Master thesis to obtain a Master of Arts in European Business at the Faculty of Economics and Social Sciences of the University of Fribourg, Switzerland

An analysis of EMNEs’ internationalization strategies: The case of Chinese enterprises in the telecommunications equipment industry

Submitted by Linjuan Que

Supervised by Dr. Michael Hilb Prof. Dr. Rudolf Grünig Chair of Management University of Fribourg Fribourg, 27th August 2015

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Table of contents Acknowledgements ..........................................................................................................................ii Table of contents ............................................................................................................................ iii List of figures ..................................................................................................................................vi List of abbreviations ..................................................................................................................... viii Chapter 1: Introduction ................................................................................................................. 1 1.1 Context and problem ............................................................................................................ 1 1.2 Motivation and objective ...................................................................................................... 3 1.2.1 Theoretical motivation ................................................................................................... 3 1.2.2 Practical motivation ....................................................................................................... 4 1.2.3 Objective........................................................................................................................ 8 1.3 Methodology......................................................................................................................... 8 1.3.1 Choice of research method: explanatory case study ...................................................... 8 1.3.2 Choice of research design: single-case study .............................................................. 10 1.3.3 Data collection and sources ......................................................................................... 11 1.3.4 Data analysis strategy .................................................................................................. 12 1.3.5 Data analysis technique ............................................................................................... 13 1.4 Structure of the thesis ......................................................................................................... 13 Chapter 2: Theoretical framework ............................................................................................. 15 2.1 Key concepts in the context of EMNEs’ internationalization............................................. 15 2.1.1 Characteristics of emerging markets ............................................................................ 15 2.1.2 The concepts of CSA and FSA .................................................................................... 15 2.2 Selected IB theories ............................................................................................................ 16 2.2.1 Rugman’s FSA/CSA Matrix ........................................................................................ 16 2.2.2 Linking Rugmans’s FSA/CSA Matrix and Porter’s National Diamond framework...18 2.2.3 Linking the FSA/CSA Matrix and the RBV approach ................................................ 21 2.2.4 Synoptic flowchart of the theoretical framework ........................................................ 22 Chapter 3: Empirical cases .......................................................................................................... 24 3.1 The global telecommunications equipment industry .......................................................... 24 3.1.1 Market drivers ............................................................................................................. 27 3.1.2 Cost drivers .................................................................................................................. 30

iii 3.1.3 Government drivers ..................................................................................................... 30 3.1.4 Competitive drivers ..................................................................................................... 32 3.2 Internationalization of Chinese EMNEs ............................................................................. 33 3.3 The internationalization of Huawei (华为) ......................................................................... 34 3.3.1 Corporate profile ......................................................................................................... 34 3.3.2 Vision, mission and strategy........................................................................................ 34 3.3.3 Ownership structure and financial results .................................................................... 36 3.3.4 Internationalization of sales ......................................................................................... 39 3.3.5 Internationalization of R&D ........................................................................................ 46 3.3.6 Internationalization of organizational management ..................................................... 51 3.3.7 Government influence ................................................................................................. 54 3.4 The internationalization of ZTE (中兴) .............................................................................. 56 3.4.1 Corporate profile ......................................................................................................... 56 3.4.2 Vision, mission and strategy........................................................................................ 57 3.4.3 Ownership structure and financial results .................................................................... 57 3.4.4 Internationalization of sales ......................................................................................... 59 3.4.5 Internationalization of R&D ........................................................................................ 64 3.4.6 Internationalization of organizational management ..................................................... 67 3.4.7 Government influence ................................................................................................. 68 3.5 The internationalization of Cisco ........................................................................................ 69 3.5.1 Corporate profile ......................................................................................................... 69 3.5.2 Vision, mission and strategy........................................................................................ 69 3.5.3 Ownership structure and financial results .................................................................... 70 3.5.4 Internationalization of sales ......................................................................................... 71 3.5.5 Internationalization of R&D ........................................................................................ 75 3.5.6 Internationalization of organizational management ..................................................... 77 3.5.7 Government influence ................................................................................................. 79 3.6 The internationalization of Ericsson ................................................................................... 79 3.6.1 Corporate profile ......................................................................................................... 79 3.6.2 Vision, mission and strategy........................................................................................ 80 3.6.3 Ownership structure and financial results .................................................................... 80

5 3.6.4 Internationalization of sales ......................................................................................... 81 3.6.5 Internationalization of R&D ........................................................................................ 84 3.6.6 Internationalization of organizational management..................................................... 86 3.6.7 Government influence ................................................................................................. 89 3.7 Cross-case analysis ............................................................................................................. 90 3.7.1 Huawei and ZTE.......................................................................................................... 90 3.7.2 Comparison with Cisco and Ericsson .......................................................................... 96 Chapter 4: Conclusion................................................................................................................ 100 4.1 Summary........................................................................................................................... 100 4.2 Implications ...................................................................................................................... 102 4.2.1 Managerial implications ............................................................................................ 102 4.2.2 Theoretical implications ............................................................................................ 103 4.3 Limitations of the findings................................................................................................ 105

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List of figures Figure 1:

Telecommunications equipment enterprises leadership landscape

Figure 2:

The FSA/CSA Matrix

Figure 3:

The National Diamond framework

Figure 4:

Synoptic flowchart of the theoretical framework and the international business context

Figure 5:

Trade in telecommunications equipment and communication services in OECD countries

Figure 6:

Mobile cellular subscriptions per 100 people by regions

Figure 7:

Telecommunications equipment revenues by region in 2011 (USD billion)

Figure 8:

Most important telecommunications equipment sellers by revenue in 1999

Figure 9:

Selected telecommunications equipment companies’ R&D expenditure

Figure 10:

Mobile phone subscriptions worldwide

Figure 11:

Mobile phone subscribers per 100 people before and after the introduction of competition

Figure 12:

Huawei’s pipe strategy

Figure 13:

Huawei’s 2010-2014 financial highlights

Figure 14:

Huawei’s revenues by customer segment and by geography

Figure 15:

Huawei’s global resource deployment and localized business operations

Figure 16:

Zhongxingxin’s shareholdings in ZTE

Figure 17:

ZTE’s 2012-2014 major accounting data prepared in accordance with PRC ASBEs

Figure 18:

ZTE’s 1998-2011 revenues

Figure 19:

Huawei’s revenue by industry, by product and by region

Figure 20:

ZTE’s R&D worldwide presence

7 Figure 21:

Cisco’s revenues by geographical region

Figure 22:

Cisco’s market leadership in targeted markets

Figure 23:

Ericsson’s consolidated income statement 2012-2014

Figure 24

Ericsson 2005-2007 acquisitions

Figure 25:

Ericsson’s business-unit approach

Figure 26:

Ericsson's 2005-2015 business models evolution

Figure 27:

FSA/CSA Matrix (Huawei and ZTE)

Figure 28:

Analytical summary (Huawei and ZTE)

Figure 29:

FSA/CSA Matrix (Cisco and Ericsson)

Figure 30:

Analytical summary (Cisco and Ericsson)

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List of abbreviations 1G

First Generation

2G

Second Generation

A&D

Acquisitions and Development

AMNE(s)

Advanced Multinational Enterprise(s)

BRIC

Brazil, Russia, India, China

CAGR

Compound Annual Growth Rate

CSA(s)

Country Specific Advantage(s)

EMNE(s)

Emerging-Market Multinational Enterprise(s)

ESOP

Employee Stock Ownership Plan

FDI

Foreign Direct Investment

FSA(s)

Firm Specific Advantage(s)

GDP

Gross Domestic Product

IB

International Business

ICT

Information and Communication Technology

IPD

Integrated Product Development

IP

Intellectual Property or Internet Protocol

ISD

Integrated Supply Chain

ITU

International Telecommunication Union

JV(s)

Joint Venture(s)

LOF

Liabilities of Foreignness

LTE

Long-Term Evolution Technology

MNE(s)

Multinational Enterprise(s)

PLA

People’s Liberation Army

PTT(s)

Postal, Telegraph and Telephone agencie(s)

R&D

Research and Development

RBV

Resource Based View

USD

United States Dollar

WEF

World Economic Forum

WTO

World Trade Organization

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Chapter 1: Introduction This chapter introduces the topic of the thesis. It consists of four sections: Section 1 presents the development of emerging-market multinational enterprises (EMNEs) and defines the research problem, section 2 specifies the motivations and objectives of the thesis, section 3 gives an overview of the methods used and section 4 explains the structure of the thesis.

1.1

Context and problem

According to UNCTAD statistics, in 1990, there were only 3,800 EMNEs from developing and transition economies, representing 11% of multinational enterprises (MNEs) worldwide (UNCTAD, 1992, p. 12). By 2009, 22,960 EMNEs represented 28% of MNEs globally (UNCTAD, 2010, p. xviii). The appearance of EMNEs in the last decades has been an impressive phenomenon.

In many industries, firms from emerging countries, particularly those headquartered in BRIC (Brazil, Russia, India, and China) countries, not only survived the battle for local markets, they internationalized rapidly through exports and foreign direct investment (FDI) to become fledgling global players. As of 2014, FDI by MNEs from developing countries reached USD 454 billion. Together with transition economies, they accounted for 39% of global FDI outflows (UNCTAD, 2014, p. xiv). Some EMNEs are even starting to aggressively challenge the established MNEs based in advanced economies (AMNEs). Such firms include Brazil’s Embraer in the regional jets market, China’s Huawei Technologies in the telecommunications equipment market, India’s Tata Consultancy Services in the information technology services market and Russia’s Gazprom in the energy market, to name but a few.

As a consequence, there has recently been an increase in academic research on EMNEs. The topic began to become popular in the late 1970s (Lecraw, 1977; Kumar, 1982). Since then, researchers have started to point out certain characteristics of these newly risen EMNEs that are different from those of AMNEs. Traditional MNEs studies were heavily influenced by the experiences of US firms (Lall, 1983, p. 2). For this reason, early studies on third-world MNEs had to differentiate and already in the early years defined a set of specific competitive advantages, motivations and modes of internationalization of companies from developing countries as a proper group (Lall, 1983;

2 Wells, 1983). These differentiated competitive advantages included low-cost, small-scale production, products adapted to developing-country needs, labor-intensive technologies and local substitutes instead of imported inputs. The studies of Third World multinationals by Lall and Wells revealed multiple insights that inspired subsequent research on EMNEs but neglected the strategic interplay between competitive advantages and firms’ internationalization moves within different industries and countries. The relevance of these early findings for EMNEs in the context of the 2000s cannot be denied completely but recent research on EMNEs proposes a considerably broader set of likely competitive advantages (Wells, 2009).

Some researchers held that traditional international business (IB) theory was insufficient to explain the occurrence of fast growing EMNEs and called for a revision or further development of the existing theoretical frameworks (Dunning/Lundan, 2008; Erdener/Shapiro, 2005), others proposed alternative explanations and new perspectives to address this phenomenon (for example Luo/Tung, 2007; Mathews, 2002). The theoretical and empirical aspects of these more recent studies remain nonetheless limited and often contradictory. For instance, Mathews considers that EMNEs expand internationally in order to acquire capabilities and competitive advantages rather than to exploit pre-existing ones (Mathews, 2002). Luo and Tung make a similar point, stating that EMNEs internationalize in order to gain novel competitive advantages rather than to make use of initial ones as a springboard for internationalization (Luo/Tung, 2007). While Mathews’ argument was partly accepted by Dunning (Dunning, 2006), Luo and Tung’s “springboard model” was strongly opposed by Narula (Narula, 2006).

Given the variety of perspectives on this subject, Ramamurti and Singh indicate that no consensus has yet emerged on whether and how EMNEs differ from earlier multinationals (Ramamurti/Singh, 2009, p. 3).

There are nevertheless two generally accepted IB concepts within both the traditional IB literature on MNEs and more recent IB studies on EMNEs. The first concept that most authors agree on is that differences in MNEs’ country specific advantages (CSAs), which are derived from national factor endowments, will lead to international transactions of capital and goods. Due to the impact of cultural, economic, institutional and geographic distance, the so-called liabilities of foreignness

3 (LOF), foreign companies face disadvantages compared to their competitors not hindered by such forms of distance in the countries where they expand internationally. For this reason, MNEs are believed to depend on valuable and inimitable firm-specific advantages (FSAs) to offset LOF and succeed abroad (Hymer, 1976; Zaheer, 1995).

The second widely recognized concept is that firms competing abroad can leverage not only their FSAs but also their CSAs (Dunning, 1998; Grewal et al., 2009; Rugman, 1981; Rugman/Verbeke, 2001).

Therefore, theories taking into account both CSAs and FSAs features of MNEs seem to be particularly appropriate for further research on EMNEs. One such general IB theory is the FSA/CSA Matrix proposed by Rugman.

1.2

Motivation and objective

Both theoretical and practical motivations make the analysis of the internationalization strategies of Chinese telecommunications equipment enterprises interesting.

1.2.1 Theoretical motivation The theoretical motivation is based on Rugman’s writings. In his early research on multinationals and the economics of internal markets, Rugman integrated CSAs and FSAs into the FSA/CSA Matrix to link the natural factor endowments of a firm’s home country and the firm’s ability to coordinate the use of its particular advantages in production, marketing or the customization of services (Rugman, 1981). In a later paper, Rugman et al. used this matrix to untangle the last fifty years of IB theory and figure out three shifts in the core unit of IB analysis (Rugman et al., 2011). IB has been a subject of serious academic research since the 1960s, shortly after the Academy of International Business was established in 1959 (Ramamurti, 2009). At the very beginning, mainstream IB concepts mainly focused on national competitiveness at the country level and on how the country factors interacted with MNEs’ domestic and international activities (Dunning, 1958; Vernon, 1966). The IB analysis was mostly limited to using national statistics on trade and FDI to define the company’s CSAs. During the 1970s, the focus shifted to FDI and cross-border

4 transfers of FSAs by MNEs (Hymer, 1976; Casson, 1979). The IB analysis largely moved to the MNE itself and the parent company’s FSAs. As of the 1980s, the central issue consisted in the international competitive advantages of MNEs in their specific cultural, economic and institutional contexts. Researchers considered MNEs as differentiated networks and their subsidiaries as units of analysis (Rugman/Bennett, 1982; Dunning/Rugman, 1985). After that, a number of studies concentrated on the development of industry clusters and networks of MNEs (Birkinshaw, 1996; Moore, 2001).

Rugman et al. believe that the FSA/CSA Matrix continues to be useful for future IB research as it allows for the integration of potential alternative units of analysis (Rugman et al., 2011). Moreover, Rugman, together with Verbeke, connected internalization theory with strategic management approaches by developing the concepts of location bound and non-location bound FSAs (Rugman/Verbeke, 1992). Most of today’s managers of MNEs make use of strategies that take advantage of interactions of CSAs and FSAs in order to position their firms in a unique and advantageous strategic space (Rugman, 2009, p. 50). The theoretical motivation of this thesis is therefore to test whether the assumption of these authors is correct and the FSA/CSA Matrix can usefully explain EMNE’s strategic activities in the context of their internationalization.

1.2.2 Practical motivation In short, the practical motivation behind this thesis is to describe and understand the internationalization strategies of EMNEs through a case study that will compare the international expansion of two Chinese EMNEs (Huawei, ZTE) and two AMNE competitors (Cisco, Ericsson) in the telecommunications equipment industry.

Awate et al. observed that EMNEs are catching up with AMNEs and competing on world markets across the spectrum, including in high technology industries where technologies, the business environment and business models can change abruptly (Awate et al., 2012, p. 205). The Chinese telecommunications equipment company Huawei is such an example. Huawei overtook Ericsson in 2012 to become the largest telecommunications equipment maker in the world (The Economist, 2012). Increasingly, the company is becoming a skilled and powerful global player, capable of

5 going head-to-head with the best in intensely competitive markets. But Huawei is not unique in this respect. There are at the moment several Chinese EMNEs (for example Lenovo, Xiaomi and ZTE) who are striving to become leading companies in the telecommunications equipment industry.

Today, information and communication technology (ICT) is not only a prominent tool assisting people in crossing time and space boundaries in order to stay connected, it is also a major driver for technological innovation, management transformation and business restructuring (OECD, 2013). ICT plays a crucial role in the globalization and the ongoing “industrial revolution”. Regarding competition in the market, the dominance of the incumbent telecommunications equipment companies from developed nations meant a steep learning curve for the newly arrived EMNEs. Ericsson is such an example. The Swedish company has been an important player in the telecommunications business for more than a century and has managed to keep some of its competitive advantages in technical innovation and competence until today. In the early 2000s, Huawei forecast that it would take 10 to 20 years for the firm to become a serious threat to the dominant position of Ericsson, Cisco and Nokia in more advanced markets because R&D experience accumulation is vital there (Huawei, 2006). Rather unsurprisingly, given its ambitious goals, a decade later, Huawei was already considered by some to be the fifth most innovative company in the world (Kamenetz, 2010).

According to the 2014 Infonetics Telecom Equipment Vendor Leadership Landscape (Figure 1), Huawei stands out as a leader in terms of market presence (market share, financials, buyer feedback on product reliability and service/support) and market momentum (market share momentum, nextgeneration intensity, solution breadth, buyer feedback on vendors’ technology innovation). The Infonetics Scorecard analyzes and profiles the six largest suppliers of telecommunications infrastructure, software and services (Alcatel-Lucent, Cisco, Ericsson, Huawei, Nokia Networks, and ZTE). Surprisingly, Cisco is the only company in the “leader” category besides Huawei, while Alcatel-Lucent and Ericsson fell just outside this category as “challenger” (Alcatel-Lucent) and “established” (Ericsson) players. ZTE, also from China, is another player in the “challenger” category, whereas Nokia Network is an “established” player.

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Figure 1: Telecommunications equipment enterprises leadership landscape

Source: Infonetics, 2015 According to the Infonectics Scorecard, Huawei’s market share has steadily increased in major telecommunications infrastructure segments. This has lead to a strong position in the softwaredefined networking (SDN) and network function virtualization (NFV) markets. ZTE enjoys a fair market share and good market momentum due to its increasing sales in the routers, carrier, Ethernet switches, mobile handsets and broadband customer-premises equipment/customer-provided (CPE) markets. Cisco maintains its long-time position in carrier networks as the top router and switch vendor, and is considered to be a very solid innovator by service providers. Ericsson shows a strong market presence in the radio access network (RAN) market, has good services revenues and overall solid financials but at the same time suffers from relatively weak market momentum. AlcatelLucent performs well in market share momentum and customer loyalty, but is at the same time struggling with balance sheet issues. Finally, Nokia Networks is again focusing on the mobile broadband and services organizations segments, which has lead to good performance but nonetheless to a loss in market momentum and market presence (Infonetics, 2015).

Despite these trends, strategic management thinkers have paid rather little attention to how Chinese firms are expanding internationally. They routinely ascribe these companies’ rapid growth in recent years to their abundant supply of cheap labor or to generous financial backing from the state, rather

7 than inventiveness (Hout/Michael, 2014). In this context, it is interesting to remember that when Japan emerged as a manufacturing exporter in the 1960s, Japanese products were for a long time a byword for low cost and low quality. Japan’s Kaizen system of lean production was hardly known to Western companies. This only changed when Japanese firms, for example Toyota and Honda, started to challenge their market positions with competitive products of good quality. Today, Toyota is often mentioned as a model of efficient manufacturing and Japanese firms more generally are among the world leaders in industries such as clean technology, car making and consumer electronics.

It is hoped that this in-depth comparative study of leading Chinese telecommunications equipment enterprises will not only provide interesting insights into the internationalization strategies of EMNEs but also help stimulate the interest of Western companies in the activities of emerging innovative companies from China. As explained above, the aim of this case study is to describe and better understand EMNEs’ internationalization strategies through a comparison with AMNEs. This will also make it possible to examine whether the interaction of CSAs and FSAs can adequately explain internationalization strategies and expansions of these EMNEs and AMNEs.

The choice of companies for this case study fell on Huawei and ZTE for the EMNEs group and on Cisco and Ericsson for the AMNEs group. Regarding the AMNEs group, Alcatel-Lucent and Nokia Networks would clearly also have been interesting companies to include. However, given these companies’ major corporate restructuring processes over the past years (including a pending merger), it seemed reasonable to focus on Cisco and Ericsson. A short overview of recent main events should make the choice understandable: In 2006, Alcatel, which was in financial difficulties, merged with Lucent Technologies. In the following years, the merged entity, Alcatel-Lucent, continued to struggle with financial problems. Nokia Networks is the result of a joint venture between Nokia and Siemens (Nokia Siemens Networks), which started in 2007 and ended in 2013 with Nokia buying out Siemens. Today, Nokia Networks is owned only by the Nokia Corporation. In April 2015, Nokia announced that it would fully acquire Alcatel-Lucent, which is likely to lead to further restructuring, as redundancies between Nokia Networks and Alcatel-Lucent are certain to exist (Ewing/Mawad, 2015).

8 1.2.3 Objective The objective of this case study is to acquire a deeper understanding of Chinese EMNEs’ internationalization strategies by uncovering their specific characteristics. In order to do so, this master thesis will first explore in what ways the internationalization strategies of Chinese telecommunications equipment EMNEs differ from those of their leading AMNEs competitors. After that, the thesis will use Rugman’s FSA/CSA Matrix to try to explain the Chinese EMNEs’ internationalization strategies and enquire whether this model can be considered sufficient.

