Siege mentality

How Ren’s iron rules of business warfare have helped Huawei’s rapid growth

World Economic Forum in Davos

Huawei’s success, says Ren, is down to spending lots of “ammo” on R&D

The founder of the telecoms and tech giant Huawei has always been notoriously low-profile and media shy. So this month it was something of a surprise when Ren Zhengfei gave a three-hour interview to Xinhua about his company, his vision and his views on what China’s government should be doing to boost the economy.

His is one of China’s greatest industrial success stories – hence the tones of reverence that pop up throughout Xinhua’s Q&A session. He started Huawei in 1987 with five friends, who between them raised Rmb21,000 and began by operating out of what Ren terms a “broken shanty” in Shenzhen, with two multimeters plus an old oscilloscope.

Xinhua points out that 28 years later he’s transformed “an unknown small workshop into a global leader in the field of communications, with revenue in 2015 of Rmb395 billion (about $60 billion), net profit of Rmb36.9 billion and a growth rate of over 30%”.

Ren’s business philosophy becomes very plain over the course of the interview. He rejects the idea of “getting rich overnight” and says he believes instead in “working hard to create wealth” and doing so by “growing slowly and healthily”. He says that Huawei’s success has been down to staying focused on its core business, rather than being tempted to dabble in real estate or speculate in stocks.

As a former soldier likes to uses military metaphors to explain his strategy. He likens focusing on one thing – but doing it better and better – to being akin to siege warfare and attaining his objective by “always attacking the same point on a defensive wall”.

Asked why Huawei has never listed its shares, Ren argues that minority shareholders would have disturbed the management’s focused approach, taking the company into a “no mans land” away from its core telecommunications business. (On a related point he adds that he and his executives are driven more by ideals and do not see money as their central goal.)

Keeping with the military language, Ren says Huawei’s ability to catch up with its Western rivals was owing to its focused strategy and its commitment to invest for the long term. Huawei has employed, he notes, “an intensive artillery and saturation attack”.

“Each year Huawei spends more than Rmb100 billion of ‘ammo’ shelling the ‘same point on the wall’, including research and development of nearly Rmb60 billion, market services of Rmb50 billion, and finally we win the leadership in the world in terms of big data transmission.”

He says Huawei has spent 28 years absorbing management lessons from the West, and his firm still spends hundreds of millions of dollars on advice from IBM and other global consultants. He adds he is “unwavering in seeking change” to “optimise the organisation and processes, to improve internal efficiency”.

Indeed, like Intel’s Andy Grove before him, there is a note of paranoia in Ren’s outlook. When asked about the firm’s weaknesses, he makes the somewhat incredible remark: “Huawei should have collapsed three years ago”. This is evidently an exaggeration, but one he makes to argue that Huawei’s corporate culture was reaching a dangerous point as senior executives sank into a comfort zone. “They got rich and all just wanted to buy a house in Beijing and raise their kids,” Ren says. “They didn’t want to go overseas anymore.”

Ren’s solution? He made the career path to becoming a “general” (his term) more straightforward for younger middle managers in Huawei’s sprawling African business than in Shanghai or Beijing. In his own form of natural selection, those prepared to tough it out in Africa would advance far faster up the corporate ladder. Ren said it has worked so well: “Now our staff in Africa do not want to come back!”

Ren is also asked about the importance of Huawei’s homebase in Shenzhen and how it impacted the company’s development. He says he would never have started Huawei were it not for a 1987 document published by the Shenzhen government clarifying the ownership of private enterprises. Later, he says, when Huawei grew bigger, some colleagues felt the tax burden was too heavy and favoured winding the company up and splitting the cash. Instead Shenzhen issued another policy document which gave far more favourable tax treatment to investment. As a result Ren and his colleagues decided Huawei should stay put and expand.

“One thing on which the Shenzhen municipal government has done a good job is that it basically does not interfere with the particular operation of the business,” he remarks. “The most important role of the government is to set the rules, and to provide the most effective protection to enterprises with respect to the rule of law and market regulation.”

“Shenzhen is taking the lead in achieving the rule of law and in achieving a market-oriented economy. Intellectual property lawsuits must be processed and the courts must be fair with the judgements.”

In fact, if there is one message that Ren seems to want to convey to the higher powers via his interview it’s how he views intellectual property as sacrosanct. “The country must strengthen intellectual property protection. Property is protected by property law, and intellectual property rights should be at least equivalent to property rights. The state should protect intellectual property rights in order to promote inventions.”

“The world has seen a large number of large companies emerging, such as Cisco, Google, Facebook, and Apple, while China has not seen many come out, because of the lack of intellectual property protection. There will be more big industries emerging in the future, such as virtual reality. China has an advantage in these industries , but to develop better, there must be very stringent intellectual property protection.”

(More evidence of how strongly Ren now feels about IP protection – this week news broke that he was suing Samsung in the American courts for an alleged infringement of 11 of Huawei’s patents related to smartphones and cellular networks. That’s a turnaround from several years ago when Huawei was on the receiving end of lawsuits from Cisco, Motorola and T-Mobile).

In a related policy prescription, Ren favours lower corporate taxes. “Tax cuts can reduce the burden on enterprises, thereby encouraging more investment and innovation,” he says. As to Huawei’s own innovation, he notes that by the end of this year the firm will employ 1,400 scientists (foreign and Chinese) at its 20 research labs around the world.

Intriguingly he also speaks of the search for “Prometheus” investments, explaining, “Prometheus stole fire [from the god Zeus], and with fire there was human civilisation, which was a breakthrough innovation”. He clearly sees scope for further breakthroughs if Beijing better enforces IP rights. “The future information society is unimaginable. The next two or three decades will be the era in which human society will undergo the greatest change. With the breakthroughs in biotechnology, artificial intelligence, and so on, the future human society will see a lot of big industries on the rise.”

As to China’s current economic performance, he is sanguine. “The Chinese economy does not have as big a problem as is imagined,” he remarks. He adds, “I think the central government is very correct in proposing the ‘new normal’. We are no longer in the pursuit of speed. Slower development and quality development is the most fundamental thing.”

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