of Commercial Buyers…………………………………………. 7
3 – Bargaining Power of Suppliers……………………………………………………… 8
4 – Treat of Substitutes……………………………………………………………………. 8
5 – Competitive Rivalry……………………………………………………………………. 8
Necessary Actions to Further Advance Operations in Canada………………………. 9
Conclusion………………………………………………………………………………… 12
References………………………………………………………………………………… 13

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Introduction
Huawei Technologies Ltd., a private telecommunications equipment provider and
operator or carrier, headquartered in China, decided to expand its viable market opportunity via
entering the Canadian market in 2008 (Celly, Han, & Lau, 2015). Huawei had an established
track record as being a globalized, or “glocalized” industry player in Asia, Russia, Africa,
Germany, and the U.K.; which highlighted the emphasis on local or a consumer-centric approach
to added-value creation with respect to its global value chain and future operating stability (Celly
et al., 2015). Localization served as building-blocks to a fully integrated global strategy which
was a fundamental factor that pioneered its positional power and ability to become a competitive
and dominant telecom industry player (Celly et al., 2015). In Canada, Rogers, Telus, and Bell
Mobility were chief competing operators and Ericsson and Nokia Siemens were two of the chief
competing equipment vendors (Celly et al., 2015). Huawei wished to become the dominant
equipment vendor in Canada; of which it did in 2012 in terms of economic or operating
performance (Celly et al., 2015).
This case study analysis addresses (1) essential information to analyze the external
environment pertinent to Huawei’s entry into Canada in 2008, via the PESTEL Framework; (2)
the competitive industry factors (Porter’s 5 Forces) and Huawei’s response to its competition;
and (3) provides viable options for Huawei to sustain and advance future operations in Canada.
PESTEL Framework: External Environment
Huawei’s mission was to make Canada one of its global R&D hubs; was well positioned in 2011.
Political: The Chinese government’s policies, starting in 2002, encouraged domestic companies
to expand their international influence to obtain external resources (of which Canada was
resource-rich), meet overcapacity production to reach heightened economies of scale, and to

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expand technological advancements (Celly et al., 2015). China and Canada wished to expand
bilateral trade via increased exports to one another in 2005 (Celly et al., 2015). Domestic
acquisitions and overseas expansions were financed via cheap loans and buyer’s credit by state-
owned banks such as China Development Bank (Celly et al., 2015). With heightened trade
initiatives and political cooperation between both countries, and state-owned banks in China
facilitating Huawei’s expansion; Canada was considered a prime market as it was a
telecommunications hub/triangle – offering rich resources and an expanded playing field with
heightened sales potential and market segment growth for Huawei.
Economic, Social, & Environmental: Prior to entering the Canadian market in 08’, Huawei was
ranked the 3rd largest telecom equipment maker (Celly et al., 2015). Huawei saw the operational
potential in the Canadian market as a viable expansion opportunity to improve its global telecom
industry position. Chinese exports to Canada increased more than 2-fold to C$52.7B where
telecommunications equipment exponentially grew more than 7-fold to C$3.4B between 2004
and 2013 (Celly et al., 2015). Subsequently, much of this growth presented a viable expansion
opportunity for Huawei in Canada’s telecom market. After 2000s dotcom bubble burst, the
network equipment industry became consolidated with fewer key industry players (Celly et al.,
2015). This reduced the dispersion of competitive rivalry in the industry, not necessarily the
intensity, however. The 5 largest players – Huawei, Ericsson, Cisco, Alcatel, and Nokia-Siemens
– with significant market concentration – controlled 80% of the global network equipment
market (Celly et al., 2015).
Between 1996 and 2002, Chinese telecom spending became saturated and sales became
highly stagnant – offering price wars and intensified competition where overseas expansion
presented the most viable solution to combat narrowing profits and uncertainty regarding

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business stability (Celly et al., 2015). International expansion served as a risk mitigation
technique where diversity trumped domestic market positioning and exponential sales growth in
Asia, the EU, Russia, India, and the U.S. Huawei had established 4 R&D centers in the U.S. in
01’ and divested or spun-off its JV stake of 49% with 3Com in 06’ (Celly et al., 2015). In 2005,
however, Huawei’s overseas revenue exceeded domestic revenue – growing at a rate above 40%
per year over 04’ and 08’ – positioned as the 5th equipment provider globally – trailing Cisco and
Ericsson (Celly et al., 2015). Huawei’s competitive advantage was low labor and production
costs in China which offered it a global market penetration pricing strategy (Daniels, Radebaugh,
& Sullivan, 2015). Its strategic partnerships, joint ventures, and R&D centers offered it
locational diversity and operational stability, tax efficiencies, and globalized diversity. R&D is
an industry prerequisite to intensified capital investments to pioneer continued growth in the
rapidly changing telecom industry due to rapid technological advances.
Various operating markets Huawei was already established in also presented expanded
capital and credit availability to magnify operations and sales; and leverage amortized expenses
such as patents and R&D which are tax deductible. Additional entry into Canada would have
expanded such economic and environmental advantages essential for value-added wealth
creation and continued core growth – complementing strategic foresight. Canada’s GDP growth
was greater than inflation between 05’ and 06’ until the global 08’ financial crisis (Celly et al.,
2015). A portion of this added global financial risk was ideally hedged via expansion into
Canada and access to Chinese banks and their “preferential tactics”; offering additional market
growth and artificially low borrowing rates.
These political motives increased incentive and capability to expand Huawei’s operating
segments in Canada (with projected growth in both operating segments and especially managed

