Internationalization Strategy - POLITesi · PDF fileCDMA: Code ... 3.3 Internationalization of Huawei ... 7.5.3 Human Resource Management

Graduation Dissertation

Politecnico Di Milano

2nd School of Engineering

Management, Economics and Industrial Engineering

Internationalization of Chinese MNEs and Italy Market Analysis:

A Case study of Huawei Technologies Corporation’s

Internationalization Strategy

Author: Wanxing Zhan

Student No.: 749656

Supervisor: Professor Lucia Tajoli

Master Thesis

July 2011


I

Acknowledgements

I would like to express my gratitude to all those who gave me the possibility to

complete this thesis.

I am deeply indebted to my supervisor Professor Lucia Tajoli from the Department of

Economics, School of Industry Engineering and Management, Politecnico di Milano,

whose help, stimulating suggestions and continuous encouragement helped me

throughout my graduate career and during completion of this thesis.

My former colleagues from Global Technology Service Department supported me

during my working in Huawei. I want to thank them for all their help, support, interest

and valuable hints. Especially I am obliged to thank Mr. Sun Tao, Project Management

Officer, Network Roll-Out Department of Huawei Technologies Corporation for giving

me permission to commence this thesis in the first instance, to do the necessary

investigating work and to use the official data.

Especially, I would like to give my special thanks to my parents whose patient love

enabled me to complete this work.


II

Abstract

In recent years, Chinese Multinational Enterprises (MNEs) have not been paid adequate

attention in terms of internationalization studies even have increasingly been involved

in the internationalization activities. This thesis applied SWOT and PEST analysis

model to analyze the Chinese high-technology MNE and the international market

respectively, and deployed the method of case study to analyze the internationalization

strategy of the Chinese high-technology MNE by studying internationalization process

of Huawei Technology Corporation in Italy market. First the development of Huawei

was introduced to show the key components of Huawei’s internationalization strategy.

Then political, economic, social, and technological analyses of Italian market and

analysis of Italian Telecom Market were conducted to show why Huawei choose this

Italian market for their internationalization. The factors that influence the

internationalization development of Huawei were also studied by the strength, weakness,

opportunity and threat analyses using SWOT model. The case study showed that: 1)

MNEs from developing countries adopt catch-up strategy in their internationalization

process by investing in developed countries and forming alliance or cooperation to

acquires technology and brand resources, and gradually enhance their competition

advantages. 2) Markets in large developed countries are more attractive for MNEs from

developing countries for having leading technologies and top-ranking Research and

Development resources, wide network of infrastructure, friendly business environment

and big market opportunity. 3) During the internalization process, except the advantages

in low cost, differentiation, technology and reputation, the MNEs from developing

countries should also enhance the management system, e.g. enterprise management,

finance management, human resource management, cost control etc.

Keywords: Case study, Chinese MNE, Huawei, Internationalization, Italy.


III

Abbreviations

ADSL: Asymmetric Digital Subscriber Loop

ARPU: Average Revenue Per User

ATM: Asynchronous Transfer Mode

B2B: Business to Business

BT: British Telecom

CDB: China Development Bank

CDMA: Code division multiple access

CEO: Chief Executive Officer

CMM: Capability Maturity Model

China Ex-Im Bank: The Export-Import Bank of China

DSL: Digital Subscriber Line

DTT: Digital Terrestrial Television

FDI: Foreign Direct Investment

FT: France Telecom

FTTH: Fiber to the Home

FhG: Fraunhofer-Gesellschaft

GPRS: General Packet Radio Service

GSM: Global System for Mobile Communications

H3C: Huawei-3COM

H3G: Hutchison Whampoa

HRM: Human Resource Management

IAS: International Accounting Standards

ICT: Information Communication Technology

IDC: International Data Corporation

IFS: Integrate Finance System

IPD: Integrated Product Development

ISC: Integrated Supply Chain

ISDN: Integrated Services Digital Network

ISP: Internet service provider

LAN: Local area network

LLU: Local-loop unbundling

LTE: Long Term Evolution

M&A: Mergers and Acquisitions

MDA: Mutual Distribution Agreement

MNE: Multinational Enterprise

MOFCOM: Ministry of Commerce

MPLS: Multi-Protocol Label Switching

NGN: Next Generation Network

OECD: Organization for Economic Co-operation and Development

OEM: Original Equipment Manufacturer

OLI: Ownership, Location and Internalization


IV

PCT: Patent Cooperation Treaty

PSTN: Public switched telephone network

PwC: PricewaterhouseCoopers

PVR: Personal Video Recorder

R&D: Research and Development

SDH: Synchronous Digital Hierarchy

SME: Small and Medium Enterprises

TAC: Technical Assistance Centre

TD-SCDMA: Time Division-Synchronous Code Division Multiple Access

TI: Telecom Italia

UNCTAD: United Nation Conference on Trade and Development

UMTS: Universal Mobile Telecommunications System

VAT: Value Added Tax

VPN: Virtual Private Network

WiMax: Worldwide Interoperability for Microwave Access

WCDMA: Wideband Code Division Multiple Access

WIPO: World Intellectual Property Organization

3G: The 3rd Generation


V

Index Acknowledgements ........................................................................................................................ I

Abstract ......................................................................................................................................... II

Abbreviations ............................................................................................................................... III

Index .................................................................................................................................................... V

1 Introduction of the Internationalization Road of Chinese Company ............................................ - 1 -

1.1 An Internationalization Course of Chinese Enterprises ..................................................... - 1 -

1.1.1 Market Seeking - Opening International Market for Meeting Demand .................. - 2 -

1.1.2 Search Technology - Enhancing Core Competition ................................................ - 3 -

1.1.3 Finding Resources - Obtaining Optimal Configuration ......................................... - 4 -

1.2 Four New Trends ............................................................................................................... - 5 -

1.2.1 Government Deregulation ....................................................................................... - 5 -

1.2.2 Invisible Barriers .................................................................................................... - 6 -

1.2.3 Background of RMB Appreciation .......................................................................... - 6 -

1.2.4 Firstly, Bringing In, and then, Going Out ............................................................... - 7 -

2 Economic History of People’s Republic of China......................................................................... - 8 -

2.1 1949-1978 Prior to Reforming and Opening up ................................................................ - 8 -

2.2 1978 - 2005 Post Reforming and Opening up .................................................................... - 9 -

2.3 2005 – Present New Economy Police .............................................................................. - 10 -

2.4 Economic Performance since Reform .............................................................................. - 10 -

2.4.1 Impact on World Growth ...................................................................................... - 11 -

2.4.2 Reforms in Specific Sectors ............................................................................ - 11 -

2.5 Reasons for Success ......................................................................................................... - 13 -

3 The Development of Huawei ....................................................................................................... - 15 -

3.1 The Global Telecom Equipment Industry ........................................................................ - 15 -

3.1.1 China’s Telecom Equipment Industry ................................................................... - 16 -

3.2 Overview of Huawei ........................................................................................................ - 17 -

3.3 Internationalization of Huawei ......................................................................................... - 19 -

3.3.1 1996-1999 Tentative Stage .................................................................................... - 19 -

3.3.2 1999-2001 Taking-off Stage .................................................................................. - 20 -

3.3.3 2001-2008 Mature Stage ....................................................................................... - 21 -

3.3.4 2008-Now Future development ............................................................................. - 23 -

3.3.5 Future Strategy and Development ........................................................................ - 25 -

3.3.6 To sum up .............................................................................................................. - 28 -

4 Model of International Road ....................................................................................................... - 30 -

4.1 Strategic Alliances ........................................................................................................... - 30 -

4.2 Absorptive Capacity ......................................................................................................... - 31 -

4.3 Absorptive Capacity on National Level ........................................................................... - 32 -

5 PEST Analysis of Italian Market ................................................................................................. - 34 -

5.1 PEST Analysis Introduction............................................................................................. - 34 -

5.1.1 Compositions ......................................................................................................... - 34 -

5.1.2 Applicability of Factors ........................................................................................ - 35 -

5.2 Political Factor in Italy ..................................................................................................... - 36 -


VI

5.3 Economic Environment ................................................................................................... - 37 -

5.3.1 Individual Economic ............................................................................................. - 37 -

5.4 Social and Culture ............................................................................................................ - 39 -

5.5 Technological Environments ........................................................................................... - 39 -

5.6 Summary: The Development Status of Italian Telecommunications Market .................. - 40 -

6 The Overall Development of Italian Telecommunications Market ............................................. - 41 -

6.1 Fixed-Line Telecommunications Market ......................................................................... - 43 -

6.1.1 The Overall Situation ............................................................................................ - 43 -

6.1.2 Market Size ............................................................................................................ - 43 -

6.1.3 Market Freedoms .................................................................................................. - 44 -

6.1.4 Infrastructures ....................................................................................................... - 45 -

6.1.5 Market Competitions ............................................................................................. - 48 -

6.2 Internet Market................................................................................................................. - 50 -

6.2.1 General Status ....................................................................................................... - 50 -

6.2.2 Market Competition .............................................................................................. - 51 -

6.3 Broadband Markets .......................................................................................................... - 52 -

6.3.1 General Situation .................................................................................................. - 52 -


6.4 Mobile Telecommunication Market ................................................................................. - 56 -

6.4.1 Overall Situation ................................................................................................... - 56 -


6.4.3 3G Business ........................................................................................................... - 58 -

6.5 Main Telecom Equipment Manufacturers and Operator .................................................. - 58 -

6.5.1 The Major Telecommunications Equipment Manufacturers ................................. - 58 -

6.5.2 Main Telecom Operator ........................................................................................ - 62 -

6.6 Italy Telecom Market Prospect ........................................................................................ - 68 -

6.6.1 Intense Compete in the Broadband Audio Market ................................................ - 68 -

6.6.2 Triple-Play Services Increased Competition, Multi-Media Became Spotlight ..... - 69 -

6.6.3 M&A in the Same Industry continually Drive Market Development .................... - 69 -

6.6.4 Rapid and Sustained Growth in Mobile Telecommunications Market .................. - 69 -

7 SWOT Analyses for Huawei ........................................................................................................ - 71 -

7.1 Strength analysis .............................................................................................................. - 71 -

7.1.1 Business Ranking .................................................................................................. - 72 -

7.1.2 Strong Marketing Capability ................................................................................ - 72 -

7.1.3 Products and Technologies ................................................................................... - 73 -

7.1.4 Sensible Decisions................................................................................................. - 73 -

7.1.5 Localization ........................................................................................................... - 74 -

7.1.6 Cultivate Culture and Standardization ................................................................. - 74 -

7.2 Weakness Analysis .......................................................................................................... - 75 -

7.2.1 The Individual’s Leadership Affected is Serious ................................................... - 75 -

7.2.2 Capital Equity Issues are Complex ....................................................................... - 75 -

7.2.3 Without Suitable Successor ................................................................................... - 75 -

7.2.4 Low-Key Style ....................................................................................................... - 76 -

7.2.5 Mattress Culture and Wolf Culture ....................................................................... - 76 -


VII

7.3 Opportunity Analysis ....................................................................................................... - 76 -

7.3.1 Terminal Market ................................................................................................... - 76 -

7.3.2 International Market Environments ...................................................................... - 77 -

7.3.3 Domestic Market Environments ............................................................................ - 77 -

7.4 Threat Analysis ................................................................................................................ - 77 -

7.5 Advises ............................................................................................................................. - 79 -

7.5.1 Enterprise Management ........................................................................................ - 79 -

7.5.2 Generation Mechanism for Leaders...................................................................... - 79 -

7.5.3 Human Resource Management ............................................................................. - 80 -

7.5.4 Operation and Management Tools........................................................................ - 80 -

8 Case study of Internationalization Strategy of Huawei in Italy .................................................. - 82 -

8.1 Advantages of Huawei ..................................................................................................... - 83 -

8.2 Location Advantages in Italy ................................................................................. - 87 -

8.2.1 Distinctive Logic of Location Choice .................................................................... - 87 -

8.2.2 Why Choose Italy .................................................................................................. - 88 -

8.3 The Development of Huawei in Italy ............................................................................... - 90 -

9 Conclusions and Future work ..................................................................................................... - 91 -

9.1 Conclusions ...................................................................................................................... - 91 -

9.2 Future Studies .................................................................................................................. - 92 -

Reference ....................................................................................................................................... - 94 -

Electronic Sources ......................................................................................................................... - 95 -

Interviews: ..................................................................................................................................... - 96 -


- 1 -

1 Introduction of the Internationalization Road of Chinese Company

In recent years, Chinese enterprises frequently appeared in the international market as "big

buyers". According to Research of State Council Development Research Center, China's

largest 500 companies, about 70% of them have various forms of overseas business

activities before 20081. Some companies with higher degree of international, such as

Lenovo, TCL and Huawei, their overseas sales were more than domestic. Before 2004,

foreign acquisitions of Chinese enterprises, there are none single transaction with amount

over 1 billion U.S. dollars takeover. From 2004, Chinese enterprises are frequent appearing

overseas Mergers and Acquisitions (M&A).

Research scholars of transnational investment, Dunning, believes that every economy has

to go through five stages2. In the first and second stage, the scale of outflow for foreign

investment is negligible. When the economy enters the third stage, in another word, after

per capita GDP reached $2,000 to $4,750, during this period, Foreign Direct Investment

(FDI) would slow down and oversea FDI would accelerate, at the same time, companies

are investing abroad and going to world. Currently, Chinese enterprises to expand overseas,

the majority companies concentrate in the eastern areas of economy development, where

per capital GDP has entered the third phase which defined by Dunning. In other word, the

internationalization of Chinese enterprises has been opening a new chapter.

Overall, the internationalization degree of Chinese corporations is still very low. Currently,

there are only about 6,000 enterprises investing abroad in the mainland of China, only

accounting for 0.4% of the total number of global multinational corporations, investment

accounted for only 0.55% of the world.

1.1 An Internationalization Course of Chinese Enterprises

Since the reform and opening up from 1978, a large number of state-owned enterprises

have gone out of China, the typical representative is the traditional trading companies, such

1 China Daily (English, 2009-05-08): “International Big Buyer”.

http://www.chinadaily.com.cn/chinagate/doc/2009-05/08/content_501632.htm. 2 International Economics J. of the Economics of Business, Vol. 8, No. 2


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as COSCO, China Air, which business type has already been including the characteristics

of international. Window Company in oversea is also an early form of internationalization

which was rising in the early stage of reforming and opening up. With the rising of market

economy, the internationalization of Chinese enterprises has gradually diversified from one

form to the following pattern.

1.1.1 Market Seeking - Opening International Market for Meeting Demand

With the deepening of reform and opening up, China has gradually become manufacturing

center of the world, and the internationalization of foreign trade has gradually emerged.

However, the export trade is still the mainstream way of going out. Many industries, such

as stationery, have accounted for a considerable market share in the overseas market.

In addition to the export trade, many Chinese companies are starting to establish their own

sales channels in overseas marketing. According to statistics of Ministry of Commerce, this

is the most important mode for overseas investment of Chinese enterprises. Fuyao Glass,

after it entered into the North American market, was assumed to build an automotive glass

factory. However, it found that it was impossible to bear the cost of labor, which

immediately stepped backward for the distribution center, only focusing on market

development and after-sales service. Currently, there are more than 100 companies which

want to establish their own sales channel, and most of them have obtained overseas sales

channels by ways of Original Equipment Manufacturer (OEM).

The M&A is another way to obtain overseas marketing channels. In 1998, the Universal

Group acquired Scheler, the U.S. Company’s brand, patents, equipment and market

networks and other major assets, directly accessing to the sales channels in U.S. market

and local brands. With the sales network channels, some Chinese enterprises establish

production bases in overseas: such as the construction assembly plants of Great Wall

Motor vehicle in Russia, which is the first wholly owned automobile companies

establishing an automobile manufacturer in the oversea, the goal is focusing on Eastern

Europe including Russia; Haier achieved the design, production and marketing Trinity in

U.S. and Europe.


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Chinese enterprises had also suffered defeat during the process of internationalization. In

2001, Ni Runfeng, Chief Executive Officer (CEO) of Chang Hong TV, wanted to realize

overseas strategy to open U.S. market, chose APEX, which was a home appliance

distributor with an influence in U.S. market, as an overseas sales channel. Starting from

July 2001, Chang Hong TV making its way to U.S., but until 2004, APEX was exposed to

4 billion accounts receivable which owed by Chang Hong.

1.1.2 Search Technology - Enhancing Core Competition

In the traditional company, they often acquire advanced technology through the

internationalization, so as to enhance their competitiveness ability, such as automobile,

electrical, mechanical manufacturing, and etc. SAIC Group, which acquired South Korea's

Ssangyong Motor and British Rover, was to get Research and Development (R&D)

capabilities and technology platform. In addition, the technology industries with quickly

updating, such as electronics, information companies, are often access to advanced

technology in order to gain time by the ways of overseas acquisitions. In 2003, BOE had

acquired Hyundai Electronics LCD sector, and entered into TFT-LCD field. After

accessing to technology, the BOE were transferred technology and business to the

domestic, constructing a production line, and expansion TFT-LCD manufacturers in the

global market by controlling the downstream, becoming the second-largest monitor

manufacturer's controlling shareholder in the world.

However, the risks of cross-border M&A are often difficult to measure for the purpose of

seeking technology. In 2001, Holley acquired Philips Mobile R&D to enter into the Code

division multiple access (CDMA) areas. At that time, the acquisition let Holley have 600

CDMA core technology patents, which cut into the core areas of the mobile phone

business. However, between Philips and Qualcomm intellectual property, this made Holley

can’t share CDMA patents from Qualcomm. January 2005, Holley signed a cooperation

agreement in Time Division-Synchronous Code Division Multiple Access (TD-SCDMA)

terminals with Datang. This mean that Holley's gave up the core technology to Qualcomm

chips, began to look for living space in the market. Based on international M&A to


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enhance technology, the company not only has to be familiar in the industry, but also need

to understand the international legal rules; otherwise, it is easily to fall into a dilemma.

In addition to M&A, Chinese companies have gone further, in currently, to establish R&D

institutions abroad. Located in Xiaoshan of Zhejiang JiaLi Technology, in 2003, began to

internationalization, established a Jiali R&D center in Germany, located to Ruhr in

Germany, and developed a series of world-class technology. For other company, it is

familiar for ZTE, Haier, Huawei, Lenovo and other initiatives to establish overseas R&D

institutions.

1.1.3 Finding Resources - Obtaining Optimal Configuration

With years’ extensive growth of Chinese economy, energy companies are often difficult to

meet for the resources required through trade. Then, they only have to get resources

through international M&A. Sinopec, CNPC, CNOOC and so on, every year, there are

some overseas acquisitions occurred in the oil and gas assets. In recent years, the big three

iron ore resources, which control nearly 80% resource all around the world, through

Price-Fixing Cartel wild speculations for iron ore, this triggered iron and steel enterprises

in China to international merger for controlling the upstream industry.

Capital is also a resource. To seek funding at the international level is a broader

international pattern. In 90s of last century, a group of state-owned enterprises issued H

shares in Hong Kong Exchange for international capital. Today, including the four large

state-owned commercial banks, as well as Sina, Baidu and other emerging industries, they

accessed resources to list overseas through the global configuration, from the initial listing

locations in New York Stock Exchange and Hong Kong Stock Exchange, extending to the

Hong Kong GEM, NASDAQ, and Singapore Exchange, and so on. The significance of

enterprises listed overseas is far beyond international capital, but also management and

cultural integration. Chinese companies listed overseas have to meet local demand for

corporate governance and securities regulatory requirements, which is turned into

preparing for the international business. However, the cost of this process is often very

large. It is estimated that the cost of direct inputs reach to 10 billion Yuan for Chinese 46


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companies which listed on the U.S. Exchange against to the implementation of new SEC

Sarbanes-Oxley Act. These costs have to be considering before deciding the

internationalization of capital.

