International Trade & Institutions - Huawei Technologies - Essay Example

?Introduction There are many reasons why most companies are into international trading, and most of them are attracted on the benefits delivered by this activity (Adams & Periton, 2006, p.228). In particular, international trade could create more job opportunities and provides inflow of foreign capital and funds, skills, and technology. Many countries in the world are into international trade such as China, U.S., India and Brazil; however, because of global financial crisis, the growth of foreign direct investment (FDI) remained to be disappointing. The market becomes uncertain and the measurable impact of the credit crunch had negative effects on FDI causing companies to postpone their planned investments. Despite the massive decrease of global investment, China and the United Kingdom (UK) remained to be amongst the expected countries that would continue to deliver growth in their FDI investment (Ernst & Young, 2008). Huawei Technologies Co. Ltd, a Chinese-based company is one the successful foreign companies that entered the UK market. In fact, some of the leading telecom suppliers in UK has been exceeded by Hauwei in terms of market share and revenue growth, which made the company the “crouching tiger in the UK market” (Blackman, 2010). The main purpose of this paper is to study a certain firm that is involved in FDI and developed an international business opportunity encompassing: business opportunity analysis, environmental analysis, competitive analysis, and strategic analysis. Huawei Technologies (UK) Co., Ltd. Huawei Co. Ltd. is one of the leading telecommunication suppliers since 1988 founded by Ren Zhengfei. Huawei, a private company is currently serving 45 out of 50 leading telecoms operators worldwide and has operations in North America, South America, Europe, Asia, Africa, and Australia. The company offers wide range of products and services such as radio access network, application and software, network solutions, broadband services, transport network facilities, storage and network security services, professional and traditional services, and devices (MarketLine, 2010a). Hauwei is in the special field of research and development (R&D) and they are highly dependent on their overseas markets that contributed 65% of their revenue growth (Griffin, 2007). Every year, the company allocated at least 10% of their annual sale in R&D for this bestowed them a competitive advantage. Huawei also “took the no. 2 position in the global mobile network gear market in the third quarter, almost doubling its market share from a year ago and surpassing Nokia Siemens” (Virki, 2009). In the global setting, the company’s success is very crucial considering that the competition is severe; however, they still manage to transcend other telecom providers in areas of optical network (rank 4), DSL (rank 2), next generation network (NGN) (rank 2), and switching network (rank 1) (Wu & Zhao, 2007, p.188). The international market has been attractive to Huawei considering that their domestic sales have been surpassed by their overseas sales. Currently, the company’s revenue is 149,059 million (33%) with an operating profit of 21,052 million (33%), and 21,741 (40%) for cash flow from operating activities (see figure 1). Business Opportunity Analysis A. Advantages underlying the opportunity. According to Lim Chee Siong, Huawei South-Pacific Region Chief Marketing Officer (n.d.), “We foresee broad market development opportunities in mobile and home broadband networks, fixed mobile convergence, business operation support systems, and smart devices” (cited in Huawei, 2010). The development of broadband in UK for 2010 is a big opportunity for the company in order to expand its market share and revenue by collaborating and cooperating with UK’s fastest growing operators for broadband access. Based on the company’s SWOT analysis (see figure 2), the growing demand and adoption of broadband (mobile and home) in UK is among the new international business venture that Huawei could undertake. Aside from the development of mobile broadband, the company will also extend to reinforce the investment in all of its business areas particularly in traditional and professional services in order to deliver quality and reliable customer service. B. Potential market size. The percentage of broadband consumers in UK compared to other major countries like Germany, U.S., and France is relatively higher, and the primary consumers are households (71%) and businesses with an average connection of 2,5000,000 a day (Yirrell, 2010). The broadband market in UK is full of competitors like Alcatel-Lucent, Nokia Siemens Network (NSN), Ericsson, Motorola, Nortel and many more; however, Huawei has a big chance to outrun the competitors with the use of their expertise and experience. The annual sales of $349.23 million and annual net income of $5.88 million would surely be increased once they dominated the broadband market in UK (Hoovers, n.d.). C. Estimated start-up costs. Companies that are interested to venture in UK need to follow six procedures of doing business. It would take them 13 days to complete