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services of 12%); despite global financial and economic hardships at the time and temporary
capital controls to limit lending activity (especially) in Europe and North America. Huawei’s
cost-efficient market penetration strategy and production was less susceptible to external cost
pressures, comparative to its competitors, despite heightened competition and related CapEx.
Entry into a developed market (Canada) offered greater stability as opposed to entry in an
emerging market at that time.
Technological: The necessity to expand and upgrade technological advancements, network
platforms, and coverage and capacity represented substantial outflows (Celly et al., 2015). R&D
and building 4G networks represented significant CapEX, but R&D is a tax deductible premium
offering significant tax write-offs – offering an incentive to expand R&D initiatives in Canada
with enhanced political ties (Celly et al., 2015). With fewer technological advances being
harmonized by domestic Chinese companies, Huawei allocated 10% of its budget to R&D to
pioneer the largest expansion of patents or intangible assets in the entire telecom global market
(Celly et al., 2015). This R&D allocation was essential to sustain and rapidly advance market
growth/share, industry position, and technological and economic progression (Celly et al., 2015).
Legal: In the U.S., Huawei’s hostile pricing strategies posed significant threats to Cisco’s
potentially eroded profit margins and domestic and global industry dominance as a preferred
vendor (Celly et al., 2015). In 03’, Cisco filed multiple copyright disputes; and while
unsuccessful, it tarnished Huawei’s reputation in the U.S. with less than a 10% market share
amongst desired equipment vendors (Celly et al., 2015). Considering its operations and strategies
were relatively inefficient in the U.S., compared to its highly diverse and strong international
performance, Canada was the next most viable option in North America even though the U.S.
offered the greatest market potential in terms of aggregate regional revenues (Celly et al., 2015).

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The U.S. government red-flagged Huawei as a potential security threat with ties to the
Chinese government, blocked its attempt to acquire 3Com, and market opportunities in the U.S.
became seemingly less plausible as allegations and protectionist measures were enforced (Celly
et al., 2015). Successively, Canada became the most viable market opportunity in North America
to advance alliances, enhance strategic operations, evolve innovative technologies, expand R&D
initiatives in North America, and optimize internal efficiencies via exploiting external markets
with its “gloaclization” business model.
Entry into Canada also reduced the threat of neglecting a potentially powerful technology
hub, which if Huawei could transform and create exponential local value with local alliances,
would reposition its perception and brand value. If successful, it would leverage its operating
sustainability by building upon its innovative R&D and operational and financial synergies
related to its two business segments; principally its core mobile equipment vendor market.
Managed services also offered an added bonus in terms of greater growth potential into
2016 (Celly et al., 2015). Huawei had to prove it was still a key suitable and reputable global
industry player to advance its market position and reposition its intrinsic or perceived underlying
brand value. Canada became the optimal the host.
Porter’s 5 Forces – Canada’s Telecommunications Industry
1 – Barriers to Entry: High. Low-cost production methods; economies of scale, experienced
learning curves, patent protection on equipment and technological advances, intensive capital
related to technological advancements, network upgrades and capacity costs, maintenance costs,
and R&D and infrastructure costs are significant. High consolidation between Rodgers, Telus,
and Bell (or the top 5 service providers) controlled 85% of the market (Celly et al., 2015).
Subsequently, substantial barriers to entry existed and Huawei’s low-cost production and global