In overall, we still have low degree of internationalization. Currently, there are only about

6,000 enterprises in China having business in oversea market, only accounting for 0.4% of

the total global multinational corporations, investment only accounted for 0.55% of the

world. Oversea FDI is still focusing on small and medium enterprises projects and the

average investment about 100 million U.S. dollars, much lower than developed countries

which average are about 600 million U.S. dollars. Regional distribution is not balanced,

Hong Kong and Macao is still a major international process for mainland enterprises. In

addition, the overall performance for the international is not ideal, only 55% of them can

be profitable.

1.2 Four New Trends

Based on past average annual growth rate around 25% for predicting, in the next five years,

China's oversea foreign investment will reach 60 billion U.S. dollars, the rate of foreign

investment accounted will continue to increase in private enterprises. In this period, the

internationalization of Chinese enterprises faces more complex background, and show a lot

of new trends.

1.2.1 Government Deregulation

Chinese enterprises internationalization, the main obstacles come from the policy,

especially foreign exchange controls and investment license, which is more complicated

and time-consuming. In 2000, the central government has promoted internationalization to

national strategic level. Since then, the policy gradually becomes loose. In October 2002,

foreign exchange started management reform; to the end of 2004, policies had been

introduced which provided credit support to key projects for oversea investment. In July of

same year, purchase quota restrictions have been removed for overseas investment foreign

exchange. With deregulation and policy support, the pace of internationalization of

Chinese enterprises will be presented to the trend of accelerating.


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1.2.2 Invisible Barriers

Over the years, the anti-dumping from overseas markets, the high technical standards and

health standards, as well as intellectual property litigation, and so on, the obstruction which

increases the process of Chinese enterprises internationalization has become unavoidable

barriers. McKinsey's data shows that 67% of China's overseas acquisitions are

unsuccessful. Almost every Chinese enterprise overseas M&A will be encountered

political censure in the host country.

International means that the interests’ conflict, with the face of barriers, Chinese

enterprises should learn to fight in the international business because complaining are

unhelpful. To face increasingly severe international trade patterns, domestic enterprises

gradually shift from passive bearing to actively respond. Facing obstacles in the path of

internationalization, Chinese companies are gradually formed a team to fight more than

cope alone.

1.2.3 Background of RMB Appreciation

Although the Government's remarks has always been cautious on RMB appreciation,

during the past year, the rate of RMB against the dollar has continuously rising which

become an indisputable fact. RMB appreciation will have a negative impact on exporters,

but there is another round of significance for Chinese Overseas M&A. Taking Japan as an

example, their companies had set off a wave of overseas M&A after the currency

appreciation. In 1985, Japan signed the Plaza Agreement3, then Yen began to appreciate,

which induce to buy foreign assets become much cheaper with Yen. From 1985 to 1990,

there are more than 21 overseas acquisitions which total amount are over 50 billion Yen.

The peak appeared in 1990, there are 45 international mergers and acquisitions during that

year.

Currently, RMB appreciation is still very small and not sufficient to form a direct drive for

cross-border mergers and acquisitions of Chinese enterprises. In the long run, the trend of

3 Plaza Agreement was an agreement between the governments of France, West Germany, Japan, the United States, and

the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by

intervening in currency markets.


- 7 -

continues appreciation of RMB will be difficult to change, which predicted that overseas

investment of Chinese companies and M&A would be activity ascendant.

1.2.4 Firstly, Bringing In, and then, Going Out

More and more overseas capitals enter into China, hunting Chinese enterprises as

acquisition targets. This seemingly reversed the process of internationalization; in another

aspect, this provides a new path of internationalization for Chinese enterprises.

Chinese enterprises want to succeed in the world, not only need to consider these factors,

but also enhance the ability level of management, as well as win the respect of the host

country. Just only like this, the road to internationalization will appear a prosperous future.


- 8 -

2 Economic History of People’s Republic of China

2.1 1949-1978 Prior to Reforming and Opening up

When P.R. China was found in 1949, the fundamental long-term goal of leaders was

transforming China into a modern, powerful, socialist country4. In the economic terms,

these objectives meant industrialization, improvement of living standards, narrowing of

income differences, and production of modern military equipment. As the years passed, the

leaders continued to subscribe to these goals. But the economic policies formulated to

achieve them were dramatically altered on several occasions in response to major changes

in the economy, internal politics, and international political and economic developments.

Prior to 1979, China maintained a command economy. A large share of the country’s

economic output was directly controlled by the state, which set production goals,

controlled prices, and allocated resources throughout most of the economy. During the

1950s, all of China’s individual household farms were collectivized into large communes.

To support rapid industrialization, the central government undertook large-scale

investments in physical and human capital during the 1960s and 1970s. As a result, by

1978, nearly three fourths of industrial production was produced by state owned

enterprises according to centrally planned output targets. Private enterprises and foreign

invested firms were nearly non-existent. A central goal of the Chinese government was to

make Chinese economy relatively self-sufficient. Foreign trade was generally limited to

obtaining only those goods that could not be made or obtained in China.

Government policies kept the Chinese economy relatively stagnant and inefficient, mainly

because there were few profit incentives for firms and farmers; competition was virtually

nonexistent, and price and production controls caused widespread distortions in the

economy. Chinese living standards were substantially lower than those of many other

developing countries. The Chinese government hoped that gradual reform would

significantly increase economic growth and raise living standards.

4 Economic history of modern China: http://en.wikipedia.org/wiki/Economic_history_of_Modern_China


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2.2 1978 - 2005 Post Reforming and Opening up

Economic reforms began after Deng Xiaoping and his reformist allies ousted the Gang of

Four Maoist faction. By the time, Deng took power; there was widespread support among

the elite for economic reforms5. As a leader, Deng's policies faced opposition from party

conservatives but were extremely successful in increasing the country's wealth.

Beginning in 1979, China launched several economic reforms. The central government

initiated price and ownership incentives for farmers, which enabled them to sell a portion

of their crops on the free market. In addition, the government established four special

economic zones along the coast for the purpose of attracting foreign investment, boosting

exports, and importing high technology products into China. Additional reforms, which

followed in stages, sought to decentralize economic policy making in several sectors,

especially in trade. Economic control of various enterprises was given to provincial and

local governments, which were generally allowed to operate and compete on free market

principles, rather than under the direction and guidance of state planning. Additional,

coastal regions and cities were designated as open cities and development zones, which

allowed them to experiment with free market reforms and to offer tax and trade incentives

to attract foreign investment. In addition, state price controls on a wide range of products

were gradually eliminated.

Since the introduction of economic reforms, Chinese economy has grown substantially

faster than during the pre-reform period (see Table 2.1)6. In January 2006, China made

major revisions to its GDP data for 1993-2004. The revisions indicated that, based on new

estimates of growth in the service sector, the size of China’s economy and its GDP growth

were significantly higher than previously estimated. For example, real GDP growth in

2004 had been originally measured at 9.5%, but the revised figure puts this rate at 10.1%.

Overall, the size of the economy in 2004 was estimated to be nearly 17% higher than

previously thought. Based on these revisions, Chinese average annual real GDP is

estimated to have grown by 9.6% between 1979 and 2005; it grew at 9.8% in 2005.

5 China's Great Transformation 6 Source: Official Chinese government data.


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Table 2.1 Average Annual Real GDP Growth Rate

China’s Average Annual Real GDP Growth Rates, 1949-2005

Time Period Average Annual Growth (%)

1949-1978 (Pre-reform) 5.3

1979-2005 (Post-reform) 9.6

1990 3.8

1991 9.3

1992 14.2

1993 14.0

1994 13.1

1995 10.9

1996 10.0

1997 9.3

1998 7.8

1999 7.6

2000 8.4

2001 8.3

2002 9.1

2003 10.0

2004 10.1

2005 9.8

Source: Development Research of State Council, PRC 2006-12-16

2.3 2005 – Present New Economy Police

The conservative administration began to reverse many of Deng Xiaoping's reforms in

2005. Observers note that the government adopted more egalitarian and populist policies. It

increased subsidies and control over the health care sector, halted privatization, and

adopted a loose monetary policy, which lead to the formation of a U.S. style property

bubble in which property prices tripled. The privileged state sector was the primary

recipient of government investment, which under the new administration, promoted the

rise of large "national champions" which could compete with large foreign corporations.

2.4 Economic Performance since Reform

Chinese economic growth since the reform has exceeded the East Asian Tigers.

Economists estimate China's GDP growth from 1979 to 2005 at 9.6% a year which has

risen ten-fold comparing the period before reforms For the period 1978-2005, Chinese

GDP per capital increased from 2.7% to 15.7% of US GDP per capital, and from 53.7% to


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188.5% of Indian GDP per capital. Per-capital incomes grew at 6.6% a year. Some scholars

believed that Chinese economic growth has been understated, due to large sectors of the

economy not being counted7.

Figure 2.1 People's Republic of China's GDP between Years 1952 to 20058

Source: Official Chinese Government Data.

2.4.1 Impact on World Growth

Twenty-five years of reform have transformed China from a centrally planned and closed

system to a predominantly market-driven and open economy. As a consequence, China is

widely seen as an engine of world and regional growth. Surges in Chinese demand account

for 50%, 44% and 66% of export growth of Hong Kong, Japan and Taiwan respectively,

and Chinese trade deficit with the rest of East Asia helped to revive the economies of Japan

and Southeast Asia. Asian leaders view China's economic growth as an engine of growth

for all Asia.

2.4.2 Reforms in Specific Sectors

1) Agriculture

Chinese agricultural performance was extremely poor and food shortages were common

during the pre-reform period,. After Deng Xiaoping implemented the household

responsibility system, agricultural output increased by 8.2% a year, compared with 2.7% in

7 China has socialist market economy in place (People's Daily Online, 2005) 8 Source: Official Chinese government data.


- 12 -

the pre-reform period. Food prices fell nearly 50%, while agricultural incomes rose9.

2) Industry

Industry was largely stagnant and the socialist system presented few incentives for

improvements in quality and productivity in the pre-reform period. In the early 1980s,

productivity increased greatly with the introduction of the dual price system and greater

autonomy for enterprise managers. By the 1990s, large-scale privatizations reduced the

market share of both the Township and Village Enterprises and state-owned enterprises

and increased the private sector's market share. The state sector's share of industrial output

dropped from 81% in 1980 to 15% in 2005. Foreign capital controls much of Chinese

industry and plays an important role.

China is now the world's biggest producer of concrete, steel, ships and textiles, and has the

world's largest automobile market. The increase in production is largely the result of the

removal of barriers to entry and increased competition; the number of industrial firms rose

from 377,300 in 1980 to nearly 8 million in 1990 and 1996; there are almost 1.33 million

manufacturing firms with annual sales above RMB 5 million in 2004. Compared to other

East Asian industrial growth spurts, China's industrial performance exceeded Japan's but

remained behind South Korea and Taiwan's economies.

3) Trading and Foreign Investment

Throughout the reform period, the government reduced tariffs and other trade barriers, with

the overall tariff rate falling from 56% to 15%. By 2001, less than 40% of imports were

subject to tariffs and only 9% of import was subject to licensing and import quotas. When

China joined the WTO, it agreed to considerably harsher conditions than other developing

countries. Trade has increased from under 10% of GDP to 64% of GDP over the same

period. China is considered the most open large country; by 2005, China’s average

statutory tariff on industrial products was 8.9%. For Argentina, Brazil, India, and Indonesia,

the respective percentage figures are 30.9%, 27.0%, 32.4%, and 36.9%10

.

Foreign investment was also liberalized upon Deng's ascension. In the early 1980s, China

9 http://faostat.fao.org/faostat/help-copyright/copyright-e.htm (last updated 4th April 2005) 10 30th September 2007 from http://www.imfstatistics.org/DOT


- 13 -

created Special Economic Zones (SEZs) to attract foreign capital by exempting them from

taxes and regulations. This experiment was successful and SEZs were expanded to cover

the whole Chinese coast.

4) Services

After China joined WTO, the service sector was considerably liberalized and foreign

investment was allowed. Restrictions on retail, whole sale and distribution were ended.

Banking, financial services, insurance and telecommunications were also opened up to

foreign investment.

5) Government Finances

Government was funded by profits from state-owned enterprises in the pre-reform era. As

the state sector fell in importance and profitability, the government relied on a confused

system of inventory taxes. The tax system was reformed in 1994 with the Value Added

Tax (VAT) becoming the main income source, accounting for half of government revenue.

The 1994 reform also increased the central government's share of revenues, increasing it to

9% of GDP11

.

Figure 2.2 Country Foreign Exchange Reserves minus External

Source: 2010 data, CIA Fact book

2.5 Reasons for Success

Scholars have proposed a number of theories to explain the success of China's economic

11 Data from CIA Fact book


- 14 -

reforms in the transition from a planned economy to a socialist market economy12

. One

notable theory is that decentralization of state authority allowed local leaders to experiment

with various ways to privatize the state sector and energize the economy. Another theory is

that officials presiding over areas of high economic growth were more likely to be

promoted for local and provincial governments in China were hungry for investment and

competed to reduce regulations and barriers to investment to boost economic growth. A

third explanation believes that the successes of the reformists are attributable to Deng's

cultivation of his own followers in the government. Successfully used export-led growth

strategy was another reason for China’s success13

. China also learned to avoid the planned

economic fate in Russia which resulted in the rise of powerful oligarchs, corruption and

loss of state revenue which exacerbated economic disparity 14

.

With China’s rapid development, many Chinese firms have already been the leading

players in the international market. Chinese multinationals could no longer be regarded as

apprentices on the international stage; they have already been investing in the developed

countries to obtain intellectual property and to learn from joint venture partners.

Therefore in this thesis, we seek to identify analyze how Chinese firms go to global. By

taking Huawei Technologies Co. Ltd as a case study, we try to find out the strategies that

Chinese firms used for internationalization.

12 Calhoun, Craig: Wasserstrom, Jeffrey N. (2003). "The Cultural Revolution and the Democracy Movement of 1989:

Complexity in Historical Connections". In Law. Kam-yee. The Chinese cultural revolution reconsidered: beyond purge

and holocaust. Palgrave Macmillan. P.247 ISBN 9780333738351 13 Sharma China's Economic Transformation, Global Dialogue 2007 Jan 1:9(1/2): 29-38. In: ABI/INFORM Global.

http://www.proquest.com/; Document ID: 1929024531 14 Remnick, David. 1997. Can Russia change? Foreign Affairs 76, no. 1, (January 1): 35-49. http://www.proquest.com/

(accessed October 28, 2010).


- 15 -

3 The Development of Huawei

3.1 The Global Telecom Equipment Industry

The global telecom equipment industry had gone through a series changes in the past few

decades. In the 1960s and 1970s, network equipment suppliers were few and were

categorized by the types of products, primarily through in-house development.

Manufacturing was largely decentralized as suppliers operated independent subsidiaries to

serve different countries and regional markets around the world. With the introduction of

digital technology in the 1980s, product lines proliferated and country-specific operations

were integrated into single, global organizations. Manufacturing tended to become more

centralized to increase production volumes and decrease unit costs. By the 1990s, the pace

of technological advances, commercialization of the internet, and privatization of telecom

services providers worldwide had created an unprecedented level of competition in the

industry. Telecom equipment suppliers took on the role of broad-based system integrators,

building extensive product lines through third-party contracts, OEM and other partnership

arrangements15

. Service providers used acquisition-based strategies to keep pace with

consumer demand and drove the market for global networking products to US$50 billion

by the end of 2000, up from US$15 billion in 199516

.

Telecommunications Industry underwent a down turn from 2001 and has lasted for almost

3 to 4 continuous years. Most Technologies have high sunk costs. The result of the downturn

was mega-mergers in Telcos, and they dramatically changed the telecom industry landscape.

The ripple effects were passed on to Telecom Equipment Providers. However, technological

advances in the internet boom had persisted up to 2006, and the technology choices and

service requirements of service providers such as AT&T, AOL and PCCW were more

diverse than ever.

15 Nissen, K. (2005) “New World Telecom: A Survival Guide for Global Equipment Suppliers”, Business

Communications Review, September. 16 McFarlan, F.W., Chen, G. and Kiron, D. (2001) “Cisco China”. Harvard Business School Case, Harvard Business

School


- 16 -

Figure 3.1 Total Revenue of Huawei in 2009

Source: Huawei Revenue Report of 2009

Telecom equipment suppliers could be broadly divided into five sub-sectors and global

players tended to align themselves with two or more of these sub-sectors: optical

transmission systems, switch systems, access systems, data communications and mobile

communications.

Table 3.1 Leading Firms in the Global Telecom Equipment Industry, 2009

Sub-Sectors Leading Firms

Optical Transmission Systems Alcatel-Lucent

Switch Systems Huawei-3Com, Cisco

Access Systems DSL: Alcatel-Lucent, Nokia-Siemens

Cable Modem: Motorola

Data Communications Routers: Cisco, Huawei

Ethernet Switches: Cisco, Ericsson

Mobile Communications Ericsson, Motorola, Nokia-Siemens

Source: Department of Urban Studies and Planning, MIT, November 11th 2009.

3.1.1 China’s Telecom Equipment Industry

In the 1980s, China’s telecom industry achieved substantial double-digit growth, and by

the end of 2002, China surpassed the US to become the largest telecom market in the world.

Overall, China’s telecom industry recorded US$112 billion in business transactions in

2004, with an annual growth rate of 34.9%, 3.7 times China’s GDP growth rate of 9.5%17

.

Phone subscriptions had increased to 390 million mobile phone users and 348 million

17 “Annual Report, China’s Post and Telecommunications Industry 2005”, Ministry of Information Industry, China

Internet Access

Temination

3% Voice Circuit

Switches

5%

Teledatacom

Servers

6%

Data Switches &

outers

7%Transport

Equipment

8%

Wireless

Infrastructure

29%

Others

42%

Total Revenue 2009 = US$ 18.1 Billion


- 17 -

fixed-line users by October 200518

. As of June 2010, there were a total of 1.1 billion

phone users in China, of which 306 million were fixed-line telephone users, and 796

million were mobile phone users.

Prior to its World Trade Organization (WTO) accession, China’s policy protected the

national emerging telecom industry and only foreign equipment vendors were allowed to

invest in China. At that time, most foreign firms entered the market by setting up joint

ventures with local Chinese companies, usually involving equity investments. The

leveraged their Chinese partners’ local market knowledge and distribution networks in

order to reduce investment risk19

. American companies accounted for 75% of the telecom

equipment market in China in 2001, within which Cisco accounted for 62% and 26% of the

routers and switching markets respectively20

. As a result of China’s entry to the WTO in

2001, a new regulatory regime is now being established and foreign operators are gradually

being allowed to access the market.

While the entry of these multinational telecom enterprises had facilitated the building of

China’s telecom infrastructure, they had also contributed to the growth of domestic

manufacturers in China. Domestic Chinese vendors started to emerge, most notably the

four companies, Huawei, ZTE, Digital Terrestrial Television (DTT) and Great Dragon

Telecommunication (GDT), collectively known as “Great China”21

. According to the

CRC-Pinnacle market research firm, domestic Chinese equipment manufactures occupied a

combined 32% of the Chinese market by 2005, of which Huawei Technologies became the

market leader with 13.5% market share.