The findings of this study will be of practical relevance for competitors and partners of Chinese EMNEs both inside and outside of the telecommunications equipment industry. Academically, it is also an important aim of this study to facilitate further research on EMNEs in general and Chinese EMNEs in particular to counter the current insufficiency of EMNE research.

1.3

Methodology

1.3.1 Choice of research method: explanatory case study According to Yin, there are five major approaches for doing management and social sciences research: case studies, experiments, surveys, histories, and the analysis of archival information. The choice of research method depends on three conditions: the type of research question, the control that an investigator has over actual behavioral events and finally the focus on phenomena of a contemporary nature (Yin, 2003, p. 1). When “how” or “why” questions are being posed, when the investigator only has limited control over events, and when the focus is on a contemporary phenomenon within a real-life context, the case study is the preferred method (Yin, 2003, p. 1).

The most important point to be considered in a research study is the definition of the research question (Yin, 2003, p. 7). Different types of research questions (how, why, what, how many, etc.) lead to three main ways to conduct a case study: exploratory case study, descriptive case study and explanatory case study (Yin, 1984). An exploratory case study is conducted when the research questions focus mainly on “what” questions aiming to develop hypotheses and propositions leading to further inquiries, e.g. “What can be learned from a study of an effective school?” (Yin, 2003,

9 pp. 5-6). A descriptive case study is generally used to present a complete description of a phenomenon within its context (Yin, 2003, p. 4). Finally, an explanatory case study is carried out when the research questions are concentrated on “how” and “why” questions dealing with operational links that need to be traced over time, e.g. “How did a community successfully overcome the negative impact of the closing of its largest employer?” (Yin, 2003, p. 6). Even though each type of case study has its distinctive characteristics, overlaps are possible and frequently unavoidable (Yin, 2003). Since the objective of this master thesis is to understand Chinese telecommunications EMNEs’ internationalization strategies and especially how they differ from those of their leading AMNEs competitors, the main research question can be formulated as follows: How do Chinese EMNEs strategically leverage their international competitive advantages, which are shaped by their CSAs and FSAs, to internationalize in ways that are different from those of their AMNEs competitors? Since this is a “how” question concerning the companies’ operational links over time, it exhibits an explanatory character.

Moreover, the question focuses on large emerging-markets companies that enter global markets, a topic over which IB researchers have little control. Also from this perspective, an explanatory case study seems to be the choice to be favored.

As Yin indicates, even if the case study is predominantly explanatory, it can be (and often is automatically) complemented by exploratory and descriptive elements since the boundaries between these research strategies are rarely perfectly clear and often overlap (Yin, 2003, p. 3). This is also the case here, which becomes evident if the research question is reformulated and divided into two-sub questions:

1. From what international competitive advantages do the EMNEs in this case study benefit with regard to their internationalization strategies? 2. With the help of what strategies have they expanded internationally?

10 The reformulation of the original research question (a “how” question) has therefore led to two “what” questions which attempt to develop hypotheses for further inquiry and demand for causal explanations (Yin, 2003, p. 3). The case study can therefore also be considered to have some exploratory elements.

Finally, the study also has descriptive features. This is because some initial investigation into the telecommunications equipment industry and the international context, relying on historical statistics and recent industry data, is necessary in order to have a good foundation for the study of the mentioned EMNEs’ internationalization strategies.

1.3.2 Choice of research design: single-case study Theory development is essential to the case study design, whether the case study’s purpose is to develop or test a theory (Yin, 2003, pp. 40-42). With Sutton and Staw, the theory development of a case study can be seen as a hypothetical story about why act, events, structure, and thoughts occur (Sutton/Staw, 1995, p. 378). According to Yin, a single-case design is appropriate when the examined case exemplifies the critical case in testing a well-formulated theory, when the case grants a representative or typical example to capture the circumstances and conditions of a commonplace situation, or when the case serves a longitudinal purpose (Yin, 2003, pp. 40-42). Moreover, it is possible that the same case involves more than one unit of analysis when the program consists of multiple embedded projects (Yin, 2003, p. 42).

For the following three reasons, this case study can therefore be conducted with a single-case design: First, this study will take Rugman’s FSA/CSA Matrix as a basis to test how EMNEs use and integrate different combinations of their CSAs and FSAs in order to find their own strategic internationalization options, which might differ from those of their AMNE competitors. Testing the FSA/CSA Matrix, which is a well-formulated theory, affords the opportunity to validate or invalidate the universal application of this theoretical framework to MNEs.

11 Second, as mentioned in the introduction, the telecommunications equipment industry is by far not the only high-tech industry where EMNEs have begun to successfully compete with traditional AMNEs. It is therefore a representative pattern of a commonplace situation and the insights and conclusions from this study in the telecommunications equipment industry will also be useful in other industries with significant EMNE players.

Finally, the fact that two newly-risen EMNEs from China (Huawei and ZTE), which were established almost at the same time and in the same neighborhood, internationalized in ways that are different from those of their traditional AMNEs rivals, also reflects on how the temporal (Ericsson) and geographic (Cisco, Ericsson) context can influence a company’s internationalization strategy.

The single-case study will have four embedded subunits, based on the analysis of the four companies mentioned above: Huawei (China) and ZTE (China) on the EMNEs side and Cisco (USA) and Ericsson (Sweden) on the AMNEs side.

1.3.3 Data collection and sources Data for case studies may come from six important sources of evidence. These are documentation, archival records, interviews, direct observation, participant observation and physical artifacts (Yin, 2003, p. 83). Yin believes that a major strength of case study data collection is the opportunity to use multiple sources of evidence. This will therefore be an important principle in the present data collection.

However, not all sources are relevant for all case studies. Yin has shown that all of the cited sources of evidence have already served as the sole basis for entire studies (Yin, 2003, pp. 83-107). Generally, interviews are considered as one of the most important sources of case study information because well-informed respondents can not only provide important insights into specific issues and situations, but also help to identify other relevant sources of evidence (Yin, 2003, pp. 89-92). During the period of January to March 2015, the four chosen companies were contacted and asked whether they would be willing to take part in expert interviews and provide some information about

12 their internationalization strategies. Unfortunately, none was able or willing to provide the author with a collection of data that could be used in the present context. Huawei explained that the company receives numerous requests for assistance for diploma theses and is forced to defer to its homepage for general information. This case study will therefore mainly rely on documents and archival records. The CSAs, FSAs and strategic internationalization choice of each company will be analyzed with the help of information collected from reports and other documents authored by the telecommunications equipment companies themselves, national agencies, academic institutions, international organizations and consultancies.

In order to accurately understand the internationalization strategies of the four telecommunications equipment manufacturers, this study will analyze both quantitative and qualitative data. The quantitative data will primarily give access to basic information as well as further details regarding the international telecommunications equipment market and the four companies’ international operations. The qualitative data will give an insight into the specific internationalization strategies and primarily be based on data from company reports and further industry documents.

1.3.4 Data analysis strategy A case study’s analytical strategy defines what to analyze and why. There are three common analytical strategies. One is to rely on theoretical propositions. Another one is to set up a framework based on rival explanations. A third one is to develop case descriptions. According to Yin, the first strategy mentioned is the most common one and follows the theoretical propositions that led to the case study (Yin, 2003, pp. 109-115). It will also be used here. This study’s research design is based on the FSA/CSA Matrix developed by Rugman. According to this model, a company’s strategy and development are determined by the interaction of its CSAs and FSAs. This is therefore the theoretical proposition that determines the analytical strategy of this thesis as will be seen below.

13 1.3.5 Data analysis technique The pattern-matching logic is one of the most common data analysis techniques used in case studies. It requires the comparison of an empirically based pattern with a predicted one or with several alternative predictions. If the patterns coincide, the results can help strengthen the internal validity of a case study. The patterns in explanatory case studies can be related to the dependent or the independent variables of the study, or both (Yin, 2003, p. 116).

This thesis will apply the pattern-matching logic to examine the internal validity of the case study. Concretely, this means it will examine whether the FAS/CSA Matrix is adequate to explain the international competitive advantages and internationalization strategies of the four mentioned telecommunications

equipment

MNEs.

The

international

competitive

advantages

and

internationalization strategies will be analyzed according to both dependent and independent variables of the chosen theoretical frameworks.

1.4

Structure of the thesis

This master thesis consists of four chapters.

Chapter 1 introduces the subject matter of the thesis. It contains four sections. Section 1 describes the context and the problems faced by academic research on EMNEs-related topics. Section 2 explains the theoretical and practical motivation of this thesis and defines its objective. Section 3 provides details on the methods used and the research design. Finally, section 4 gives an overview of the organization of the thesis.

Chapter 2 provides the theoretical foundation of the thesis. Section 1 defines and outlines key terms and concepts in the context of EMNEs’ internationalization. Section 2 explains Rugman’s FSA/CSA Matrix as the fundamental theory used in this thesis. Section 3 relates the FSA/CSA Matrix to Porter’s National Diamond framework. Section 4 describes the connection between the FSA/CSA Matrix and the Resource Based View approach. Finally, section 5 introduces a synoptic flowchart, which integrates the mentioned theoretical frameworks and the business context of the

14 telecommunications equipment industry, and consequently serves as an analytical scheme for this case study.

Chapter 3 focuses on specific empirical findings on the internationalization paths of Chinese EMNEs’ in the telecommunications equipment industry. Section 1 and Section 2 provide an overview of the global telecommunications equipment industry and the internationalization of Chinese EMNEs’ in this industry. Sections 3 to 6 introduce the internationalization paths of the two largest Chinese telecommunications equipment companies on the one hand and those of two leading Western competitors on the other hand. Section 7 then proceeds to a strategic analysis of those four companies’ internationalization paths, dividing them into an EMNE group and an AMNE group in order to highlight strategic similarities and characteristics.

Chapter 4 contains the final remarks of this thesis. Section 1 summarizes the key findings and conclusions of the case study. Section 2 deduces the managerial and theoretical implications from the study’s empirical results. Finally, section 3 underlines the limitations of the findings and the research.

15

Chapter 2: Theoretical framework 2.1

Key concepts in the context of EMNEs’ internationalization

2.1.1 Characteristics of emerging markets Emerging markets can be defined as countries that are building up a new economic structure with the help of market-oriented and business-focused strategies, which offer greater chances of business success to investors (Sutton, 2007). Commonly cited emerging markets include large countries such as China, India and Nigeria, but also smaller nations like Hungary, Latvia and Romania (IMF, 2012). Their evolution towards a connected market economy is generally based on favorable policies like the promotion of FDI and technology transfers, but may also depend on factors such as a large population, natural resources or other economic reserves (Aguiar/Gopinath, 2004; Kaminsky/Reinhart/Vegh, 2004). At the domestic level, emerging market countries often go through a phase of both economic and political transition, which makes further policies necessary, e.g. anti-corruption campaigns or measures to stabilize the business environment (Luo, 2005).

Due to their increased economic relevance, these emerging market countries are often able to play a more important role on the international stage. They can act either individually or as part of a regional trade bloc that has the ability to attract businesses that invest and grow in the region. In addition to economic issues, they may also take position on political questions. However, for firms from emerging market nations, such increased access to the global scene also means that they have to face the pressure to innovate and constantly improve their competitive position on a worldwide scale (Sutton, 2007).

2.1.2 The concepts of CSA and FSA Country-specific advantages (CSAs) and firm-specific advantages (FSAs) are concepts introduced in early IB theories and used by Rugman in his internationalization theory (e.g. Rugman, 1981). CSAs are a “bundle of unique national factors” enjoyed by an organization (e.g. an MNE) in a particular country and can for example consist in natural resource endowments or a well-educated labor force (Rugman, 1981). Mainstream international economics explain how a nation’s

16 comparative advantages determine which goods and services it will be able to export. However, not only natural resources and the education level of the labor force are relevant. Models like Hofstede’s cultural dimensions theory (the Hofstede Centre) and House et al.’s GLOBE studies (House et al., 2004) have shown that cultural characteristics, e.g. cultural distance vis-à-vis other nations, can regularly be regarded as instrumental or detrimental to a country’s success in international competition (Rugman and Verbeke, 2009b). Finally, political and administrative rules, e.g. the regulation of imports and exports or inward and outward FDI, can also greatly affect IB transactions (Rugman, 1981). FSAs are a “set of unique capability proprietaries” which condition the competitive advantages enjoyed by an organization (e.g. an MNE) (Rugman, 1981). FSAs arise from special know-how or capabilities, which are unavailable to other MNEs and could only be duplicated by them in the long run and at high costs. In many cases, FSAs stem from upstream research and development (R&D) expenditures which have led to innovative products or production processes (Rugman, 1983). In other cases, innovation occurs more at the downstream level, which can lead to differentiated product lines, thereby generating FSAs in marketing or distribution (Rugman, 1985). Special capabilities of MNEs can for example consist in a unique element of their management structure or core routines which lead to FSAs (Rugman/McIlveen, 1985).

2.2

Selected IB theories

2.2.1 Rugman’s FSA/CSA Matrix Rugman’s research on CSAs and FSAs led him to consolidate these advantages into a two-by-two matrix (Figure 2). His matrix is often used to analyze and illustrate the nature, performance, and strategies of MNEs because he has shown that it is the interaction of CSAs and FSAs that shapes a firm’s international competitive advantages and strategies (Rugman, 1981; Rugman, 2009, p. 50). With regard to the strategic options available to an MNE, Rugman’s matrix can therefore be seen as a powerful analytical tool which makes it possible to identify the MNE’s relative strengths and weaknesses in the form of CSAs and FSAs.

17 Figure 2: The FSA/CSA Matrix

Source: Rugman, 1981

Within the FSA/CSA matrix, the impact of country factors is depicted on the vertical axis, ranging from weak to strong CSA impact on a firm’s strategic activities. Examples would be a mature venture-capital market or a rich natural resource endowment. On the horizontal axis, a firm’s FSAs can be seen, ranging again from a weak to a strong impact. An example would be a company’s capacity to coordinate its advantages in the areas of production, promotion and services customization. Firms in Quadrant 1 (strong CSAs, weak FSAs) are typically cost leaders relying on location factors, such as natural endowments of resources, cheap labor, and energy costs. In this quadrant, only CSAs matter to explain the scope and direction of a firm’s internationalization activities. Quadrant 2 (weak CSAs, weak FSAs) firms are generally inefficient and floundering due to a lack of intrinsic CSAs and FSAs and consistent strategies. These firms will either have to exit the market or undergo a restructuring process to build CSAs or to improve FSAs. This quadrant can also represent domestically-based SMEs with little global exposure. Quadrant 4 (weak CSAs, strong FSAs) represents differentiated firms with strong FSAs in managerial aspects (such as marketing and customization) for whom CSAs are not an essential part of their long-term orientation. These unique and proprietary FSAs are protected by entry barriers which prevent rival

18 firms from acquiring similar FSAs. Entry barriers may also be related to the organizational structure and the nature of the top management team. Quadrant 3 (strong CSAs, strong FSAs) firms can normally choose to follow any strategies mentioned above given the strength of both their country-specific and firm-specific advantages. In this quadrant, a firm’s FSAs are enhanced and facilitated by the home country’s CSAs. In such a favorable constellation, MNEs must pay particular attention to avoiding managerial difficulties because the management is key in the successful combination of FSAs and CSAs (Rugman, 1985).

2.2.2 Linking Rugmans’s FSA/CSA Matrix and Porter’s National Diamond framework The FSA/CSA Matrix developed by Rugman can be related to Porter’s National Diamond framework (Figure 3) for national competitiveness (Porter, 2008a). Porter’s National Diamond framework looks at the sources of competitive advantage of nations and organizations that resulted from their home country context. It proposes that the home country context of an organization is an important factor with regard to the likelihood that it achieves a competitive advantage on a worldwide scale. This is because the home country context provides essential basic elements which determine the quality of the business environment and which support or hinder the creation of advantages in global competition.

According to Porter, a nation will export those goods that make most use of the factors with which it is well-endowed. He also argues that the national context (e.g. the nature of competition in the home country) creates strong tendencies as to how companies are founded, organized and finally managed. Based on this approach, he defines four determinants of national competitive advantage as: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. Rugman described these determinants as an “interactive system that affects firms in the home economy” (Rugman et al., 2011).

19 Figure 3: The National Diamond framework

Source: Porter, 2008a Factor conditions stand for a country’s business environment with regard to production factors which are relevant for competition in a particular industry. These factors can be divided into human resources (e.g. qualification level, labor cost, deregulation of labor markets), material resources (e.g. availability of space, natural resources), knowledge resources (e.g. quality of university research), capital resources (e.g. efficiency of the stock market) and infrastructure. These factors together often provide each country with a unique set of initial CSAs, upon which certain specific industries and firms are subsequently built and developed. Porter underlines that there is no need for these factors to be nature-made or inherited but may be developed and changed. For this reason, fluctuations in competitiveness may stem from factors such as political initiatives, technological progress and socio-cultural changes (Porter, 2008a).

Demand conditions exhibit the state of home country demand for products and services produced in that same country. Home country demand conditions can have an impact on the country’s factor

20 conditions as they may influence the speed and direction of product development and innovation. According to Porter, three major characteristics are relevant in this respect: (1) demand mixture (the mix of customer needs and wants), (2) demand scope and growth rate, and (3) the mechanisms that transmit domestic preferences to foreign markets. Porter believes that a nation may be able to achieve a national competitive advantage in a certain industry or market segment if home country demand indicates new demand trends earlier to domestic producers than to foreign rivals. As Porter sees it, home markets are more important than foreign markets when it comes to an organization's capacity to recognize customer needs (Porter, 2008a).

The related and supporting industries criterion refers to the existence or non-existence of related and supporting industries that are internationally competitive. Related and supporting industries are industries that supply products and services or coordinate activities in an existing industrial value chain. An industry that is internationally successful may also be able to create advantages in its related or supporting industries. In return, competitive related and supporting industries may strengthen innovation and internationalization trends in later stages of the value chain (Porter, 2008a).

Firm strategy, structure, and rivalry covers country factors that relate to how companies are established, organized and managed, and the characteristics of domestic competition. Cultural aspects such as management structure, working morale or interaction between companies, play an important role in this regard. An important factor is the relationship between corporate objectives and the commitment of the workforce. Companies are also heavily influenced by the structures of ownership and control. For example, privately-owned businesses in industries that are dominated by owner-managers will behave differently than public companies whose shares are traded on the stock exchange. Porter argues that domestic rivalry and the pursuit of competitive advantages within a specific country can help provide organizations with a base and the necessary skills to achieve comparable advantages on an international or global scale (Porter, 2008a; 2008b).

The National Diamond model makes it possible to systematically analyze the task environment and the strategic choices both in nations and in organizations. Above all, it stresses the importance of analyzing strategic choices as not only a function of industry structure or a firm’s resources, but

21 also as one of the institutional framework and its constraints. On the national level, the model helps governments initiate policies that develop national advantages, which, in turn, enable industries to create a strong competitive position internationally. Porter sees such a potential in policies that ensure high expectations of product performance, high safety or environmental standards or good vertical co-operation between suppliers and buyers. On the organizational level, the model enables companies to identify if and to what extent they can build on CSAs to create a competitive advantage with regard to their global competitors.

The National Diamond framework can therefore be used to analyze both the unique national factors enjoyed by an organization in a particular country (CSAs) and the unique capability proprietaries, which have lead to the competitive advantages enjoyed by an organization (FSAs).

2.2.3 Linking the FSA/CSA Matrix and the RBV approach In his research, Rugman stresses that every MNE has an idiosyncratic set of FSAs, which give it a competitive advantage with regard to other firms (Rugman, 1981). This approach anticipates the modern Resource Based View (RBV) of the firm (Prahalad/Hamel, 1990; Barney, 1991).

Resources can be defined as tangible and intangible assets, which are semi-permanently tied to a firm and allow the firm to develop strategies that benefit its efficiency and effectiveness (Caves, 1980, p. 65). Grünig and Kühn classify resources into tangible and intangible assets, individual and collective human resources (Grünig/Kühn, 2011, p. 266). Tangible assets include financial resources (e.g. liquid assets, credit facilities) as well as physical assets (e.g. equipment, real estate). In general, tangible assets are easy to identify and evaluate by the simple valuation on a company’s balance sheet. Intangible assets are not always as easy to identify and evaluate. They comprise structures (e.g. organizational structures), systems (e.g. controlling systems) and processes (e.g. production processes), technology, information and legal rights (e.g. copyrights, patents), the recognition and reputation of a company (among stakeholders such as suppliers, banks or potential employees), the quality and size of its customer base. Individual human resources are a specific kind of intangible assets. They include expertise (e.g. knowledge, skills) and the motivation of managers and employees. Like most intangible assets, individual human resources cannot be found

22 on a company’s financial statements since companies do not own their employees. Nevertheless, human resources are quite stable over time, as employment contracts are usually long-term. Hence, the appraisal of their human resources is important to firms. Collective human resources are another specific kind of intangible assets. They include features of the corporate culture (e.g. basic company values), primary competencies (e.g. quality procurement, marketing), and metacompetencies (e.g. the ability to innovate, to cooperate, or to implement change).

The RBV approach considers firms as unique bundles of idiosyncratic resources. It examines the resources available to a firm and the links between a firm’s internal characteristics and their performance (Barney, 1991). It understandably assumes that firms are heterogeneous with regard to the strategic resources they possess and control. Resources leading to a sustained competitive advantage are valuable, rare, imperfectly imitable, and not perfectly substitutable (Barney, 1991).