the whole procedure with a percentage cost (income per capita) of 0.7% for all the official, legal, and professional services (see figure 3). The paid-in minimum capital is 0.0% which means that the firm is not required to deposit any amount upon registration. A 13 days completion of business procedure in UK is an advantage because usually it would take 32 to 35 days (world set-up) before a firm can start in doing business (Doing Business, 2011). Therefore, UK is considered to be the best and the “easiest place to set up and run a business in Europe” (UK Trade & Investment, 2010a). Furthermore, in the Ernst and Young European Attractiveness Survey 2010, UK had gained the highest rank as the “most attractive destination for FDI with total inflows of 36% despite of the global financial crisis” (Ernst & Young, 2010). In terms of paying taxes, firm needs to pay eight kinds of tax or mandatory contributions with a total tax rate of 37.3% of the profit (see figure 3). D. Risks. Telecom operators in the world are facing significant numbers of risks that fall under the four quadrants of threats that coincides to the Risk Universe model of Ernst & Young (n.d.): strategic, compliance, operational, and financial threats. The risks that are below the radar are the top 10 risks of telecommunications in 2010 (see figure 4), and the number 1 in the rank which is “losing ownership of the client” remains to be topped. This risk is brought by the increasing number of industry players in the market both in consumer and enterprise, and the only ground to compete with this risk is to change customer’s view on telecoms’ service value through clear and consistent communication, and convince them to continue believing in the high-quality services of networks. Another major risk that lies in the growing adoption and demand of broadband market is in the construction and installation stage of the project. Despite of the benefits brought by this opportunity such as resilient and simplified networking, the massive application of new technologies could still ruin the operation, and potential occurrence of risks would increase. It is a requirement that once the new technologies are deployed, management and mechanisms should be modified in order to have a consistent and aligned networking mode, and with this scenario, complexities in the operation and maintenance (O&M) will increase. Environmental Analysis Economic environment. UK remained to be strong and stable in their economy despite of the global financial crisis. In fact, foreign companies still prefer to invest in the country through joint-venture, exporting, mergers and acquisitions, etc., and as a result, the FDI projects in UK have a successive year of growth (UK Trade & Investment, 2010b). According to World Bank (2009), the economy of UK is very established with a gross domestic product (GDP) of US$2,174,529,808,278 billion in 2009, and it is a good place for global companies to thrive. UK is a country of creativity and innovation and the number four of the best place to do business ranking that is why they are not left behind in the emergence of new technologies from other countries (Doing Business, 2010). Mobile broadband becomes the fundamental growth driver in all telecom products and services introduced in the European market that will continue to become a new source of revenue growth for the next five years (2009-2014) (Hatton, 2009). Political environment. In deciding for a good product location, political environment is always taken into consideration. A country would encourage more investors if its political setting is mature, stable, and certain at national level, if cost and regulatory requirements are not a burden, and most importantly the imposition of taxes at local level. Over the years, UK political environment is specifically aimed on the importance of political inducements like low-interest, tax concessions, cash subsidies, and many more just to attract foreign companies (Abbott, 2003, p.19). Gradually, these influential factors seemed to be successful considering that UK has sustained its world-class status being the best place for FDI. Social environment. Population rate is one of the long-range issues that can be found in the social environment of any country. Most of the time, industrialized countries had managed to control their population rate compared to the performance of developing countries that has a tremendous effect on the stability of an economy. EU countries are not exempted to this situation; in fact, the contraction of their population had a big impact on the balance of their taxation power because only few of their citizens are paying taxes while the rest of the population is dependent. “The UK has a social security system originally planned when there was seven people for every pensioner; the proportion is now nearer to two or more” (Stone & McCall, 2004, p.18). Cultural Environment. In every investment, customs and behavior of a certain country is a necessary factor in order to become successful for this will determine if the company’s domestic product/services are acceptable in the new markets. The growing broadband adoption in UK is greatly influenced