3.2 Overview of Huawei

Huawei Technologies Corporation (Huawei) was established by Ren zhenfei in 1988 in

Shenzhen. It is a private enterprise which specializes in research and development (R&D),

production and marketing of communications equipment, and providing customized

18 China Today (2005) “China to Have over 440 Million Mobile Phone Users by End of Next Year”

http://www.chinatoday.com/ 19 “China’s Telecommunications Industry in 2004”, Asia Case Research Center Case, University of Hong Kong 20 Ibid. 21 When the first characters of the four companies were arranged in reverse order, the phrase “Great China” was created.


- 18 -

network services for telecom carrier. Today, Huawei is the largest networking and

telecommunications equipment supplier in China and developed into a high-tech

Multinational Enterprise (MNE) which provides telecommunications networks products,

services and solutions for 45 of the world’s top 50 operators.22

By the end of 2007, Huawei has set up 8 regional headquarters worldwide, including Asia

Pacific Headquarters in Malaysia, East Pacific Headquarters in China, Commonwealth of

Independent States Headquarters in Russia, Latin America Headquarters in Brazil, Middle

East & North Africa Headquarters in Egypt, South Africa Headquarters in South Africa,

Europe Headquarters in United Kingdom, and North America Headquarters in the U.S.

There are more than 100 branch offices, 12 R&D centers and 28 training centers23

around

the world (as shown in Figure 3.2).

Figure 3.2 Training Centers around the World

Source: http://www.huawei.com/trainingcenter

According to Huawei 2007 official released report, Huawei achieved US$12.6 billion

revenue, and US$16 billion as total contract sales, respectively increasing by 47.7% and

45.5% over 2006. The overseas contract sales increased significantly by 60.4% in 2007

compare to 2006. It reached US$11.5 billion, accounting for 72% of the total contract

sales.24

22 Source: Huawei Win-Win Interview (2009-08-28) and www.huawei.com 23 Ibid 24 Gan, Ross (April, 2008):”2008 Corporate Update”, Huawei Global Industry Analyst Summit, Huawei Technologies.


- 19 -

Figure 3.3: Total Contract Sales and Overseas Contract Sales25

Source: Huawei Annual Report 2004 and 2008 Corporate Update, Huawei Global Industry Analyst Submit.

3.3 Internationalization of Huawei

Huawei began to consider international expansion in 1996 in developing countries like

Russia and Africa, and it further entered European, America and Asian Pacific market after

2000. The internationalization strategy applied is to orient to technology R&D and to

compete internationally with price competitiveness and technologically value-added

products.

The internationalization process of Huawei can be divided into four stages:

Stage 1 (1996-1999) – Tentative Stage;

Stage 2 (1999-2001) – Take off Stage;

Stage 3 (2001-2008) – Mature Stage;

Stage 4 (2008 till now) – Future development.

3.3.1 1996-1999 Tentative Stage

At the initial stage of internationalization, Huawei’s market selection strategy is targeting

the markets that have weak telecommunication infrastructure but have great developing

25 Source: Huawei Annual Report 2004 and “2008 Corporate Update”, Huawei Global Industry Analyst Summit,

Huawei Technologies.

26703830

55828200

11000

16000

600 1100 23004800

7200

1150022.5%

28.7%

41.2%

58.5%

65.5%71.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2002 2003 2004 2005 2006 2007

Total Contract Sales Overseas Contract Sales

Total Contract Sales and Overseas Contract Sales (US$ in Million)


- 20 -

potentiality26

. Compared with developed countries, the developing countries have

relatively backward telecom technologies. Huawei is capable of adapting to the

development of the telecom industries in these countries and it can rely on low-cost

advantage to compete with its competitors in these markets. This is the reason why MNEs

from developing countries usually choose another developing country as their investment

host countries27

.

As a breakthrough, Huawei began its international business at Russia in 1996. In 1997,

Huawei formed joint venture (Beto-Huawei) with Umberto Konzern Russia, which is a

Russian telecommunications company. As a new player in international market, the

development of Huawei in Russian market is very hard at the first stage. After spending

four years on waiting and studying, in 2000, when Russian economy recovered, the sales in

Russian market became one of the main sources for Huawei’s overseas sales.

Furthermore, in 1998, Huawei went into Asian market for the first time through

international bidding. At the beginning, the overseas potential customers did not know

much about China telecom industry, thus, they had no confidence in Chinese high

technology products. Recognizing that company reputation is as important as technology,

Huawei started to focus on brand building in international marketing. On the other hand,

Huawei increased R&D investment on new technologies and improved R&D cooperation

with world top telecom enterprises.28

3.3.2 1999-2001 Taking-off Stage

Taking-off Stage was the fastest international expansion period for Huawei. In the late of

90’s, most oversea customer kept the impression that products made in China are low cost

and low quality. In order to change people’s attitude, Huawei launched a marketing

initiative called “New Silk Road” and participate in all kinds of international expositions.

Meanwhile, Huawei also invited overseas customers to its campus in Shenzhen. By doing

26 Wu D. and Zhao F. (2007): “Entry Modes For International Markets: Case Study Of Huawei, A Chinese Technology

Enterprise”, International Review of Business Research Papers, Vol.3 No.1.183 – 196 pp. 27 Wells, Louis T. (1983): “Third World Multinationals: The Rise of Foreign Investment from Developing Countries”,

Cambridge, Mass., MIT Press, 206 pp. 28 Source: Huawei Interview (2008-04-16) and “Milestones of Huawei”,

http://www.huawei.com/corporate_information/milestones.do.


- 21 -

this, customers can get a direct impression of China’s economic reform progress. In order

to capture opportunities, Huawei was busy working everywhere, from disease-ridden

Africa, war-tortured Iraq, post-tsunami Indonesia, to post-earthquake Algeria.

After several years efforts on investing and operating in Russia, South America and Africa,

Huawei gradually built up a good reputation and brand image. After 1999, Huawei

accelerated its steps and entered Southeast Asia (Thailand, Singapore, and Malaysia),

Middle East (Saudi Arabia, United Arab Emirates) and Africa (South Africa, Egypt) in

succession. Huawei sent out many of sales and service engineers from home country to

setup branches and service centers in these countries. During around two years, Huawei

established branch offices in over 40 countries. In 2001, the total contract sales achieved

about US$3.1 billion, with 12% of the international sales.29

3.3.3 2001-2008 Mature Stage

Huawei kicked off European operations in 2001. It was not until 2005 that Huawei was

awarded its first major contract by Telfort. After that, it took another 3 years to break into

the Tier 1 operator market and embark on the wide ranging business it has today in

Europe. Currently, Huawei is providing products and services to 45 of the top 50 telecom

operators, with 1 billion subscribers around the world.

29 Ibid


- 22 -

Figure 3.4 Cooperation Company with Huawei around the World

Source: http://www.huawei.com/maincooperationcompany

The strategies that Huawei applied to enter European market include franchising,

co-research, co-production (OEM) and Co-sales (help each other to sale products in each

own markets). For example, in 2004 Huawei signed a contract with Nokia-Siemens

Networks and invested US$100 million to form a joint venture for TD-SCDMA technology

development, marketing and manufacturing. In 2005, Huawei signed a Mutual Distribution

Agreement (MDA) with Marconi (UK) to sell each other products. Cooperation with

world-leading telecom operators like British Telecom (BT) and Vodafone means that the

gate to European mainstream market has been opened to Huawei. The top European

presses Reuters reported that Huawei had been rising rapidly and ranked among the

world-leading telecommunications equipment suppliers30

. By applying product reselling,

cooperation, joint ventures and setting up branch offices, Huawei successfully entered

European countries like Germany, France, Italy, Spain, United Kingdom, Sweden and

etc.31

In 2007, the company’s contract sales reached US$2.05 billion32

.

North America is the largest telecom market in the world. It is also the most difficult one

30 Young, Doug (2005-05-26): “Chinese Tech Giants Knock on Europe’s Gates”, Reuters, Paris,

http://www.reuters.com/article/ParisTech/idUSL2632418020050526 31 Source: Huawei Interview (2008-04-16) and “Milestones of Huawei”,

http://www.huawei.com/corporate_information/milestones.do. 32 Source: Huawei Interview (2008-04-16).


- 23 -

for Huawei to capture. In order to enter North America market, Huawei took the advantage

of R&D ability and the 3COM’s international market resource to set up joint venture:

Huawei-3COM with 3COM (U.S.), the main player in data communication market. In

2006, Huawei transferred total share of Huawei-3COM (H3C) to 3COM, so that H3C

became 3COM’s wholly-owned enterprises33

. At the end of 2007, Huawei jointly with

Bain Capital (U.S.) put forward acquisition proposal of 3COM (U.S.). However, the

proposal was rejected due to national security concerns34

.

In this stage, Huawei has successfully shifted international market target from developing

countries to developed countries. China-based cost-effective R&D is one of Huawei’s

competitive advantages of expanding abroad. Up to June 2005, Huawei Technologies has

established a total of 10 joint R&D labs with Texas Instruments, Motorola, IBM, Intel,

Agere Systems, Sun Microsystems, Altera, Qualcomm, Infineon and Microsoft.35

3.3.4 2008-Now Future development

After 20 years of growth, Huawei has grown into a leader in the telecommunications

industry. In May 2008, Huawei joined Optus to develop a mobile innovation center in

Sydney of Australia. The objective is to accelerate the adoption of high-speed mobile and

wireless broadband. The year after, Thomas Lee, the Vice Director of the Industry

Standards Department of Huawei, became one of the new members in the Worldwide

Interoperability for Microwave Access (WiMax) Forum. At the same year, Huawei won

the Green Mobile Award at the GSMA Mobile Awards. On July 9, 2010, according to U.S.

magazine Global Fortune 500, Huawei was present for the first time with the annual sales

of 21.8 billion U.S. dollars and net profit of 2.67 billion U.S. dollars.

How to maintain and continue developing becomes a new challenge for Huawei?

Continuous innovation based on customer demand

R&D Resources and Bold Investment

33 Source: “Milestones of Huawei”, http://www.huawei.com/corporate_information/milestones.do. 34 Weisman, Steven R. (2008-2-28): “U.S. Security Concerns Block China’s 3Com Deal”, New York Times,

http://www.nytimes.com/2008/02/21/business/worldbusiness/21invest.html?pagewanted=print. 35 Source: Huawei Interview (2008-04-16) and “Milestones of Huawei”,

http://www.huawei.com/corporate_information/milestones.do.


- 24 -

At the end of 1990s, China higher education institutions had increased enrollment.

These led to over 40 million well educated, high tech personnel were available for

high tech industry.

Huawei grasped this opportunity to absorb a lot of R&D resources. 48% of its

employees are engaged in R&D and it has set up 17 R&D centers worldwide and 22

joint innovation centers. In addition, 10% of Huawei's annual sales are invested in

R&D. Even during its start up period, Huawei invested a large portion of its tiny

profits in R&D. During the global economic crisis in 2009, Huawei still added USD 2

billion to its R&D.

R&D Achievements

Due to the investment of R&D, Huawei gained a lot of achievements on R&D. It

deployed the world's first commercial LTE network for TeliaSonera in Europe, with

innovative products such as distributed Node B, Single-RAN, and E5.

Additionally, Huawei is the top 2 company with global patent filings by World

Intellectual Property Organization (WIPO) in 2009 (more than 42,000 applications in

aggregate). Currently, Huawei has positioned among the "Most Innovative

Companies" globally and is ranked fifth behind Facebook, Amazon, Apple, and

Google. (Feb 2010) Furthermore, Huawei's optical transmission product won the

"2009 R&D 100 Award" from the well known U.S. R&D magazine. This award was

dubbed the "Innovative Oscar" in the high tech world.

These strong innovative capabilities helped Huawei to gain a total subsidy of 273

million RMB in 2009.

Now, Huawei is a pioneer in technological innovation in China which is the first

company to comprehensively introduce IP technologies into communication

technologies. In addition, Huawei is the first one to introduce all IP switching, all IP

transmission, and all IP access. It is the vendor with the most advanced technologies in

these fields. The application of all IP technology has significantly lowered the


- 25 -

equipment cost and reduced power consumption and equipment size.

Huawei once invested a lot in developing Global System for Mobile Communications

(GSM) equipment, but the market for GSM was not yet developed. Huawei invested in

Wideband Code Division Multiple Access (WCDMA) technologies when The 3rd

Generation (3G) technologies were mature. Thanks to all IP technologies, Huawei

achieved great success with 3G. When it was noticed that there was still great potential

for GSM and Huawei's Western rivals were mainly focused on 3G, Huawei shifted its

technological advantages from WCDMA to GSM and reaped huge benefits.

Cooperative and Standardization

Huawei established joint labs with leading players such as HP, Infineon, Intel,

Microsoft, Qualcomm, Sun Microsystems, and Texas Instruments.

Huawei vigorously protects its own innovations and respects for the rights of other

intellectual property holders. In 2009, Huawei paid US$200 million in license fees to

IPR holders.

The telecom industry is a highly standardized industry, where mainstream standards

account for 90% of the market share. By adopting a strategy of not having to "reinvent

the wheel" but stand on the shoulders of giants, Huawei has gradually moved from a

passive to an active position in global competition. Currently, Huawei is a member of

123 standardization organizations with more than 148 leadership positions.

Huawei has submitted over 18,000 technical proposals in international standardization

organizations, incorporated several hundred patents and technologies into mainstream

standards, and accumulated intellectual property rights required for participating in the

global telecom market.

3.3.5 Future Strategy and Development

Stick to Transformation to Build Internationalized Management and Operation System:

1) Continuous Transformation


- 26 -

Western companies enjoy many advantages: a legacy of dozens, even hundreds of years of

company development, as well as hundreds of years of economic development leading to a

favorable industrial environment in the West. In addition, these companies enjoy adequate

human resources, powerful social foundations, a strong business heritage, top class

technical expertise, an established R&D system, abundant capital, well known brands, an

established market position and customer base, a world class management system and

operation experience, comprehensive marketing, and a service network covering the

world's customers. Huawei, which persevered in the face of fierce competition, has come

to realize the importance of management.

In 1998, Huawei introduced leading practices from large Western companies, such as

Integrated Product Development (IPD), Integrated Supply Chain (ISC), Integrated Finance

System (IFS), Human Resources Management (HRM), and quality management.

Mr. Ren's stories about "cutting the feet to fit the shoes" and "wearing American shoes"

inspired Huawei's determination and its subsequent management transformation.

By cooperating with companies like IBM, Hay Group, PricewaterhouseCoopers (PwC),

and Fraunhofer-Gesellschaft (FhG) in order to better introduce western management

practices, Huawei strives to promote its process, organization, and IT management and to

establish a management system with a focus on creating customer values.

2) Up to the Requirements of Top-Tier Operators on their Major Partners

The world's top-tier operators audit their suppliers in the following 12 areas: corporate

strategy planning, internationalized operation, product technology and R&D management,

supply chain, technical service, quality management, end-to-end project management,

corporate social responsibility, environment protection and energy efficiency, and security

management.

Incumbent operators from Europe started to evaluate Huawei in 2003. After years of

stringent audits, they came to the conclusion that Huawei is fully qualified, has met

industry standards in many areas, and has satisfied the necessary requirements to be a


- 27 -

major supplier. Huawei has passed the extremely strict audits of many world-leading

telecom operators including BT, France Telecom (FT), Vodafone, T-Mobile, and Telecom

Italia (TI). At the same time, Huawei's management has satisfied the stringent

requirements of leading operators in Europe time and time again, and this fact supports our

development in European markets.

3) Huawei Sees Crisis as Opportunity to Expand

At about 12 midnight on January 2, Huawei employees who were still out holidaying

received a joyful e-mail from Chairman Sun Yafang. "Our company maintained stable

growth in 2008. Global sales reached $23.3 billion, up 46% year on year, and the

percentage of income from the international market exceeded 75% of the total," she told

company colleague people.

It is not difficult to understand Sun Yafang’s elation if one knows anything about the IT

industry situation in 2008. Sun Yafang used words like "complicated," "challenge," and

"struggle" to describe the year’s difficulties.

Huawei is on the list of the world’s 10 most influential companies according to December

17, 2008, issue of Business Weekly. The magazine pointed out that Huawei has become an

example of how to gain global influence.

Huawei’s sales income in 2007 was $16 billion, 72% of which came from overseas

markets. Since the beginning of 2008, the global financial crisis has added great

uncertainty to Huawei’s development mix, especially as overseas income has become very

important to the company, prompting speculation about Huawei’s funding.

Equipment suppliers usually get most of their accounts receivable during the third and

fourth quarter of a year. A Huawei insider reveals that management had originally

expected heavy fund pressure during the fourth quarter as some clients might not have

been able to pay on time due to the financial crisis, a situation that turned out not so bad as

they had feared.


- 28 -

The insider said top management had revealed at an internal meeting that accounts

receivable taken in the fourth quarter totaled $11 billion, meaning accounts receivable in

the first three quarters came to only 30% of the total.

After maintaining rapid growth for many years, the question is whether Huawei can

continue to grow in 2009 when the economic situation will be even tougher. CEO said in

the beginning of 2009: "The global economic situation may be very complicated in 2009,

but for us this is an opportunity as well as a challenge. Our global sales are expected to be

over $30 billion in 2009."

Huawei has told China Business News that the financial crisis was a challenge for all

equipment makers, and that, compared with other suppliers, Huawei and ZTE, with their

advantages in costs, would see more opportunities. "As operators all wish to cut investment,

they will certainly choose lower cost products."

According to the Huawei insider, a Chinese engineer’s salary was only 1/7 of that of a

foreign engineer. In a long-term contract with hotels, the room rent for its employee is only

100 Yuan to 200 Yuan per day, while the expense for an employee of a foreign company is

usually more than 1000 Yuan.

3.3.6 To sum up

Huawei’s threat to the international telecom equipment suppliers was not to be

overlooked36

. In early 2005, a survey report of 100 telecom operators worldwide ranked

Huawei eighth among wire line equipment suppliers, up from 18th

the previous years. In

addition, Huawei ranked fourth in service and support. The report called Huawei’s

ascendancy “astounding” as it surpassed several incumbent vendors in perceived market

leadership.

However, Huawei still faces an intense competition. Huawei’s track record was

disappointing in the U.S., just short of solid distribution networks to break into the

36 Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson, “Strategic management: competitiveness and

globalization: cases” 8th version, Cengage Learning,2009.


- 29 -

lucrative enterprise markets; the network of choice in the developed countries was still

Cisco. Huawei’s products appeared to be derived from those of other companies, either

through patent-mining or reverse engineering. To become a serious global contender,

Huawei would have to move beyond low-cost versions of Western gear. Its low-cost

strategy seemed increasingly untenable as its reliance on local service partners in foreign

markets would ultimately raise its cost of running the business. At the same time, foreign

companies were increasing their manufacturing base and R&D facilities in China and

would soon become equally competitive in terms of pricing.

Huawei’s connection to the Chinese army continued to cast a shadow around Huawei’s

image for some overseas customers. Although the company was trying to improve its

corporate image and increase transparency, questions of trust and reputation could

undermine its efforts to win contracts with governments and internments enterprises in the

long run. Facing so many thorny challenges, Huawei’s management had to draft a

sustainable global strategy.


- 30 -

4 Model of International Road

The central idea of national catching up is the technologic and economic convergence

between leading countries and followers (Abramotiz, 1986). Since 1960s, with the

empirical studies of catching up experience of the US, Japan, and South Korea, this theory

has been rapidly developed. Technology and innovation are central to the catching-up

process; latecomer firms have advantage to target progressive and dynamic industries.