As Grant writes, the RBV is not so much a theory of firm structure and behavior, but an attempt to explain and predict why certain firms may achieve a position of sustainable competitive advantage enabling them to earn superior returns (Grant, 1991, p. 110). In the context of this thesis, the RBV approach can therefore be used to identify the resources which an MNE enjoys and to analyze how it leverages them as FSAs.

2.2.4 Synoptic flowchart of the theoretical framework From the foregoing sections, it follows that the FSA/CSA Matrix, the National Diamond framework and the RBV approach constitute the theoretical framework of this thesis.

In order to apply the theoretical framework to the telecommunications equipment industry, some initial investigation into the telecommunications equipment industry and the international business context is necessary. Thus, a set of four globalization drivers will be selected to describe the relevant international business context (Yip, 1992). The globalization drivers chosen are: market drivers, cost drivers, government drivers and competitive drivers (Yip, 1992). These factors will make it possible to analyze the international business context with which the MNEs have to deal in the telecommunications equipment industry.

23

Once the international business environment has been analyzed, the four selected companies’ international competitive advantages and their internationalization strategies will be studied. To do this, the CSAs and FSAs of each company will be identified and evaluated with the help of the National Diamond framework and the RBV approach. The concrete analysis of FSAs and CSAs will follow Grant and Jordan’s three-step approach: (1) identifying the key resources, (2) appraising the resources and (3) developing strategy implications (Grant/Jordan, 2012).

The following synoptic flowchart (Figure 4) gives an overview of the theoretical framework mentioned as well as the relevant international business context.

Figure 4: Synoptic flowchart of the theoretical framework and the international business context

Source: own creation based on theoretical frameworks

24

Chapter 3: Empirical cases 3.1

The global telecommunications equipment industry

The global telecommunications equipment industry has constantly grown for over 15 years and thus has created a lucrative multi-billion dollar market (Figure 5). The spread of mobile phones in the developed world, together with the emergence of two main technology standards, analogue technology of 1G networks and GSM technology of 2G network, led to economies of scale in both network equipment and handsets. OECD economies’ trade in telecommunications equipment increased from USD 126.6 billion in 1996 to USD 374.6 billion in 2007, a 300% augmentation within a decade (OECD 2009, p. 314). The telecommunications services sector has expanded in a similar way. The main drivers behind this market growth can be seen in factors such as huge demand, decreasing prices, advances in technology and an important movement towards privatization and liberalization (OECD, 1991). In 2004, China overtook the United States to become the world’s largest exporter of telecommunications equipment (OECD, 2011, p. 358). Following a sharp decline during the economic and financial crisis that started in 2008, revenue and investment in the telecommunications equipment industry stabilized again in 2010 and already increased again in 2011 in OECD countries. Huawei forecasts that by the year 2025, there will be over 100 billion ICT connections worldwide, a market of unprecedented scale (Huawei, 2014, p. 4).

25 Figure 5: Trade in telecommunications equipment and communication services in OECD countries

Source: OECD, 2013

Analysys Mason, a London-based consultancy, expects telecommunications revenues in developed economies to remain flat or even decline for the foreseeable future, while the outlook for emerging markets looks much brighter at an average revenue growth rate of 5% until 2017 (Economist Intelligence Unit, 2014). Given these numbers, it is no wonder that most of the world’s leading telecommunications carriers are focusing their efforts on the flourishing emerging markets (Figure 6).

26 Figure 6: Mobile cellular subscriptions per 100 people by regions

Source: own creation adapted from ITU and World Bank A 2009 special report by The Economist on “Telecoms in Emerging Markets” found that three trends have particularly reshaped the telecommunications industry landscape. First, the spread of mobile phones in developing countries was accompanied by the emergence of local mobile operators (in China, India, Africa and the Middle East) which rival or surpass their Western competitors in size. These carriers have invented new business models and industry structures that enable them to obtain benefits by serving low-spending customers which Western firms would not be interested in. The second trend is the rise of China's two leading telecommunications equipment makers, Huawei and ZTE. While they initially only followed cost leadership, they have now acquired a growing reputation for quality and innovation. Their global expansion since the early 2000s and their capacity to drive down costs were in large part responsible for the consolidation across the industry. The third trend is the increase in economies of scale in both the network equipment and handsets markets. The main reasons for this were the wide use of smartphones in developed countries and full internet access in the developing world due to the availability of mobile networks and low-cost computing devices (The Economist, 2009a).

27 3.1.1 Market drivers The structure of the worldwide telecommunications equipment market is similar to that of many mature markets, consisting of a relatively small number of companies that control large parts of the market. The six top vendors consistently reach material market shares in their segments and collectively capture 57% of revenues, or USD 106 billion of USD 184 billion in total in the year 2012 (Infonetics, 2013). The customers of these multinational telecommunications equipment companies range from telecommunications operators and service providers to public institutions, companies and individual consumers around the world (OECD, 2013). However, the telecommunications equipment MNEs’ main targets as clients are clearly the major telecommunications carriers. This point was made in several of the major telecommunication equipment companies’ annual reports. Ericsson wrote that it is “a global company supporting more than 500 operator customers and the ten largest customers, half of which are multinational, account for 47% of Ericsson’s net sales” (Ericsson, 2014, p. 1). Huawei stated that it was working with around 20 leading carriers worldwide and had created 186 commercial networks globally (Huawei, 2014, p. 18). 70% of its sales revenues came from its carrier business (Huawei, 2014, p. 18). Finally, ZTE’s carrier network revenue accounted for 57.4% of the its operating revenue (ZTE, 2014, p. 54). Another form of evidence is that after the economic downturn, telecommunications industry revenues began to increase steadily due to investments by the operators. This, in turn, triggered an overall rise in international trade in telecommunications equipment (OECD, 2013, p. 30).

The telecommunications equipment industry is a highly international one (Lannon, 1992). The figures regarding sales and revenues of equipment sellers as well as the different locations of their customer base make this particularly clear (Figure 7). As the equipment producers’ most important customers are situated in different countries around the world, the same is true for the source of their sales and revenues. Contracts with firms from outside their home country are therefore vital to their survival. The Swedish company Ericsson, for example, derives only 12.4% of total revenues from Northern Europe and Central Asia (Ericsson, 2014, p. 29). Huawei and ZTE, the two largest telecommunications equipment producers from China, provide equipment and solutions to customers in more than 180 countries. Despite significant market shares in these large markets,

28 they obtained 66.2 % and 50.2% of their total revenues from outside of China, respectively (Huawei, 2014; ZTE, 2014).

Figure 7: Telecommunications equipment revenues by region in 2011 (USD billion)

Source: The Economist, 2012b

In 1999, the International Telecommunication Union (ITU) created a list of the ten most important sellers of telecommunications equipment based on total revenues. At that time, the majority of firms had their headquarters in Western Europe or in the United States (Figure 8).

29 Figure 8: Most important telecommunications equipment sellers by revenue in 1999

Rank

Company

Location

Telecommunications Equipment Revenue (USD billion)

1

Lucent

USA

26.8

2

Ericsson

Sweden

21.5

3

Alcatel

France

20.9

4

Motorola

USA

20.5

5

Nortel

Canada

17.3

6

Siemens

Germany

16.8

7

Nokia

Finland

14.7

8

NEC

Japan

12.6

9

Cisco

USA

8.4

10

Hughes

USA

5.7

Source: own creation adapted from ITU, 1999

A recent analysis by the Economist found much change in the top positions. While the two emerging multinationals from China, Huawei and ZTE, entered the list, established leaders in the industry were forced to merge to survive. In 2006, the financially troubled French company Alcatel merged with Lucent Technologies from the United States. In 2007, the Finnish company Nokia formed a joint venture with Siemens (whom it bought out in 2013). In 2014, Nokia sold its handset business to Microsoft and declared to buy Alcatel-Lucent SA in an all-stock transaction to create the biggest equipment manufacturer on the mobile phone networks market (Ewing/Mawad 2015). Nortel, once Canada's most valuable company, collapsed in 2009 and sold many of its assets to Ericsson (The Economist, 2012b). At least until the Nokia-Alcatel-Lucent merger is complete, two firms are likely to dominate the global telecommunications equipment market: the established Swedish company Ericsson and the newly emerged Chinese company Huawei (Ewing/Mawad, 2015).

30 3.1.2 Cost drivers The telecommunications industry is technology-intensive and constantly undergoing commercial development and innovation processes. Accordingly, R&D is vital for firms active in this industry and the cost it generates constitutes a considerable part of their total expenditure. Most of the large telecommunications equipment producers, both from AMNEs and EMNEs, spend between 10% and 20% of their revenues on R&D (Figure 9). This is well illustrated by the fact that all of the telecommunications equipment companies in this study have established R&D projects in every major telecommunications and software cluster around the world. Figure 9: Selected telecommunications equipment companies’ R&D expenditure Company

Net sales/revenue

R&D expenditure

R&D as percentage

(USD millions)

(USD millions)

of net sales

Cisco (USA)

47,142

6,295

13.4%

Ericsson (Sweden)

26,919

4,280

15.9%

Huawei (China)

46,483

6588

14.2%

ZTE (China)

13,141

1,453

11.1%

Source: Own creation, adapted from the companies’ 2014 annual reports

3.1.3 Government drivers Companies in the telecommunications industry are heavily influenced by government actions. These include spectrum auctions, grants of licenses, the approval or disapproval of mergers or agency action on consumer prices. Moreover, policymaking in different countries can be volatile.

Despite the influence of government actions, there are relatively few trade barriers in the global telecommunications equipment markets and especially the telecommunications services market is mostly quite deregulated (OECD, 1991). While developed nations (e.g. the United States and the United Kingdom) deregulated their telecommunications markets already in the early 1980s, less developed nations in Latin America and Africa only began to deregulate their respective markets in the 2000s. The liberalization moves in developing nations created a large rise in telecommunications equipment commerce (Figure 10; Figure 11). Chinese telecommunications

31 benefitted significantly from the fact that in these new markets there were only few pre-existing business relationships, allowing them to reach considerable market shares (Rhoads/Hutzler, 2004).

Figure 10: Mobile phone subscriptions worldwide

Figure 11: Mobile phone subscribers per 100

(billion)

people before and after the introduction of competition (Year 0)

Source: The Economist, 2009a; 2009b

Today, technical specifications in the markets for fixed and wireless telecommunications products and services have been mostly standardized throughout the world, as most national governments understand the need for interoperability and compatibility (OECD, 1991). However, standardization is often not the result of government activity. Most important producers of telecommunications equipment have participated in international standardization bodies so as to make sure their technologies interoperate properly.

Finally, the issue of government ownership needs to be addressed. Today, most major telecommunications equipment producers are privately-owned or publicly-listed firms without any special relations to governments (it will be seen later that in many cases, it is nevertheless assumed that governments may play, or have played, a role). Among telecommunications service providers, however, a large number of carriers are still mostly in government ownership. This is true for some of the world’s biggest telecommunications and mobile companies (e.g. China Mobile, China

32 Telecom, China Unicom, Deutsche Telekom, France Télécom and NTT DOCOMO; see ITU, 2001) and is inherited from a history of state regulation and control in these markets.

3.1.4 Competitive drivers Thanks largely to significant liberalization moves in the telecommunications services markets in both advanced and less advanced economies over the past twenty years, the amount of imports and exports in the telecommunications equipment industry has steadily been high (OECD, 1991). Since most of the world’s major telecommunications equipment companies are located in OECD nations, exports from these to other countries have constantly been higher than imports (OECD, 2013). Of the six top telecommunications equipment sellers, three come from the EU, one from the US and two from China. As the number of commercially interesting customers for large telecommunications equipment companies is limited, competition for contracts with these customers, who are located in various countries throughout the world, is quite intense.

Regarding the competitive environment, the worldwide telecommunications markets can be described as open (OECD, 1991). This openness has clearly benefitted the competitive process, generally enabling bids for contracts from all major telecommunications equipment companies (Rhoads/Hutzler, 2004). However, the competitive situation also has to deal with a paradox because while the telecommunications equipment companies are competing on contracts, they have to cooperate on technology. Every telecommunications equipment company owns a portfolio of technologies and IP rights (e.g. patents). To make sure their technologies are compatible, they set industry standards in different for a such as international standardization bodies or private consortia. Given the need for cooperation despite considerable competitive pressure, the situation is rather special: While interoperability and compatibility are a necessity for every telecommunications equipment company, worldwide rivalry for contracts is often fierce (Rhoads/Hutzler, 2004). Given the innumerable court battles between these companies, there remains a large potential for conflicts and disagreement, which from a competition perspective may even be a good thing (Levine, 2005).

33 3.2

Internationalization of Chinese EMNEs

The Chinese political leadership launched its “open door” policy in 1978 and its “go out” policy in the late 1990s in order to encourage Chinese firms to invest abroad and secure access to resources and technology in foreign markets (World Economic Forum WEF, 2014). The economic reform program of 1978 initiated the creation of special economic zones for manufacturing and trade, the rise of small collective businesses, and the privatization of state-owned industry. These reforms stimulated three decades of remarkable economic growth in China (Morrison, 2011). From 1980 to 2010, China’s real gross domestic product (GDP) grew at an average annual rate of nearly 10%, lifting hundreds of millions of people out of extreme poverty and creating an urban middle class. The reforms of the 1990s included tax and currency restructuring and policies to facilitate foreign enterprise, free trade, and the growth of equity markets (WEF, 2012). An important milestone in China’s integration into the global economy was reached when the country became a member of the World Trade Organization (WTO) in the year 2001. Especially for Chinese MNEs, this evolution was of major importance (Nolan/Zhang, 2002). For many decades, China’s economy grew mainly thanks to labor-intensive, but low-value-added goods. Unsurprisingly, the country’s telecommunications infrastructure was lagging far behind that of Western nations. However, after Chinese policymakers adopted a new strategy that included importing Western telecommunications equipment, engaging in joint ventures (JVs) in equipment manufacturing and promoting homegrown research and development (R&D) to create recognizable brands, China’s economy began to develop differently (Ahrens, 2013; Aleyn, 2001). By the late 1980s, a small number of highly active research groups acquired the capabilities necessary to create Chinese telecommunications equipment. This was the context in which the companies Huawei and ZTE were established in the neighborhood of a special economic zone of Shenzhen. More recently, the Chinese government launched new policies encouraging the internationalization of Chinese firms, which also prepared the ground for the entry into the world of talent, technology, equipment and capital from China (WEF, 2015). At the same time, further government initiatives (e.g. the Belt and Road Initiative, the Silk Road Economic Belt, the 21st Century Maritime Silk Road) helped create the conditions for further business-promoting international cooperation frameworks (WEF, 2015).

34 As a consequence of these developments, Chinese companies are now in a position to internationalize differently. Their internationalization movements continued even at the height of the 2008 financial crisis and between 2012 and 2014, Chinese outward FDI grew from USD 88 billion to USD 116 billion, according to recent data from China’s Ministry of Commerce (WEF, 2015). According to a survey of 120 leading Chinese MNEs by the World Economic Forum (WEF, 2014) and Strategy&, traditionally, when Chinese companies pursued their overseas expansion, they focused on foreign markets to obtain overseas resources. More recently however, they started to develop their own innovation competence and competitiveness. They no longer only innovate in products and technologies, but also in service and business models (WEF, 2014).

3.3

The internationalization of Huawei (华为)

3.3.1 Corporate profile Huawei Technologies Co. Ltd. (Huawei) is a private high-tech company established in Shenzhen (Guangdong, China) in 1987 (Huawei, 2014b). From being a mere sales agent for a Hong Kong firm that produced exchange switches, it grew into a globally leading company which specializes in R&D, production and marketing of telecommunications network equipment, IT products and solutions, and smart devices (Huawei, 2014b). In 2012, Huawei outperformed Ericsson in terms of annual revenue to become the world’s largest telecommunications equipment company (The Economist, 2012a). Huawei provides products and services to customers in over 170 countries (Huawei, 2014) and it has set up 45 training centers and 36 shared service centers globally to uphold its engagement of being close to the customers and ensure an efficient and fast response time (Huawei, 2014c). In the year 2013, Huawei entered into contracts with 45 out of 50 large carriers worldwide and was ranked 285th on the Global Fortune 500, based on its yearly revenues (Huawei, 2014b).

3.3.2 Vision, mission and strategy Huawei’s mission statement is “Building a better connected world”. It sees its mission as a duty “to work with its customers and top global partners to create a simplified, standardized, and easyto-use network, thus creating value for global progress” (Huawei, 2014). In order to keep pace with

35 the fast evolution of the industry, Huawei has developed six core values as its global strategic driving forces: customer first, dedication, continuous improvement, openness and initiative, integrity and teamwork.

To be among the technological leaders and thus meet customer needs, Huawei is investing large resources into continuous innovation. Today, it is working towards a so-called “zero-wait customer experience” that features high bandwidth and service diversity (Figure 12). To make sure it is able to provide future-oriented information pipes, the company has formed open partnerships with other firms (e.g. SAP and Accenture).

While at the beginning Huawei was mainly focused on cost leadership, it has now developed what it calls “pipe strategy”, a differentiation strategy (Figure 12). It has established three different business groups to provide ICT solutions to different customer segments: carriers, enterprises, and consumers. Huawei’s “pipe strategy” is a focused one. For carrier networks, which have to deal with surging data traffic, it concentrates on architecture from end to end so that a high-caliber information pipe is achieved. For enterprises and industry verticals, it focuses on ICT infrastructure and positions itself as a product provider, without however developing industry-specific application software. For consumers, it only provides network devices that generate and consume traffic excluding non-networked electronics.

36 Figure 12: Huawei’s pipe strategy

Source: Huawei, 2014

Huawei has three main aims with regard to its three customer segments: (1) to serve as a strategic partner to more carriers in their future transformation, (2) to be among the top providers of an integrated ICT infrastructure for enterprises, and (3) to be among smart device brands that are preferred and most trusted by consumers. It intends to achieve these goals by focusing on its pipe strategy, efficient management, and steady growth. With regard to its rivals, Huawei writes that it aims to work more openly with them as both partners and competitors to jointly build an open and innovative industry ecosystem and share the integrated benefits across the industry value chain. Finally, the company stresses its commitment to its global talent strategy and responsible corporate global citizenship as crucial parts of its global expansion strategy.

3.3.3 Ownership structure and financial results Huawei is jointly owned by around 84,000 of its Chinese employees, based on an Employee Stock Ownership Plan (ESOP) (Sevastopulo, 2014). It is privately owned and at this time, a public listing does not seem likely. The fact that Huawei is an employee-owned company is often emphasized by Huawei to stress that it is not government-controlled. Huawei’s founder, Ren Zhengfei

37 (hereinafter Ren), holds roughly a 1.4% stake, but has veto power over Huawei’s important decisions. According to Ren, he has never exercised his veto power (Sevastopulo, 2014). In 2014, Ren publicly rejected the possibility of the company’s stock market listing, confirming that Huawei’s ESOP plays a positive role in enhancing corporate efficiency and is key to the company’s long-term success. He described shareholders of public companies as greedy and short-termist.

According to the Huawei Basic Law (an equivalent of Western company statutes), the ESOP is supposed to make sure that the most able and sensible employees are considered for the most important tasks. In 1990, when Huawei was still a start-up, it had difficulties in getting access to external finance and introduced its ESOP scheme in order to fund its marketing and R&D activities (Zhu et al., 2013). In 1997, Huawei reorganized its ESOP program. The focus was no longer on providing the company with liquidity, but on incentivizing employee productivity. In order to do so, the company offered long-term stock options valuing the initial shares at RMB 1 per piece with fixed dividends for the employees (Zhu et al., 2013). In 2001, Huawei started to adopt virtual stock options and linked its employees’ equity price and dividend to the annual change in the company’s net assets as audited by KPMG (Sevastopulo, 2014).

Today, employees are offered shares on the basis of their grade and job performance. This means, they have to reach a certain internal rank (grade 13, the category for new graduates; Sevastopulo, 2014). In addition, they must have worked at Huawei for at least one year. When employees leave the company, they must sell their shares back to Huawei at the current price. However, if the relevant employees are at least 45 years old and have worked at Huawei for eight years, they can retain their shares (Sevastopulo, 2014). The aim of this strategy was to make sure that principalagent risks are minimized and the motives of the company and its employees as aligned as possible.

Critics asserted that Huawei is not truly employee-owned because foreign staff cannot join the ESOP scheme. Moreover, it is said that Ren in fact enjoys significant control because unlike conventional shares, most ESOP shares are restricted shares without influence on management decisions (Zhao, 2010).

38 Regarding financial results, the revenues of Huawei have constantly grown since 2006. Even after the financial crisis that began in 2008, when many rivals were struggling with negative sales growth, the company flourished financially. In 2010, it overtook its rival Alcatel-Lucent and two years later, in 2012, Huawei’s half-year sales showed that it had surpassed Ericsson and become the world’s largest telecommunications equipment company by revenue (The Economist, 2012). Both sales and operating profit developed in a healthy way over the last years (Figure 13). From 2010 to 2014, the company’s compound annual growth rate (CAGR) in revenues amounted to 12% and its operating profit grew by 2% on average. In 2014, Huawei’s sales revenues reached USD 46,5 billion with an increase of 20.6%. The company expects its CAGR to figure at around 10% during the next three to five years (Huawei, 2014). Figure 13: Huawei’s 2010-2014 financial highlights

39

Source: Huawei, 2014

3.3.4 Internationalization of sales After it had been founded in 1987, Huawei spent around a decade focusing on the home market and on becoming strong in R&D and low-cost manufacturing. The company started to internationalize only in the year 1997, when it formed a JV in Russia (Huawei, 2014b).