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operating efficiencies permitted it to enter the market. Canada’s retail telecom sector was small,
accounting for only 10% of the North American market in which the U.S. dominated (Celly et
al., 2015). Capital intensity and high fixed costs, or degree of operating leverage (DOL),
represent the biggest barrier to entry. The degree of financial leverage (DFL), or access and
credibility to expanded debt capital, is relatively high.
2 – Bargaining Power of Commercial Buyers: High. Retail service providers have high
influence over technological advancements, incur significant CapEX, and its key industry
players are highly consolidated. Purchases from equipment vendors are conducted in in large
quantities and commercial buyers of telecom equipment placed pricing pressures on its suppliers
to increase operating margins (Celly et al., 2015). Low contract bids and heightened reliability
and response to rapid technological advancements (via high R&D expenses) were key
characteristic of desired equipment vendors in Canada’s telecom industry over this time period
(Celly et al., 2015). The bargaining power of individual consumer buyers is, however, low.
Regardless, in 2012, Huawei’s operating margin was larger than Ericsson and Nokia
Siemens (the other 2 dominant equipment vendors) where Huawei had successfully repositioned
itself as the largest equipment vendor in the global market with revenues exceeding $35B; while
having the greatest operational efficiency in terms of its operating margin of 9.10% (Celly et al.,
2015). This was 44% and 48% more efficient than Ericsson and Bell. Huawei also had the lowest
R&D as a percentage of revenue at 13.70% - resulting in competitive financial, operational,
political, and tax synergies with low-cost production methods in China (Celly et al., 2015).
Subsequently, more of its cash flows were available at a lower opportunity cost to fund
additional value and undertake additional expansion opportunities or to be remitted to China.

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3 – Bargaining Power of Suppliers (Equipment Vendors): Moderately-Low. As inferred from
Exhibit 8, the retail service providers were highly consolidated where equipment vendors only
represented 8% of industry market share (Celly et al., 2015). Retail service providers dominated
market growth and industry revenues; except in 2011, where relative annual revenue growth for
equipment vendors was over 2-fold greater at 5.5% vs 2.5% (Celly et al., 2015). Retail service
providers (Rogers 34%, and Telus and Bell each at 28%) dominated the pricing power over
equipment vendors (suppliers) with high levels of subscribers – increasing price wars, low
contract biding, and narrowing profit margins for equipment vendors (Celly et al., 2015).
4 – Treat of Substitutes: High. Price wars and low contract bidding made low pricing power for
equipment providers exposed to the threat of increased substitutes between competitors. Huawei,
with its low pricing biding and relatively lower-cost market penetration strategy presented the
ability for it to capture greater market share over its competition and improve its operating
margin, economies of scale, and R&D allocation efficiencies. Access to non-traditional
equipment vendors also poses a serious threat to maintain economic stability (Celly et al., 2015).
Huawei’s low-cost business structure and industry competitiveness permitted its ability to remain
a fierce competitor for market share accretion over its rivals between 08’-11’. Its strategic
partnerships and JVs as forms of local cooperation facilitated or positioned it to do so.
5 – Competitive Rivalry: Intense/High. Major equipment vendors and service providers were
comparable in size and scope to its respective competition. Equipment vendors offered similar
services, technological equipment, and mobile operating platforms to its service providers.
Equipment vendors chose cooperation in times of increased pricing pressures from buyers
(service providers) and key competitors operated in similar market segments. Huawei’s low-cost
location posed a threat to substitution for other key players and the industry was undergoing a

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seemingly bust-cycle due to the aftermath of the financial crisis – partially recovering in 2011
(when Europe experienced heightened economic hardship). Huawei responded by capturing the
majority of aggregate global contracts (40%) and expanding access to 45/50 of the world’s
largest operators in 2013 (Celly et al., 2015). Its in-house production capabilities and vertical
integration in China to reduce costs and leverage production efficiencies were essential to such
industry positioning (Daniels et al., 2015).
To produce superior operating performance or rates of return in an industry, the
competitive landscape and degree of competition are essential to understand. Operating risks
must be identified and strategically mitigated – as Huawei did with its core business model and
complimentary operational and market efficiencies mentioned above; indicative of its superior
operating performance.
Necessary Actions to Further Advance Operations in Canada
{Implement global horizontal integration + Continue Local Investment by creating
a government-sponsored joint venture (JV) (via a 50% Canadian government grant) – with
a local industrial/construction holdings MNC – to spin-off self- sustainable small tech
entities in Canada by 2024}. Huawei must continue to heavily invest in innovative R&D
initiatives with local partners to better capture local talent and spread increased CapEX and
investment costs in infrastructure and R&D in the form of a JV with the Canadian government
and a local infrastructure or industrial sector MNC.
Specifically, creating 5 small-enterprise future telecom or tech spin-offs will enhance
Canada’s tech hub, local telecom and technological competencies, expanded international capital
inflows, and will be largely profitable for both companies involved in the JV after divestment.
These 5 small-enterprises will require an initial investment of $50 million and Huawei will

