Huawei Internalization Issues - Case Study Example

Name Affiliate institution Unit Huawei internalization Date Introduction This article focuses on Huawei Technologies Company. The company is an emerging multinational headquartered in Shenzhen China. The multinational company specializes in the area of telecommunication, equipment and services and networking. The company began its operations back in the year 1987 and since then it has a global presence in many countries. According to Liu, (2011) the company is one of the leading telecommunications equipment distributors in the global market and is estimated to serve about one third of the global population. Huawei's company specializes in the business of consultancy and operational type of services, telecommunication networking and equipment for organization consumers as well as in the area of manufacturing electronic communications gadgets in the global market. In the year 2011 the Company invested a whopping $3.74 billion in the area of research and development. Further Huawei technologies products and services are available in more than 140 nations. It is estimated that, the company currently provides its product and services to more than 45 operators in the world and their main competitors are companies such as Cisco Systems, ZTE and Alcatel-Lucent. China, is a country guided by communist principles although not entirely. The nation has for long managed to retain control of people’s lives in virtually all aspects while promoting international investments by locally owned companies, types of ownership and entrepreneurial activities. Major industries in the country are in their prime in terms of productions, a major characteristic of an emerging market economy in the world (Liu, 2011). Further the company has a strong and expanded financial sector which has for long evolved to meeting the financial need of the people and industries. In addition to these characteristics the national government has no international debt and the local banks in the country have a credible record of lending to people. This is supported by good saving culture adopted by the people. Another reason why china is an emerging market economy is due to its huge population that makes its local products and services to have ready consumers and thus high returns for the company and increased investment in the market. China growth and innovation has been encourages by the ongoing Privatization of numerous manufacturing industries. The government is also in the process of privatizing more companies (Laforet, 2012). This has encouraged rapid growth and investors are accessing the capital to invest in foreign markets and attracting foreign investors.   Huawei market entry Huawei expansion into the global market was driven by desire for growth. The main reason for such strategies is strict regulation of china telecom industry. Above this majority companies such as real estate, oil and gas, mining are state owned and government controlled. In contrast, Huawei was hindered by overwhelming profit pressures in the telecommunication sector. These conspiring factors motivated the company to naturally search for foreign markets with higher profit and less competition (Matthew, 2000) After a decade of hard work and dedication in provision of products and services the company global brand was easily recognizable in the market. Its brand was associated with high quality of products and services provided at a low cost in telecom sector. The company values are driven by a strong cost of ownership. This cost of ownership is a survival strategy for the company in the global market because it makes the company attract more consumers as compared to others in the market. This means that, the company possibly stands a higher chance as substitute in the market in case of a crisis or turmoil in the market (Matthew, 2000). Huawei strategy to go global was driven by the ever-changing face of competition locally and internationally. The company feared that other companies commanded more competitive advantages in the local market and that this limited the opportunities offered by the local market in exploiting the economies of scale; poorly developed infrastructure, lack of skilled human resource skills, unavailability of sufficiently developed intellectual property rights, poor technology and inadequate access to capital that restricted investments (Eric, 2007) A company entry strategy is a well-coordinated technique of delivering its product and services to their target consumers or market. There is variety of methods exploited by companies to enter a foreign market. They include joint ventures, mergers, licensing and acquisition. Scholars have extensively discussed global market entry strategies. The entry modes discussed includes licensing and even franchising. Other factors discussed by scholars include various market entry alternatives adopted by international companies and the factor that influences such. These strategies are guides for comprehensive and incisive analysis to understand different consumers in the market, cost of their rivals and their preferred strategies (Laforet, 2012). Speed of internationalization Huawei began its internationalization process exactly ten years after they began their operations in 1987. Huawei Internationalization started off with the signing of its first overseas contract back in the year 1997. Later the company opened a research and development center in Bangalore and later one in India two years before in 1998. To meet its technical capacity the company contracted IBM to manage its consultancy services for a period of two years. This strategy saw steady increase of speed in terms of expanding to new international market thus boosting their sales of their products and services to USD 100 million (Eric, 2007). Another major achievement took place after two years when its sales multiplied fivefold to a tune of around USD 552 million. Afterwards Huawei established another four research and development centers in US. The company later came to realize the importance of expanding into the global market products and services and this enabled deeper global market penetration. Thus, Huawei