When Huawei was established, the telecommunications equipment business was booming in China. Its Western AMNE competitors (e.g. Alcatel, Ericsson, Motorola and Nokia) had already started to penetrate the Chinese market for large companies and municipal infrastructure in economically more developed cities. At the time, the two largest telecommunications equipment suppliers in China were the government-backed Alcatel JV/Shanghai Bell and the equally government-backed Siemens JV/Beijing International Switching System (Luo et al, 2011). While those companies may have had a first-mover advantage, they neglected the country’s rural regions, where conditions were less favorable and profit margins often thin. This was the context in which Huawei’s founder Ren, who was an officer in the People’s Liberation Army (PLA), decided to base his business strategy on Mao Zedong’s revolutionary philosophy of “occupying the countryside first to encircle and finally to capture the cities” (Xiao, 2010). He thought it strategically unwise to compete with dominant AMNE competitors in big cities such as Beijing or

40 Shanghai. Instead, he encouraged his salespeople to undercut competitors’ prices in rural areas where there were hardly any AMNEs. Later, when Huawei’s position in rural markets was solid, he moved on to enter city markets. In the early 1990s, Huawei’s engineering and sales force travelled to each of China’s 2,800 counties to promote its products with solutions customized to the local demand structure (e.g. with regard to budget or logistical limitations (Pomfret, 2010). This business strategy involved a large staff presence. It was both a sales and product strategy, as it aimed at resolving problems such as unstable power supply and damages caused by rodents (Mackie, 2011). The company formed JVs and other partnerships with the state-owned Postal, Telegraph and Telephone agencies (PTTs), which allowed it to promote the sales of Huawei products and create a prosperous business relationship with the PTTS by sharing some of its profits with the agencies (Harwit, 2007). In 1996, Huawei generated sales of RMB 2.6 billion (USD 312 million), mainly derived from rural markets in China (Qie/Li, 2004). The company occupied 20% of the national market for switches and was only surpassed by Shanghai Bell (Harwit, 2007). Finally, thanks partly to an intensive campaign of price undercutting and a new government policy of “buying local”, Huawei managed to become China’s number one telecommunications equipment manufacturer (Qie/Li, 2004).

Huawei invested the revenues from the switch and optical markets to finance research projects in the mobile telecommunications business. As a result, Huawei was prepared and well positioned when GSM technology began to become an important area of investment towards the late 1990s. Based on its research and expertise, it managed to launch its first wireless GSM-based solutions in 1998. Since its products were customizable and interoperated efficiently with the pre-existing infrastructure, Huawei finally managed to enter China’s metropolitan areas (Huawei 2014b). As a consequence, the company managed to conclude major contracts with large cities (e.g. Beijing) or the body in charge of the public railway system (Gilley, 2000).

Internationally, Huawei adopted an approach similar to its national strategy of beginning in the rural areas to slowly moving towards the cities. It began by entering developing countries where there was less competition and then moved on to more developed ones. When Huawei began to be active on an international level towards the late 1990s, it had to defend itself against the usual

41 stereotype of poor-quality Chinese products (even though it was already technically capable) and was forced to make significantly better offers (e.g. lower prices) than its AMNE rivals. Understandably, it was at the beginning mostly developing countries that considered Huawei to be an ideal supplier. Huawei therefore began to internationalize in countries and regions such as Southeast Asia, Russia or Africa and only later made attempts to also enter the Western European and North American markets. Huawei’s made its first international deal with Hong-Kong-based Hutchison Telecommunications in 1996. Hong Kong, which at the time was British, already had a well-developed telecommunications market. As it was situated not far from Shenzhen, Huawei’s founding place, it offered the company a unique first chance to test its capabilities (Huawei, 2014b). One year later, in 1997, Huawei entered into a JV with the Russian Beto Corporation, where its main task was to produce switching equipment locally in Russia (Harwit, 2007). While Huawei’s prices (12% below the international standard) were an important selling factor, it was especially the company’s aftersale services that impressed its customers in Russia. Once Huawei had entered the Russian market, it began to also make sales in South-Asian, African and South-American markets. Based on a large Chinese labor force, especially engineers working for relatively low wages, Huawei’s pricing became more aggressive, often undercutting its established rivals by 30% (Farhoomand/Ho, 2006; Harney, 2005). As a consequence, further contracts were awarded to Huawei, for example one in Thailand in 2005, where Huawei’s bidding offer was 46% below what the customer had expected (The Economist, 2005b). Another important factor of Huawei’s success was its ability to benefit from China’s foreign policy with regard to developing nations. The company was always prepared to send engineers and sales personnel to places where it expected to find business opportunities (Farhoomand/Ho, 2006). Its sales and engineering people that were willing to work in African regions with civil wars and natural disasters made a significant contribution to the company’s revenues. According to Ren: “Our government has a successful diplomatic policy, which mandates winning a lot of international friends. Huawei’s international marketing strategy is to follow China’s diplomatic route, and I believe this strategy will be successful as well” (Luo et al., 2011, p. 69). One example is a trip by China’s then vice-premier to Africa in 2000, which later led to a range of multimillion-dollar

42 contracts with African nations. Since the year 2006, the company’s sales in Africa have been worth over USD 2 billion (The Economist, 2012b).

Once Huawei was successful in developing country markets, its focus turned to the mature markets of North America and Europe. It won its first major contract in the year 2001, when a Dutch company decided to purchase Huawei wireless equipment. The product was special due to its high degree of interoperability and the fact that it could be upgraded by software only, with no need to also change hardware components (Pomfret, 2010). It was only one example of “cost innovation”, providing advanced features at low cost by saving the cost on hardware (Zeng/Williamson, 2007). Afterwards, Huawei concluded a contract with Neuf, a French operator. It offered not only very low prices, but even agreed to build some parts for free, additionally granting the operator a threemonth trial period before purchasing it (Farhoomand/Ho, 2006). At the beginning of 2001, Huawei also entered the telecommunications equipment market of the United States, establishing a company presence in Plano, Texas. Yet, it took the company more than three years to begin to attract US customers. Since then, Huawei has had some success in middle-range markets and its site in Plano now serves as its US headquarters, overseeing seven R&D centers as well as twelve other US offices (Prasso, 2011).

In 2004, Huawei launched its second major internationalization move. This time it benefitted from credits over more than USD 10 billion from two major Chinese banks (Qie/Li, 2004). Armed with liquidity, Huawei began a major global business campaign. Oftentimes, it lowered its prices significantly (on some occasions by 70%) compared to its competitors and offered its clients loans when they were unable to pay directly (Harney, 2005). It can be said that Huawei’s competitive prices decisively contributed to its increasing success in developed markets.

In late 2004, Huawei succeeded in winning its first contract in Europe for mobile infrastructure of the third generation (3G). The buyer was again a company from the Netherlands (Telfort) (Harney, 2005). This was an important step for Huawei because it solidified and legitimized its reputation in the telecommunications equipment industry as a major global player (The Economist, 2005b). Few weeks later, the company managed to secure contracts with an Australian and a British operator, the latter calling the firm “a key supplier”, which further strengthened Huawei’s position

43 (The Economist 2005b). The amount of the company’s overseas sales consequently had increased from USD 50 million in 1999 to USD 2.24 billion in 2004, accounting for 41% of Huawei’s total sales (Huawei, 2014b). In the year 2005, Huawei’s overseas sales for the first time exceeded those in its home market (Huawei, 2014b). More importantly, by this time, its international sales no longer simply depended on its low prices. The company had started to create a service platform that was active worldwide, with customer satisfaction ratings reaching high levels (Huawei, 2014b). Furthermore, Huawei kept investing in innovative technologies, resulting for example in 4G products and services that are being used in hundreds of commercial networks with more and more customers naming Huawei as a trusted commercial partner (Huawei, 2014). In 2010, Huawei launched what it called an “ABC strategy” of “growing average revenue per user […], increasing bandwidth and reducing cost” (Huawei, 2011). To achieve this, the company moved from a product-driven approach to an end-to-end service approach. This means, it not only provided software and hardware, but also services such as maintenance.

It also adopted a new strategy with regard to product development. While historically, most of Huawei’s revenues originated in the carrier network market, since 2011, it began to focus more and more on the enterprise and consumer business. Even though the carrier network business remains important, sales in the enterprise and consumer segments grew considerably. This strategic move, which was undertaken especially because the carrier network business was considered less foreseeable (Huawei, 2011), eventually developed into Huawei’s pipe strategy, mentioned above.

Under its new policy, Huawei began to work with new strategic partners (e.g. SAP) in order to do research in areas such as big data and cloud computing (Huawei, 2014). It has manufactured almost 500 data centers worldwide and now serves several hundred of the market’s major clients. The know-how acquired in cloud technologies and big data allowed Huawei to develop the "hardware + software + service" business model, which was implemented with a premium product strategy aiming at a "smart life" for individuals, vehicles, and the household (Huawei, 2014). In pursuance of these goals, it has, for example, developed a global strategy for the Internet of Vehicles (IoV)

44 and already established a partnership with vehicle manufactures including Mercedes Benz and Audi.

With respect to its consumer business group, Huawei gave up its white-label, low-end customized phones to develop its proper brand of mid-range and high-end mobile phones (Huawei, 2014). In 2012, the company launched a dual-brand smartphone strategy (Huawei and Honor). According to the company, the Huawei brand targets people of action such as business executives and whitecollar workers. For this brand, the company focuses on promoting high-end smartphones and wants to establish a brand image connected to high quality and innovation. Honor, on the other hand, was conceived as a mainly Internet-based brand for mobile phones under Huawei. It mainly targets young people, such as young professionals and students, who are used to being connected to the Internet in most situations of life (Huawei, 2014). For the Honor brand, Huawei focuses on the Internet business. It intends to replicate the online business model that was successful in China in other markets by first establishing exemplary markets and then expanding globally. Finally, the company has been developing retail outlets and opening new channels (including e-commerce) to expand retail access and enhance consumer experience. By December 2014, Huawei had opened 630 branded stores worldwide. Its Huawei Ascend P7 smartphone has been sold more than 4 million times in over 100 countries in 2014. Under the Honor brand, Huawei sold over 20 million smartphones globally via its online platform by 2014, an almost 30-times increase within a single year (Huawei, 2014). The dual-brand strategy, coupled with Huawei’s strategic football sponsorship deals around the world, has proven successful and has led to more brand awareness and higher market share for Huawei's consumer business group. This was confirmed by an Ipsos survey which found that brand awareness had gone up from 52% in 2013 to 65% in 2014 in the 32 countries examined (Huawei, 2014). This means that around two-thirds of the public in these countries had heard of the Huawei brand. Furthermore, Huawei’s brand momentum has also increased, as another survey found that 43% of consumers would recommend the company’s mobile phones to others, which meant that it was among the three most recommended brands (Huawei, 2014). Finally, Huawei also was the first Mainland Chinese company to be included in the Interbrand’s Top 100 Best Global Brands list in the year 2014.

45 The corporate strategic shift and the deployment of the pipe strategy led to strong and diversified streams of revenue and various innovative products, while remaining within the limits of the corporate budget. This pipe strategy meant a fundamental move from Huawei’s initial cost leadership choice in developing markets. The new strategy has helped Huawei achieve a successful and balanced global presence as well as stable growth in the carrier, enterprise and consumer business (Figure 14). Concretely, larger scale, more efficiency, reduced costs, higher consumer brand awareness and a better product structure allowed Huawei to constantly increase its gross margin, e.g. by 3.2% from 2013 to 2014 (Huawei, 2014). Figure 14: Huawei’s revenues by customer segment and by geography

Source: Huawei, 2014

46 3.3.5 Internationalization of R&D When Huawei was founded, China was entirely dependent on imports to cover its need for telecommunications equipment and the majority of large telecommunications equipment producers were already active in China (sometimes in the form of a JV) (Qie/Li, 2004). Given this situation, Huawei’s founder Ren was determined to develop a Chinese firm that should be able to successfully compete with the pre-existing telecommunications equipment producers. However, he was by no means the only one. More than 200 home-market firms had the same strategic goal as Huawei (Fan, 2006). Nevertheless, the differences in approach could not have been larger. While Huawei’s rivals were mainly attempting to engage in JVs in order to benefit from their more developed partner’s technology, Ren’s company made the important strategic decision to create internal capacities to develop technology (Luo et al., 2011). It can therefore be said that endogenous innovation is a vital factor in explaining Huawei’s advanced technology and, especially compared to many of its domestic rivals, its success.

After Huawei was founded, it spent its first years selling exchange switches and fire alarms that were produced in Hong Kong (Huawei, 2014b). In 1990, Huawei’s founder decided to adopt a new policy and defined the mission and vision of his company as being “to develop national industry, keep pace with advanced technology, and develop based on its own research” and “to capture the domestic market, open overseas markets, and compete with foreign counterparts” (Qie/Li, 2004). Ren was convinced that established AMNE companies would not transfer their cutting-edge technology to Chinese firms via JVs and that it was unwise to hand over local market knowledge advantages to its AMNE competitors. Thus, even with a weak technological base, Huawei would evolve better by carrying out its own R&D. It was in this very year that Huawei embarked on carrying out independent research and soon began to commercialize its own simple switches, initially targeting hotels and small enterprises (Huawei, 2014b).

To survive and differentiate itself from its home-market competition, in 1991, Huawei began to develop a more complicated large-scale switch system that no MNE would have been prepared to share with its Chinese JV partner (Fan, 2006). By this time, the company had a very high ratio of R&D employees to total employees, with 500 people working in R&D and only 200 in production. Huawei kept investing significant sums in R&D, even in times of financial difficulties during the

47 early 1990s, when the company had to borrow money from other companies that demanded excessive interest payments (sometimes 20%-30%) (Harwit, 2007; Qie/Li, 2004). In the year 1993, Huawei managed to release the first major product which had been created fully in-house (a largescale switch, research on which had begun already in 1991). Thanks to this switch, with an unprecedented capacity in China, Huawei managed to position itself as the clear technological and innovative leader among the Chinese companies in the industry (Conti, 2007). A major contract from the Chinese army leading to the creation of the first national telecommunications network ensured Huawei’s products would be deployed in the entire country (Gilley, 2000). This, in turn, provided the company with new funds that would enabled it to scale up R&D on new products, e.g. optical network transmission systems and mobile communications systems (Gilley, 2000).

Huawei has consistently kept focusing on R&D as its most importants business and since the foundation of the company it has invested more than 10% of its annual revenues for this purpose (Huawei, 2014). In the year 1995, the company founded research centers in Beijing and Shanghai in order to focus on data communication routers and mobile communications equipment (Fan, 2011). Although being reticent to import foreign technology, Huawei has actively learned from US management techniques. In 1997, Huawei started to adopt IMB’s Integrated Product Development (IPD) and Integrated Supply Chain (ISC) to restructure and standardize its R&D operations. According to Huawei’s senior managers, the organizational structure of the company’s R&D operations was assimilated to IBM’s IPD process, which led to major efficiency enhancements in Huawei’s R&D processes (Fan, 2006). Now, the company’s in Shenzhen headquarters decide how to allocate funds and then sets objectives and deadlines for product development teams (PDT). A PDT, which consists of a group leader, an R&D leader, a purchase leader, a manufacturing leader and a marketing leader, then begins to work on the project. When the objective is achieved, the PDT ceases to exist. In the early development phases of Huawei, China’s huge labor market, which had plenty of welleducated engineers that were prepared to work for less money than their Western counterparts, initially made sure the company had a considerable marginal cost advantage over its AMNE rivals. However, for many years, Huawei’s R&D competitive advantages in China derived not only from the absolute cost and scales benefits, but also from the fact that most of its R&D activities and other

48 corporate operations had been performed in China. Thus, the company’s marketing and other service teams were able to collaborate closely with R&D staffs in order to react quickly to changing customer demands. While its AMNEs competitors also had large presences in China, their core R&D activities were usually kept away from China due to their fear of intellectual property (IPR) leakage. This separation between R&D teams and other supporting teams, such as marketing teams, were detrimental to the AMNEs’ internationalization in China. For instance, in 1999, the company China Mobile wanted to sell a prepaid mobile phone service. Huawei managed to react quickly and customized a product that interoperated well with China Mobile’s pre-existing systems, which allowed it to capture 80%-90% of the domestic market within the segment (Fan, 2006). The capacity to be able to answer customer demands quickly has been an important element of Huawei’s R&D process, both in domestic and international markets (Li, 2006). The company’s customer-centric R&D strategy has led to products working with already existing protocols, technologies and equipment constraints, instead of requiring upgrading a complete system. Huawei’s client-centric and good-value-for-money approach was and still is extremely important in developing markets which are facing operating issues and are sensitive to pricing. During the financial crisis, this way of conducting R&D has also proved successful in developed markets, leading to a considerable competitive advantage for Huawei over AMNEs. Like in China, where Huawei’s breakthrough began with the mentioned China Mobile contract, in Europe, Huawei really emerged as a serious rival when it succeeded in offering a solution that harmonized with Dutch mobile operator Telfort’s pre-existing software and made possible simple upgrades via software, not expensive hardware. As the company’s internationalization proceeded, Huawei started to leverage its worldwide talent pool to support its global R&D operations. Huawei’s selection of international locations was to a considerable extent determined by the availability of talent offering competitive advantages in the respective regions. In developing countries, Huawei took advantage of cheap R&D resources and a relatively low cost of skilled labor. In developed nations, Huawei attracted experienced and knowledgeable R&D engineers in order to absorb advanced technology. Its R&D division in India, for example, is located in Bangalore, where IT firms have attracted great numbers of highlyeducated software engineers and skilled university graduates (Gillespie, 2001). Huawei’s R&D laboratory in Sweden is situated in a valley that was once called “The Wireless Valley” of the world

49 (Niblaeus, 2014). In Sweden, the home country of Ericsson, Huawei was able to take advantage of the great pool of experts in telecommunications and engineering. The company also managed to recruit former Ericsson personnel and attract new graduates with interesting profiles (Huawei, 2006). Finally, the company’s US R&D center in Dallas is situated closely to those of its competitors (e.g. Cisco) (Huawei, 2014b).

While Huawei clearly emphasized endogenous R&D activities, it established already in early years a series of international partnerships with AMNEs to enhance supplier relationships. A manager of Huawei said that “one of the factors that decides whether Huawei produces or buys a piece of equipment is the profitability of the product” and that the company is prepared to buy products from other firms if those products “no longer have high margins and are correspondingly cheap to purchase”. Furthermore, Huawei engaged in partnerships with overseas firms in order to make technological advances in areas where internal capabilities had not been developed. The company was also prepared to acquire certain technologies (e.g. microchips) from competitors such as IBM or Motorola. Huawei also bought platforms – hardware or software components that form part of a piece of equipment – from Texas Instruments and even entire products from IBM (Gillespie, 2001). Huawei takes a similar approach with regard to some R&D and laboratory JV projects. Huawei participated in several JVs, e.g. one in 2002 to work on technology for smartphones or another one in 2003 to develop enterprise data networking products and technologies related to the 3G standard (Huawei, 2002). During the years 2006 and 2007, Huawei established JVs with several large companies, including Motorola, to develop UMTS technologies, with Symantec to develop storage and security appliances and with Global Marine, to provide end-to-end submarine network solutions. Besides, Huawei also has established strategic alliances with academic institutions and its major carrier and enterprise customers. It can therefore be said that such collaborations are now an integral part of Huawei’s internationalization strategy (Luo et al., 2011). These international partnerships are not only in harmony with its strategy to build an open and in innovative industry ecosystem and share the integrated benefits across the industry value chain. In the relevant areas, they also lead to production methods that are more efficient and cost-effective than uniquely relying on internal

50 research projects and have the positive side effect of increasing the company’s market reach (Luo et al., 2011). Today, Huawei has over 70’000 employees engaged in R&D operations, which is more than 45% of its total workforce worldwide. It has set up 16 R&D centers and 28 centers for joint innovation with leading carriers globally. It has also worked closely with partners from the industry, academia and research institutes with the aim to take the lead in research, innovation and implementation regarding 5G networks in 2020 (Huawei, 2014b).

As its focus on R&D continues, it has filed around 50,000 patents in China and around 24,000 outside the country (around 40,000 of which were granted) (Huawei, 2014). It is, for example, one of the major contributors to the LTE (Long-Term Evolution, a mobile communications standard) specification and it holds 183 key positions in 177 standards and open source organizations. In the year 2014 alone, it filed over 4,800 proposals for standards (Huawei, 2014). Huawei has received a number of top LET awards and was ranked as a Top 100 Global Innovator by Thomson Reuters in the IP & Science division (2014). Even compared to its international competitors, Huawei has in many segments become a technological frontrunner. Nonetheless, it must also be mentioned that Huawei’s technological activities have at times been the subject of controversies and it was sometimes alleged that the company had acquired technology in illegitimate ways to innovate more quickly. Both Cisco and Motorola have already sued Huawei over theft of intellectual property. In a case concerning a code for a router, Huawei reached a settlement with Cisco (Leyden, 2004). In another case concerning trade secrets of Motorola, a federal court found an employee of that company guilty of handing those secrets to Huawei (Wahba/Lee, 2010). Huawei, in turn, accused Motorola of passing on secret information to Nokia Siemens as a consequence of a restructuring between the two companies. In the end, the two firms settled, with Motorola agreeing to pay for the right to transfer the relevant information to the Finnish-German JV (Raice, 2011). Clearly, technology theft and reverse engineering are phenomena that occur in other sectors as well. However, the allegations against Huawei did have a negative impact on Huawei’s chances to seize a bigger share of the US market.