by the demographic factors of the country such as population aging, earnings, education, and employment rate; however, the cultural environment in UK explained that broadband is acceptable in the country. Formal and Informal Barriers to Trade. In terms of formal trade barriers, the government of UK is not that keen enough with regard to the entrance of foreign companies, and they are giving them the freedom to set up their businesses in the country. The country also does not discriminate any type of business either privately or publicly owned investment because they do not placed certain restrictions or conditions on any kinds of investment. The fact that inward investment had helped the country’s economy, they encouraged foreign companies to trade and invest in the country in exchange of free and private services to potential investors. Some of the formal or informal trade barriers include currency value, legal-political regulations, socio-cultural identity, and linkages. As a sign of support to foreign companies, UK had made their procedure in starting a business and property registration much easier, and gives foreign investors a specialized tax rate that is relatively lower. The country is dedicated in giving “least barriers to entrepreneurship in the world and has the third least barriers and investment in the world” (UK Trade & Investment, 2010a). Competitive Analysis Huawei believed that becoming a leading supplier of telecommunications in major countries of the world had given them the competitive edge over other industry players. However, stiff competition would gradually pull their market share because there is a great tendency for them to lower their prices in order to maintain their good global market position. According to Ren Zhengfei, the Chief Executive Officer of Huawei, “Professional Service is a key strategic investment for Huawei and our Managed Services, in particular, achieved rapid growth and helped customers to establish a competitive edge” (cited in Huawei, 2009, p.2). Huawei had received several awards and recognitions from different fields from all over the world such as being the one of the world’s respected 200 companies and world’s most influential companies in the latest Forbes list (McGregor, 2008). However, most of Huawei’s competitive advantage has originated from being a customer-oriented company that provides top quality products and services at a lower cost (Einhorn, n.d.). Being a cost advantage company through R&D had also made them competitive. Based on the survey conducted by the West Sussex County Council in UK, it has been found out that home and mobile broadband in UK has been essential but it needs to have fast and reliable network connection (Broadband Analyst, 2011). The high broadband customer satisfaction of 80% is not an assurance because the percentage of consumers dissatisfaction are rapidly growing up to 5% in just one year (2009 to 2010) (Ashford, 2010). Actually, broadband service market in UK is full of competitors that include, Ericsson, Nokia Siemens Network (NSN), Alcatel-Lucent, Nortel, Motorola, O2, Vodafone, Orange, and many more. Innovation and at the same time cost reduction are among the strategies that the company could consider. The market share of the company seemed to break the strangehold status of other leading telecom providers as Huawei got the highest market share of 36% in long term evolution (LTE) compared to competitors (see figure 5). Strategic Analysis Core competencies and source of competitive advantage. The strength of the Huawei lies on its innovation and creativity. Along with this competency is their investment in R&D at a high level that would support the company’s goal to become an expert in the area of broadband networking. Leading market position in terms of sales, promotions, manufacturing, and quality service also remained the priorities of the company. Aside from modifying the internal management process, Huawei is also reorganizing their human resource mechanisms from centralised to more decentralised composition. With their new governance, front line employees are given the chance to participate and involved in the any decision-making activities of the company making them more qualified and satisfied with their jobs. The company believed if they highly valued their employees, the will become more efficient and effective in responding to customer needs. Another source of Huawei’s competitive advantage is through the use of professional service model and service flow. Through this model, all of the company’s project operation will be delivered with highest quality and the accomplishment of the project will be always in advance of the scheduled time frame. By providing evident objectives and efficient communication to all employees, services will be delivered with utmost originality and customers will be deeply impressed. This mechanism is among the company’s source of competitive advantage not just in gaining confidence from their local service partners or leading operators but also an increase in revenue. Recommendation - International strategies. As Huawei delivered wide range of products and services, their extensive experiences