Perez and Soete (1988) claim that latecomer firms have enough time and sufficient

productive capability as well as other resource endowment, especially human capital

relevant for new technologies, catching up can be achieved through “window of

opportunity”.

4.1 Strategic Alliances

According to alliance research (Yoshino and Rangan, 1995), we define strategic alliances

as agreements between two or more partners as a cooperative form towards a common goal

by sharing necessary resources as well as coordinating activities.

Besides the advantages that collaboration encompasses such as flexibility, commitment

reduction, and facilitating organizational learning etc (Mowery et al, 1992). Strategic

alliances have additionally advantages in offering opportunities.

Access market;

Accelerate the return on investment;

Share the cost 6 of investment such as R&D;

Spread risk;

Access resources such as complementary technology;

Create efficiencies through economies of scale and scope;

Co-operation competition.

Companies using strategic alliances might gain an early window on emerging opportunities.

They may want to commit to more fully in the future and obtain overall level of flexibility

by establishing a limited stake in a venture, while maintaining the flexibility to either


- 31 -

increase their commitment later or shift these resources to another opportunity.

4.2 Absorptive Capacity

Absorptive capacity (Cohen and Levinthal, 1990) is defined as a firm’s general ability to

value, assimilate, and commercialize new, external knowledge. They argue that a firm’s

absorptive capacity is developed cumulatively, path dependent, and based on prior

investments in its member’s absorptive capacity.

In the school of absorptive capacity, many scholars explored internal determinants of

absorptive capacity. They found that firms with high levels of absorptive capacity invested

more in their own R&D, utilized alliances, in-house expertise with relevant technologies,

and communications with alliance partners. Absorptive capacity of alliances partners are

related to learning process which is a function of the absorptive capacity of the dyad. The

importance of absorptive capacity will appear through different type of alliances in terms

of non-equity alliances, such as joint R&D, franchising, and licensing, and equity alliances,

such as joint venture. They propose that non-equity based exploration alliances are greater

interdependent than equity based exploitation between absorptive capacity and learning of

each partner.

Based on a historical analysis, technology catching up is an outcome of a process of

technology accumulation. A country’s potential for rapid growth is strong not when it is

backward without qualification, but rather when it is technologically backward than

socially advanced. In other words, absorptive capacity can be established only if sufficient

social capability has been built. In the dynamic economic evolution, the potential for

developing absorptive capacity at a basic level is not only associated with a country’s

endowment of high skilled labor but also closely related to the corresponding mechanism

of open communication. Therefore, we argue that an embedded catching up system is

developed within an individual organization-society pyramid, in which absorptive capacity

is built on social capability and catching up is generated when absorptive capacity and

social capacity are prepared.


- 32 -

4.3 Absorptive Capacity on National Level

To measure China’s national-level absorptive capacity, two indicators can be chosen. First

is the endowment of researchers and the other is the ratio of R&D investment over GDP.

According to the announcement from Organization for Economic Co-operation and

Development (OECD) in 2006, the number of researchers in China has increased over 77%

from 1995 to 2005, China has ranked the second worldwide with 926 000 researchers by

2005, just behind U.S. The following figure gives the comparison across OESO,

Netherlands, European Union Countries, and China on ratio of R&D investment over GDP.

In order to identify the main characteristics of China’s national absorptive capacity, the

source of R&D expenses and the allocated distribution of R&D fund are also considered.

From figure, we can see China’s investment in R&D over GDP was averagely above 1.05%

per year; by 2006, this ratio had approached to 1.5%. According to the report submitted by

National Development and Reform Commission to National People’s Congress, China is

aiming to rise spending on R&D up to 1.58% of GDP in 200937

. These two indicators

implicate that China’s absorptive capacity at national level has been tremendously

developed; measuring at a country level, the technology gap between China and European

developed countries is getting smaller.

Figure 4.1 R&D Expenditure Based on GDP

Source: Official Chinese Government Data

According to China Statistic yearbook of Science and Technology (2008), government has

37 Source: Official Chinese government data.


- 33 -

not been a major source of R&D fund. From figure 4.2 we can see in 2007, only 24.7% of

R&D fund was from government; whereas 69.1% was from enterprise and 4.6% from

banks, which is comparable with that in 2000, in which the ratio is 32.4%, 34.9%, and 8.8%

respectively. A report from Economist on Dec. 20, 2008 said that China is now close to

surpassing Japan in total research spending; and corporate R&D in China has soared 23%

comparing with 1-2% between 2001 and 2006 in America and Europe. The changes in the

source of R&D investment imply that Chinese enterprises have intentionally started to

build up absorptive capacity.

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2000 2007 Difference

32.40%

24.70%

-7.70%

34.90%

69.10%

34.20%

8.80%4.60% -4.20%

Government Enterprises Banks

Figure 4.2 The Funding Source of R&D Investment

Source: China Statistic yearbook of Science and Technology (2008)

With respect to the distribution of R&D expenditure, the data from China Statistic

Yearbook of Science and Technology (2009) reflects that 71% of R&D funds were

allocated to enterprises and 18.9% to domestic research institutes and universities. Since

public research institutes & universities in China are closely technological collaborating

with enterprises, it is sensible that part of R&D investment by enterprises was spent in the

university industry collaborative R&D projects.


- 34 -

5 PEST Analysis of Italian Market

5.1 PEST Analysis Introduction

PEST analysis stands for "Political, Economic, Social, and Technological analysis" and

describes a framework of macro-environmental factors used in the environmental scanning

component of strategic management. It is a part of the external analysis when conducting a

strategic analysis or doing market research, and gives an overview of the different

macro-environmental factors that the company has to take into consideration. It is a useful

strategic tool for understanding market growth or decline, business position, potential and

direction for operations. The growing importance of environmental or ecological factors in

the first decade of the 21st century have given rise to green business and encouraged

widespread use of an updated version of the PEST framework.

Figure 5.1 Factors in PEST Analysis

5.1.1 Compositions

Political factors are how and what degree a government intervenes in the economy.

Specifically, political factors include areas such as tax policy, labor law, environmental

law, trade restrictions, tariffs, and political stability. Political factors may also include


- 35 -

goods and services which the government wants to provide or be provided (merit goods)

and those that the government does not want to be provided (demerit goods or merit bad

thing). Furthermore, governments have great influence on the health, education, and

infrastructure of a nation.

Economic factors include economic growth, interest rates, exchange rates and the inflation

rate. These factors have major impacts on how businesses operate and make decisions. For

example, interest rates affect a firm's cost of capital and therefore to what extent a business

grows and expands. Exchange rates affect the costs of exporting goods and the supply and

price of imported goods in an economy.

Social factors include the cultural aspects and include health consciousness, population

growth rate, age distribution, career attitudes and emphasis on safety. Trends in social

factors affect the demand for a company's products and how that company operates. For

example, an aging population may imply a smaller and less-willing workforce (thus

increasing the cost of labor). Furthermore, companies may change various management

strategies to adapt to these social trends (such as recruiting older workers).

Technological factors include technological aspects such as R&D activity, automation,

technology incentives and the rate of technological change. They can determine barriers to

entry, minimum efficient production level and influence outsourcing decisions.

Furthermore, technological shifts can affect costs, quality, and lead to innovation.

5.1.2 Applicability of Factors

The model's factors will vary in importance to a given company based on its industry and

the goods it produces. For example, consumer and Business to Business (B2B) companies

tend to be more affected by the social factors, while a global defense contractor would tend

to be more affected by political factors. Additionally, factors that are more likely to change

in the future or more relevant to a given company will carry greater importance. For

example, a company which has borrowed heavily will need to focus more on the economic

factors (especially interest rates and exchange rates).


- 36 -

Furthermore, conglomerate companies who produce a wide range of products (such as

Sony, Disney, or BP) may find it more useful to analyze one department of its company at

a time with the PEST model, thus focusing on the specific factors relevant to that one

department. A company may also wish to divide factors into geographical relevance, such

as local, national, and global.

5.2 Political Factor in Italy

On June 2nd, 1946 Italy, which was previously a Monarchy ruled by the same house which

had ruled Italy since the early 1800’s. After the results of a popular referendum which was

intended only to determine whether the Head of State should be elected by popular vote or

come from a family dynasty. In either case, The Head of State, would appoint members of

the government, but not govern personally.

The Italian republic is democratically represented by the parliament. The President of the

republic is elected for a period of 7 years by parliament and then nominates the Prime

Minister who proposed the other ministers, pending the approval of the President who

officially nominates them. The Judiciary is independent of the executive and the legislature.

As such, the President represents the unity of the nation and carries several responsibilities

previously given to the King of Italy. He is elected by the lawmakers, appoints the

executive and is the president of the judiciary. He is also the commander in chief of the

armed forces.

The President is also the guardian of the Italian Constitution and can openly reject

anti-constitutional laws by refusing to sign them. National elections appoint the parliament


- 37 -

with the exception of some life senators, currently 7 (three of which are previous

Presidents) and are elected for a maximum of five years. There are about a hundred

provinces in twenty regions in the Italian State, these regions being considered in the

Italian Constitution. A prefect oversees each province and represents, reports and is

appointed by the central government.

From the political point of view Italy is an ideal country where to export Huawei’s product.

It has good international relationships, especially with other EU countries where we are

already present and with the China. There are no restrictions to the importation or the

exportation of capitals and goods. The accounting system follows International Accounting

Standards (IAS), the same adopted by all EU countries. There is a stable political regime

with a multi-party system, which can ensure the certainty of law and the respect of

contractual rights. However lawsuits tend to be lasting and expensive, and this could

represent a risk in case of a contractual breach.

5.3 Economic Environment

The Italian Economic Environment is also quite good for our project. Italian economy is

based on services and industry. The per capita GDP is $30,200 that is much higher than

China ($4,000), but which is enough to ensure the population with the possibility to save

some of their budget for the acquisition of expensive products. In addition income is better

distributed than China: looking at the Gini Index, Italy has a 36 and China have a 50

(where 0 means equally distributed and 100 means unequally distributed). If we bear in

mind the different dimensions of the two countries all the other economic indicators can be

considered similar. Just the Unemployment rate is a little bit higher in China, 9.3% against

7%, but it is not very relevant.

5.3.1 Individual Economic

1) Freedom from Internal Control

Italian citizens are free to move within the boundaries of the country as they please. No

form of restriction of personal freedom is permitted. In extraordinary situations, the

authority of public safety may adopt temporary provisions, which will have to be


- 38 -

communicated within 48 hours to the judicial authority. If the judicial authority does not

validate these provisions within the 48 hours, they will be revoked without taking effect.

And Italians are also free to travel in and out of the country without restrictions and have

possibility to immigrate or return at any given time with no further consequences.

2) Communication Systems

The largest communication system in Italy is cell phones, which has various providers and

each provider has various plans. There is a plan that will fit each and every person (it is

predicted that by 2007 the diffusion cell phones among the population will reach 105% a

cell phone per citizen). Internet has been growing in the past few years, but the big internet

boom happened in 2001. There were more companies providing internet and better

connection over the country. But the more advanced part of Italy in communication is the

north comparing with south of Italy which is not very popular. And now the education

system is introducing internet in Italian schools.

3) Foreign Currency Transactions

Since 2002, all the monetary transactions in Italy and most of European countries are

European currency issuing Euro. And now, Euro is very stable and powerful which are one

of the best currencies in the world and most transactions now are already in Euro. This also

encourages tourism to increase thanks to the unified currency with twelve countries.

4) Economic Statistics

Italy was believed to have accurate economics statistics and which was visualized on

several public statistic web sites. However, the economic statistic is no longer believed due

to the big crack that happened. Parallax, one of the biggest Italian companies with known

worldwide, affected a lot of worldwide markets.

5) High Wage Policies

Compared to the rest of Europe countries, Italy has low wages. This is a great factor that

discourages people to go work for such a low wage, and family not afford the products

sold in the country due to the low working force. The major businesses are obligated to

export their factories in countries where there are more working force for lower wages like


- 39 -

India or Pakistan. It is very hard for the average worker to afford a family and provide

them with expensive items.

6) Foreign Trade Impacts

Italy's trade has been increasing from year to year since it has joined the European Union.

The quantity of goods imported and exported are both high. In 2003, Italy imported a total

of 135 million Euros and exported 1.096 million Euros38

. Italy imports more than it

exports.

7) Protection of Foreign Currency Earning Enterprises

Having one of the most powerful economies in the world, Italy still maintains an open

economy. It is a part of the EU and the multilateral economic organization G8, as well as a

member of IMF and WTO. This provides Italy with a high protection from foreign

currency earning enterprises.

5.4 Social and Culture

Actually, Italy has a population of 58,147,733 inhabitants. The 98.4% of them are literates,

and the 66.4% of them are aged between 15 and 64 years. It must be highlighted the fact

that in Italy are present 72 million mobile telephones: Italians have a strong culture of

always being locatable, and for this reason, they in average hold 1,25 mobile phones each

person, more than every other country. On the other hand, they are not yet very confident

with more modern issues like as internet: just 28,870,000 inhabitants can be considered

internet users. For this reason, we can look at them like as conservatives.

5.5 Technological Environments

They are not interested in assembling our product directly in Italy, but just in importing it

from the countries where they have already established some plants. For such reason, from

a technological point of view, Italy is mainly interested in the level of transportation and

telecommunication infrastructures, rather than in the research intensity or in the university

system. Italy actually has 19,459 km of railways (16th in the world), 484,688 km of

38 World Bank Annual Report in 2004


- 40 -

roadways (11th in the world), and 133 airports distributed on the territory. The telephone

system is modern and well developed, fax is widely used and mobile signal covers almost

all the Italian territory.

5.6 Summary: The Development Status of Italian Telecommunications Market

Italy's well-developed and open telecommunications market, which is Europe's third

largest telecom market. At the end of March 2005, the penetration rate of fixed-line,

Internet, broadband connections and mobile phone were 53.5%, 33.6%, 8.9% and 105%39

,

which fixed telephone market is in fourth place around Europe; and which Internet and

broadband market is relatively small and backward comparing with other country in

Western Europe; however, the mobile telecommunications market is one of Europe's most

developed markets. In recent years, the rapid growth of broadband market in Italy, audio

and multimedia become a new focus of competition; and mobile market has always shown

a good prospects.

In Italy, the capacity of telecommunications equipment production is weak, most of which

equipment are provided by Alcatel, Marconi, and other international telecommunications

manufacturer. However, the competition of Italian telecom market operators are very fierce,

including the world's sixth large telecom operators - Telecom Italia Group, which

dominates almost all Italian telecom market. Other major operators including WIND,

Vodafone, H3G, FASTWEB, and so on, form a number of disputes operators to compete

for the market. So, from this statistic data shown, this is why Huawei choose to enter the

Italy mobile market as a cut; at the same time, this provides a good opportunity for Chinese

telecom equipment manufacturers, Huawei, can refer to this trend to develop and produce

marketable products or provide new services. The Chinese telecom operators with

competitiveness can also be actively considered entering into the Italian market, which

take the broadband and mobile telecommunications market as a breakthrough. According

to requirement of market oriented to identify market needs and provide effective services,

it will lay a good foundation in the European telecommunications market.

39 Source: Chinese Embassy Investigate Report in Italy.


- 41 -

6 The Overall Development of Italian Telecommunications Market

Italy's fixed telecommunications market ranked fourth in Europe. As with most EU

countries, Italy has opened its fixed telecommunications market since 1998, but the

competitive is not highly severity in the original. After 2000, some operators began to enter

the Italian telecommunications market while they provide services from 2001, so that the

competition gradually increases. However, due to different market conditions, some

companies were forced to merge, or through mergers in order to seek space for growth.

Italy has Europe's most advanced mobile telecommunications market, which reached 56

million users in 2004, while the mobile phone penetration rate reached 105% in March

2005, and most of them are pre-paid subscribers. It attracted many large operators for

fierce competition in mobile telecommunications market. Vodafone and TIM, the world's

largest mobile telecommunications companies, settle down in Italy. WIND is the

third-largest GSM operator in this market, and H3G launched the first 3G communications

technology services (3G/UMTS) in March 2003 in the Italian market.

Italy's Internet market is relatively small, only about one-third of the population uses the

Internet. Italy, both narrowband and broadband of Internet are relatively lagging behind

Comparing with other EU countries. Despite the narrowband area has been growing fast

from mid-1999, but it still largely lag behind France and Germany. At the same time, the

broadband penetration is only just advance than Greece and Ireland in Western European

countries. On one side, this low rate depends on the lack of infrastructure; on the other

hand, it depends on the low PC penetration. However, data shows that the broadband

market is growing rapidly, so that it becomes the most competitive market in Western

Europe. As lack of broadband cable, Internet service development was lagging behind, but

this promoted the rapid development of payment satellite TV. At the same time, as lack of

cable, the competition becomes fierce in the Italian facility rental and unbundled areas.

Despite the lack of network infrastructure, Italian Fiber to the Home (FTTH) project is

developed at top level in European. In addition, Value-Added Service is the world

advanced level; broadband video and Internet audio (VoIP) are widely used in many cities.


- 42 -

The following table shows the overall condition of the Italian telecommunications market.

Table 6.1 The Overall Situation of Fixed-Line Telecommunications Market40

Fixed Telephone Lines in use 2.645 million line

Density of Fixed-Line Telephone 53.50%

Operator

Telecom Italia

WIND

Vodafone

Source: Development Status of Italy Telecommunications Market Report

Table 6.2 The Overall Situation of the Italian Internet Market

Amount of computers connected to Internet 626536

Internet users 1950

Internet penetration 33.60%

ISPs 256

Main ISPs TIN.it


Table 6.3 The Overall Situation of the Italian Broadband Market

Broadband Users 4.86 million

DSL user 4.44 million

ISDN user 5.83 million

Broadband penetration 8.90%


Table 6.4 The Overall Situation of the Italian Mobile Market

Mobile Phone user 61.40 million

Growth rate 7%

Mobile phone penetration 105%

Main Operator

TIM

Vodafone

WIND

H3G


Table 6.5 List of Channels and Line in Italy (Unit: Thousands)

Year 2003 2004 2005 2006 2007 2008

PSTN line 22,569 22,244 21,943 21,372 20,731 20,254

Growth Rate - -0.14% -1.40% -2.60% -3.00% -2.30%

ISDN Line 4,584 5,856 6,644 6,943 7,110 7,117

Growth Rate - -27.70% 13.50% 4.50% 2.40% 0.10%

Broadband 48 430 1,001 2,376 4,234 5,661

40 Development Status of Italy Telecommunications Market Report


- 43 -

Growth Rate - 795.60% 132.90% 137.30% 322.90% 33.70%

Total 27,201 28,530 29,588 30,691 32,075 33,032

Growth Rate - 4.90% 3.70% 3.70% 4.50% 3.00%

Source: Italy Telecommunication and Information Cooperation Federcomin

The following will give out the detail analysis for Italian Telecom Market.