51 3.3.6 Internationalization of organizational management Overall, Huawei employs around 150,000 people worldwide, 30% of whom are working for the headquarters in Shenzhen (Huawei, 2014). While many Japanese firms that internationalized sent their own executives abroad, Huawei has a policy of hiring locally where possible (Harney, 2005, p.15). In 2013, 79% of its overseas employees and 20.7% of its mid-to-high managers were hired by local recruiters. For its headquarters in Europe, Huawei made the strategic decision to locate them in the United Kingdom, which not only was considered positive for its reputation, but also made sure it could easily access the European markets. Figure 15: Huawei’s global resource deployment and localized business operations

Source: Huawei, 2014b

In the years before Huawei began to internationalize, it promoted consistency and control through its Basic Law. The Basic law was seen as a comprehensive framework that should invite Huawei’s employees to “think about complex management issues as the firm moves forward” and was long considered vital for the company to “catch up to and compete with multinationals” (Luo et al., 2011).

In the late 1990s, when Huawei started to expand internationally, a very tight control from the corporate center in Shenzhen was increasingly seen as burdensome (WEF, 2013). It fell far behind

52 its AMNEs competitors in terms of operational efficiency. Huawei’s managers realized that it was necessary to adapt the organization of its management to the company’s internationalization process and bring it into conformity with globally applied principles. The aim was to delegate authority and achieve a more efficient, project-centered (“glocalized”) organizational operation. To catch up with Western competitors, Huawei initiated its “IT Strategy and Planning” plan in the year 1997. It employed people from IBM to develop new business processes and modernize the relevant IT systems. Moreover, Huawei has constantly collaborated with globally renowned consultancy firms (e.g. Fraunhofer-Gesellschaft, Hay Group or PricewaterhouseCoopers) to enhance its company management, HR management, ESOP scheme, financial management and quality control (Huawei, 2011). After seven years’ effort, Huawei has established a company-wide managerial system that is focused on customer demand and tries to find a sound balance between local empowerment and central control (Huawei, 2004). Huawei also has adopted ISO9001 (an international standard for quality management systems) and TL9000 (an international standard for quality management systems of the telecommunications industry) to develop its self-assessment capabilities and continuously enhance its products and services (Huawei, 2013).

In order to train its staff, Huawei regularly sends promising employees to less developed countries, as it believes that a difficult and unpredictable environment will be particularly instructive and capacity-enhancing for them. In return, these employees receive an interesting level of pay and adequate benefits for their expatriate period. Moreover, Huawei has always tried to hire locally where this was possible. In the year 2012, 29% of its management and 73% of all employees at its overseas locations were non-Chinese (Huawei, 2012).

The management of Huawei had to respond to criticism regarding the transparency and correctness of the company’s financial data. It underlined that as a matter of policy, Huawei, unlike many other companies, relied on the services of different firms for audits (e.g. KPMG) and advice on financial matters (e.g. Fraunhofer Gesellschaft) to make sure its data are reliable (Tang, 2004). Huawei also uses its global talent pool to make geographically reasonable decisions. In 2013, it chose London as the place for its Global Finance Centre of Excellence, which would manage the company’s global financial risk and ensure high international standards in its financial management.

53 Regarding leadership, Huawei’s founder Ren is considered to be a leader with a clear philosophy, vision and a proven capacity to inspire Huawei’s staff, having created the company’s special culture, spirit and organization (Lou et al., 2011). Time Magazine recognized him as one of the world’s 100 most influential people in the Builders and Titans category in 2005 (Forney, 2005). Regarding people who inspired Ren, it is said that Mao Zedong and Louis Gerstner, the former CEO of IBM, have had a significant impact on his style of management (Li, 2006, p. 6). Ren pointed out that he was particularly impressed by Louis Gerstner’s ideas of modern management when it came to the customer-centric approach in an increasingly competitive business environment during the 1980s (Li, 2006, p. 6). At the very beginning of Huawei’s expansion, the company culture was leader-centric. High respect for the top management was indispensable and military rhetoric often used. Ren referred to Huawei as a wolf with three characteristics: accurate smell, persistent attack regardless of one’s own safety, and collective/team struggle. He also used to refer to Mao Zedong’s military thoughts as managerial guidelines. Phrases such as “strive to survive at all costs”, “survive from the burning to become a phoenix” and “serving customers is the only reason to remain in existence” have widely penetrated the company’s internal discourse and advertising material (Cheng/Liu, 2007). This corporate culture, which inspired many employees, played an essential role in the early years of Huawei’s development as a small local firm.

As Huawei initiated its internationalization process in the middle of 1990s, the culture of wolves did not harmonize well with Western humanism and a more people-oriented culture. The decided that it had to adapt its culture of wolves towards a more humanist attitude. In 2001, Huawei People, Huawei’s internal journal, wrote that the real internationalization would not be achieved unless the view of narrow-minded dignity war overcome. Huawei introduced a series of international standards and adopted many elements of international business culture with the help of the mentioned consulting firms (e.g. instance customer relationship management initiation with Accenture) (Huawei, 2014b). Today, Huawei is said to have successfully changed its corporate culture of wolves into one of customer-centric innovation (Cheng/Chen, 2008).

54 In the year 2011, Huawei adopted a new management system. It chose a rotating-CEO system, which demanded that the four eligible chairmen of the Board – Guo Ping, Hu Houkun, Xu Zhijun, and Ren himself – could not serve for more than six months before the post of CEO would move to the next person (Huawei, 2011). It was not entirely clear why such a decision was made, especially as half a year would often be considered not long enough to get acquainted with all current issues. However, one possible explanation is that it is part of a succession strategy. When applying Hofstede’s national culture dimensions to Huawei, the company is found to be oriented in the long-run and it also shows features of collectivism (Hofstede, 2001). Long-term orientation and collectivism can, to some extent, also be found in its internationalization activities. Oftentimes, Huawei had to first sacrifice profits in order to be able to set foot into a new regional market. Collectivism can be traced back to elements of Confucianism Huawei’s corporate culture. Values such as harmony, respect and diligence are considered important. The importance of harmony can for example be seen on its Shenzhen campus, where it provides meeting rooms designed as Zen gardens. It also tries to provide its employees with an attractive environment, for example restaurants and cafés serving high-quality drinks and food (e.g. an espresso bar).

Thus, Huawei has been making efforts to institutionalize in a way that allows it to maintain a globally consistent company culture in accordance with its values. Several schemes help it achieve this aim. One element consists in corporate culture training for its employees. Another element are platforms for staff communication, e.g. an internet forum where employees can openly make suggestions as to how business conduct can be improved and management made more efficient. Finally, Huawei’s corporate values have been implemented into its management systems and reward behavior that is in conformity with them (e.g. talent recruitment and incentive systems must be oriented towards its focus on customer satisfaction).

3.3.7 Government influence The extent of government influence at Huawei is subject to controversies. It is thought that Ren’s military background certainly helped him to establish a telecommunications equipment company at a time when the city of Shenzhen only began to develop economically (Qie/Li, 2004)).

55 Nonetheless, the government did not play a known active role in the foundation of Huawei. What is clear, however, is that the company, like others in the industry, did benefit from certain government policies, R&D grants, and finance backing for the promotion of Chinese telecommunications companies. This kind of support was important for Huawei to be able to catch up with its established AMNE competitors in the late 1990s (Harwit, 2007, p. 129).

In 1996, in the context of growing offer and demand in the telecommunications equipment market, the government of China terminated the special import regime that had thus far been applied to the industry. It began to specifically support national telecommunications equipment producers (buying-local campaigns) and imposed regulations on foreign investments. Three mainly statecontrolled players became important to Huawei’s positive development: On the one hand, the military and the government that provided important jobs to the company (Gilley, 2000, p. 95). On the other hand banks (e.g. China Construction Bank) that ensured generous credit backing and even helped out when certain state-owned purchasers were unable to pay for Huawei’s work (Gilley, 2000, p. 96). Moreover, Huawei benefitted from both conditional and unconditional research and development grants from the government (Huawei, 2010). As a consequence, Huawei was able to successfully develop an own product range and its sales increased steadily, thanks to, as mentioned, contracts with large towns or the public railway system and major plans to develop China’s infrastructure.

In addition to the benefits in the home market, Huawei clearly also benefitted from the way in which China developed on the international stage. When the country’s foreign policy became more active and it started to establish political links with developing countries (e.g. in Africa or South America), it was often an opportunity for Huawei to begin thinking about expanding into new markets. The Economist wrote that in Africa, Huawei was “everywhere, and welcome almost everywhere” (The Economist, 2009a).

As the Chinese government was promoting the export of high-tech products, Huawei received strong government backing as well as financial loans and commitments to financially guarantee its overseas contract. As the Chinese government secured access to less developed countries’ commodities, it offered in exchange to provide “loans-for-development”. As a consequence,

56 Chinese banks, most of which are state-owned, afforded credits not only to Huawei, but also to its clients in case they needed it. An example of such a venture is the company’s activity in Brazil. Huawei was a bidder for a contract with the Brazilian company Tele Norte. As it was able to offer at the same time a China Development Bank credit with low interest rates, it had a considerable advantage over its rivals. This is part of a more general trend which makes it important for telecommunications equipment companies to be able to offer financing solutions when bidding for contracts at the global level.

The influence of the government has sometimes led to problems for Huawei (as well as its domestic rival ZTE, discussed below). While a positive diplomatic relationship with another country can lead to business opportunities, the opposite may happen when government relations develop in undesired ways. On the one hand, it is possible that there is pressure on the Chinese companies to stop working in a certain country. On the other hand, it is also possible that the government on its own or in the course of negotiations with another government decides to re-focus its priorities on other industries (e.g. because the promise to create more new jobs), which may compromise Huawei’s negotiations or even already concluded contracts (Qie/Li, 2004). A probably even more serious issue is that Huawei’s initial dependence on government and military jobs has led to questions over the enduring involvement of these institutions. In countries such as the US or Australia, Huawei missed out on lucrative business opportunities (e.g. the acquisition of a company in the US) because of allegations that they would enable the company to carry out commercial or government-backed spying activities (Gorman, 2012; Greenberg, 2012). Whether these concerns are substantiated or only politically motivated is rarely certain. What is clear, however, is that they constitute a threat to the company’s reputation and to some extent also its growth perspectives in the respective countries.

3.4

The internationalization of ZTE (中兴)

3.4.1 Corporate profile Zhongxing Telecommunications Equipment Corporation (ZTE) was founded in Shenzhen (Guangdong, China) in 1985 by several state-owned companies close to China’s Ministry of

57 Aerospace Industry. Based on its operating revenues, ZTE is the largest publicly listed telecommunications equipment manufacturer in China. According to its website, ZTE is “dedicated to the design, development, production, distribution and installation of a broad range of advanced telecommunications systems and equipment”, with products ranging from carriers’ networks, handset terminals and software systems to related products and services (ZTE, 2014). ZTE is the world’s fifth-largest telecommunications equipment producer in terms of revenues and its fourth largest based on mobile phone unit sales (Godinho/Ferreira, 2012). Globally, it has concluded contracts in over 160 countries. In the Chinese market for telecommunications equipment, the company is among the most important supplier. Thanks to long-existing business relationships with leading telecommunications operators (e.g. China Mobile, China Telecom), ZTE is the market leader for several telecommunications products in China.

3.4.2 Vision, mission and strategy Under the mission statement of “capitalizing on opportunities arising from macro-restructuring to create value out of information”, ZTE is committed to providing customized communications products and services for clients worldwide. It further commits to respecting its employees and enabling their career development, providing opportunities for them to grow with the company and generating optimal returns for shareholders as well as giving back to society. The company positions itself as a comprehensive telecommunications solutions provider. It wants its mobile handset sales to grow until they generate around half of the company’s revenues, partly because handset sales tend to create more opportunities for networks business (Zhang/Allon, 2010). Besides, ZTE offers products that have been estimated to be 25% to 90% lower in price than those of Western rivals (Athreye/Chen, 2009). ZTE aims to achieve breakthroughs in profitability through innovation in technologies and business models within new sectors (e.g. smart voice, internet finance or big data).

3.4.3 Ownership Structure and Financial Results ZTE is partly listed on stock exchanges. 55.01% are listed in the stock exchanges of Shenzhen (since 1997) and Hong Kong (additionally, since 2004), 44.09% were retained by the state-owned

58 entities and the company’s senior management (Zhang/Alon, 2010, p. 299). Its largest shareholders are Chinese state-owned Zhongxingxin with 30.78%, foreign shareholder HKSCC Nominees Limited with 18.28% and Chinese stated-owned Hunan Nantian Group with 1.09% (ZTE, 2014). Zhongxingxin, which is owned by three state-owned enterprises as shown in Figure 16, is ZTE’s controlling shareholder. Figure 16: Zhongxingxin’s shareholdings in ZTE

Source: ZTE, 2014 ZTE’s financial result show a steady growth pattern from 2012 to 2014 (Figure 17). Thanks to increased contract profitability and a more efficient cost management, net profits attributable to shareholders grew significantly (94%) from 2013 to 2014, figuring at RMB 2.63 billion (USD 424.2 million) in 2014 (Figure 17). Operating revenue in the same year reached RMB 81.47 billion (USD 13.2 billion), which means a growth rate of 8.3% with regard to 2013. Basic earnings per share increased by 97.4% from 2013 to 2014, amounting to RMB 0.77 (USD 0.124) in 2014. Regarding the geographic origin of the Group’s operating revenue, around RMB 40.58 billion (USD 6.55 billion) were generated domestically, whereas RMB 40.89 billion (USD 6.60 billion), slightly more, were generated internationally (ZTE, 2014).

59 Figure 17: ZTE’s 2012-2014 major accounting data prepared in accordance with PRC ASBEs

Source: ZTE, 2014

Unit: RMB in millions

3.4.4 Internationalization of sales ZTE’s has been following the paths of Huawei’s market expansion and mainly concentrated on lower-end markets in both China and abroad. In ZTE, there is an internal saying stating that “Huawei aims to overtake world-class telecommunications equipment companies; ZTE tries hard to overtake Huawei”. Like Huawei, ZTE began by targeting rural markets and businesses by mainly providing low-cost products and services to avoid direct confrontations with the much stronger international (or internationally-backed) rivals. It was only in 1996 that ZTE began to target larger cities for sales.

With the support from the Chinese government, ZTE was the first Chinese telecommunications company to go abroad and it started its internationalization journey earlier than Huawei. To establish its foothold, ZTE did not attempt to enter markets that were already saturated with powerful multinational rivals and instead targeted less advanced economies that preferred low-cost solutions (Fan, 2006). In 1996, it began to internationalize by establishing several branches in Indonesia (Chinese Champion, 2015). In 1998, ZTE won an important bid worth USD 95 million

60 in Pakistan. This was not only ZTE’s first large overseas telecommunications project, but also the first to be awarded to a telecommunications firm from China (Fan, 2011). In the same year – in order to learn about Western countries’ more advanced management structures and technologies – ZTE decided to open a first R&D institute in the US, with the aim of writing software and developing switching and other technology products (Fan, 2006). Have opened an R&D center in the US, it opened its first full-scale office in Pakistan in 1999. Three years later, ZTE entered the UK market, and in 2004 it provided the Olympic Games in Athens with the telecommunications equipment services needed (Zhang/Allon, 2010). Even though it started earlier than Huawei, ZTE’s sales did not take off for many years (Figure 18). For this reason, it undertook major internationalization efforts once China had become a WTO member in the year 2005. This was also encouraged by policymakers at home. At home, the long postponement of the issuing of 3G mobile licenses by the Chinese government was a major source of frustration for ZTE. This was because the existing 2G market was largely dominated by AMNEs. ZTE had invested vast sums into 3G technology and consequently had to wait a long time for the sales that would allow to recoup them (Zhang/Allon, 2010). It can almost be said that ZTE was forced to go abroad.

Figure 18: ZTE’s 1998-2011 revenues

Source: adapted from Athreye/Chen, 2009

Considering the relatively generous availability of funds for ZTE as a largely state-owned enterprise (as well as its double stock market listing), ZTE’s difficulties abroad – as opposed to Huawei’s success – surprised many industry experts (Fan, 2011). ZTE founder Hou Weigui (hereinafter Hou) explained the firm’s hesitant approach to internationalization as follows in the

61 year 2005: “If we internationalized aggressively, we would face considerable risks and pressure from our rivals. We therefore need to know our capabilities and evaluate the financial risks accurately. Otherwise, we would be gambling. We have been active in international business for almost ten years. We started small, with a low-cost business. Now, we can increase the scale slowly. Our biggest challenge in internationalizing is our HR shortage for international business. Finding international talent and appropriate locations in our host countries are our key unsolved problems. Before 2004, we only had one division for international business we now have two. 2005 was named our international year.” (Fan, 2006) Prior to 2005, ZTE’s marketing strategy stressed the domestic Chinese market. After 2005, its initial internationalization plans focused on Southeast Asia, Africa and the Middle East and. ZTE’s Western telecommunications equipment competitors were hardly interested in these regions as their offers would have been unaffordable for local telecommunications operators (Fan, 2011). The evolution of ZTE’s sales between 2005 and 2006 was rather disappointing when contrasted with those of its major rivals. For example, ZTE’s sales accounted for only USD 3.2 billion in 2005 and USD 3.4 billion in 2006, while Huawei achieved contract sales worth USD 8.2 billion in 2005 and USD 11.0 billion in 2006. ZTE’s sales made in international markets only reached USD 1.14 billion (2005) and USD 1.51 billion (2006), whereas Huawei’s international sales were at USD 4.8 billion (2005) and 7.15 billion (2006) (Huawei, 2006; ZTE, 2006).

Following the adoption of a multinational operators cost-leadership strategy in 2005, ZTE entered large markets in Europe (e.g. Russia), Asia (e.g. India) and South America (e.g. Brazil). Its access to India was facilitated by its experience with large-population markets and it managed to conclude a major contract with the most important telecommunications carrier in the country, BSNL. However, ZTE also entered smaller economies such as Algeria, Malawi and Tunisia (The Economist, 2009a). One of ZTE’s advantages over AMNEs firms was its ability to provide more flexible and low-cost products and services, especially in less advanced economies. Its Western rivals lacked the cheap-labor background to make comparably attractive offers in these markets (The Economist, 2009a).

62 It was thanks to contracts with leading telecommunications operators like France Télécom, Telefónica and Vodafone, that after 2006, ZTE increasingly managed to get access to the European and North-American markets. However, ZTE had to be flexible in developed nations as well, often dropping its own brand in favor of that of the respective operator. Its AMNE rivals would not usually have accepted such conditions. ZTE offered this option to operators having already purchased its telecommunications equipment. Like this, they were able to sell customized mobile phones on the basis of ZTE’s products, and ZTE did not have to spend money on marketing. Moreover, the company was able to learn more about the customer’s behavior in these markets and focus on building business relationships with the operators, while building up scale for its handset business. Building on these advantages, ZTE achieved considerable growth in the years that followed.

ZTE was able to achieve double-digit growth in revenues every year, even after the financial crisis began in 2008. In the Chinese market, ZTE was awarded the contract to build the country’s 3G mobile network, which additionally strengthened the firm. It invested considerably in innovation that led to new technologies (e.g. CDMA 2000) and was continuously able to secure contracts with major operators in its home market (e.g. China Unicom and China Mobil). A major advantage over some local rivals stemmed from the fact that ZTE (like Huawei) now only offered networks or handsets, but was able to offer solutions in both markets, which additionally would interoperate smoothly.

Internationally, ZTE benefitted from an industry trend as advanced-economy markets were stagnating and many carriers decided to expand into developing markets, where ZTE was already strong. ZTE was able to successfully cooperate with several developed-country operators, especially during and after the 2008 financial crisis, for example by providing vendor-financing solutions for the construction of the networks.

Even though today, ZTE seems to have a solid future perspective, it also has to deal with challenges. While it has been growing it both its networks and mobile phone businesses, it nonetheless has a disadvantage of size. In an ever more consolidated industry, ZTE’s revenues in absolute terms are much smaller than those of its top rivals in the telecommunications equipment

63 industry. Moreover, its low-end products in developing markets are not sufficient to become a key player in developed nations in Europe and North America (Figure 19). This, however, is not going to be a simple task because in order to access high-end markets, brand appeal and know-how in selling directly to customers are indispensable.

Regarding less fundamental challenges, there are also allegations of corruption going back to the company’s period of rapid expansion (e.g. in Ethiopia and the Philippines) (Wall Street Journal, 2014).

64 Figure 19: Huawei’s revenue by industry, by product and by region

Source: ZTE, 2014

3.4.5 Internationalization of R&D ZTE has continuously been investing more than 10% of its revenues into its R&D operations, where almost 27,000 of its personnel are employed (ZTE, 2014). The firm is currently running 18 centers for R&D, eleven of which are located in China and seven in other countries (Figure 20). The focus of every R&D center depends on the availability of local expertise and other resources.