international signed contract surpassed its realized domestic sales for the first time in the year 2005. In the year 2008, Huawei began to undertake one of the commercial activities in North America (Laforet, 2012). Laforet, (2012) further argues that, by the year 2010, Huawei revenue rose by 34 percent while its domestic revenue realized from sales increased by 9.7 percent in the same financial year (2009 to 2010). This massive profit was realized due to continued internationalization of its products and services. One year later in 2011, the company built more than 20 clouds computing centers around the world and further shipped approximately around twenty million communication devices. The company net profit in 2011 stood approximately USD 3.64 bn. This article emphasizes on the entry modes of Huawei in the international market. There are diverse strategies employed by companies to enter a global market. These strategies are influenced by firm’s desire, environmental factor and other factors. The article analyses Huawei joint venture, Export Entry in different global markets such as Russia, rationale behind this and the theories of internationalization. After ten decade of building their brand, Huawei breakthrough came in the year 1996 in Russia. The company set its foot in Russia by setting a joint venture with a local company in Russia known as Russia Telecom and Beto Konzern in its effort to develop the Russian market the following year. As a new entrant in the market, the company faced many challenges when trying to develop the market. The company spent around spent four years assessing the market and waiting for orders until in 2001 when they got the first order. The target niche in Russia was targeting areas with weak telecommunication infrastructures by greatly developing them while considering their cultural and social conditions (Ping, 2007). The second strategy was targeting the markets which enjoyed good relationship with its home country. Huawei first chose those host markets which have good relationship with home country. After that, the company considered its operational advantages and then establishing a research and development center. Thus entering into joint venture with two Russian companies was the first telecommunication investment outside China Ping, 2007). According to Ping, (2007) Huawei's internationalization process also targeted South America market. The company adopted a different strategy with that used in Russia as it adopted export entry mode method. Export entry mode is a strategy whereby the company decides to sell all its physical products manufactured in foreign countries to the target country by exporting its products. This market strategy is generally perceived as driven by poor commitment form of penetrating the market. The influencing factors in this entry mode are issues to do with geographical location and distance coupled with local market dynamics. From the beginning of the last decade henceforth the company expanded its influence in Asia, North Africa and Middle East. Huawei dispatched their staff in these regions to open new branches complete with service centers. In 2001, the company products were available in European market and in North America. In these regions different strategy was rather applied to penetrate the market. Huawei adopted various contractual entry modes in these global markets. The strategy employed included franchising, co-production, co-sales, co-research and others. For instance, in Europe Huawei cooperated with another company to develop and market their products and services while helping to sell the company products in Asia markets. In 2002, Huawei cooperated with Motorola in providing network infrastructure and marketing of data communication . Internationalization theories The world is witnessing a steady rise of companies transforming themselves into multinational companies. This article aims to provide an analysis of theories to explain internationalization of Huawei. Huawei internationalization was due to its capability of Chinese companies to reform in relation to global companies. Factors such as firm’s weakness and their limited marketing capability coupled with administrative constraints and poor brand development due to government sheer control of companies motivated the company to venture in foreign market. State owned companies have been very successful in business due to huge support by the government in terms of soft loans marketing channels and government procurement. Therefore, it can be interpreted that Huawei internationalization is a determination to escape limitations by the government which worsens their domestic business situation. In order to neutralize this constant challenge the companies have to explore foreign markets to exploit their comparative ability and advantages while avoiding the disadvantages of exclusively operating domestically. Extremely disadvantaging local reasons for exploring the international market includes limited opportunities due to regional protectionism, high cost of transport, inadequate access to capital and poor developed and unskilled human resources in the country. Uppsala Internationalization Model The stage theory of internationalization also referred to as process theory, states that Internationalization of a particular company follows a gradual process. The model postulates that company internationalization is a process that encompasses an interplay between access to knowledge about foreign markets and the modes operations in that country and on the other hand an increasing commitment of resources to foreign markets. The models explain that the process takes place in two distinct patterns ( Zhao, 2007). The first patter according to Zhao, (2007) is the firm’s involvement in the country grows if the establishment chain exists. This is entirely an export undertaking that is common in the market through independent followed by sales and finally manufacturing. The next pattern holds that the company penetrates into the new foreign market with greater psychic distance. Thus no firms can kick of the process of investing in the foreign market without going through both patterns