6.1 Fixed-Line Telecommunications Market

6.1.1 The Overall Situation

Table 6.8 Fixed Telecom Operation Index (Unit: Thousand Lines)

Year 2000 2001 2002 2003 2004

PSTN Line 22,569 21,965 21,436 20,899 20,624

ISDN Channel 4,584 5,403 5,756 6,027 5,827

DSL Connection 115 405 927 2,265 4,437

Cable-modem Connection 0 0 0 0 0

Broadband connection 0 0 0 0 0

Switched Ethernet line 0 36 100 160 193

ULL or LLU 0 15 122 510 759

Equivalent Circuit 766 542 409 1,131 1,731

Lines per capita rate (%) 47.3% 48.1% 48.7% 50.6% 53.5%

The degree of digital main lines (%) 100% 100% 100% 100% 100%

Source: Report of Italy Information Technology Market Analysis

Table 6.9 Fixed Telecom Financial Index (Unit: Million Euros)

Year 2000 2001 2002 2003 2004

Revenue of Fixed line service 18,001 18,698 18,883 19,457 19,814

Growth Rare（%） 4.5 3.9 1.0 3.0 1.8

Revenue of Fixed line service with

using

15,203 15,001 14,482 14,608 14,646

Revenue for new fixed line service 2,798 3,697 4,401 4,849 5,168

Market share of new business revenue

（%）

15.5 19.8 23.3 24.9 26.1

Consumption of fixed

telecommunications

16,307 16,564 16,502 16,669 16,970

Fixed into a percentage of GDP（%） 1.37 1.34 1.28 1.28 1.26

Source: Report of Italy Information Technology Market Analysis

6.1.2 Market Size

From the income view, Italy fixed telecom market is one of the largest telecommunications

market in Europe's. The revenues of fixed telecom reach 19.8 billion Euros (see figure

6.1)41

in 2004, increased 1.8%, the growth almost attributed to broadband services.

41 Chinese Embassy in Italy: Development Status of Italy Telecommunications Market Report


- 44 -

Figure 6.1 Fixed-Line Telecom Market Revenue Situations

Table 6.10 Fixed Line Telecom Market Revenue Situations. (Units: Million Euros)

2000 2001 2002 2003 2004 2005 2006

Retail sales of fixed line 16307 16564 16502 16669 16970 17271 17572

Wholesale of fixed line 1693 2134 2381 2788 3195 3602 4009

Source: Italy Information Research Analysis Center

In 2004, the fixed telecom spends a total of 16.97 billion Euros, the annual consumption

293 Euros per person. Since 2000, the rate of fixed-line retail spending has been declining

in GDP; and the proportion has been remained 1.26% in 2004.

Table 6.11 Italy Fixed Telecom Retail Market Situation

2000 2001 2002 2003 2004 2005 2006

Fixed telecom retail market

consumption (Million Euros) 16307 16564 16502 16669 16970 17271 17572

Percentage of GDP (%) 1.37 1.34 1.28 1.28 1.26 1.31 1.34

Source: Italy Information Technology Market Analysis Report

6.1.3 Market Freedoms

Since January 1998, the public fixed telecommunications networks and voice telephone

market had been released, which ended the monopoly of Telecom Italia. Data transmission

16307 16564 16502 16669 16970 17271 17572

1693 2134 2381 2788 3195 3602 4009

0

5000

10000

15000

20000

25000

2000 2001 2002 2003 2004 2005 2006

Retail sales of fixed line Wholesale of fixed line

Fixed-line Telecom Market Revenue Situation.

Mil

lio

n E

uro

s


- 45 -

market began to free competition as early in March 1995. June 2004, the Italian

Communications Security Bureau issued 120 fixed voice telephone licenses and 84 permits

of building telecommunications networks, but only 40 operators actually provide phone

service. Currently, Telecom Italia is still a dominant operator from the revenue of

telecommunication, in 2004, which occupied the share of 73.9% in the fixed

telecommunications market. From 2000 to 2004, the Alternative Operators market share

increase from 15.5% to 26.1%42

.

Table 6.12 Fixed Telecom Incomes for Leading Operators (Unit: Million Euros)

2000 2001 2002 2003 2004 2005

Fixed Telecom income of

leading operators 15203 15001 14482 14608 14646 14684

Fixed Telecom income of

optional operators 2798 3697 4401 4849 5168 5487

Source: Italy Information Technology Analysis Report

Figure 6.2 Fixed Telecom Income Situations

6.1.4 Infrastructures

Telecom Italia is still dominated by the underlying market in the network, which wide

range of Synchronous Digital Hierarchy (SDH) and Asynchronous Transfer Mode (ATM)


15203 15001 14482 14608 14646 14684

2798 3697 4401 4849 5168 5487

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005

Fixed line income of leading operators Fixed line income of optional operators

Fixed Telecom Income for Leading and Optional operators

Per

cen

tage


- 46 -

network throughout every town of the country. The operator’s speed of the synchronous

digital network is more than 2.5 Gigabit. The whole transmission network includes 66

switches and 628 local switches; and long-distance network includes 3.9 million loops;

distribution network consists of 105 million km twisted-pair copper cable. This company

also operates the 3.65 million km (including path) of optical network, of which 960,000

km are installed in the long-distance of fixed-line. The network can ensure that TIM

directly provides fiber access to large business customers. In the first half of 2004 and

2005, the company has continually expanded its Multi-Protocol Label Switching (MPLS)

network to support Gigabyte Ethernet access services.

Gradually, many companies rank among the optional operator, to challenge Telecom

Italia’s dominance of the network backbone. Some operators which have Pan-European

infrastructure have also entered the Italian market, including COLT, Inter-route (2004

acquisition by British Telecom), and MCI.

The following table lists the Italy telecommunication situation of fixed network

infrastructure, distribution and operator.

Table 6.13 Italy Fixed telecom Infrastructures Provider Situation

Network

Provider Local Access

Regional

Network

National

Network

International

Network

Data

Center

Telecom Italia √ √ √ √ 2

WIND Unbundled

PSTN、xDSL 30 18275 KM × ×

Tiscali xDSL × √ √ ×

FASTWEB Ethernet、xDSL 5 17000KM × ×

Acantho Ethernet 1 × × 1

ACONET xDSL × √ × ×

Albacom xDSL × √ × ×

Albacom.Amps xDSL 1 √ × ×

Alpikom xDSL × √ × √

ASCO TLC Ethernet × √ × √

Atlanet xDSL 3 √ × ×

COLT Telecom × 3 √ Parent 1


- 47 -

company has

Pan-Europe

Network

Elitel × × √ × ×

Energ.it xDSL × √ × ×

ePlanet × 10 4100KM × 33

Estel × 3 × × ×

Eutelia xDSL 4

7000KM

(Including

Optical

Line 5450

KM)

× ×

Infracom(Includi

ng Serenissima

Infracom and

Autostrade

Telecomunicazio

ni )

xDSL、WLL 25

3600KM

Optical

Network

along

Higher

way

× ×

Metroweb × 1 4950KM √ ×


Telecom Italia is still the most important local access network operators, the service of

equivalent lines of its total reaching 30.1 million until the end of 2004. Italy local access

lines in service steady growth since 2000, while ISDN channel is gradually developing and

becoming main position in the fixed-line access network. However, integrated services

digital network began to decline in 2004, replaced by DSL and a number of Switched

Ethernet which has a rapid growth. Until the end of 2004, DSL network rose to 14.4% of

the total proportion.


- 48 -

Figure 6.3 Local Access Line Distributions

Table 6.14 Local Access Line Distribution43

(Unit: Thousand)

2000 2001 2002 2003 2004 2005

PSTN 22569 21965 21436 20899 20624 20349

ISDN 4584 5403 5756 6026 5827 5627

DSL 115 405 926 2264 4437 6609

Switched Ethernet 0 36 100 160 193 226


6.1.5 Market Competitions

Despite official government announces the release of fixed telecommunications market

from January 1, 1998, but the real competition began in June in the same year, the two

operators, Albacom and Infostrada, reached agreements with the Telecom Italia for

network interconnection. But more optional operators are still providing services for the

SMB market, ultimately, the two biggest operators, Telecom Italia and WIND, form the

mainstream market situation, the TELE2 Italia companies, which ranked three compete

with them on price. In the business user market, Albacom is the main service provider. In

many cities, FASTWEB ranks among the major carriers with Ethernet and digital

subscriber loop with non-binding offer IP voice service. Tiscali launched a residential

broadband voice services in July 2005, WIND also claimed following up this service in the


22.569 21.965234 21.436 20.899 20.62425 20.3495

4.584 5.403 5.756 6.0268 5.827 5.6272

0.115 0.405234 0.92669 2.2645 4.437 6.6095

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005

PSTN ISDN DSL Switched Ethernet

Local Access Line Distribution

Uin

t:M

illi

on

Lin

e


- 49 -

second half of 2005.

Telecom Italia, which has always been leading provider of fixed telephone services both

commercial and residential customers, has 20.232 million PSTN line to the end of 2004,

while WIND, which rank second, has 2.4 million active users.

The following table lists the Italian business and residential customers of fixed voice

telephony market situation:

Table 6.15 The Italian Fixed-Line Voice Service Provider

Leading Operator Infrastructure Tendency

Telecom Italia SpA √ Both

Optional Operator Infrastructure Tendency

Albacom SpA √ Business

Atlanet SpA √ Both

Elitel SpA √ Both

Eutelia SpA √ Both

FASTWEB SpA √ Both

Tele2 Italia SpA Optical Carrier Housing

Tiscali SpA √ Housing

WIND SpA √ Both

Source: Italy Information Technology Market Analysis Consultant Institution

1998, the price began a gradual decline after opening up the fixed voice market, which is

the results of fierce competition during the optional operators and leading operators. This

competition led to network congestion, but it brought more charges declining significantly,

especially in business market users.

Since 1998, the Italian PSTN lines continued to decline, in 2000, a total of 22.6 million,

but by 2004, it dropped to only 20.6 million (see table 6.16). As the local access

infrastructure, Telecom Italia, prior to 2001, to a large extent, it can be said that it was the

only operator to provide direct access to voice services, circuit-switched carriers. In 2002,

WIND began to provide circuit-switched voice services through "non-binding local loop".

To the end of 2004, WIND already has 392,000 non-binding PSTN lines in use. Other

providers, such as FASTWEB Company, began providing direct access through the

network packet voice services.


- 50 -

Table 6.16 PSTN Line (Unit: Thousand)

Year 2000 2001 2002 2003 2004 2005

TIM PSTN Line 22569 21950 21386 20569 20232 19895

Non biding PSTN Line 0 0 50 330 392 454

Source: Italy Information Technology Market Analysis Report

6.2 Internet Market

6.2.1 General Status

In 1999, Tiscali launched the free subscription service, the Italian Internet market was

beginning to grow. In early 2000, some new entrants are gradually beginning to follow

Tiscali to provide Internet services through a free subscription. Ultimately, some of the

major carriers which do not follow this pattern found that they had lost a lot of users.

Analysis shows that, to the end of 2004, Italian Internet users reach approximately 19.5

million and fixed Internet site reach 900 million (see table 6.17), although the market has

been continuing to grow on the Internet, but the Italian Internet penetration is still far

behind the United Kingdom, Germany and Nordic countries.

Table 6.17 Italy Internet Market Situation (Unit: Thousand)

Year 2000 2001 2002 2003 2004 2005

Internet Fixed Site 5132 6810 7997 8375 8900 9425

Growth Rate % 80.9 32.7 17 5.1 6.3 5.9

Internet User 10000 13141 15137 17500 19500 21500

Growth Rate % 177 31.4 15.2 15.6 11.4 10.3

Activate Internet User 6402 7752 9116 10415 11068 12151

Internet penetration % 17.3 22.7 26.1 30.2 33.6 9.8



- 51 -

Figure 6.4 Italian Internet User and Penetrate


6.2.2 Market Competition

At present, four major operators dominated the Italian Internet market, accounting for

three-quarters of the market share. The four companies are the Telecom Italia Media,

WIND, Tiscali, TELE2. All of them provide both subscription options on the basis of

access and subscription access to narrowband services except TELE2. Tiscali is the third

largest domestic carrier in Internet market in Italy, if taking into account its international

business and from the amount user point of view, Tiscali companies ranked first in Italy,

ranked third in Europe (lagging behind T-online Company and Wanadoo companies). To

the end of 2004, the company reached 7.4 million active users worldwide. WIND was once

a leader in the Italian Internet market, but beginning in 2004, which fall behind Telecom

Italia as its over-reliance on dial-up users.

The following table lists the major provider in Italian Internet service market.

Table 6.18 The Amount User in Each Main Italian Internet Service Provider

Company Activity User

TI Media 4,540,000

WIND 2,300,000,

Tiscali 1,560,000

1013.141

15.13717.5

19.521.50.173

0.227

0.261

0.302

0.336

0.098

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005

Internet User Internet penetration %

Percenta

ge

Italian Internet Uese and Penetrate

Internet U

serUnit Million


- 52 -

Tele2 1,500,000


It is showing a fierce competition scene in Italian business Internet access market. Telecom

Italian dominates a well position in each business segment market, and its affiliated,

Telecom Italia Sparkle, to provide services to corporate users, while Telecom Italia

wireless service for Small and Medium Enterprises (SME) and the "home office"(SOHO)

market. WIND and BT Albacom have the same larger share in the business market, while

FASTWEB’s market share has a rapid increase in the business market, the business

customers reaches 81,000 in March 2005, 51% of its total revenue; region operators have

also established a wide range of business customers which rely on the relationship with

local government and enterprises; there are some local service providers such as Infracom

and Eutelia, to enter into the market by virtue of its innovative business localization

services. In addition, a number of pan-European operators such as COLT, Infonet and MCI,

have begun to enter the business (mainly in enterprises) market.

6.3 Broadband Markets

6.3.1 General Situation

Italian broadband market lags behind other Western European countries, to March 2005, a

total of 4.86 million broadband users, the penetration rate only 8.9%, while Italy is pursuit

of Germany, Spain and Portugal, but, so far, it is only a little higher than the later ones of

Greece And Ireland. Italian Government has realized the situation and starts the

development of broadband competition, at the same time, taking this as the key point for

future economic development. View of this, the government made great efforts to give

priority to the development of the broadband market, and actively stimulate domestic

demand which has proved that it’s pricing and incentives had played a very successful

results. Comparing with other countries in European, Italy broadband penetration is still

not high, but the growth left a deep impression in the second half of 2003 and 2004.

In March 2005, the two largest operators, Telecom Italia and Fastweb, reported operating

condition in access network, Telecom Italia, with 435 million broadband access (of which

1.01 million are bulk sales); Fastweb with 542,000 of the Broadband users (March 2004 to


- 53 -

376,500 users).

Table 6.19 Total Amount of Broadband Connections and Penetration rate in Italy

2000 2001 2002 2003 2004 2005

Total Broadband

Connection 115000 441934 1027060 2424600 4630447 6836294

Broadband

Penetration 0.2% 0.8% 1.8% 4.2% 8.0% 11.8%


Figure 6.5 Total Amounts of Broadband Connections and Penetration Rate

As the Italian has many historical and cultural city and hills city, which lack of major

underground cable facilities, development of broadband mainly focused on Asymmetric

Digital Subscriber Loop (ADSL). Other carriers with licenses (OLOs) often use

non-binding local loop (ULL) provides a wide range of external broadband services. Italy

is the largest non-binding access to markets in Europe, to March 2005, there are about

818,000 non-binding lines (50.8 million for digital subscriber loop) in Italy, after Germany

and France Western Europe ranked third.

Some other types of broadband technology have also been introduced to compensate for

the lack of cable infrastructure. For example, Fastweb provide residential and business

broadband access services through Ethernet local area network (Ethernet LANs). To March

2005, it has 206,000 broadband subscribers, making it to become the largest provider of

115 4421,027

2,425

4,630

6,836

0.2%0.8%

1.8%

4.2%

8.0%

11.8%

0%

2%

4%

6%

8%

10%

12%

14%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000 2001 2002 2003 2004 2005

Total Broadband Connection Broadband Penetration (%)

Bro

adb

and P

enetratio

n

To

tal Bro

adban

dC

onnectio

n

Total Amount of Broadband Connections and Penetration Rate


- 54 -

switched Ethernet LAN in Europe. The company claim that the occupation will reach to 45%

in the broadband market in late 2006.

Tiscali initially introduced Satellite Broadband by the end of 2001; Telecom Italia is also

involved in this business following Tiscali. At the end of 2004, there are about 125,000

using satellite broadband. Telecom Italia claims to cover all of Italy to provide satellite

broadband services in April 2004 through Telespazio and Hughes, while new operators

Atitel also plans to provide satellite services to the end of 2004. However, they have not

introduced any new services to July 2005.

The figure can be showed that the digital subscriber loop broadband technology is still the

most widely used in Italy; approximately 93% of the broadband is connected via this way.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005

DSL of TI Non-bidding DSL Switched Ethernet Satellite Broadband

Per

centa

ge

Italian Broadband Market Technology Distributions

Figure 6.6 Italian Broadband Market Technology Distributions

Table 6.20 Italian Broadband Market Technology Distributions44

(Unit: Thousand)

2000 2001 2002 2003 2004 2005

DSL of TI 115 390 850 2,040 4,010 5,980

Non-bidding DSL 0 15 72 240 427 614

Switched Ethernet 0 36 100 160 193 226

Satellite Broadband 0 35 75 65 125 185




- 55 -


Telecom Italia is the leading provider of broadband infrastructure, which provides 86% of

Italy's broadband connections (excluding satellite broadband), while the optional operators

will share the remaining 14% market share, the three most important are FASTWEB,

(through digital subscriber loop, and switched Ethernet), WIND and Tiscali (the latter two

through digital subscriber loop), BT Albacom and Eutelia to provide services for a number

of small users, accounting for less than 1% Share.

Telecom Italia is the only services provider of mass-market broadband; in March 2005, it

has been sold out 1.01 million broadband connections volume. The retail market was

controlled by Telecom Italia, Fastweb, WIND, and Tiscali which has develop in recently,

three of them accounted for 89% retail market share. Telecom Italia offered a wide variety

of services to meet different levels of consumers, therefore 66% of market share are

control by TI. From 2002 to 2003, broadband providers began to reform development

strategies, taking into account the large commercial users has been completed the

installation of broadband, the new strategic would focus on the development for small

users multi-level pricing, including advance payments, according to minutes Billing, in

accordance with the flow of billing, package pricing.

The following table describes the situation of Italian broadband access service providers.

Table 6.21 The Situation of Italy Broadband Access Service Providers

Service Provider Broadband facilities User

TI (Including Alice, Tin.it and Smart) DSL 3,340,000

FASTWEB DSL 336,040

Switched Ethernet 205,960

WIND (Including Non-bidding Local Loop) DSL 350,000


With the continuous progress of non-binding services, increasing broadband speeds and

new technology, Italian broadband market has been found in many new ways of broadband

services, such as VOD, DTT, personal video recorder (PVR), real-time network TV (Web

Reality TV) and so on. WIND, Fastweb and Telecom Italia (Alice) also provide video

phone service to consumers.


- 56 -

6.4 Mobile Telecommunication Market

6.4.1 Overall Situation

Italy is one of most mature market in mobile telecom in Europe, at the end of March, in

2005, penetration rate up to 105% based on active user calculated (registration penetration

rate up 110%). However, the number of mobile telecommunications users still on the rise,

first quarter of 2005 continued to rise 2%, by the end of March to reach 61.4 million

registered users.

Italian mobile users using pre-paid payment methods as high as 92%, this is the highest

percentage in Western Europe countries. However, the average revenue per user (ARPU)

shows that it is just not proportional, just wandering the average level in Western European

countries. This is because that all operators want to retain customers and provide a full

range services. After 2003, the operators began to do the business of automatically

recharge actively, this activity help them increased their ARPU successfully.