65 Figure 20: ZTE’s R&D worldwide presence

Source: ZTE, 2014

Like Huawei, ZTE was from the beginning on convinced that only enterprises competing with internally-developed technologies would survive and expand into new markets. This was why it was one of a small group of Chinese telecommunications equipment manufacturers that engaged in their own research instead of hoping for technology transfers via JVs. While at the beginning, ZTE produced not only telephones, but also watches and other electronic products, it was impressed by the importance of foreign switches on its home market and began to research the relevant technology. Eventually, it dedicated major resources into the development of a small telephone switch for rural home markets (Zhang/Alon, 2010).

As it accumulated more expertise, ZTE kept focusing on its switch technology and was quite successful with a particular product (the ZXJ10 switch). Good sales enabled the company to diversify its portfolio and enter new segments (e.g. transmission and video technology). A main advantage was its access to skilled, but cheap labor, which allowed it to learn from existing technologies (e.g. GSM, CDMA) and develop its own products. While the frontrunners Nokia and Ericsson had to invest many years to develop the GSM standard, ZTE became a quick adopter and withing few months built its first base-station (Zhang/Alon, 2010). After that, it became itself a

66 frontrunner and in 2000 launched the world's first CDMA mobile phone with a SIM card that could be detached. Further innovations based on this standard followed (Fan, 2011).

When ZTE wanted to compete with its AMNE competitors on 2G and 3G standards (Fan, 2011), it realized that it was lacking the know-how and experience required. Therefore, the firm had no choice but to internationalize its R&D. While this generated costs that were much higher than those in its home market, ZTE benefitted greatly from these investments. Its US center in San Diego, for example, which encouraged ZTE to open further R&D centers (e.g. in Bangalore, France and South Korea). Nonetheless, while in percentage points, ZTS’s investment in R&D look impressive, in absolute numbers they are quite small compared to those of its top rivals in the telecommunications equipment industry.

Compared to Huawei, ZTE is less diversified. Nevertheless, the company has always made sure it does not depend on one single technology and conducted R&D in different areas. It attempts to base its R&D decisions on market-driven advance tracking. For example, ZTE had invested in each of the three likely 3G mobile standards, which paid off in 2009 as China announced that its 3G networks would run on more than one standard. ZTE also applies modern management learning to its R&D activities to ensure costs and time-expenditure are reduced and the outcomes optimized.

Like Huawei, in the course of its internationalization, ZTE also engaged in a number of international partnerships for R&D. To advance with its R&D on the 3G standard, it established a partnership with Hong-Kong-based Hutchison. It also had joint laboratories with important telecommunications industry players (e.g. IBM, Qualcomm). Furthermore, it has worked with major European telecommunications carriers on technology issues (e.g. France Télécom, Portugal Telecom). Finally, it has also set up partnerships with competitors (e.g. with Alcatel or Ericsson to enhance its mobile systems). ZTE was also active in international standard setting bodies relevant to the telecommunications equipment industry. It has filed applications for more than 50,000 patents worldwide (17,000 of which were granted) and has submitted over 200 international standards proposals. Given that only 17,000 of 50,000 patent applications led to patents, it was sometimes suggested that patent quality might have suffered from its smaller R&D budget (Godinho/Ferreira 2012). Moreover, given its internationalized R&D activities, ZTE no longer

67 enjoys the same cost advantage as it used to compared to its AMNE competitors. A less generous budget might especially become a problem in the context of expensive legal fights, which are becoming more and more common in the telecommunications industry. 3.4.6 Internationalization of organizational management ZTE has around 66,500 employees working for its 107 global branches. Its approach is one of globalization through localization. It builds on partnerships with strong local firms to get access to new markets (Fan, 2006). As a consequence, the company has many collaborations with foreign technology companies, some of which are distribution and service partners in the local market (e.g. Ericsson), others technology and solutions providers (e.g. Switchcore).

ZTE also knows the importance of investing in local human capital. While a new subsidiary usually starts with employees from China, the amount of locally hired staff increases as the operation becomes more important. On average, around 70% of its foreign subsidiaries are host-country nationals, which is also due to the company’s hiring local agencies for recruitment. Nonetheless, many key positions such as finance are typically filled with Chinese managers (Cooke, 2012). The last fact might explain to some extent why ZTE struggled much more to internationalize than Huawei did. The fact that ZTE hesitates to engage more local managers could indicate that very rigid structures are not ideal if a company tries to be internationally successful. While financial state backing can clearly be helpful, it is not sufficient if organizational adaptations are not up to the company’s needs. Regarding the ZTE’s management culture, founder Hou has had a profound impact on the company’s business strategy and corporate culture. His background differs considerably from that of Huawei’s Ren. Hou is a former manager of a state-owned enterprise and had to go to Shenzhen to explore what opportunities the special economic zone offered to ZTE. His management style is described as sober and mild-mannered, which is sometimes explained by his engineering and statecompany background. Instead of a culture of wolves, he defined a culture of bulls, alluding to these animals’ stability, pragmatism and low-key visibility approach. Traditionally, before a market potential becomes clearly visible, ZTE tends to be careful. ZTE’s bull culture has close links with Confucianism’s “golden mean” or “doctrine of the mean” philosophy. According to this thinking,

68 people should avoid the extremes and strive for the “golden middle” in order to prosper. Another Confucian element at ZTE can be seen in its aim to have a structurally simple organization (Hout/Michael, 2014). Like Huawei, ZTE has adopted international management standards (e.g. ISO9001), many of which it achieved before its home-country rival did.

Despite its cautious approach under Hou, ZTE was the first Chinese company become active in the international technology markets. However, it did so slowly and carefully. The dominant view was that aggressive internationalization would be a gamble. Before internationalizing on a grand scale, ZTE wanted to have the capabilities needed, absorb enough international talent, improve its brand and develop a working localization strategy (Athreye/Chen, 2009). ZTE has focused more on manufacturing than services and only recently moved from developing to more advanced markets.

3.4.7 Government influence As presented in the corporate profile and ownership structure sections, the company has strong ties with government agencies and was even founded by people close to the Chinese Ministry of Aerospace Industry. 44% of its shares are not listed and owned by state-backed entities and the overall controlling shareholder is a company (Zhongxingxin) that is also state-owned. The government was also an important factor in ZTE’s internationalization move, given that it provided the funds necessary for the firm’s expansion and later made sure it has access to bank credits. While it is not the country’s largest technology firm, ZTE was chosen as a “National Innovative Enterprise” and impresses politicians because it has managed to grow from a low-cost producer to an innovative company (Cooke, 2012). While the government ties were clearly important in the building up of ZTE, it also has a similar downside as in the case of Huawei. Given particularly its strong state background, ZTE sometimes faces allegations that it cannot be trusted and might be unable to win certain contracts for this reason (Zhang/Alon, 2010).

69 3.5

The internationalization of Cisco

3.5.1 Corporate profile Cisco Systems, Inc. (Cisco) was founded in 1984 and is headquartered in San Jose (California, USA). Leonard Bosack and Sandra Lerner, two computer scientists at Stanford University Business School, tried to find a way of sending emails between computers that were part of different networks at their university’s computer science department. What they finally invented was the world’s first multiprotocol router system (Brueller, 2010). They later founded Cisco, which today is a global leader in the manufacturing, designing and selling of telecommunications networking equipment and services (Cisco, 2014).

Its products and technologies consist of the following categories: switching, next-generation network routing, service provider video, collaboration, data center, wireless, security and other products. Its customers are grouped into four segments: businesses of all sizes, public institutions, telecommunications companies and other service providers and individuals (Cisco, 2014). Cisco entered the list of Fortune 500 companies already in 1997, when it was ranked among the top five companies in terms of return on revenue and return on assets (Cisco, 2013).

3.5.2 Vision, mission and strategy For 30 years, Cisco’s vision has focused on helping to change the way the world works, lives, plays, and learns (Cisco, 2014). The company’s mission statement is to “shape the future of the Internet by creating unprecedented value and opportunity for our customers, employees, investors, and ecosystem partners” (Cisco, 2014).

In the year 1993, three board members of Cisco (John Chambers, Edward Kozel and John Morgridge) wrote down the company’s strategy as a list of four goals: (1) developing a broad enough product line to provide customers with one-stop-shop networking solutions; (2) enhancing the efficiency of the acquisition process; (3) harmonizing standards for networking equipment across the industry; and (4) choosing appropriate strategic partners (Tempest et al., 2000).

70 Since then, the company has grown mainly through the acquisition of innovative companies rather than through the development of technology internally, having concluded more than 170 acquisitions by the year 2014 (Cisco, 2014). Until today, Cisco’s approach is to “build, buy, partner, and integrate” and its strategy consists in delivering integrated solutions that help their clients grow, control costs and reduce risk (Cisco, 2014, p. 38). The company has successfully increased its revenues by offering a wider array of software. Cisco’s somewhat general goals are the creation of value for the company and its owners, while remaining flexible with regard to the long-run strategy and efficiency increasing measures (Cisco, 2014).

3.5.3 Ownership structure and financial results Cisco has been listed on the NASDAQ since 1990. In 2009, the Cisco stock became a part of the Dow Jones Industrial Average index. Furthermore, its shares were added to the S&P 500 Index and NASDAQ-100 Index, underlining the systemic relevance of the company. The early ownership evolution will shortly be presented. The firm’s founders, Bosack and Lerner, ran into financial difficulties in 1987 and had no choice but to look for outside investors (Poole, 2005). Donald T. Valentine, founder of Sequoia Capital, agreed to invest USD 2.5 million in venture capital for a 32% shareholding under the condition that he may become the company’s chairman and has the right to force out its founders. The top management was soon afterward composed of people appointed by Valentine (Tempest et al., 2000). After the company had been listed, the founders were let go (Lerner) and resigned (Bosack) from Cisco, respectively (Poole, 2005). In 1998, only eight years after its IPO, Cisco’s market value was beyond USD 100 billion. Until today, its stocks are highly popular, which can be seen in the fact that 1,771 institutional holders (e.g. Vanguard Group, Blackrock or Bank of New York Mellon) are among them, controlling over 75% of its stocks (Nasdaq, 2015). Its financial health can be seen in the liquidity flows towards shareholders in 2014, when the company bought back shares in the amount of USD 9.5 billion and paid out dividends of USD 3.8 billion (Cisco, 2014).

71 Cisco has been one the fastest growing company and in the history of the ICT industry. Between 1989 and 1998, for example, Cisco’s sales grew at a CAGR of 89%, from USD 28 million to USD 8.5 billion (Tempest et al., 2000). Ever since having gone public, Cisco has delivered strong gross margin and profitability. Cisco’s annual gross profit margin has stayed at around 60%, while those of Ericsson and Huawei only reached around 38%. In 1999, the company’s sales reached USD 12.2 billion, passing USD 10 billion for the first time, and continued to increase with a 55% year-onyear growth by 2000 (Cisco, 2010). However, after the internet bubble burst in the year 2000, annual average sales growth slowed to around 15%.

3.5.4 Internationalization of sales Cisco brought its first router to market in 1986, two years after its foundation. However, Bosack and Lerner did not succeed in selling their technology to a well-capitalized computer firm. For this reason, they sold their routers directly to interested buyers such as universities, R&D centers as well as the aerospace industry and government agencies. This direct sales in the year 1987 reached USD 1.5 million. However, the company’s finances were limited and its sole marketing activity consisted in contacting engineers and software developers working via an internet-like computer network (ARPANET).

In the late 1980s, with the backing of Sequoia Capital, Cisco reacted quickly to the boost of the commercial internet market. In 1988, it found important customers in enterprises that had branches in different locations using different networks. Cisco mainly sold to big corporations (e.g. Boeing, General Electric, HP) as well as the US Army, as they were the ones with extensive institutioninternal networks. At that time, there were few competitors with comparable technological knowhow and a comparable product and service line (e.g. Alcatel, Lucent Technologies, Nortel Networks). While companies like Alcatel or Nortel had a longer history in the networking market, Cisco offered routers at sensible prices and was technologically superior in that market (e.g. supporting a broader choice of protocols). From USD 1.5 million in 1987 its sales surged to USD 28 million in 1989. Cisco’s internationalization direction was influenced by its customers’ need to be able to stay connected when they expanded globally and to rely on good-quality products and services.

72

When Cisco began to internationalize, competition arose from unexpected angles. Companies that were much smaller but sometimes better in their niche markets began to spring up, especially in the market for SMEs. As a reaction, Cisco began to build an extensive channel partner network consisting of systems integrators, service providers, other resellers and distributors to penetrate into different markets.

In the early 1990s, after going public, Cisco started to open offices abroad. In 1991, Cisco opened its first international office in the United Kingdom In the following year, further international offices were set up in Canada and Japan. Then its Brazil, Belgium, Mexico, Hong Kong offices were established.

In the mid-1990s, corporation-internal intranets began to become fashionable, which led to a considerable increase in customers for Cisco. Strategically, Cisco aimed for a top market position and a market share of around 50% in all markets on which it was active (Rifkin, 1997). This was a strategy it had learned from General Electric. It carried out market studies, consisting for example in investigating customers and learning from opinion leaders to identify its target markets. While Cisco’s focus was on its core products, routers and switches, it worked at the same time on constantly expanding its product line in order to be able to offer further networking solutions. In 1996, advances in technology of digitization enabled manufactures to integrate historically separated voice, data, and video networks into a more efficient and economical one. As a result, telecommunications carriers started to replace their voice-only networks with new integrated ones. By positioning its products for this market, Cisco was competing with a far larger group of rivals than it had in the past, including Lucent and Nortel. Thanks to its ability to offer a wide range of products, it could market an end-to-end network solution, which most major companies at that time were considering to purchase. By the year 1998 had emerged as number one or two in most of the around 15 markets in which it was active and clearly had established itself as a trusted business partner, especially for large firms (Tempest et al., 2000).

73 When the internet bubble burst in the early 2000s, Cisco’s growth slowed for the first time, as the telecommunications industry as a whole was going through difficulties (Bhaskar, 2004). Cisco benefitted greatly from not having pinned all its hopes on routers and switches as those sectors were becoming less attractive, whereas completely new markets were beginning to develop (e.g. internet video, internet conferences) (White/Vara, 2008). While Cisco was the clear market leader in the switching and router markets (reaching market shares of up to 70% to 80%), quality-wise it could not claim the same with regard to the network security market (Hochmouth, 2006). However, as the company successfully marketed its network security products and managed to use its good reputation among large companies to globally lead in most related markets (Hochmouth, 2006). Since its know-how in this area was not comparable to its router and switches competence, it acquired a number of innovative start-ups in this segment (Mayer/Kenney, 2004).

This was also the time when Cisco began to seriously focus on emerging markets. Its approach was to geographically organize into what it called “theatres”: an Asia Pacific and Japan theatre, an emerging markets theatre, a European markets theatre and a US and Canada theatre (Oates, 2005). Having realized that many emerging markets had comparable features, Cisco began to acquire knowledge across regions and developed a strategy with regard to emerging markets. It identified markets where it expected to be able to attain a sufficient market position. It would then analyze which products and services were most likely to be needed, there. Finally, it defined the way to develop and sell the products, if necessary through a JV or mergers and acquisitions. In 2007, Cisco opened its Globalization Center East in Bangalore as its second corporate headquarters. One aim was to be closer to its customers and be able to globally react to their needs around the clock (Cisco India, 2015). In 2008, Cisco began to invest around USD 16 billion in China over 5 years and in 2010 even added a new “theatre” for the region (including Mainland China, Hong Kong and Taiwan) (Cisco, 2014).

Simultaneously, Cisco began to shift its business focus from individual products and services to products and services integrated into architectures and solutions to meet customers’ business outcomes (Cisco, 2014). Cisco’s executives believed that internationalization did not just concern particular emerging markets countries, but was a phenomenon concerning globally connected economies, requiring the acquisition of new skills in order to be able to offer solutions adapted to

74 clients in the entire world. Cisco’s internationalization strategy marks a shift from a geographical focus to a business management focus (Cisco, 2014). This change in perspective that put more emphasis on less advanced economies while at the same time remaining focused on developed economies allowed Cisco to again flourish financially beyond the expectations of investors (Cullen/Parboteeah, 2013). Cisco’s deep-rooted “General Electric” philosophy, together with its consistent market-driven and customer-centric business transition and extensive direct sales and channel partner networks not only has balanced its global presence and margin profitability (Figure 21), but has also secured its market leadership in its targeted segments (Figure 22). Figure 21: Cisco’s revenues by geographical region

Source: Cisco, 2014

75 Figure 22: Cisco’s market leadership in targeted markets

Source: Cisco, 2014b

As successful as Cisco was, not all of its ventures ended positively. Many companies it had acquired never produced the expected returns. The authors Mayer and Kenney analyzed four possible reasons for these failures (Mayer/Kenney, 2004). A first reason is that Cisco’s pattern of acquisition was so aggressive that it was unlikely that it always properly assessed the target’s assets and liabilities. Secondly, acquisitions in market niches were financially interesting only as long as Cisco was the only major player on the market, but less so once competition began to emerge. A third reason consisted in acquisitions in sectors in which Cisco lacked sufficient know-how to make them profitable. A final reason was that Cisco may have acquired some companies too early for fear that it might miss out on a spectacular share price rise, a common phenomenon during the internet-bubble period whenever a company had marketed a successful product.

3.5.5 Internationalization of R&D Cisco describes its R&D strategy as consisting in solving clients’ business problems by providing them with smart networks and technology architectures which are built on integrated products, services and software platform (Cisco, 2014). The internationalization of Cisco’s research and (especially) development required many years of preparation in its home market. In this respect, the company was similar to its Chinese competitors presented above.

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An important part of Cisco’s R&D strategy has been the acquisition of other companies and the formation of partnerships in order to get access to new technologies. Even though not all its acquisitions were successful, overall Cisco’s acquisition strategy delivered very positive result, considering that many firms in the ICT industry, especially European ones, failed in integrating the companies they had acquired in the Silicon Valley (Inkpen et al., 2000). The beginnings of this strategy took place in the switching market. Cisco was almost forced into this strategy as it was two important business partners (Boeing and Ford) that in 1993 made the conclusion of a contract conditional on Cisco’s using the cheaper switches produced by another company (Tempest et al., 2000). The management of Cisco reacted by purchasing the other company and decided that in case Cisco could not develop a product or service internally within a reasonable time frame (around half a year), it had to acquire it in order not to lose business opportunities (Bower, 2001). As a consequence, Cisco soon began to buy minority shareholdings in companies that had some advanced technologies which might be useful in the future. At the beginning, Cisco mainly acquired companies that were small, located closely to Cisco (both geographically and culturally) and promised considerable future growth (Rifkin, 1997). An advantage of such targets was that they were not expensive to buy and growth could follow with the help Cisco’s own customer base (Tempest et al., 2000). While in 1993 Cisco acquired three companies, in the year 2000 it acquired an incredible 24 of them (Mayer/Kenny, 2004). The company was particularly interested in knowhow in the fiber-optic and wireless technology markets (Tempest et al., 2000). By 2014, Cisco had completed more than 170 acquisitions (Cisco, 2014b).

International acquisitions followed after the company had initially focused on acquiring US companies in entrepreneurial areas (e.g. Boston, Silicon Valley) (Kenney/von Burg, 1999). Cisco’s acquisitions outside the US, overall around 25 in number, were made in areas that had a similar background of entrepreneurship and start-up creation such as Israel and the Scandinavian countries. (Avnimelech/Morris, 2002). The integration of the products and services of these newly acquired companies was not always easy (Tempest et al., 2000). While it was in Cisco’s interest to integrate most of the acquired solutions, it decided to focus on integrating those products which were at early development stages. Cisco’s system of “new product introduction” required that its know-how in

77 areas such as manufacturing and marketing was also applied to the newly acquired solutions, thereby ensuring that its usual standards were present in all services and products.

3.5.6 Internationalization of organizational management Cisco has around 71,500 employees working in 380 offices and is active in more than 165 countries (Cisco, 2014). Globally, it has almost 70,000 channel partners (Cisco, 2014). Like its Chinese competitors, Cisco has a highly international workforce. A special report on employee demographics showed that Cisco had recruited over 40% outside the US and Canada, with over 10% hired specifically in emerging-market countries (Cisco, 2009).

Regarding its management culture, Cisco had initially been a quite centralized company. Board member John Morgridge was convinced that decentralizing at a too early stage would lead a loss in economies of scale and control (Tempest et al., 2000). Between 1991 and 1993, reducing costs and focusing on consumer needs was key to Cisco’s corporate culture and the orientation of its management. Once the company was on a steady course, board member John Chambers initiated a decentralization trend, organizing the companies into three different business lines: service providers, enterprise and SME. Moreover, each of these three divisions had several further subunits. Despite some decentralization, major areas (e.g. finance, IT and manufacturing) were kept centralized. Given its expertise, Cisco was among the early adopters of a more IT-based organization, which facilitated the company’s international administration activities. As early as 2000, 90% of Cisco’s orders, which means USD 60 million a day, were transacted through the Internet (Nolan, 2001). This has not only increased its sales internationally (while saving costs), but also led to more overall customer satisfaction as the majority of support requests were reaching Cisco via the internet (Morgridge/Heskett, 2000; Nolan, 2001; Tempest et al., 2000). In the year 2001, after the internet bubble had burst, Cisco’s revenues fell significantly and John Chambers decided to re-orient the company’s expansion, which was especially necessary after years of strong acquisition activities (Bhaskar, 2004; Chatman/O’Reilly/Chang, 2005). The number of acquired companies had led to a situation that in some cases different Cisco divisions were

78 working as competitors for a particular customer (Brueller, 2010). Chambers therefore proposed an organizational re-arrangement.