had build advantages in telecom network infrastructure, applications and software, professional services, devices, and customer services. They believed that success would be attainable if the process is precise and proven. Centralize O&M, core network design, and continuous customer innovation are among the international strategies that Huawei needs to incorporate in order to maintain competitive advantage in the global market. First, the company should develop a detailed network of construction plan which is in line with the company’s interest. To have an assurance of high quality of planning and implementation, they need to acknowledge experts or those that have in-depth understanding of the new technologies (broadband). Careful planning and implementation is a gradual strategy that could help in hasty network construction and risk minimization. Second, information is very important in construction, delivery, and maintenance of the network/services because the lack of information would cause potential errors. To counter this problem, a detailed as-built model wherein information for the whole network can be easily extracted in case there are errors is necessary. On the other hand, because O&M technologies are important part of the strategy, experts should be placed in a comprehensive training and learning process for them to be more capable and fully aware in the handling of the new network technologies and features. Recommendation - Mode of entry. According to Pride and Ferrell (2010, p.260), firms can used four different modes to enter an international market: “(1) no regular export activities; (2) export via independent representatives (agents); (3) establishment of one or more sales subsidiaries internationally; and (4) establishment of international production/manufacturing facilities.” However, in the case of Huawei consecutive stages of exporting, alliances, and FDI are not strictly followed for the company is using different market entry strategies that is flexible to different markets and products. For instance, Huawei would usually use the join-venture and export entry mode if the product/services they are to produce are traditional such as storage and network security services, and if these are without advantages then they will be using the contractual mode (franchising, co-research, and co-production). In the case of mobile broadband devices, Huawei should cooperate with giants in this area (Vodafone, T-mobiles, and Orange) or the contractual mode as their entry modes because these product/services are without advantages. Recommendation - Location of each stage of the value chain. In terms of support activities for value chain, the centralized structure of the human resource of Huawei, and extensive training for their experts are helpful to the operation of the company considering that employees would become more efficient and effective in responding to customer needs. Due to franchising, co-research, co-production (OEM) method, Huawei had managed to enter the UK broadband market, and it apts to leverage economies and supply scale and scope where competitors may fail. Conclusion Huawei Technologies (UK) Co., Ltd. is one of the Chinese-based companies that has been successful through international trade. Becoming the leading telecom suppliers of products and services in the world indicated that Chinese are not imitators but they are great innovators. Mobile broadband is a new international business venture that Huawei might undertake. The benefits behind this opportunity are tremendous and doing business in UK is not complicated. The economic, political, social and cultural environments in UK are favourable to the company, and it is also free from formal and informal trade barriers. Although the broadband market in UK is full of competitors, it would be easy for Huawei to stand against them considering that they have the best core competencies. To remain competitive, it should always consider a strategy that is driven by customer requirements. References Abbott, L.F., 2003. Engineering firms: a survey of factors affecting their growth and performance. Manchester, England: Industrial Systems Research. Adams, S. & Periton, P., 2006. 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Strong financial performance Weaknesses Private ownership Legal disputes Opportunities Increasing presence in video collaboration domain Demand for 3G and high bandwidth infrastructure Growing adoption of broadband (home and mobile) Threats Intense competition Operator consolidation and network sharing Technological changes Source: (MarketLine, 2010b) Figure 3: United Kingdom’s ranking in Doing Business 2011 Starting a Business United Kingdom Procedure (number) 6 Time (days) 13 Cost (% of income per capita) 0.7 Paid-in Min. Capital (% of income per capita) 0.0 Paying Taxes Payments (number per year) 8 Time (hours per year) 110 Profit tax (%) 23.2 Labor tax and contributions (%) 10.8 Other taxes (%)3.3 3.3 Total tax rate (% profit) 37.3 Source: (Doing Business, 2011) Figure 4: Top 10 Business Risk for Telecommunications in 2010 Source: (Ernst & Young, n.d.) Figure 5: Huawei: LTE Market Share Source: (Blackman, 2010) Read More