Table 6.22 The Overall Situation of the Italian Mobile Market

Register Active users

Total User 64,346,000 61,395,000

Advance user 59,067,540 56,260,538

Contract User 5,278,460 5,134,462

The proportion of Advance User 92% 92%

Penetration 110% 105%


Table 6.23 Active User (Unit: EUR/User/Month)

Year 2001 2002 2003 2004 2005

ARPU 28.7 28.3 29.1 29.5 30.2

Advance User ARPU 24.9 24.4 25.2 24.7 25.1

Contract User ARPU 60.9 65.3 72.3 75.1 80.7



Italian mobile telecommunications market is dominated by four companies, Telecom Italia

Mobile (TIM), Vodafone, WIND, and H3G SpA, which is only operating third-generation

mobile communication technology (3G) services. The company's basic data and market


- 57 -

share as follows:

Table 6.24 Based Data of Italian Mobile Telecommunications Operator45

Operator Date Technology Population

coverage

Equipment

Provider

H3G SpA Oct, 2000 W-CDMA 74% Ericsson

TIM 1984

Analog: TACS

Digital：GSM900/1800;

GPRS;UMTS

TACS:98%,

GSM:99.8%

DMCS900,

Ericsson

Italtel,

Siemens

Vodafone

Omnitel March,1994

GSM900/1800;

GPRS; UMTS

GSM: 99% ；

WCDMA:60% Nokia

WIND July, 1998 GSM1800;GPRS;UMTS GSM:98.9% Ericsson

Source: Huawei Investigate Report for Italy Market.

Figure 6.6 Italian Mobile Telecom Operator Market Share

Table 6.25 The Position of Italy Mobile Telecom Operator (Unit: K Thousands)

Register User Activity User

Amount

Prepay

(%)

Market

Share Amount

Prepay

(%)

Market

Share

TIM 26,186 89% 40.70% 25,487 89% 41.50%

Vodafone 22,500 92% 35.00% 20,700 92% 33.70%

WIND 12,100 98% 18.80% 11,744 98% 19.10%

H3G 3,560 90% 5.50% 3,464 90% 5.60%

Total 64,346 92% 100% 61,395 92% 100.00%


45 Huawei Investigate Report for Italy Market.

TIM, 41.5

Vodafone

Omnitel, 33.7

Wind, 19.1

H3G, 5.6

Italian Mobile Telecom Operator

Market Share

TIM Vodafone Omnitel Wind H3G


- 58 -

6.4.3 3G Business

March in 2003, H3G Italy, it is the first company to enter Italian market and began

developing the third generation mobile communication technology (3G), with about 70%

market share, currently dominating the market, in March 2005, its users reaching 350

million. In May of 2004, Vodafone and TIM joined the 3G markets; WIND also began to

provide 3G services at the same year in June. TIM want to attract more users to join 3G

network, which launched 6 mobile phones and provides a range free charge service of 3G

voice and multimedia in order to reach target of occupying 50% of Italian 3G market share

to the end of 2006. IPSE2000 also won the 3G licenses, but has not yet to carry out related

business.

Telecom Italia Mobile said in a report, due to service innovation, and its Non-Voice

services accounted for 14.9% of service revenues in the first quarter of 2005, an increase of

14%. Vodafone also rely on the activities of “Vodafone live!” and “Mobile Connect Card”

to develop non-voice services. To March 2005, the user to reach 270 million depends on

"Vodafone live!" and its revenue of non-voice services rose to 14.6%. Nevertheless, the

two non-voice services account only 23% market share, it is difficult to shake the

leadership position of H3G's.

6.5 Main Telecom Equipment Manufacturers and Operator

Italy is a full competition market in the telecommunications industry, for each segment

carrier face intense competition; and Italian production capacity of telecommunications

equipment was poor, so the equipments are provided by international manufacturers. The

following will give the further description for the major equipment manufacturers and

operators in Italy.

6.5.1 The Major Telecommunications Equipment Manufacturers

Italy is not a power country in the field of telecommunications equipment, the equipment is

more provided by foreign companies. Major telecom equipment providers include Marconi,

Italtel, Alcatel, Nokia-Siemens Ericsson, Nortel Networks, Cisco Systems, and so on.


- 59 -

1) Marconi Co., Ltd

Marconi Co., Ltd. was founded in the 80's of 19th century, which was once the world's

fastest growing communications and IT companies. Marconi is a telecommunication

equipment company which provides design solutions in a number of regional. It mainly

produces and provides telecommunications and information technology equipment, while

provides related services. The network technology and services of Marconi help its

customers’ evolution from narrowband networks to next-generation broadband network.

Marconi established R&D centers in 19 countries, production base in 16 countries, and

provided services in over 100 countries. It has more than 2,000 employees, annual sales

around 300 million Euros. The company has been in the London Stock Exchange and

NASDAQ stock Exchange.

Marconi operations in several regions, including North America, Europe, Middle East,

Africa, Latin America, Asia-Pacific region, its clients including public network operators,

network service providers, large companies, government departments, education and

scientific research institutions. With the famous of its management, products, business,

research and development of strategic resources, it becomes Italy's main

telecommunications company and an important company of telecommunications supplier

in the Nordic region, the Mediterranean region, North America and Latin America.

Main Business Scope:

The company's core business is divided into two types, namely, network devices and

network services.

Network equipment includes design and supply of communications systems, in order to

achieve voice, data and video transmission and conversion. The equipment includes:

broadband access, broadband routing and switching, wireless microwave communications,

next generation switching technology, optical networking, and network management.

Network service includes providing support services of telecommunications companies

and other communication network, which provides advice; implementation of the

installation, instruction and maintenance, value-added services, and so on.


- 60 -

Marconi’s Next Generation Network (NGN) products, Marconi Multi-Service, Marconi

Multiservice Network, and its service functions, helps its customers meeting business

challenges and benefit in the following areas:

New services to increase revenue

Providing the most optimal network to reduce operational expenditure (Opex)

Giving effective long-term investment in order to increase the efficiency of capital

expenditures (Capex)

In currently, as the company financial deterioration, the state of enterprise has more

problematic cause the business rapid decline.

2) ITALTEL

ITALTEL is joint venture Company setting up by Telecom Italia and the German

multinational Siemens, which is Europe's largest manufacturer of telecommunications.

Corporate headquarters and other business office of ITALTEL are located in Milan and

Roman, and setting Research Laboratory in PALERMO and CARINI.

The total employees of ITALTEL approximately 2,100 people, 52% of the employees, that

is, 1,100 people which are working in the area of Information Technology developing,

primarily engaged in: broadband networks, voice, Data integration and advanced network

management system. The company ranks fifth all around the world with strong strength in

the area of soft switch. In 2003, total revenue was 5.92 billion Euros.

The name of ITALTEL became the synonymous of Telecommunications and continuous

innovation in nearly 80 years, which core business including designing, development and

installation of new generation integrated multi-service networks (voice, data, And video

combined), and through a full range of support services for continuous development.

In addition, the overall strength of ITALTEL is able to provide reliable, open and

promising infrastructure for fixed and mobile telecommunications companies and Internet

service provider (ISP). Nearly 10 years, ITALTEL insists continuous innovation and


- 61 -

substantial funding.

Partners and shareholders

ITALTEL establish a solid technical and commercial partnership with Cisco Systems,

which allows the company to have the ability to use GLOBAL NETWORK SOLUTIONS

program to develop market, and provide network voice, Data products, network services,

maintenance solutions, engineering and network consulting services.

In addition, ITALTEL became solution partner of Cisco Systems in Europe, the Middle

East and Africa (EMEA) from 2000; while in 2002, it became Gold Certified Partner of

Cisco Systems, and getting Qualification certificate in 2003.

From December 2000, U.S. private equity CD&R becomes largest shareholder (48.77%) of

ITALTEL, other shareholders include the world's largest telecommunications companies -

Telecom Italia (19.37%), the world leaders in Internet network, Cisco Systems (18.40%);

other financial investment consortium also includes two U.S. funds, ADVENT

INTERNATIONAL and BRERA CAPITAL.

Oversea Market

In addition to Italy, ITALTEL equally possess prestigious in foreign countries, mainly

market located in Spain, Russia and Latin America, while in Argentina, Brazil, Colombia

and Guatemala also have a market. In Europe, ITALTEL began to establish market in

Germany, France and other emerging market economies.

ITALTEL took the lead to transfer advanced technology to China in the beginning of

reform and opening the and actively formed a joint venture company, through more than a

decade business development in China, built a lot owned, joint venture companies, while

established close relations with China's Ministry of Information Industry, Ministry of

Railways, China Unicom and other cooperation.

At present, the company's overall conditions declined in business, ongoing restructuring of

joint venture work; it was said that Siemens, Alcatel and so on are very interested in


- 62 -

ITALTEL.

6.5.2 Main Telecom Operator

Since 1998, the EU has been gradually opening up the telecommunications industry;

Telecom Italia's monopoly position was gradually broken, although the company still took

a strong dominated field in the various market segments. As the appearance of the lure of

market and the high-tech, a growing number of telecommunications companies have joined

the ranks of competition, the most competitor of which include WIND, Vodafone,

FASTWEB, and H3G, BT Albacom, ATLANET, and etc. The following will be

introduced respectively. There are many companies such as Tele2, Tiscali, Telefonica

supalpina, Eutelia (EdisonTel, Noicom, Nts), Metroweb SpA, ePlanet, Unidata,

Brennercom, Infracom, Parla.it, Colt, Interoute, MCI, and etc, forming a situation of many

operators to compete for market.

1) TELECOM ITALIA

TELECOM ITALIA Group is Italy's leading information and communications technology

companies, with high competitiveness of technology innovation, quality service and solid

customer relations, making it successfully winning the position as one of blue-chip

companies with most stable and profitable in Europe's. Telecom Italia Group has

developed more than 100 years inherited the electronic communications business, while

also involved in media, Internet and cutting-edge information technology, and was

committed to research and develop of future technologies. Telecom Italia Group is

composed by Telecom Italia, TIM, Finsiel with operating business information technology,

Olivetti Tecnost with providing office and system solutions, Telecom Italia Lab, Telecom

Italia Media, and other new business companies.

In 1994, Telecom Italia was incorporate by former IRI-STET’s five independent affiliation

telecommunications company (SIP, IRITEL, ITALCABLE, TELESPAZIO, and SIRM). In

1996, STET corporation transferred shares to the Italian Treasury Estate Department, while

in October 1997, governments made the company become a fully privatized corporation

through a way that selling out shares. August 2003, TELECOM ITALIA merged company

with OLIVETTI.


- 63 -

TELECOM ITALIA is the world's sixth-largest telecommunications company, which is

also Italy's largest fixed-line telecommunications company with absolute dominance

position in Italy market; wireless communications services which provided by TIM

accounted for 60% market share in Italy; at the same time, it also has a wide range

overseas markets; TIN.IT is the largest Internet Service Provider operator in the Italian

Internet market, which belong to TELECOM ITALIA. TELECOM ITALIA is the listed

company in BORSA ITALIANA and New York Stock Exchange.

2) WIND

WIND was founded in 1997，which is an integrated telecommunications companies to

provide telephone, mobile phone and network services. WIND is Italy's third-largest

fixed-line telecommunications company, and has 7.4 million fixed line users and 12.4

million Internet users.

In 2001, when the merger occur between the former WIND mobile telecommunications

company and the fixed-line telecommunications company INFOSTRADA, France

Telecom and ENEL joint venture to WIND Group. In 2003, ENEL purchases stake of 26.7%

(about 1.5 billion) from France Telecom, making ENEL became the group's controlling

party. In early 2004, ENEL transferred 100% of the funds of ENEL.NET to WIND share,

so, it made the funds of WIND growth of about 3.2 billion Euros. As ENEL Networks

possess fiber optic network with trunk lines, and more than 2,000 telecommunications

point, this transferring of ENEL means that the WIND Group had full ownership of the

network infrastructure.

The wide coverage of WIND telecommunications networks exceed industry peers, the

coverage of its mobile phone network over more than 98% of the population, and as its

fiber optic lines extend over 18,000 km, making its service covers all of Italy in the phone

and network. WIND is the most important operators in the telephone market, the situation

of their networks (LIBERO) ranked first in Italy, and in the third position in many Italian

network providers. WIND is also ranked third in mobile phone service industry in Italy,

while its mobile phone service launched just three years, they account for 19% of the


- 64 -

market share.

3) BT Albacom

BT Albacom, Italy's largest telecommunications company providing services for business

customers, mainly engaged in the fixed network telecommunications services provide a

full range of information services and solutions for businesses and public administration.

BT Albacom is committed to the telecommunications market provide all data, voice and

network transmission services for business customers, and to meet international standards.

Because of its network infrastructure associated with the European network, it has ability

to provide high-tech innovative solutions and other services.

Since January 2001, after BT Albacom acquired BASICTEL Company (BASICTEL is

created by Italian national railway company to enter the telecommunications sector of

commerce and trade), its network distributed more extensive, fiber optic line over 8000 km,

fully realized Coverage of a wide broadband range.

BT Albacom is established by British Telecom (BT) and the Italian National Labor Bank

(BNL) after they reached in strategic agreement in September 1995, then BT Albacom has

developed rapidly, and several shareholders joined in, including MEDIASET joined in

May 1996 and ENI Group (ENI, the Italian national hydrocarbon group) joined in

December 1997. In February 4, 2005, British Telecom (BT) bought full ownership of the

company. March 31, 2005, BT Albacom reported gross income was 6.64 billion Euros, the

growth increased more than 150% comparing with 2004; as now the business customers

has reached 240,000.

4) FASTWEB

The mainly business of FASTWEB is operating the broadband fixed network. In

December 1, 2004, E. BISCOM was merger with FASTWEB, and renamed FASTWEB

Company, focused on the Italian broadband telecommunications services and their

development.

FASTWEB, in a short time to market, they have developed a new generation of transport

networks technology which is more over than traditional techniques in major cities in Italy.


- 65 -

FASTWEB, by using the extending IP protocol, made use of optical fiber and xDSL

systems implement the management of voice, data and video, so that it takes a clear

competitive advantage. In this case, FASTWEB almost provided customers with an

unlimited broadband service, but also brought excellent returns for its investment in

infrastructure. In addition, it was possible to develop new services, and strive to create and

implement a new operating platforms which combination telecommunications, Internet and

television.

FASTWEB provided a broad range of services in various fields: large and small businesses

corporations, freelancers, shops, and residents of households, from voice telephone service

of broadband network linked to the advanced video communications equipment (company

use video conferencing equipment, home Use of video phones), virtual private network

(VPN), mobile audio and video, telephone monitoring, digital television, which were

directly realizing through the fiber or xDSL technologies.

In February 14, 2005, Executive Council of FASTWEB adopted the Strategic Plan

2005-2013, planned entered a new stage of development in 2006, so that half of the Italian

people used FASTWEB broadband network, and planned to invest 2.8 billion Euros in

2010, making FASTWEB extending to 220 million customers, becoming Italy's

second-largest telecom market.

5) H3G

In November 2000, H3G obtained UMTS license costing 3.2 billion Euros (at the time the

company name is Andala), and vowed to become media leader in mobile

telecommunications operators in Italian.

H3G's history is a process of challenging, which is the first licensed company in Italy to

create the third-generation mobile communications company of the New World.

Shareholders in H3G's will combine good resources and technology to create a new UMTS

value chain.

H3G took the core position in the third generation mobile communication technology in


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the new "value chain ", which develop capabilities of a comprehensive 3G service base on

transparent, simple and cost of effective operation, taking reforming and high quality as the

goal, to meet customer requirement such as residents, Freelancers, companies and other

users.

In addition, H3G plans to develop an Internet technology platform for all operators and

suppliers, to provide a variety of integrated solutions for new problems, and create a wide

range of mobile telecommunications services, which will make it taking an important role

in technical and commercial operations.

H3G took "video football game" as the core of its current services, which mean H3G users

can watch the football game closely in home; the score can be displayed on the screen

simultaneously. The service will connect 25 million football fans and the world's

third-generation mobile telecommunications to promote the expansion of market, which

play a greater driving force.

Headquartered of H3G is in Milan, the Technology Management Department located in

Rome, the branches throughout the country.

6) Vodafone Italia

To the end of June 30 2005, Vodafone customers has reached 2276.7 million in Italy,

thanks to the increase in the number of users and services scope of broadening, the total

revenue is 8.159 billion Euros in fiscal year 2004-2005.

From 2000 to 2005, Vodafone Italy, the total investment reached 9 billion Euros, of which

2.4 billion Euros for winning UMTS licenses. There are about 10,000 employees, eight call

centers across the country, more than 2,000 sale points, and have signed roaming

agreements with 223 countries, 426 international telecom companies.

December 2003, Vodafone Italy, opened up a UMTS network, and at the end of February

2004, sold UMTS card to businesses and individuals. To May 25, 2004, Vodafone

extended their marketing to mobile phones. Currently, the services in Vodafone Italy have

a great development, and the technology has been beyond the past, not only can access the


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GSM and GPRS network, but also access the UMTS network. Vodafone provide

comprehensive services for its GSM and UMTS user in Italy in order to expand the

business scope, to provide better quality service such as voice communication, etc.

The end of 2000, GPRS network coverage has reached 100% in Italy, now GSM network

also covers 97% of the national territory, population coverage of 99.4%. To March 31,

2005, UMTS network population coverage reaching 70%, and plans to increase to 75-80%

in 2 to 3 years.

From Omnitel to Vodafone

Vodafone Italy, proposed by CARLO DE BENEDETTI and ELSERINO PIOL, is different

from the currently the company philosophy, which gained in the Italian mobile

telecommunications license in 1994.

Omnitel company has dominated in Italian telecommunications market, as well as the

development of the telecommunications market and the enormous commercial profits of

mobile phone, the company began to focus on providing mobile telecommunications

services from December 1995 in terms of providing you Voice, but with the constant

renewal of the telecommunications market and the emergence of new management

methods, although it gained a series of success in 1996, it had gradually slid into the

inevitable downturn.

April 2000, Omnitel was acquired by the British Vodafone Group. Vodafone Group is

largest mobile communications group all around the world, which has more than 130

million customers in 26 countries until 2003. In 2001, Omnitel brand began to close to

Vodafone company; May 27, 2002, Omnitel Vodafone had changed its name to Vodafone

Omnitel, the sequence of the name not only emphasized Vodafone Group in its service and

value, but also has a dominant position while in the image and foreign exchange; to May

12, 2003, the company completed its conversion process in the Italian brand. Today,

Vodafone Italy has become one of the most important, as the past 10 years, a model of

successful management in Italian companies.


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7) ATLANET

ATLANET AG, an Italian state telecommunications enterprise which provides

telecommunications services, was founded in 2000, under the Fiat Group. The services

mainly focus on large enterprises, SMEs and freelancers.

ATLANET provided a variety of services in the domestic network, and achieved a high

level of voice service, which was aggregate by 24 points (over 12,000 channels) and 42

data service point (distribution of the country, associated with the trunk fiber, more than

11,000 IP channel). Because of such a broad network, ATLANET were able to provide

services in more areas, which development plan was further reduce the cost of transport

and connection base on traffic aggregation points. In Rome, fiber optic line of ATLANET

has been extended over 330 km; it also use fiber-optic network in Milan, while in Turin,

synchronous digital transmission (Synchronous Digital Hierarchy, SDH) technology were

used.

Currently, as an optional operator, ATLANET is committed to local loop unbundling (LLU)

system to directly connect customers’ network.