Instead of focusing on the three business groups, the aim was now to focus on technology. Its acquisitions in Israel and the Nordic countries can already be seen in this context. The problem, however, was that in many areas in which it had purchased companies, it lacked the necessary expertise to diversify into the most attractive new markets (White/Vara, 2008). The solution was seen in the acquisition of fewer, but larger companies, which had entire platforms, including the capacities which Cisco lacked. While before, the company’s products were mostly sold at high prices directly to the customers, it now also had products that were sold via retailers (e.g. a homenetwork product for PCs developed by the Linksys Group Inc., which continued to be sold under that company’s brand name) (White/Vara, 2008). Such a complex ecosystem of products and services – as well as companies – requires appropriate structures for the flow of information, especially to keep track of new trends. For this reason, Cisco has developed a portfolio of formal and informal mechanisms. One formal organizational decision led to the creation of a business development group whose task it was to analyze the industry environment. A more informal source of information is Cisco’s policy of asking their executives, especially those from acquired start-up companies in the US and abroad, to keep in touch with their pre-existing network of industry experts.

Regarding outsourcing, Cisco had quite early adopted a manufacturing strategy that allowed it to produce low-return equipment by other companies (e.g. in Europe, but also in the US) (Morgridge/Heskett, 2000). By 2000, Cisco operated only three such sites itself (Tempest et al., 2000). Only after the burst of the internet bubble did the company systematically start to shift its manufacturing to emerging markets with larger cost advantages (Cullen/Parboteeah, 2014).

Regarding management, Cisco has for many years been presided by John Chambers. He does not have a military (Huawei) or state-company (ZTE) background, but used to work for technology companies Wang Laboratories and IBM. He was CEO from 1995 to 2015, one of the longest tenures as CEO in the technology industry, and since 2015 has served as executive chairman. His

79 leadership style was described as “command-and-control” in the early years, but later developed into a more collaborative form of guidance, which not all of the other managers appreciated (HBR, 2010). Under Chambers, Cisco became part of the Fortune 500 list, survived the internet bubble crisis without long-lasting problems and re-organized its structure several times while increasingly venturing into new markets and geographic locations (Nusca, 2015; Hansen, 2010).

3.5.7 Government influence Like the Chinese companies Huawei and ZTE, Cisco has at times come under scrutiny due to its access to sensitive information via its network equipment products. A more general reason might lie in the role US government programs have played in some aspects of the development of the US technology sector (Roll, 2013). A specific case occurred after Edward Snowden, a former National Security Agency (NSA) employee, revealed that the NSA regularly accessed data and hardware by American enterprises to spy on other countries. Cisco was at some point even removed from the list of the Chinese central government’s approved technology suppliers (Carsten, 2015).

In the US, Cisco was one of the companies that were likely to benefit from the exclusion of Chinese companies from many telecommunications projects.

3.6

The internationalization of Ericsson

3.6.1 Corporate profile Telefonaktiebolaget L. M. Ericsson (Ericsson) was founded in Stockholm (Sweden) in 1876 by Lars Magnus Ericsson as a repair shop for telegraph equipment (Ericsson, 2015b). Today, Ericsson develops, produces and sells telecommunications equipment (hardware and software) for both wireless and wireline solutions. In many of the world’s countries, including Brazil, China and India, Ericsson has had a presence for over 100 years (Ericsson, 2014). Even though the competitive landscape has become more challenging, the company is still among the leading telecommunications equipment manufacturers worldwide. The company provides support for more than 500 carrier networks with more than 2.5 billion subscribers and has an increasing number of non-carrier customers (Ericsson, 2014).

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Ericsson is active in four business segments: networks, services, support solutions and modems. 40% of the worldwide mobile traffic is carried through Ericsson networks. Its ten largest customers, five of which are MNE, are responsible for half the company’s net sales (Ericsson, 2014).

3.6.2 Vision, mission and strategy Ericsson’s vision is “a Networked Society, where every person and every industry is empowered to reach their full potential”. Its mission statement is to “lead transformation through mobility”.

Ericsson has adopted a strategy of on the one hand maintaining its long-term competitive advantages in its core business and on the other hand becoming a leading player in promising growth markets (e.g. cloud computing, IP networks). It sees technology, people, leadership in services and worldwide scale as its major assets. Based on this, its four-pillar core aims are to (1) remain strong in the networks segment, (2) expand in services, (3) expand in support solutions and (4) become a leading network society enabler (Ericsson, 2014).

3.6.3 Ownership structure and financial results Ericsson is a publicly listed company and its shares are listed in Sweden (NASDAQ OMX Stockholm) and in the United States (NASDAQ New York) (Ericsson, 2015b). In the course of the company’s history, Ericsson at one point needed help from Swedish banks as well as the government after a major investor (Ivar Kreuger) had committed suicide due to financial difficulties. As some of Kreuger’s shares ended up in the hands of US telecommunications firm (ITT Corporation), the future of the company remained uncertain, until banks that belonged to the Wallenberg family arranged for the repurchase of the shares and began to rebuild the company. The Wallenberg family has since then controlled the company (Ericsson, 2015a.

During the past years, Ericsson managed to maintain its strong market position and innovation leadership. Nonetheless, the company’s sales and margins have stagnated (Figure, 23).

81 Figure 23: Ericsson’s consolidated income statement 2012-2014

Source: Ericsson, 2014

3.6.4 Internationalization of sales Two years after the company’s foundation in 1876, Ericsson began to produce and sell telephones (Ericsson, 2015a). As soon as demand for telephones increased, US firm Bell Telephone Company (Bell) acquired Sweden’s largest telephone network with the aim to only use its own equipment. As a consequence, Ericsson, similarly to Huawei, had to begin by selling its products at cheaper prices to telephone institutions not associated with Bell who were mainly located in the countryside but also in other Nordic countries (Ericsson, 2015a).

Ericsson managed to strengthen its position at home after it had formed a partnership with Stockholms Allmänna Telefonaktiebolag (SAT) with which it repurchased the network from Bell. As its home market was saturated, Ericsson expanded its presence in the Nordic countries, where it succeeded in becoming an important provider of telecommunications equipment. The company soon entered further European countries, of which Great Britain and Russia (including their colonies) became its most significant international markets. In the United States there were already

82 very advanced competitors, which is why Ericsson hardly had any business there. It did however expand to remote countries like Mexico or China and by 1900 95% of its sales were generated outside its home market (Narayandas et al, 2007).

In the 1920s and 1930s, government intervention in the telecommunications industry started to be felt. Governments had started to connect the privately-built, but fragmented networks and generally awarded the contract to only one firm. In the face of competition by companies by larger companies, especially ITT Corporation, Ericsson began to focus on the manufacture of switches and telephones. In the United Kingdom, the company had managed to establish a stable foothold (e.g. through a JV with the British National Telephone Company) and was often considered for contracts, especially in the British colonies (e.g. Australia, South Africa). The First World War and the following slowdown of the European economy had a great impact on Ericsson, which not only had to give up its equipment in Russia, but also could sell its products only in a limited number of countries (Ericsson, 2015a). Even after the 1930s, the telecommunications equipment producer’s customers were mainly stateowned monopolists. This often meant there was only one major customer per country. Ericsson was relatively well positioned, also after the Second World War, not least thanks to its geographically varied customer base. However, whenever there states were in financial difficulties (e.g. during the oil crisis), the manufacturers often had to reduce their prices and even offer financing solutions, which for Ericsson was not always possible (Ericsson, 2015a).

As telecommunications markets slowly began to be deregulated, Ericsson began to seek access to new market, especially the lucrative US market. In 1975, Ericsson introduced the first computercontrolled switch, which helped the company double its market share and facilitate its entry into the US market. Despite these new opportunities, the competitive pressure was relatively high, leading to unspectacular sales and profit figures.

Technical innovations (e.g. microprocessors) led Ericsson to diversify into new markets such as data processing and office automation. The new markets opened up new opportunities for Ericsson. The Swedish telecommunications regulator Televerket worked together with other Nordic agencies

83 as well as with Ericsson to develop a new telecommunications standard. Ericsson was therefore in the best position to afterwards provide these countries with compatible telecommunications equipment. Moreover, the Nordic 1G standard became part of the European 1G standard so that for some time, Ericsson was the only manufacturer who could provide interoperable equipment for both of them. As a consequence of its success in its home and other European markets, Ericsson was able to invest heavily into mobile phone technology and in the early 1980s began to produce its own mobile phones.

When the 2G standards were adopted in Europe and in the United States, Ericsson continued its industry leadership. The company had developed a 2G system based on a technology that would also work with 1G technology infrastructure (Niblaeus, 2014). In the US, Ericsson’s system was chosen, with the Swedish company winning over local Motorola and ATT&T. In Europe, the chosen 2G standard (GSM) required part of Ericsson’s technology, which not only gave it an important first-mover advantage, but also generated considerable license revenues. As a consequence, the 1990s were a successful decade for Ericsson, but also for the entire industry as globally, mobile operators began to order 2G-compativel telecommunications equipment (Niblaeus, 2014). As GSM-based systems almost became a global standard, the company was able to achieve high market shares in the mobile telephony market.

Nonetheless, not everything went well for the Swedish company. Its consumer mobile products, its SME division and its fixed-line division were struggling with falling sales and profit numbers (Narayandas et al, 2007).

In the crisis following the burst of the internet bubble, Ericsson got into financial difficulties as it had missed out on successfully expanding into the lucrative consumer mobile phone segment. Furthermore in the equipment market, less large and long-term contracts were awarded. As a reaction and to catch up in the mobile phone market, Ericsson decided to pursue its internationalization through the launch of JV with Sony (Narayandas et al., 2007). This cooperation, which lasted until 2012, led to a stronger position on the consumer market, thanks to a better design and access to all globally used mobile telecommunications standards. In the telecommunications equipment market, Ericsson decided to focus on its 14 most important

84 customers and ensuring that it could offer a high level of service in all their locations. In short, the company made a bet on large multi-year contracts from a limited number of MNE carrier customers. Ericsson’s new consumer perspective (mobile phones) and key account customer intimacy (equipment infrastructure) turned out to be a good decision and even during the 2008 financial crisis, it was able to defend its markets shares.

3.6.5 Internationalization of R&D Ericsson’s has a tradition as an innovation leader, which also stems from the way it sees itself as a company, founded long before most of its competitors in the telecommunications equipment industry.

Today, its technological strength builds on its advances in R&D, which led to a portfolio of over 37.000 granted patents, one of the broadest in the industry for the 2G, 3G and 4G standards. Via its expanding licensing business, the company generates value from its investments in R&D (Ericsson, 2014). For decades, Ericsson has consistently invested around USD 5 billion annually into its R&D projects. More than 24,000 of its employees are active in its R&D activities worldwide (Ericsson, 2014). As discussed, the company was an industry leader in the evolution from the first voice communication networks (2G) to today’s high-speed (4G) data transmission solutions (Ericsson, 2013b). Like Huawei, even when the times were financially challenging and Ericsson close to insolvency in 2001, it allotted over 20% of its spending to R&D projects. Moreover, in its long history, Ericsson has itself become an innovation factor as many smaller companies were founded to serve its needs (e.g. components, services).

Historically, the founder of Ericsson began by analyzing the telephones imported from companies like Bell and Siemens. As Bell’s telephone was not patented in the Scandinavian countries, he created an improved version of their product. Soon, Ericsson was producing its own telephones and already in 1885 presented a first innovation with a product that facilitated the operator’s work.

85 Later, the company was one of the first European developers and manufacturers of automated switches (Ericsson, 2015a).

Before the telecommunications market was deregulated, the state-owned telecommunications companies had a considerable power of discretion. While sometimes local suppliers were favored, often a bidder’s record in R&D and its economies of scale were relevant factors. Moreover, contracts were often only awarded if at the same time a local R&D center would be founded. In this sense, R&D locations had to follow Ericsson’s sales opportunities, which led to a widely spread network of global innovation centers. Ericsson’s research horizon was usually less than three years and only very few funds were allotted to projects that would only lead to concrete outcomes within more than three years.

Once the telecommunications markets were becoming deregulated, Ericsson was successful in working with government agencies to make the company’s R&D efforts coincide with the standards the government would later adopt (as described in the previous section). Geographically, Ericsson’s most important R&D locations are in Sweden and in North America. Thanks partly to Ericsson, Sweden has a considerable experience and expertise in the development of telecommunications equipment (which also attracted the Chinese companies Huawei and ZTE). It employs more than 9,000 researchers in its largest R&D hub in Sweden, globally 24,000 engineers work for it. Apart from the US and Sweden, it has innovation centers in countries like China, Hungary and India (Ericsson, 2013). Finally, partnerships and acquisitions have also been important to Ericsson’s innovation and internationalization activities. While Cisco made a large majority of its acquisitions in its home market, Ericsson acquired companies all over the world (see the examples from 2005 to 2007 in Figure 24).

86 Figure 24 Ericsson 2005-2007 acquisitions

Source: Ericsson, 2007

3.6.6 Internationalization of organizational management Ericsson has more than 118,000 employees and sales in over 180 countries (Ericsson, 2014). The geographical location of its workforce is highly international. Only 15% of Ericsson’s employees are active in the company’s home market Sweden, less than in India (18%), but more than in North America (13%) and North East Asia (including China) (11%) (Ericsson, 2015b).

Given its long-standing international activities, the company has naturally been responsive and sensitive to national and regional specificities. Certain core values helped make its internationalization successful. Internally, the principles of respect, professionalism and perseverance are upheld. Externally, a close contact with its large customers is an important company commitment.

87 Regarding corporate culture, the company went through an evolution. Before the internet bubble burst in the early 2000s, Ericsson’s approach was one of being a technical driver. The company was not good at organizing workflows, but successful in selling its technologies, an approach that was not cost-effective. Today, the company’s approach is more market-oriented. Since 2002, it has been organized in three business units (e.g. Networks, Global Services and Multimedia) and ten regions (e.g. North America, Northern Europe and Central Asia, North East Asia) (see Figure 25). While the business-unit approach fosters competence in the respective segments, the regional approach ensures both solid local competence and good relationships with local customers are at the company’s disposal. At the same time, the Swedish parent company provides local branches with the support needed (e.g. in technological, marketing). Figure 25: Ericsson’s business-unit approach

Source: Ericsson, 2006

The change in corporate culture can also be explained from a perspective of the evolution in product focus. While at the beginning, Ericsson was mainly focused on large network-infrastructure projects, which demand for managed service for a long time, today, the transmission of mobile data

88 and the importance of supporting software have made a new approach to organizational management necessary (see Figure 26).

Figure 26: Ericsson’s 2005-2015 business models evolution

Source: Ericsson, 2012 Regarding de-centralization, Ericsson’s leadership has for a long time believed in giving local branches responsibility and decision-making power so that they can quickly respond to regional needs. As a consequence, regional market units (see Figure 26) were responsible for their finances, for their sales and for creating strong ties with their large MNE customers. Organization management was made compatible with international standards (e.g. ISO9001) requirements. Ericsson has extended the decentralization approach to its R&D branches in 2006 in order for them to be able to quickly react to local changes in demand.

The management of Ericsson has often changed since the early 1990s and so has the leadership style. Lars Ramqvist (1990), whose leadership style was dominating and direct, emphasized the importance of R&D and a good local service. Sven-Christer Nilssen (1998) was more focused on consensus, but did not manage to stay CEO for a long time. Kurt Hellström (1999) became CEO

89 after the internet bubble had burst and managed to reduce costs without losing any major customer. Carl-Henric Svanberg (2003) was the company’s only CEO that had been recruited externally for being a good dealmaker. Under his leadership, the company acquired more than hundred companies. Since 2010, Hans Vestberg, has managed the company with a focus on technological innovation and sustainability. Overall, Ericsson’s leaderships selection is sometimes considered conservative as most CEOs were long-serving Ericsson employees and Svanberg was the only CEO without links to the controlling Wallenberg family (Gripenberg/Carsson, 2005).

3.6.7 Government influence In Sweden, the ICT industry has for some time been identified as a strategically critical and fastgrowing industry. The country’s government has launched several initiatives leading to the development of ICT-related projects and regional clusters (e.g. Robot Valley focusing on the robotics industry or Kista Science City focusing on ICT and especially on wireless communication) (Vinnova Report, 2009, p.31). The Swedish government kept supporting the popularity of the industry, e.g. with a program that made the acquisition of PCs tax-deductible (Niblaeus, 2014). Another example is the government’s 2009 “broadband for all” program, which demanded that all parts of the country should have access to broadband networks until 2020 (The Telegraph, 2009). Oftentimes, these initiatives led to business opportunities for companies like Ericsson. Regarding state ownership, Televerket used to be Sweden’s state-controlled monopolist in the telecommunications sector from 1853 to 1993. The company engaged in close cooperation with Ericsson with the aim of developing globally leading mobile communication standards, from which the company benefitted considerably in the international competitive environment. (Niblaeus, 2014). During its crisis time in the early 2000s, Swedish public had called for Ericsson’s then responsible executives Ramqvist’s and Hellström’s to resign and the Swedish government had appointed a commissioner to inspect the company’s activities (Narayandas et al., 2007). Since then, this “broadband for all” campaign has greatly stimulated Ericsson’s R&D deployment and constant domestic market penetration.

90 3.7

Cross-case analysis

3.7.1 Huawei and ZTE The two EMNEs relevant in this case study – Huawei and ZTE – were established almost at the same time in the same industrial zone in Shenzhen. When they were founded, many of their AMNE competitors had already entered the Chinese market and begun to make profits in the country’s urban markets. The oligopolistic and international nature of competition in the telecommunications equipment industry was decisive for the way Huawei and ZTE internationalized as EMNEs.

To avoid direct confrontation with their AMNE competitors, Huawei and ZTE had to begin in China’s rural markets in which the AMNE companies had little or no interest. As they steadily grew in their home market, internationalization became the only way for them to grow strong enough to effectively compete with their globally active AMNE rivals.

Both Huawei and ZTE were path-breakers among Chinese telecommunications equipment companies in terms of the internationalization of their sales and their R&D operations. Initially, their strategic choices and internationalization paths showed remarkable similarities. The main reason for this lies in the similarity of their CAS.

What

follows

are four principal common characteristics

of Huawei’s

and

ZTS’s

internationalization path during the early internationalization stages:

Initial avoidance of direct competition with established AMNEs rivals: Both companies started their businesses in China’s rural markets. The timing of their establishment was perfect for them to catch a large market share in China’s telecommunications infrastructure (and therefore equipment) boom in the 1990s. As latecomers, however, they faced the disadvantage of being less sophisticated and innovative than their AMNE rivals, who had entered the Chinese market via JVs. Instead of confronting them, which would hardly have been fruitful, they relied for many years on their revenues from China’s rural areas and from developing countries. Only later did they start to expand their global presence to developed markets by competing aggressively on price against their established AMNEs rivals.

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Endogenous R&D innovation instead of technology transfers via international JVs: Unlike many newly-emerged Chinese telecommunications equipment companies who hoped to benefit from technology transfers through international JVs, Huawei and ZTE early on made the strategic decision to develop technology and products internally. Even though the telecommunications equipment industry is highly technology-intensive, they succeeded in their R&D endeavors by making use of the cost advantage that came from Chinese R&D inputs (e.g. through reverse engineering) and later by absorbing advanced research experience and expertise in developed countries. This enabled them to offer state-of-the-art innovation at low-cost prices to customers with limited budgets (e.g. developing countries or developed countries in times of crises).

Innovation cooperation: Both Huawei and ZTE have engaged in numerous forms of international cooperation. They established partnerships with their AMNEs in various fields (e.g. technology innovation, product development, sales channels and management practice) to accelerate their internationalization processes and share risks outside their home country. These international partnerships greatly helped offset their liability of foreignness disadvantage enhanced the competitiveness of their products and increased their corporate efficiency. They have also actively participated in a variety of industry-related national and international standardization bodies, which facilitated their international R&D operations and augmented their legitimacy. Chinese government support: Without the Chinese government’s favorable industry-wide policies support and, at some points, financial backing, Huawei’s and ZTE’s domestic growth and rapid international expansion of Huawei and ZTE would not have been possible. However, it was only once their approaches (e.g. towards R&D) made them stand out among around 200 other newly emerged domestic telecommunications firms, that they were recognized as “national champions” of China’s telecommunications industry. In the early internationalization stages, both Huawei and ZTE strategically followed the Chinese government’s diplomatic objectives to penetrate into less developed markets with their cost-effective and customized telecommunications solutions (and vendor financing thanks to credit lines from state-backed Chinese banks). This may be a main reason why they sometimes became the targets of political initiatives abroad, claiming they could not be trusted for security reasons.

92

To sum this first part up, it can be said that Huawei and ZTE benefitted from similar CSAs due to being confronted to a comparable domestic and international business context and having enjoyed similar forms of government support. Later however, as will be shown below, the two companies leveraged these CSAs in dissimilar ways and consequently developed different FSAs, which led to the adoption of different internationalization strategies.