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assume the majority-ownership stake of 51% in this government-sponsored JV (covering 50% of
necessary capital at risk) – costing $18 million – an added premium for majority equity stake in
conjunction with a local industrial firm footing the remaining $7 million and the majority of non-
capital resources. Canada’s government will sponsor this JV and assume 50% of the financial
risk (via a grant to advance domestic industry) – even if the project is discontinued (permitting
non-repayment). Substantial royalties will be paid to the Canadian government if the JV is
deemed successful. Capital is to be spread equally over the first 3 years – resulting in tax write-
offs or reduced tax liabilities for infrastructure and R&D advances in Canada and China – also
reducing the impact of remitted monies taxes overseas to China.
This government-sponsored grant will require a cost-plus contract where all partners
share any incremental costs related to unforeseen contingencies and overspend. The $50 million
budget includes a 10% premium to account for such cost uncertainties. Undertaking such a
lucrative JV, which would be government-sponsored by Canada, mitigates risks which is
essential for survival in the telecom industry; especially for Huawei to remain positioned as a
global industry leader and a top contender in Canada. These spin-offs will be highly lucrative
(potentially valued at 2x to 3x initial investment) in terms of premium pricing for producing self-
sustainable tech entities. Hence, transforming Huawei’s impact on evolving Canada to be a more
advanced global tech hub; horizontal integration will do the same for China.
Huawei must, however, be diligent to ensure this cooperation doesn’t dilute its market
success as rewards and royalties are shared, with less centralized control. Huawei should also
choose to implement global horizontal integration via acquiring sophisticated global competitors
or R&D tech companies to advance its core competencies and limit the impact of competitive
rivalry which is intense in the telecom industry. Production should remain in China, but other

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rival business lines could prove to be highly lucrative – magnifying its revenue, patent, and
customer basis and even grow economies of scope - diversifying value-added business segments.
These combined recommendations will solidify and progress Huawei’s operating success
as “glocalization” will complement its core R&D hub in Canada towards generating additional
revenue growth and market expansion in North America. Such spin-offs are essential to further
transform Canada’s innovative tech hub and further advance its market position and respective
synergies; leveraging Huawei’s capacity to continue to achieve superior returns, additional
contract bids, and stabilize operating performance at levels similar to 2012 and 2013. With
aggregate revenues in excess of $35B and heightened operating margins comparative to its key
rivals, Huawei can afford to acquire competing firms and R&D tech companies with its
additional cash flow availability from its superior operating margin, profitability (3B+), and extra
capacity at lower production costs in China comparative to its other global competitors. This will
serve as a means for inorganic growth, value-added wealth creation, and greater global and
localized industry power.
This recommended course of action will leverage the direct benefits of advancing
Huawei’s core competencies, industry significance and relevance, global and Canadian telecom
market positions, and comply with the criteria of strategic attractiveness, economic viability, and
feasibility or sustainability. Horizontal integration and establishing such a unique JV in Canada
to create self-sustainable tech spin-offs in Canada by 2024 will (1) generate additional tax
benefits from China’s overseas political incentives and progress Canada’s desire to advance its
tech hub (government-sponsored JV grant and tax write-offs); and (2) increased tax deductible
amortized premiums in the form of expanded R&D and patent write-offs.

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Key limitations to horizontal integration and establishing a JV spin-off initiative include
a strain on discretionary internally generated profits and free-cash-flow (FCF) and the ability to
organically grow internal investments and finance short-term solvency requirements. Such
acquisitions may require external financing from preferred institutional investors, Eurobond
markets, and the need for additional government grants and subsidies – typically given to capital
intensive R&D companies to incentivize domestic investment. Regardless, such a wide-scale
local investment will prove to be lucrative, if successful, in terms of economic gains from the
sale of such self-sustainable entities at a premium pricing structure.
Conclusion
This recommendation will complement Huawei’s core business model; strategic
foresight; projected growth; increased bargaining power and leverage (horizontal integration);
operational and financial synergies; and enhanced brand equity. Simultaneously, while retaining
its core production synergies and economies of scale in China and improving future business
stability and industry market share accretion globally, and in Canada. Such said strategies will
improve its competitive standpoint and economies of scope respective to its industry rivals.
Local investment is a pillar of Huawei’s business model. Horizontal integration is a key
strategy to advance growth inorganically and acquire additional core competencies to capture a
greater portion of aggregate industry revenues. Both strategies will also magnify Huawei’s direct
impact on increased production and additional economies of scale at its production headquarters
in China; retaining additional political incentives to expand its domestic production capacity in
China and technological advances in both China and Canada.

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References:
Celly, N., Han, M. & Lau, M. (2015). Huawei in Canada: Can it become a trusted
player? (Product No. HK1061-PDF-ENG). Retrieved fromhttp://hbsp.harvard.edu
Daniels, J. D., Radebaugh, L. H. & Sullivan, D. P. (2015). International business (15th ed.).
Upper Saddle River, NJ: Pearson Education.

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