6.6 Italy Telecom Market Prospect

Many telecommunications consulting firm and research centers, such as Australia Paul

Budde Consulting, Analysis Research Center, and information technology and

telecommunications industry market research firm International Data Corporation (IDC),

have made forecasts for the Italian telecom market. Italian telecommunications market will

show the following trends in the next few years:

6.6.1 Intense Compete in the Broadband Audio Market

As Italy has the lowest line rental costs in Europe, non-binding measures will continue to

grow rapidly, and it predicted that broadband connection speeds would also show strong

growth after 2005. Recently, France Telecom launched a residential network VoIP services;

Tiscali is also join in the competition bravely in this Greenfield in July 2005; Telecom

Italia Wire line will be launched defend War before the rapid growth of a competitive

market; PSTN rental fee would be a major competitive advantage. Telecom Italia, as to


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provide a high-end services, has been effectively improve ARPU, but it still needs to

protect its weak VoIP market, for which it must be provided effective solution of

Broadband voice in the second half of 2005, and lower its PSTN rental fee.

6.6.2 Triple-Play Services Increased Competition, Multi-Media Became Spotlight

Fastweb has launched ambitious plans to extend fiber coverage to 45%, this activity

undoubtedly aggravated the competition in triple-play services market, and the key of

competition for consumers will be reflected in the provision of services Content. As IP TV

putting into practice, more pay-TV content will be gradually introduced. In order to get a

better position in the market, Telecom Italia is actively adjust their strategies, and set up a

2.5 billion Euros proprietary funds for Telecom Italia Media, not only the integrated digital

terrestrial television (DTT) and Internet TV have brought tremendous pressure to Fastweb

company, but also make up the defects service which caused by the cable shortage.

6.6.3 M&A in the Same Industry continually Drive Market Development

The M&A and restructuring will continue between the Italian telecommunications market

in the future. Sold WIND was not ultimately solid Italian telecommunications market;

Eutelia has been seeking rapid expansion through acquisition; TELE2 companies are

poised to invest in infrastructure, any non-binding provider will be a possible target. The

purpose of M&A is to seek greater and better development.

6.6.4 Rapid and Sustained Growth in Mobile Telecommunications Market

Although users has been growing rapidly in the mobile telecommunications, no matter a

high penetration rate, however, Italian warm-hearted personality and preference for mobile

phones, this will continue to promote the rapid growth and create a miracle of

telecommunications penetration base on stability of the population. The following table

describes Italian mobile telecommunications market projections on the next few years.

Table 6.26 Italian Mobile Telecom Market Forecast Unit: K Thousand

Year 2010 2011 2012 2013 2014

Residential prepaid subscribers 55,738 56,090 56,442 56,794 57,146

Residential contract customers 4,604 4,723 4,842 4,961 5,080

SMBs 7,275 7,265 7,255 7,245 7,235


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Large corporate users 680 679 678 677 676

Total User 68,297 68,757 69,217 69,677 70,137

Prevalence rate (%) 116.77 117.56 118.35 119.14 119.93



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7 SWOT Analyses for Huawei

Huawei did not succeed, but in the growth.

Figure 7.1 Factors in SWOT Analysis

Since it’s found, Huawei started the company from agent communications switch products

in Hong Kong. After twenty years of development to overcome the various difficulties,

from the cracks to survive, relying on a strong marketing behavior and endless stream of

technological progress, it defeated many powerful opponents, and step into the world's

leading telecommunications solutions provider, become a national brand which was proud.

At the same time, it became a benchmark in the same industry and even many Chinese

companies to learn. SWOT Analysis of Huawei as follows:

7.1 Strength analysis

Core competitive ability is a key factor to sustainable development. Huawei, which takes


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strong campaign for many years in the multitude telecommunications industry, has a

profound understanding of this. So, from the beginning, Huawei is setting up their own

advantage of brand from many areas, such as R&D, channel, service, and so on. Huawei is

a distinctive company, through years’ accumulation, many advantages and benefits have

become dominant in the industry.

7.1.1 Business Ranking

January 27, 2009, WIPO announced the quantity of Patent Cooperation Treaty (PCT)

applications on its website in 2008 global. Data show that, in 2008, Huawei Technologies

Co., Ltd ranks top of PCT applications which takes 1,737 pieces of PCT applications from

last year's No.4 (1,365 cases)46

straight stepping to No.1 for the first time.

7.1.2 Strong Marketing Capability

Huawei was said the wolves fighting strategy in the industry. Huawei people, especially

president Ren Zhengfei, have advocated this in the marketing: unity, fierce, fast and

efficient to win the trust of customers, grabs a large number of orders, even at high cost

and high pay. Such tactics gathered strong momentum, input and output were huge, so as

to convince customers, but also give a great deterrent to the opponent. These have become

a famous label and greatly enhance the brand and influence of Huawei.

For personal qualities of marketing, Huawei will also take the time and cost for strict

training, at the same time, provide a powerful impetus and protection in the remuneration.

In the strategy of Marketing, Huawei has right direction and specific goal for development.

At the beginning of the Enterprises established, it is difficult to compete with large

communication equipment manufacturers as the limited strength. So company starting

from the rural areas and the low end, gradually nibbles market share of large

telecommunications equipment suppliers, and develops skills with the wolf pack tactics,

finally, beat the competitor to win the major market share.

46 Huawei Win-Win 2009-02-05


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7.1.3 Products and Technologies

The most proud for Huawei people is the competitiveness which comes from strong R&D

and technological innovation. In similar companies in China, Huawei's strength in this area

is recognized as first position. Since the company just enters the stage of profitability, in

the absence of uncertain future, Huawei dare to put a large proportion of the capital, began

to focus on developing its own high-end communications equipment. Huawei can compete

in the high-end market depending on its independently developed the world's leading-edge

core technology.

In the initial accumulation of technology, it has formed tradition of high R&D investment

and innovation. In the high-end technology, from scratch, from weak to strong and to lead

the industry, it has formed a virtuous cycle, became a world-class technology innovative

company and the industry leaders. It is one of a few companies which have ability to

provide next-generation switching systems manufacturers all around the world. The

quantity of patent application ranks the first position in China, and it possesses of a number

of 3G innovation in industry. Most of its communications products based on their

independent developed property rights products, which fully respond to customer needs.

Huawei takes advantage of their own in the management of IPD, Capability Maturity

Model (CMM) and in product of development, to meet the broadband metropolitan area

network and enterprise network requirements through the product design and scalability, as

well as operational characteristics, in order to provide solution to customers with more

efficient, safe, easily expandable. Taken the method based on shared devices & software

system development and design, all data communications products choose VRP unified

common operating platform and iManager N2000/Quidview network management systems

to maintain continuous investment in the development of ASIC chips, at the same time,

introduce a cost-effective solution and products.

7.1.4 Sensible Decisions

The company was established in the telecommunications market penetration, Present Ren,

in the leader's leadership, courage to invest for marketing operations, and occupy high

ground for technology R&D of the industry. To get in return capital through selling


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business prior the industry winter, and then, go abroad for an overseas distribution at

appropriate time, every step of the walk is very wise.

Also some errors in the development of decision-making, but this did not threaten the

company's fundamental, and influence the company forward. Most of the time, Huawei

walked in front of trends and time, enabling the company to seize the opportunity to

rapidly grow and develop.

7.1.5 Localization

Based on the Chinese user and localization services, nowadays, China is not only the

world's most rapidly growing demand for network equipment, but also become network

equipment supply base only after North America in the world. Obviously, Huawei have a

clear understanding to this point: if domestic manufacturers want to surpass the

competition of foreign companies, it has to take more efforts on localization. However, this

difference must establish on the major technical standards. Take product as an example,

firstly, it has to ensure equipment performance and stability, and on this basis, focus on the

domestic user specific business needs for development, only this to reflect the

competitiveness of localization. In this respect, Huawei has achieved very good results.

7.1.6 Cultivate Culture and Standardization

• Attention to staff training. Do not pay attention to the surface of the diploma; all

employees must start from the grass roots. Huawei University was established and convey

not only in job skills training, technology, but also for cultural transmission, so as to

increase the sense of identity and belonging Sense. Senior managers are growing up step

by step.

• Cultivate a good corporate culture. Company attaches importance to training of

ideological and cultural, usually organizes staff learning; the company's leaders are good at

boot, and gradually formed a wolf culture: active, united, focused, ferocious has become a

common label in the industry.

• Standardization. Formulated Basic Law of Huawei, Huawei will be written down in


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the form of regulation during their development in marketing, development and

management, human resources, culture and tradition accumulation. The company's location

and type, and direction of development identified, is long-term development for the

company under the foundation.

7.2 Weakness Analysis

7.2.1 The Individual’s Leadership Affected is Serious

As a private enterprise, all private enterprises will inevitably exist a common problem in

general, the leader's personality. President Ren, the company's top leaders, has ingenious,

as the company forward step by step, but the company’s operation are more controlled by

the president. The risk largely depends on president’s action, so that is not conducive to the

sustainable development for the company. Under the dominant power, mistake decision

will appear easy. At the same time, it takes less attention to public opinion and does its

own way, so this usually induce instability; Huawei respected wolf and stiff competition,

most people, especially for young graduate, could not bear this pressure, this is one of the

reasons for employees jump and sudden death.

7.2.2 Capital Equity Issues are Complex

Company invests in human wave tactics to sell out for public relations in the long-term,

with substantial funds for research and development. The effect is significant, but this

make the company's financial struggled when resurgence. - the company is facing the risk

of cash flow fracture many times, and have no choice to encourage staff investment

holding to ease the financial pressure. As the company's development and growth, funding

issues have been eased, but the equity problem has become complicated. Complex of the

shares influence the company's profit distribution and decision-making, even the company

missed the opportunities to list. As Huawei is not listed company, and its financial are

much weaker comparing with Alcatel and Cisco. To some extent, this will hinder the

process of internationalization, but also limits R & D expenditures.

7.2.3 Without Suitable Successor

As president has always been strong, when the rapid progress in the company, there is no


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successor with the same charge of the future for the company, which increases the

uncertainty of the company. The company will have a great shock after current present

retired; there is a certain gap comparing with foreign famous companies after their coacher

coaching.

7.2.4 Low-Key Style

Lack of public relations propaganda does not help to improve corporate image. In front of

the media deliberately maintain low-key image, this gradually increasing mismatch

between the company's reputation and the strength. Many Chinese people are not familiar

with Huawei, which is not conducive to establish the company's brand value and difficult

to access to the mobile terminal market and win the trust of consumers in mass popularity.

7.2.5 Mattress Culture and Wolf Culture

Mattress culture and wolf culture in Huawei are against human nature management

requirements, which are not conducive to physical and mental development for the staff

and will certainly affect the work efficiency.

7.3 Opportunity Analysis

7.3.1 Terminal Market

With the rapid development of the telecommunications industry, this gives great

opportunities to Huawei. Actually, in Chinese market of 3G including a serious of business

opportunities, lack of 3G terminal product has been the biggest stumbling block for the

development. As the pace of development is very inconsistent for the global 3G market,

compared with 2G mobile phones, the number of 3G mobile phones is still negligible.

Therefore, in early stages of development, the domestic 3G market is still a coexistence

market including network card, Internet and mobile multi-terminal form. Huawei has the

advantage of WCDMA. As early as 1998, Huawei began research and development testing

for WCDMA terminal product, and gradually established research and development office

in Beijing, Shanghai, and Shenzhen, and around the world in Europe, the United States,

South Korea and other regional offices. Since 2000, WCDMA test UE of 3G network

equipment has become an important network testing tool vendors. At that time, the world


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is still at the eve of large-scale commercial for 3G network, and the market situation of

monopolize has not yet formed around the foreign telecom giants. So, developing 3G

terminals are very favorable in time for Huawei. Based on the experience of foreign

countries, in 3G markets depending on data-based value added services, mobile terminal as

carriers for voice and data service, and differentiation competitive embodiment, will be

more and more to customize. This will increase the threshold of mobile terminal industry,

and domestic communications equipment manufacturers with the core technology

advantage and competitive will seize the opportunity.

7.3.2 International Market Environments

With Chinese rapid development and international distribution, Chinese companies have

been significantly improved in overseas development environment; more and more

Chinese companies are starting to show their talents in the international market. In the

mobile wireless communications and the Internet integration changes constantly, plus

rapidly changing trends, the Chinese company and the world are basically at the same

starting line, with many years business in the foreign operations and international brand

building, Huawei is expected to be just top international technology companies like

Panasonic, Casio, and Siemens.

7.3.3 Domestic Market Environments

China's real economy has been starting transformation from the low value product to

high-tech products with higher value-added, while Huawei has already walked in the front,

and become one of the best technological innovation of Chinese companies. Now, Huawei

is expected to become national brand of proud for people like Panasonic, Sony as long as

operating careful.

7.4 Threat Analysis

1. Through years of rapid development, company has gradually gone through the stages

of development, and entered the maturity stage. It is difficult to obtain huge profits through

aggressive expansion in the future. However, it is a proper transformation to operation in

the capital, technology R&D investment. At the same time, comparing with Cisco, Alcatel


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and other companies, network design and network deployment as well as human resources,

Huawei take a distinct disadvantage in these areas. With more telecom operators consider

network functions and performance, the low price strategy would be losing their appeal for

Huawei. Global telecommunications provider is to shift more operations to China, to take

advantage of low-cost engineering and manufacturing capabilities. Alcatel and Shanghai

Bell plus TCL set up joint ventures. Nortel Networks has been alliance with the Electronic

Products Group, China Putian, to manufacture 3G mobile devices. This will enable

low-cost advantage of Huawei is no longer significant, and facing great competitive

pressures.

2. After years of development, business activity gradually decreased in the company, it

would cost more and greater difficulty to maintain high activity of the original wolves’

tactics. And now, a large number of second generation have been introduced to the

company, so that it is a new challenge to heritage of Huawei spiritual, continue to dynamic,

fierce flame.

3. After financial crisis, every government wants to promote their economic development

which will take a variety of strict protection measures. Take European Union as an

example, in January 2009, the products without registration or pre-registered in EU

REACH regulations will be ban into the EU Market, which means many products

including communications product will face ROSH directive, WEEE directive and

REACH regulation test. These new trade protection measures could lead to a greater effect

to export of communication products Effects represented by environmental standards,

intellectual property.

4. Huawei will face overall challenge of strong international company, as the domestic

telecommunications market is becoming increasingly open and decreasing import tariffs.

With the brand becoming more prominent, Huawei will be increasingly becoming a strong

competitor of many international companies, and will also become a challenge object and

competitor to many new companies. Addition to considering the expansion, we should also

start considering holding the current market.


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Summary:

After years of development, now is the time to take off, but due to the development of

leadership and the many remaining issues, making the company's future involving

potential problems. Looking for a same illustrious successor, the appropriate expansion

and business transformation to further promote their brands should be more important

thing.

7.5 Advises

7.5.1 Enterprise Management

It is a general issue to concern: the emerging enterprises in China growing up in the past 20

years, are generally rely on the iron-fisted leader of individuals or the wisdom of small

groups developed. This development model comprises much human culture of Chinese

characteristics, whether enterprises can adapt to the institutionalization and standardization

Management philosophy for practice? Whether the traditional mode of authoritarian led

enterprise to business success, and top management team is able to discard?

As a technology enterprise paying attention to corporate culture and standardize the

management, Huawei can consider the introduction of institutional knowledge

management, to establish an organized, systematic learning culture and mode, in order to

enhance the core competitiveness of employee and the entire organization (the ability to

continuous acquire knowledge and organized institutional knowledge resources), directly

supporting enterprise management. Meanwhile, the model of institutional knowledge

management can help build learning, collaborative work culture-based enterprises which

can help Huawei to become modern learning organizations.

7.5.2 Generation Mechanism for Leaders

The leader, does not mean the highest decision-makers, but as a decision-making group for

corporate strategy. The individual role of leaders was one legend (start, transition) in the

Chinese and foreign enterprises which have been confirmed. The companies, which realize

continually overcoming difficulties and achieving sustainable development, even more

depend on the specific organizational structure of a systematic and synergies of the entire


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decision-making and implementation team. The generation mechanism for leaders and

promotion mechanisms for staff are complementary, while the former is the highest

demonstration for the latter. Promotion mechanism is not only the base and verification

system for the leaders of the generation mechanism, but also provide a steady stream of

excellent talent pool and quality personnel files.

In the long-term development for Huawei, the collective wisdom cohesion based on the

system is more important success factor. Therefore, the promotion of system and

transparent generation mechanism for leader cannot be ignored and avoided.

7.5.3 Human Resource Management

Talent inflow and outflow has always been larger in Huawei, and even it has been blamed

for a large waste of human resources. In the high-speed stage, enterprise would be

inevitable using some human resources of unconventional strategy, and this also does have

a very effective and operating incentive results.

Establishing an open, free business environment, emphasizing on individuality and

autonomy of employees, Huawei should focus on people-oriented. Employees are the most

important resource, and companies should focus on staff training and motivation.

However, as the market and enterprises gradually go to matures, exciting needs would be

replaced by the orderly need. Scientific and systematic evaluation positions, promotion

mechanism and long-term career planning for employees and employers, have become

increasingly important. Huawei's success in enhancing the share of international market, to

achieve international development, needs a sound human resources management system as

a support and protection. It can also take the opportunity to solve some other management

issues, such as high staff mobility, high costs of human resources, and higher training

costs.

7.5.4 Operation and Management Tools

In the operational level with the specific management tools, the main challenges faced by

Huawei are able to effectively implement the management system through the


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demonstration, and whether achieve self-improvement by use of their own learning and

knowledge resources. During the company stepping to maturity, the enterprise gradually

eliminate unconventional operation after high-speed development, such as R&D

management, marketing management, human resource management, cost control, financial

management, etc.

Financial and fund management is the key and vital for modern enterprise. Huawei has to

need to upgrade financial management to the same height with R & D and marketing,

because financial accounting management directly impact on enterprise management for

decision-making based on the accuracy of financial data. Financial and capital operations

are the important means to compete with the international competitor.


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8 Case study of Internationalization Strategy of Huawei in Italy

As for Huawei case, why Huawei choose FDI in oversea market rather than choose

sub-contract as agency to sell their product? As we know, FDI is expensive because a firm

must bear the costs of establishing production facilities in a foreign country of acquiring a

foreign enterprise. FDI is risky because of the problems associated with doing business in a

different culture where the “rules of the game” may be very different. Relative to

indigenous firms, there is a greater probability that a foreign firm undertaking FDI in a

country for the first time will make costly mistakes due to its ignorance. When a firm

exports, it need not bear the costs associated with FDI, and it can reduce the risks

associated with selling abroad by using a native sales agent. Similarly, when a firm allows

another enterprise to produce its products under license, the license bears the cost or risks.

The following three reasons maybe explain why Huawei choose FDI over licensing to

sub-contractor.

Licensing may result in a firm’s giving away valuable technological know-how to a

potential foreign competitor.

Licensing does not give a firm the tight control over manufacturing, marketing, and

strategy in a foreign country that may be required to maximize its profitability.

Another problem with licensing arises when the firm’s competitive advantage is based

not as much on its products as on the management, marketing, and manufacturing

capabilities that produce those products. It is that such capabilities are often not

amenable to licensing47

.

As we know, Huawei is a telecom enterprise belonging to technology intensive industry.

The key competency or comparative advantages of high technology products mainly stem

from technology and brand. Huawei has certain gap with the MNEs from the developed

countries in these two aspects. Huawei’s comparative advantages over MNEs from the

developed countries arise from low R&D cost. Huawei utilized low cost advantage as a

competitive weapon to penetrate the markets in developed of the countries rather than as a

47 International Economics 7th Edition Ch 7


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purpose or motive to invest in the developed countries. Huawei intends to acquire the

technology advantages rather than “exploit” its low cost advantages in developed countries.