What follows are three principal differences between Huawei and ZTS, which led to dissimilarities in their internationalization paths: Different ownership structure: Huawei’s and ZTE’s ownership structures differ fundamentally. Huawei is a private company, jointly held by its Chinese employees through the ESOP affiliated to the employee union. ZTE is a partly publicly listed company and partly controlled by several Chinese state-owned enterprises. Huawei’s employee stock ownership plan is an important incentive for employees to perform well and have an interest in the company’s efficiency and success. It allows Huawei’s executives to manage the company for long-term oriented profits without quarterly pressure. ZTE adopted a Chinese “Guoyou Siying” approach, which means “state-owned, privately managed”, to balance its ownership and corporate operations. Even though the Chinese government appears to have had a hands-off attitude to ZTE’s corporate management, the centralized management structure has sometimes led to slow or misled strategic decisions. Different internationalization processes: Huawei’s founder Ren realized the necessity of internationalization as early as 1995 and declared: “We should not wait to expand abroad until everything is ready. Instead, we will get familiar with the markets and then conquer them in the process of learning from our international competitors. When domestic markets eventually get saturated, Huawei will die unless we can build an international team in three to five years. Of course, we must realize that we have no competitive advantage, and that we can only gain the market through advanced technology, reliable quality and superb service” (Luo et al., 2011, p. 69). Huawei therefore saw internationalization as a learning process, allowing it to develop its own intangible assets and strengths. It began its internationalization in 1997 and its first successes (both in developing and developed countries) were based on a cost-leadership strategy. However, the

93 management realized that such a strategy was insufficient to attain a strong position in Europe and North America with their huge but sophisticated markets. Huawei therefore adopted a new strategy of differentiation. It wanted to compete on easy-to-upgrade customized products and service quality. This opened the doors to contracts with many major European telecommunications operators, some of whom recognized Huawei as one of their key suppliers.

Even though ZTE internationalized earlier than Huawei (thanks to a major international contract in 1998), its internationalization process was slower and less impressive. ZTE’s leadership was afraid that aggressive internationalization would be equal to gambling and it would only enter a market if there was a clearly visible market potential. The company’s major internationalization efforts only began after 2005 and it had much more experience in developing than developed markets. In order to push its internationalization, ZTE adopted its initial cost-leadership strategy by providing low-cost telecommunications solutions and white-label handsets. Even though recently the company tried to move towards a differentiation strategy, its size disadvantages and limited R&D inputs make such an evolution difficult as the mid-range and high-end markets are very competitive, given the presence of considerably more resourceful players.

Different corporate cultures and management mechanisms: Huawei has continuously worked on its organizational learning and transition mechanisms in order to create sustainable competitive advantages. Under Ren’s leadership, the company has since the 1990s strategically invested in many forms of international cooperation to learn from leading technologies and R&D processes, world-class management systems and innovative operation processes. Its internationalization benefitted from such a proactive-learning approach. In contrast, ZTE’s slightly conservative Confucian “golden-mean” leadership and corporate culture, which stressed transaction results, has often constrained the company’s internationalization pace and missed the best timing for internationalization. In addition, its centralized organization structure has sometimes hindered adequate and well-timed strategic decisions, which also hurt the company’s internationalization.

Given the results of this comparison, it does not surprise that Huawei and ZTE are positioned in different quadrants of the FSA/CSA matrix:

94 Figure 27: FSA/CSA Matrix (Huawei and ZTE)

Source: own creation

Initially, on their Chinese home market, ZTE and Huawei were similarly successful. Later however, within the internationalization context, ZTE fell far behind its competitor. This evolution indicated that good CSAs are important to EMNEs in their early stages, but that they are in no way a guarantee for a successful internationalization. As follows from the above analysis, the reason why Huawei’s internationalization was more effective than that of ZTE was that Huawei successfully developed a set of sophisticated FSAs and intelligently leveraged its CSAs and FSAs in an integrated way to internationalize by adapting to changing contexts.

The following table provides an overview and short summary of the above findings and makes it possible to contrast the ways in which Huawei and ZTE internationalized, especially presenting the different FSAs they developed and the strategies they consequently adopted:

95 Figure 28: Analytical summary (Huawei and ZTE)

Company

CSAs

FSAs

Internationalization path

Generic strategy adopted

Huawei

- Large domestic market

- Private ownership without quarterly pressure

- First penetrated into developing countries to avoid direct competition with leading AMNE rivals (late 1990s)

- Initial strategy of cost leadership

- Significant industry-wide policy support - Developing country oriented diplomacy - Generous financial government backing - Abundant low-cost R&D resources - Collective and longtimeoriented Confucian culture

- Effective ESOP and corporate efficiency

- Customized products and services

- Later entered developedcountry markets, seeing internationalization as a learning process to enhance its global competitiveness (early 2000s)

- Successful international branding

- Eventually achieved large global presence

- Endogenous R&D innovation

- Eventually moved to differentiation strategy: effective combination of price, service, innovation and customization

- Proactive and long-time oriented leadership - Agile and efficient corporate transitions - Comprehensive and sophisticated management mechanisms - Unified corporate culture and core values

ZTE

- Large domestic market - Significant industry-wide policy support - Developing country oriented diplomacy - Generous financial government backing - Abundant low cost R&D resources - Collective and longtimeoriented Confucian culture

Source: own creation

- Turn-key contracts in the 1990s - Endogenous R&D innovation - Customized low-end products and services - Pragmatic and controllable corporate culture

- Penetrated into developing countries first to avoid direct competition with its leading AMNE rivals (mid 1990s) - Interrupted because aggressive expansion was considered as “gambling” by the leadership - After 2005 accelerated internationalization, driven by government policy and competitor Huawei’s internationalization moves

- Cost leadership: offer low-end customized products and services - Attempts to move towards a differentiation strategy, yet difficult due to size disadvantages and limited R&D inputs

96 3.7.2 Comparison with Cisco and Ericsson The two AMNEs relevant in this case study – Cisco and Ericssson – both come from advanced economies, yet differ in some aspects from each other as they benefitted from dissimilar CSAs in their home-country business contexts.

Moreover, while having had quite different

internationalization paths, they nevertheless share similarities with their EMNEs counterparts, Huawei and ZTE.

Cisco was founded in the same period as Huawei and ZTE, while Ericsson had already been active for more than 100 years when these companies were founded. Cisco and Ericsson have in common a history of innovation leadership, not present in Huawei’s and ZTE’s history. Interestingly, Ericsson started – like Huawei – by reverse-engineering products of competitors that were more advanced.

Before the internet bubble burst, both Cisco and Ericsson were focused on technology-driven innovation and targeted high-end markets in ways in which Huawei and ZTE would not have been able to. Once the bubble bust, however, both companies began to become more customer-centric and tried to also provide cost-saving solutions for less resourceful customers. In that sense, they had strategies similar to Huawei’s successful (and ZTE’s unsuccessful) differentiation strategies.

Both Cisco and Ericsson have over time acquired a large amount of companies, thereby increasing not only their technological portfolio but also their international reach. This way of increasing R&D capacity and improve revenue generation would not have been possible for Huawei and ZTE for much of their evolution and poses a significant challenge to these latter companies’ market share and R&D capacity.

Finally, Cisco and Ericsson have repeatedly benefitted from government policies and more direct forms of government support. Ericsson has profited greatly from government initiatives and was even able to cooperate with the Swedish telecommunications agency to develop important standards. Cisco, on the other hand, was one of the companies that were likely to benefit from the exclusion of Chinese companies from many telecommunications projects in the US. In that sense

97 it can be said that all four telecommunications equipment companies in this study have at times benefitted from direct and indirect forms of government support.

The following figure shows the AMNE telecommunications equipment manufacturers in the FSA/CSA Matrix. Unsurprisingly, both are in Qudrant 3 as they have strong CSAs as well as FSAs:

Figure 29: FSA/CSA Matrix (Cisco and Ericsson)

Source: own creation

In addition, the same table for AMNEs that has been presented above for EMNEs, shall allow comparisons both between the two AMNEs and between the AMNEs and EMNEs.

98 Figure 30: Analytical summary (Cisco and Ericsson)

Company

CSAs

FSAs

Internationalization path

Generic strategy adopted

Cisco

- Large and sophisticated domestic demand

- Strong gross margin profits

- Initially followed its American MNE customers

- Differentiation strategy: target high-end markets with reasonably priced innovative products and integrated solutions

- Globally leading ITC infrastructure

- Advanced innovation capacity - Mature A&D processes

- Advanced innovation competitiveness - Numerous and diversified ITC clusters - Prosperous startups ecosystem - Mature venture capital market

- Early use of standardized online operations & management systems

- A&D acquisitions in countries with similar startup culture and mature venture capital market (mainly Israel and Scandinavian countries)

- Extensive startup and venture capital networking

- Singled out and specifically targetet emerging markets (Cisco “theatre”) after the internet bubble in 2000

- Stable and outstanding top executives

- Outsourced manufacturing to emerging markets

- Longtime innovation leadership

- Initially penetrated into neighboring Nordic countries, then geographically close countries (Russia, UK)

- Government policy protection

Ericsson

- Large and sophisticated domestic demand in Nordic and EU countries - Globally leading ITC infrastructure - Advanced innovation competitiveness

- Strongest patent portfolio covering 1G-4G networks technologies - Customer-driven R&D - Early global presence

- Numerous and diversified ITC clusters - Influential telecommunications agency in the Nordic region and EU - Significant industry-wide policy support - Government backing (initiatives)

Source: own creation

- Established telecommunications agency relationships worldwide - Dynamic mergers and acquisition expansion

- Rapidly continued with UK-related Oceania countries, Asia, Latin America to establish global presence, except in the North America - Entered North America markets with innovative switching products after market deregulation in late 1970s

- Differentiation strategy: initially provided premium forefront products, eventually added cost-saving solutions for its global key account customers

99 The cross-case analysis and especially this chapter have shown that the principles for internationalizing successfully in the telecommunications equipment industry are similar for AMNEs (Cisco, Ericsson) and EMNEs (Huawei, ZTE). The home-country CSAs play a significant role in constraining or facilitating the development of a company’s FSAs. However, a company that benefits from particular CSAs still needs to create and leverage its unique FSAs to offset the liabilities of foreignness and succeed in international markets by adapting to changing conditions. These four MNEs’ internationalization strategies have therefore confirmed the validity of Rugman et al.’s conclusion: It is the interaction of CSAs and FSAs that shape a company’s strategic position on its internationalization path.

In this case study, due to the selection of companies, the hypothesis was tested in two ways. First, through the selection of AMNEs and EMNEs, which stand for companies that (development-wise) have fundamentally different home-country business contexts. Second, through the selection of two AMNEs, which, despite originating in advanced economies, differ considerably from one another, given their years of foundation are more than 100 years apart. What the analysis in this case study has shown was that it is the interaction of CSAs and FSAs that decides whether a company’s internationalization is successful. While the initial CSAs of the companies may differ, to be successful in their internationalization, the companies need to develop FSAs which tend to go in similar directions (Cisco, Ericsson, Huawei). At the same time, similar CSAs as a starting point are no guarantee that the necessary FSAs will be developed (Huawei, ZTE).

100

Chapter 4: Conclusion 4.1

Summary

It was the objective of this case study to explore in what ways the internationalization strategies of Chinese telecommunications equipment EMNEs differ from those of their leading AMNEs competitors within Rugman’s FSA/CSA Matrix and to enquire whether this model can be considered sufficient.

The telecommunications equipment industry is characterized by the need for considerable investments in technology and exposure to rapid market changes. The ability to transform in a rapid and agile manner is critical. Today, the market is globalized and highly competitive. Factors such as price, product functionality, service quality and timing of new products and services have a major impact on the telecommunications equipment companies’ competitiveness (Athreye/Chen, 2009). Interestingly, even though the global telecommunications markets have been in the process of deregulation for almost three decades, governments worldwide still have a significant influence on their national markets. Given the opportunities as well as challenges in this unpredictable environment of technology disruption and changing international business, the globally active telecommunications equipment companies compete fiercely, while at the same time maintaining a certain level of cooperation in order to share some of the risks of this unpredictability (e.g. R&D partnerships, standardization, cross-licensing) (Nicolas/Thomsen 2008).

Historically, national monopolists played a major role in the evolution of the telecommunications industry. As internationalization progressed, these national champions created an oligopolistic competitive landscape with only a small number of companies dominating the global markets. When the Chinese government began to liberalize the country’s economy and called for the development of a modern telecommunications infrastructure, the established leading AMNEs telecommunications equipment companies were quick to enter the Chinese market, at first leaving the newly emerged local companies such as Huawei and ZTE with limited competitive options. Compared to their AMNEs’ tested technological strengths and extensive market reach, Huawei and ZTE were in comparatively weak positions.

101 The Chinese telecommunications equipment manufacturers Huawei and ZTE therefore had to find their own ways of succeeding in this competitive setting. They did so by first penetrating into China’s rural areas and, later, developing countries. In these markets, they enjoyed three important CSAs stemming from their home-country context: large domestic markets, low-cost R&D inputs and wide-ranging government support. Both Huawei and ZTE initially adopted a cost-leadership strategy to offer customized low-cost products and services in less lucrative markets where their leading AMNEs competitors had no or few commercial interests. By avoiding direct competition with their stronger AMNE rivals where they were unbeatable, Huawei and ZTE managed to achieve considerable sales and were soon recognized as national champions, which led to important policy support and generous financial backing from China’s central government. Yet, an analysis of Huawei’s and ZTE’s internationalization shows that these CSAs can be used and developed in different ways, once the companies become active on a global level and that success is not determined by CSAs alone.

Huawei reacted to the competitive market by adopting a differentiation strategy similar to that of Cisco and Ericsson, and began to offer a wide range of products, services and integrated solutions. Given the market context, such a strategy required Huawei to be able to deliver reliable, easy-toupgrade and cost-saving products. In its early internationalization stages, the company was prepared to customize its products and solutions upon request with regard to every single customer. It can therefore be said that Huawei’s most distinct FSAs, differentiating the company from Cisco and Ericsson, were its customer-centric R&D and highly customized products.

In comparison, ZTE succeeded at a similar time as Huawei in its Chinese home market, benefitting from the same CSAs. However, in its internationalization ventures, ZTE eventually fell behind its home-country competitor. A possible explanation for this can be seen in its conservative leadership approach, especially its rather centralized organizational structure, which kept the company from developing the necessary FSAs (e.g. in R&D or localization) and consequently deepened its latecomer disadvantages.

The cross-case analysis has shown that in order to become a leading telecommunications equipment MNE, the same principles apply to AMNEs (Cisco, Ericsson) and EMNEs (Huawei,

102 ZTE). The home-country CSAs play a significant role in constraining or facilitating the development of a company’s FSAs. However, even if a multinational company enjoys considerable home-country CSAs, it still needs to create and intelligently use its unique FSAs in order to be able to offset the liabilities of foreignness and succeed in international markets. The internationalization strategies of the four analyzed MNEs’ internationalization strategies have therefore confirmed the validity of Rugman et al.’s conclusion. It is the interaction of CSAs and FSAs that shapes a company’s strategic position.

In this case study, the CSAs of EMNEs Huawei and ZTE differed from those of AMNEs Cisco and Ericsson. Moreover, there were also differences in CSAs within the AMNE group. However, once internationalization had begun, the differences with regard to what made a successful strategy started to disappear. Indeed, whether the MNE came from an emerging-market or advanced-market context, it had to focus on leveraging its unique FSAs to achieve a successful global expansion in the same international business contexts. It was the interaction of these two types of advantages that determined the companies’ choice of internationalization strategy. Rugman’s FSA/CSA matrix can therefore appropriately be used for further research on EMNEs’ internationalization. It is however recommended that such studies not only take into consideration the industry-wide context, but also the international macro-economic context, as major events (e.g. bubbles or recessions) may have a considerable impact on an industry’s dynamics.

4.2

Implications

4.2.1 Managerial implications The conclusion of this thesis leads to a number of outcomes that are relevant to managers in the high-tech industry who are faced with internationalization challenges. As underlined in the summary, the necessity of developing unique FSAs is not limited to either EMNEs or AMNEs, but equally concerns both. The outcomes shall be presented in the form of recommendations: -

Develop innovation capacity internally while maintaining partnerships with technologically more advanced companies (learning curve).

103 -

Develop an appropriate organizational structure with a unified and recognizable corporate culture (“spirit”) and adapt it in a timely manner when circumstances change (disruption, transition phases).

-

Encourage top management to remain in contact with their industry-relevant connections in order to have a better chance of learning about emerging industry trends.

-

Avoid direct competition with much stronger rivals to be able to survive and first develop a unique competitive advantage that offsets latecomer disadvantages.

-

Do not exclusively rely on cost leadership once survival in the industry is certain and economies of scale are achieved.

-

Choose locations for your R&D operations where you can benefit from a competitively skilled workforce.

-

Encourage an organizational management structure that makes sure local branches have the flexibility to react in the best possible way to local trends.

4.2.2 Theoretical implications Fast growing EMNEs have been an impressive phenomenon over the last decades. Unsurprisingly, there has recently been an increase in academic research on the subject.

As early as in the 1980s, researchers began to single out characteristics of the newly-risen EMNEs that were different from those of their AMNE competitors. Some researchers said that traditional IB theory was insufficient to explain the occurrence of fast-growing EMNEs and called for a revision or further development of the existing theoretical frameworks (Dunning/Lundan, 2008; Erdener/Shapiro, 2005). Others proposed alternative explanations and new perspectives to address this phenomenon (Luo/Tung, 2007; Mathews, 2002). It can nonetheless be said that the theoretical and empirical aspects of these more recent studies remain limited and often contradictory.

Given the large variety of perspectives on this subject, Ramamurti and Singh indicated that no consensus has yet emerged on whether and how EMNEs differ from earlier multinationals (Ramamurti/Singh, 2009, p. 3). It is in this context that Rugman et al. proposed that the FSA/CSA Matrix continues to be useful for research on EMNEs’ internationalization. Their model allows for

104 the analysis of a company’s strategy through the integration of its CSAs and FSAs, which takes into account both the home-country business context and a firm’s unique resources (Rugman et al., 2011). This thesis found that Rugman et al.’s assumption was correct. The FSA/CSA Matrix is an appropriate tool for analyzing EMNEs’ and AMNEs’ international competitive advantages and internationalization strategies based on the interaction of their CSAs and FSAs. No evidence could be found in support of the recently made hypotheses that EMNEs expand internationally in order to acquire capabilities and competitive advantages rather than to exploit pre-existing ones (Mathews, 2002) or that EMNEs internationalize in order to gain novel competitive advantages rather than to make use of initial ones as a springboard for internationalization (Luo/Tung, 2007). In fact, while both Huawei and ZTE were certainly looking for competitive advantages when they internationalized (e.g. through R&D centers and partnerships), this was by no means their only motivation. Huawei needed to expand because at home, the company would not have survived once the markets had stagnated, given there was strong competition and Huawei needed to acquire considerable know-how to become a serious rival. ZTE internationalized because it had invested large sums into the development of a technology, which due to regulatory barriers for a long time could not be brought to market in China, so that the company had to turn elsewhere to recoup its costs.

Rugman et al.’s approach turned out valid in another sense as well. For companies in Quadrant 3 (strong CSAs, strong FSAs), a major competitive risk lies in management problems. Ericsson has for a long time been a Quadrant-3 company. When the internet bubble burst, it became evident that its management had been successful in innovating, but lacked the skills to re-organize its workflows to control cost. Huawei, which has only recently become a Quadrant-3 company, has not yet had similar management-related issues. A final theoretical insight was that in the concrete application of the FSA/CSA Matrix, a company’s FSAs may well be enhanced and facilitated by its CSAs. However, when starting from a certain set of CSAs, a wide range of developments is possible, which stresses the interactive relationship of CSAs and FSAs. Huawei and ZTE were founded in the same city in the mid-1980s and therefore

105 enjoyed comparable CSAs. As was seen above, however, their internationalization finally differed in many respects.

4.3

Limitations of the findings

This master thesis focused on the internationalization of two Chinese MNE in the telecommunications equipment industry, comparing them to two AMNE rivals.

Some of the challenges which the two Chinese MNE encountered will be common to the internationalization of all MNE, whether they have an emerging-market or an advanced-nation background (e.g. liabilities of foreignness). Some challenges, however, are specific to the industry, location, company type or development stage. For this reason, the results cannot be generalized in all cases. For example, there are few industries where state-owned companies (and governments) have for such a long time played a major role as in the telecommunications industry, even once the market became liberalized. Another example is the fact that not all EMNE come from countries that have such an active foreign policy as China and, particularly, a comparable global influence. A final example is the central importance of innovation in the telecommunications sector. Not all industries (e.g. construction) rely on R&D in a comparable way. However, the findings of this case study could provide inputs and empirical evidences for future studies on EMNE internationalization theory, especially in high-tech industries.

A final limiting element resides in the fact that this study primarily depends on secondary data for both qualitative and quantitative analysis. The secondary data in this paper have been selected from existing academic literature and public business information (company websites, annual reports, industrial reports from leading consulting firms and international agencies, mainstream business journals and newspapers). For the selection of data, careful attention was paid to ensure the quality of the data is good. Moreover, it was possible to compare results with some of the pre-existing research on the internationalization of telecommunications equipment MNEs, both AMNEs and EMNEs. Nevertheless, it must be added that it remains difficult to verify the appropriateness and quality of the data in every single case.

106

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