and understanding them. The model commands immense influence on understanding Huawei process on internationalization. However, the bigger challenge in modern world process of internationalization is that many firms do not follow the stipulated patterns as argued by the model. Studies focusing on internationalization of companies have hypothesized that increased global competition have completely moved to a whole new level pushing firms to explore the possibilities of investing their resources in the foreign market. Accelerating level of technologies in all sectors has resulted into rapid internalization (Rodrigues, 2005). Other new phenomenon such as service intensive business environment combined with networking nature of organizations. Firms eventually draw colossal benefits from that relationship motivating them to go global. From the new formed global based relationships the firms discovers the nature of international markets and entry mode (Runyan, 2011). Runyan, (2011) explains that the mainstream model that explain the rationale for internationalization of business entities have various assumptions which holds that firms will invest in global markets on the basis of their identifiable competitive advantage in that country which allows them secure adequate return to cushion the additional risks and costs which comes as a result of operating in the foreign market. This argument is largely from various researches carried in Western companies which have attained huge domestic strength and high maturity level before they think of internationalization. However, with consideration to such enterprises such as like Samsung group a, Acer and LG, as the later entrants to international market, these firms did not start from positions of strength but rather from the resource-disadvantaged position of an isolated firm seeking some connection with the technological and business mainstream. This model of internationalization offers a potentially useful contribution to better understand the international of Chinese firms. The model typically refers to East Asian countries (Runyan, 2011) China is a recent example of that can be described by the model in the international market trying to steadily catch up with those countries that developed early in terms with technology and know-how as well as in the development of business environments supportive of international competitiveness. While Chinese firms have some initial competitive advantages, such as low labor costs, these becomes less crucial as the firms move into more sophisticated market compounded with higher-value products (Runyan, 2011) (Runyan, 2011) espouses that, in this way, outward FDI may help them fill up the gap via acquiring appropriate resources and assets. Given these kind of resource there is an indication that that low levels of legitimacy are faced by many firms in emerging economy, and they need for financial capital. These rules that is likely to have much greater impacts on the action and performance of new ventures than established companies or government-supported enterprises. National institutions are mainly understood as the rules of the game in a society. The model argues that at the most fundamental level, institutions are more regulative and cognitive existing social structures and activities that provide stability and meaning to social behavior. Then the institution can be classified on the basis of political influence, legal aspect, and societal aspects. The institutional context of developing countries, especially governance and its operating agents, has a tendency of featuring importantly in the context of developing country business (Sunny, 2012). Strategies of firm from newly industrialized economies are an outcome of a complex interplay of organizational and institutional factors. China is a typical developing country where government involvement has been particularly significant. China therefore may perfectly provide new insights regarding the relevance for firm internationalization of the interplay between government and entrepreneurship. Conclusion Huawei is among one of the few companies from china which have managed to successfully expand their business in the international market. The article provides greats insights on the process of internalization into the internalization process as well different entry strategies implemented in Russia, North America, Middle East and North Africa in telecommunication industry. The analysis provided in this paper is an indication that the structure of the industry and the country where it is located plays considerably important roles in investing in foreign markets. This is different compared with traditional manufacturing companies driven by high technology because they trivialize firm’s factor in entry. As evidenced in this paper, when high-tech firms decide to internationalize their products and services they easily penetrate the market than those in third world countries. Companies like Huawei with high level of technology in their home countries infrastructure capacity, reputation of its products and services influences greatly the process of foreign market investment. To avoid negative influence from their home countries, firms like Huawei had no choice rather than enter into developing countries market like Kenya. As a strategy, firms like Huawei have to first set research and development centers or register their subsidiaries to develop an international market. References Deng, Ping. 2007. Investing for strategic resources and its rationale: The case of outward FDI from Chinese companies." Business Horizons 50.1 (2007): 71-81. Fang Zhao. 2007. Entry modes for international markets: Case study of Huawei, a Chinese technology enterprise." International Review of Business Research Papers 3.1 (2007): 183-196. Harwit, Eric. 2007. Building China's telecommunications network: industrial policy and the role of Chinese state-owned, foreign and private domestic enterprises. The China Quarterly 190 Li, Peter Ping. 2007 Toward an integrated theory of multinational evolution: The evidence of Chinese multinational enterprises as latecomers. 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