Technology and R&D resource seeking are Huawei’s strategic goals of investing in

developed counties. In this chapter, we studied the development of Huawei in Italy as an

example case to analyze the internationalization process of Huawei. Huawei first

established in Italy in July 2004, and set up its Milan and Rome offices in the same year

and in April 2006 it opened the Turin office.

8.1 Advantages of Huawei

The advantages of Huawei can be considered in two aspects: 1) Inborn advantages

including low cost, high efficiency and differentiation; 2) Acquired advantages refer to the

advantages gradually formed after offsetting the weakness in technology, reputation.

Inborn advantages were mainly used in the initial stage of internationalization to open

foreign markets and develop acquired advantages through international competition and

cooperation. In the mature stage, Huawei focused on exploiting the acquired advantages to

consolidate its strategic position in the international competition while protecting its

existing advantages. Another advantage that influences the development of Huawei is the

government support.

1) Cost and Efficient

Cost is a very powerful “offensive” weapon in business competition48

. Some scholars

suggested that MNEs from the developing countries might utilize their comparative low

cost advantages as their primary offensive strategy to penetrate international market49

.

High performance-price ratio products and highly efficient services become the primary

competitive weapons in Huawei’s international strategy. Huawei’s low-cost advantage is

generated from low-cost China-based R&D and engineering resources. Huawei’s report

shows that the average cost of Huawei’s R&D employee is US$25,000 per year, while that

of the European enterprises is around US $120,000-150,000 per year, six times of

Huawei’s. Meanwhile, Huawei’s R&D staff work on average about 2750 hours annually.

48 Porter, Michael E. (1980): “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, New York:

Free Press. 49 Rugman, A.M. (2006): “Multinational Enterprise Strategy for Developing Countries”, in Multinational Corporations

and Global Poverty Reduction, edited by Subhash C. Jain and Sushil Vachani, Edward Elgar Publishing, pp142-163.


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While European R&D people work only 1300-1400 hours every year. The man-hour

investment is about 2:150

. As a result, Huawei does not only have low cost R&D, but also

has fast response to innovation and customer request.

Cost advantage is a relatively important competitive factor for MNEs from developing

countries to penetrate international market, but in order to compete in other higher

value-adding markets; differentiation, innovation and brand advantages are also required51

.

2) Differentiation

Differentiation advantages refer to Huawei’s customized solutions of next generation

telecommunications networks. Huawei is willing to customize products and solutions for

the specific or special requirement of each and every customer. This is the most prominent

characteristic that differentiates Huawei from those western telecom enterprises mainly

offering relatively fixed solutions. In Italy, Huawei using this advantage to provide

end-users products with a seamless convergent telecommunications experience anytime,

anywhere, and via any terminal. As such, it offers a range of Next Generation end-to-end

Telecom and IT network solutions to main Mobile and Fixed Line Italian Operators such

as Telecom Italia, Vodafone, Wind, H3G and Enterprise Networks. The full product

portfolio includes wireless products, network products, application and software products

and terminals. In July 2010, Huawei launched to the Italian open market its branded new

smart phones based on Android, U8110 e U8230 technologies. It has also been presented 2

GSM mobile phones, G6600 e G7002, and the new Wi-Fi modem E5830S.

In terms of technology, brand and management, there still had been some gaps between

Huawei and enterprises from the developed regions at that time. But Huawei today has

managed to make up for the weaknesses and have already formed some acquired

advantages in international competition through consistent efforts.

3) Technology

Maintaining the technology advantage of the core product is the key for high-technology

50 Source: Huawei Interview (2008-04-23). 51 Child, John and Rodrigues, Suzana B. (2005): “The Internationalization of Chinese Firms: A Case for Theoretical

Extension”, Management and Organization Review, Vol.1, No.3, pp. 381–410.


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enterprises to engage in cross-boundary investment. Huawei provides state-of-the-art

technology that meets the needs of the most demanding customers. Huawei believes in the

importance of research and development. It stresses the development of high-end and

mid-range technologies through participating in international R&D cooperation and setting

up independent R&D system. Huawei invests an average of 10% of its revenues in R&D

on an annual basis, at the similar level as the leading telecom enterprises like Motorola,

Alcatel-Lucent52

. The R&D expenditure in 2005 was US$588 million, more than triple that

in 2000 (US$180 million) (Figure 8.1)53

. 46% of its employees are dedicated to research.

Huawei holds the second place worldwide for the number of registered patents, with 1.847

registrations in 2009.

Figure 8.1 Revenue, R&D Expenditure and R&D Intensity

Source: Huawei Annual Report 2004 and Huawei Annual Report 2006

4) Reputation

As most of MNEs from developing countries, Huawei also suffers from lack of

internationally acknowledged brands or trade names54

. Good reputation is one of the main

criterias to evaluate an enterprise’s success in internationalization. These could also be

advantages for MNEs in overseas investment. In 2004 when Huawei started its presence in

52 Brian, Low (2007): “Huawei Technologies Corporation: from local dominance to global challenge”, The Journal of

Business & Industrial Marketing, Vol. 22, No. 2, pp.138. 53 Source: Huawei Annual Report 2004 and Huawei Annual Report 2006, www.huawei.com 54 Wells, Louis T. (1983): “Third World Multinationals: The Rise of Foreign Investment from Developing Countries”,

Cambridge, Mass., MIT Press, 206 pp.

19932290 2128

2694

3827

5982

180 342 355 389 487 588

9.3%

14.9%

16.7%

14.4%

12.7%

9.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

1000

2000

3000

4000

5000

6000

7000

2000 2001 2002 2003 2004 2005

Revenue R&D Expenditure

Revenue, R&D Expenditure and R&D Intensity (US$ in Million)


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the Italy, China was not perceived as point of excellence for the high-tech market. Now the

perception is different and Huawei gives a strong contribution, thanks to the high-level of

solutions and services offered to the telecommunications operators. Huawei solutions

passed the strong testing phases and demonstrated to be best in class solutions. Huawei are

very fast in transforming key innovations into market realities. Currently, customer can be

confident that Huawei can satisfy their innovation requirements in a very short period of

time.

5) Government Support

During the transitioning period, Chinese government authorities are more interested in

guiding future development of larger firms55

. They are willing to provide financial support

to these domestic larger firms or “national champions” for their internationalization and

protection from domestic market56

. In internationalization process, Huawei also benefits

from government support and protection. For example, to improve the R&D capability of

Chinese telecom enterprises, the governments helped to bring about technology

cooperation and strategic alliance between Huawei and foreign telecom giants like

Motorola, Siemens, Nokia and etc. Governments also provide soft loan for Huawei’s

international operation, for example, The Export-Import Bank of China (China Ex-Im

Bank) and China Development Bank (CDB) provided Huawei US$600 million57

and

US$10 billion58

credit respectively in 2004.

Under governments’ meticulous care and support, Huawei quickly grew from a weak

domestic private enterprise into a multinational telecom enterprise with international

competency.

55 Nee, Victor and Opper, Sonja (2007): “On Politicized Capitalism”, in Victor Nee and Richard Swedberg (eds.) On

Capitalism, Stanford: Stanford University Press, pp. 93-127.

56 Child, John and Rodrigues, Suzana B. (2005): “The Internationalization of Chinese Firms: A Case for Theoretical

Extension”, Management and Organization Review, Vol.1, No.3, pp. 381–410. 57 Huawei News (2004-04-08): “A US$600 Million Export Buyer's Credit Framework Agreement Signed between China

EXIM Bank and Huawei”, http://learning.huawei.com/english/EnglishVersion/new.php?NEWS_ID=617. 58 MOFCOM News (2005-03-15): “China Mobile Bids to Take First Global Step”,

http://english1.mofcom.gov.cn/aarticle/counselorsreport/asiareport/200503/20050300025160.html.


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8.2 Location Advantages in Italy

8.2.1 Distinctive Logic of Location Choice

In order to protect their investments and minimize risk and uncertainty, MNEs usually

prefer to invest in politically and economically stable countries. However, Huawei has the

unique logic of strategic location choice. Huawei set its eyes on the potential market

behind uncertainty and risk. In the initial stage of participating in international competition,

Huawei does not possess the strength for directly crossing swords with telecom enterprises

from the developed countries. Therefore, Huawei set its eyes on the potential markets

behind uncertainty and risk in developing countries. Huawei accumulated strength and

achieved international influence by grasping the opportunity of development in these

countries. These also laid a good foundation for Huawei to further improve its strategic

layout in global market and participate in higher level of international competition.

Even developing countries provided a lot of opportunities for the internationalization of

Huawei, attractions of markets in large developed countries could more than offset any

problems of psychic distance. At present, most of Huawei’s investment concentrates in

developed countries and majority of overseas sales also come from developed countries.

Some studies on Chinese MNEs showed similar evidences to explain why they prefer to

invest in developed countries with possible huge culture shock, because they are pursing

long-term globally-oriented strategies and the source of crucial technology and brand

assets59

.

Huawei decided to expand its presence in Italy for the important competences found at

local level. Italy needs to create its Global Microwave R&D center serving both the Italian

and the Global market. The Italian operators are very strong both on fixed and mobile

communication and they are making high investments in the development of new

technologies. Huawei was involved in very innovative local projects such as the technical

development of the first trial of LTE/4G network with Telecom Italia in 2009. Italy is also

a very active market in terms of consumer mobile applications.

59 Li, Ping P. (2003): “Toward a Geocentric Theory of Multinational Evolution: the Implications from the Asian MNEs”,

Asian Pacific Journal of Management, Vol. 20, No. 2, pp. 217–242.


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8.2.2 Why Choose Italy

The attractiveness of specific factor endowments in host country for investment by MNEs

is the location advantage60

. Location advantages is the main reason for location choice,

which contain natural resources, economic environment, cultural and social factors,

political power, legal environment and etc. These aspects in Italian market were analyzed

using PEST algorithm Chapter 5. As one of the developed countries, the location

advantages of Italy are summarized as:

1) Leading technologies and top-ranking R&D resources.

According to the case studies on three Chinese high technology MNEs by Li Ping61

, the

primary motive of MNEs from China engaging in cross boarder investment in the

developed countries is technology seeking. Italy is the 4th European largest investor in

R&D by volume, with spending totalling over €15 billion. Italy contains an extensive

network of high-quality universities and public and private institutions and a modern

network of science and technological parks, which ensure that research is widely integrated

into industrial processes. These technology clusters have significant positive impact to

technology innovation. Companies investing in Italy can rely on an average of 300,000

graduates per year62

. A survey conducted by Ipsos Explorer in February 2008 of 60

multinational companies operating in Italy, highlighted that top foreign multinationals

located in Italy benefit from sector-specific technical and managerial skills and

patents/know-how (55%) as well as the capacity to set trends in different industries, such

as fashion and design (53%)63

.

2) Wide network of infrastructure and business environment.

Italy has a wide network of infrastructures which is conducive to increase operation

efficiency. Italy has a strategic position in Europe and is in the heart of the Mediterranean

Sea. Italy is the main thoroughfare linking southern Europe to northern and central Europe

60 Dunning, John H. (1988): “The Eclectic Paradigm of International Production: A Restatement and Some Possible

Extensions”, Journal of International Business Studies, Vol. 19, No. 1, pp. 1-31. 61 Li, ping p. (2007): “Toward an Integrated Theory of Multinational Evolution: the Evidence of Chinese Multinational

Enterprises as Latecomers”, Journal of International Management, Vol. 13 No. 3 p.p. 296-318. 62 Source: Minister of University and Research 63 Why Italy: http://www.invitalia.it/site/eng/home/why-italy.html


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by land, sea and air. The majority of Europe's capitals are within 3 hours flying time from

Rome. It provides a gateway affording easy access to 436 million consumers across the

European Union, and a further 240 million in Northern Africa and the Middle East. Italian

roads cover approximately 1 million km, making them the second longest network in the

EU 25, after France. With an evolved system of international ports, logistics platforms and

interports, Italy ranks as the second most important country in Europe for maritime freight,

and the second also for passenger transport: 263 ports scattered along 7,400 km of

coastline, 80 million passengers per year, port traffic of 550 thousand ships64

.

A friendly business environment could offer efficient platforms and abundant capitals for

commercial operation of high-technology products. Following a thorough reform of Italian

corporate law in 2003, the legal framework for companies can now be considered one of

the most modern and dynamic in Europe. During the past years, Italy has been

implementing a broad reform of the Italian corporate tax system and the corporate income

tax rate is now reduced to 27.5%. The good ecosystem combined with the positive

collaboration with some Italian universities make Huawei very positive for the current and

future business in Italy.

3) Market and opportunities.

Italy boasts a long tradition of Information Communication Technology (ICT) innovation

dating back to the beginning of last century. Today Italy remains a source of vigorous and

dynamic innovation, a major developer of pioneering technologies. It contains a potential

market of almost 60 million potential consumers (more than 25 million internet users)

which making Italy one of the most outstanding pilot markets worldwide for development

and launch of ICT products and services. Italy is Europe’s fourth largest ICT market, with

market value exceeding € 60 billion in 2010. TLC market share is worth € 41.8 billion and

the IT one is equal to € 18.4 billion65

.

64 Ibid 65 Foreign Direct Investment in ICT sector in Italy:

http://www.invitalia.it/site/eng/home/investment-opportunities/ict.html.


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8.3 The Development of Huawei in Italy

Huawei was first established in Italy in July 2004, and set up its Milan and Rome offices in

the same year. In addition, Huawei opened its Turin office in April 2006. In the

development process, Huawei put great emphasis on localization. As a result, more than

half of its employees in Italian offices are locals and Huawei has worked with several local

major telecom operators such as Telecom Italia, Vodafone, Wind, and Enterprise Networks.

In Italy, Huawei is focused on providing end-users products with a seamless convergent

telecommunications experience. In May 2009, Retelit S.p.A has selected Huawei to deploy

its commercial WiMAX 802.16e network covering north and central parts of Italy. In

November 2009, Huawei announced the completion of a joint LTE test with Telecom Italia.

In 2010, Huawei scored the latest in a string of deals for HSPA+ and LTE with Italy's

second mobile carrier, Wind. In June 2011, Telecom Italia and Huawei have signed a

5-year development agreement in several technological fields with the objective to develop

fixed new generation network infrastructures, mobile devices and innovative applications,

software and enterprise solutions, with a total amount of 1 billion U.S. dollar. The

agreement reached today strengthens and extends the cooperation between Huawei and

Telecom Italia both in Italy and in Latin America in different technological fields including

devices, application and software, enterprise solutions as well as research into new

technologies and services. Huawei is a fast-growing company and through this renewed

agreement with Telecom Italia aims to continue increasing its expansion in Italy bringing

value to the local business community.

To meet local training requirements, Huawei also opened a training center in Milan, which

includes a fully-equipped local training lab. In addition, a fully-functional Technical

Assistance Centre (TAC) was established in order to support local customer requests

round-the-clock. In this internalization process, Huawei expects to acquire the R&D

resources in developed countries and combine them with its existing technology advantage

to form new ownership advantages, and then transfer it from developed countries back to

China.


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9 Conclusions and Future work

9.1 Conclusions

Since economic reform and opening up in 1978, the Chinese economy developed at an

unprecedented rate for more than 30 years, with an average annual increase of around 10 %.

China has again become one of the world's major economic powers with the greatest

potential. According to the World Bank in 200766

, China has become the largest

developing country and emerging economy in the world. With the development of Chinese

economy, more and more Chinese enterprises started the internationalization process,

which will promote China’s economic and even the world economic development. This

thesis studied the Chinese MNEs’ internationalization process to provide some evidences

for the improvement and extension of existing internationalization strategy.

The method of case study was applied to analyze the internationalization strategy of the

Chinese high-technology MNE by studying internationalization process of Huawei

Technology Corporation in Italy market. This case study of Huawei’s internationalization

strategy attempted to address the following questions: 1) what are the key components of

Huawei’s internationalization strategy? 2) Through the analysis for Italian economic

market and telecom market, why Huawei choose this market for their internationalization?

3) What are the factors that influence the internationalization development of Huawei?

First, the development of Huawei was introduced to show the key components of Huawei’s

internationalization strategy. Huawei’s general internationalization strategy is technology

R&D oriented, pushing forward the internationalization process and engaging in overseas

investment from developing countries to developed countries. In the internationalization

process, Huawei makes full use of its comparative advantages in low cost, differentiation

and relative advanced technology as the powerful weapon to penetrate international

markets. However, as the company gradually goes to mature stage, the low cost will be not

yet an advantage while it competes with other world technology companies.

66 World Bank (2007): He, Jianwu and Kuijs, Louis, “Rebalancing China’s Economy- Modeling a Policy Package”,

World Bank China Research Paper No. 7, http://www.worldbank.org.cn/english/content/working_paper7.pdf.


- 92 -

Then, political, economic, social, and technological analyses of Italian market and analysis

of Italian Telecom Market were conducted to show why Huawei choose this Italian market

for their internationalization. In summary, the Italian market has leading technologies and

top-ranking R&D resources, wide network of infrastructure, friendly business environment

and has Europe's third largest telecom market. Even developing countries supplied a lot of

opportunities for the internationalization process of Huawei, however, for pursing

long-term globally-oriented strategies and the source of crucial technology and brand

assets, most of Huawei’s investment concentrates in developed countries.

The factors that influence the internationalization development of Huawei were studied by

the strength, weakness, opportunity and threat analyses using SWOT model. This study

showed the advantages of Huawei in low cost, technology, strong marketing capability,

and government support. In the operational level, the main challenge faced by Huawei is

the effective implementation of the management system.

From the case study we learned that: 1) MNEs from developing countries adopt catch-up

strategy in their internationalization process by investing in developed countries and

forming alliance or cooperation to acquires technology and brand resources, and gradually

enhance their competition advantages. 2) Markets in large developed countries are more

attractive for MNEs from developing countries for having leading technologies and

top-ranking R&D resources, wide network of infrastructure, friendly business environment

and large market opportunity. 3) During the internalization process, except the advantages

in low cost, differentiation, technology and reputation, MNEs from developing countries

should also enhance the management system, e.g. enterprise management, finance

management, human resource management, cost control etc.

9.2 Future Studies

Although Huawei is the forerunner of China’s telecommunication enterprises in term of

internationalization, Huawei still experiences many difficulties in competing with the

world’s largest telecom market – the North American market for having some gaps in

terms of technology, capital, R&D expenditure and level of internationalization. In the


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future, we will study:

1) How will Huawei adjust the internationalization strategy to compete with the larger

telecom market in the world?

2) The influence of Culture factors. How will Huawei handle with the cultural

difference between Eastern and Western countries? Based on the previous research

on the impacts of cultural conflicts on Chinese enterprises’ internationalization

from the perspective of “liability of foreignness” 67, we will further analyze the

impact of Chinese culture on Huawei’s internationalization.

3) How will the adjustment of management strategy influence the further development

of Huawei? Especially after going to public, maybe being listed in the stock market

will be a new starting point for Huawei’s internationalization. At the same time, it

will face with many changes, such as changes in equity, capital and risks, which

will have deep impacts on its internationalization decision-making.

Thus, future case study on Huawei will continue to deploy a dynamic approach.

67 Child, John and Rodrigues, Suzana B. (2005): “The Internationalization of Chinese Firms: A Case for Theoretical

Extension”, Management and Organization Review, Vol.1, No.3, pp. 381–410.


- 94 -

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Interviews:

Mr. Sun Tao, Project Management Officer, Network Roll-Out Department of Global

Technologies Service in Huawei Technologies Corporation

During my internship in Huawei, we have communicated with Mr. Sun more than ten

times to introduce the strategy for me.

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