President Trump’s placement of Huawei on the US entity list was a body blow. The magnitude of the hit should not be understated. Being cut off from US technology has staggered the multinational. But, to their credit, Huawei didn’t go down. They took the hit and stayed on their feet (thus far).
I’m not really sure what the US government thought it would achieve with the ban. To stop Huawei’s growth in international markets? To shift 5G market share to Ericsson and Nokia? To cripple the company? Just an assertion of principle?
I think they really just don’t understand Huawei.
Yes, the US government can hurt Huawei by limiting their access to technology (and to certain foreign markets). But, absent a viable competitor, this won’t have much impact long-term. Because Huawei is fundamentally not a technology company. Huawei is a human resources company. And is kinda obsessed with survival.
My take on this is three points.
But first…consider joining Asia Tech Strategy, my podcast and subscription newsletter on the strategies of China / Asia tech companies.
Point 1: Huawei’s core strategy has always been about survival.
If you read Ren Zhengfei’s talks and papers going back to the early 1990’s, what jumps out at you is how different Huawei is. The goal of the company has never really been about money. Nor about becoming a tech giant. Nor about innovation. And it has definitely not been about going public and getting a big payday. Huawei’s fundamental purpose has always been about survival.
“Being big and strong temporarily is not what we want. What we want is the ability and resilience to survive sustainably.” – Ren Zhengfei (2001)
Note some of Ren’s writings / talks over the years:
- 1998: “How Long Can Huawei Survive?”
- 2000: Survival Is fundamental To An Enterprise”
- 2001: “Huawei’s Hard Winter”
Ren has been talking for literally decades about how Huawei can survive long-term – and about the common causes of corporate decline. My simplistic take is that Ren came up with a fairly logical plan for long-term survival – which is:
- Satisfy your customers. Better than your competitors. No matter what it takes. They are your lifeline and your cash flow.
- Other activities like technology, research and innovation are just a means to this end. And as technology can be copied and / or bought (especially in China), your customers are the only thing that really protects you.
- Satisfied customers are also how a company grows and gets to economies of scale, which is critical. You need scale in order to decrease unit costs and be the low-cost producer in your market.
- Superior scale also gets you the resources you need to outspend your rivals on technology / IP and next generation products.
That’s it. Serve your customers. No matter what. Then get big and slowly grind your competitors down with lower costs and greater R&D spending. And within this, the only resource you really have are your people and their cumulative brainpower. Which brings me to Point 2.
Point 2: Huawei’s main resource is its people. And its main strength is the HR strategy that motivates them.
Huawei, like most engineering-based enterprises, has only one real resource, which is the cumulative brainpower of its people. This is the resource that creates the products and sells them to their customers. And as technology changes quickly, they must continually create and recreate the products – and therefore the value of the enterprise. Huawei’s main strength is the system they have developed for the creation, assessment and distribution of value by +190,000 people. It’s about HR strategy.
“Resources can be exhausted; only culture endures. Huawei does not have any natural resources to depend upon. What we do have is the brainpower of our employees. This is our oil, our forest, and our coal. Human ingenuity is the creator of all wealth.” – Ren Zhengfei
American capitalists (like me) usually say that shareholders are the stakeholders with ultimate say in a company. For example, Warren Buffett calls the free cash flow produced by companies as the “owners’ earnings” (note: Huawei refers to it as “surplus value”). We generally regard the holders of debt and equity (and their equivalents) as the corporate owners. You could also argue that government is just another type of owner that takes its cut of cash flow via taxes.
However, if you ask European companies about the distribution of a firm’s economic value, you will likely hear talk about multiple stakeholders, such as employees, owners and the community. And you might even hear some talk about a triple income statement (a really bad idea).
But at Huawei, the only stakeholders you ever really hear about are the current employees. It’s all about the top contributing, current employees. Shareholders, providers of capital, retired employees and even the founders are all a distant second in importance.
Note how different this is to other large engineering-focused companies (say GM and Bosch), where much of the value goes into guaranteed salaries (regardless of contribution) and into post-retirement benefits (i.e., not current employees). Huawei is not only focused primarily on this one group, they are also operating much more as a meritocracy with regards to labor.
Note how that is also different than large investment banks and law firms, which are also labor-focused meritocracies. Investment banks and law firms don’t have +190,000 employees being assessed for performance and +90,000 owning shares.
Huawei to me looks a lot like what 3G capital has been doing in consumer-facing companies like Budweiser and Burger King. They have instituted “meritocracy and partnership” on a massive scale in a knowledge business. There is a lot of ownership. And you rise and fall based on your performance. I’ll go more into this in Part 2 but the main point is that Huawei’s main resource is collective brainpower and their main strengt is the HR strategy, not technology.
A useful ratio to remember for Huawei is 4-to-1. After you take out the basic costs of goods sold, depreciation and such, you get a gross margin for the company that then goes to then providers of labor and capital. And in Huawei, this money goes about 4-to-1 to current employees vs. all the rest. The company focuses its cash flow on current employees, with a heavy weighting to the top performers. The rest of the 4-to-1 goes to owners and other stakeholders (including retired employees).
Point #3: Huawei is awesome at inspiring dedication in their top contributing, current employees.
As mentioned, the over-riding principle at Huawei appears to be that the top contributing, current employees should get the vast majority of the economic value created. And that is pretty logical. If brainpower is Huawei’s main resource, this is the group that creates that value. So recruiting and motivating this group is the biggest priority. And they don’t just want them motivated. They want them completely dedicated to the enterprise. They want them “all in”.
In practice, this is actually pretty complicated. It’s a big company. Staff are at different stages of their lives and careers. How do you get current staff, senior staff and incoming staff to go “all in” in creating value for customers – and therefore the enterprise?
My oustider’s take is that Huawei is mostly focused on motivating teams and team managers. High performance teams with aggressive and dedicated managers are the engine of Huawei. And these are mostly in sales and marketing and R&D. They make the largest contributions to the customers and therefore the enterprise. That’s pretty logical I think. You motivate at the team level and within the departments that matter most. And then you scale it up.
But how do you assess contributed value?
Staff are rated every 6-12 months across metrics such as sales performance (usually team-based), talent, dedication, and the potential for advancement. The phrases I keep coming across in my reading are “dedicated employees” and “high-performance teams”. In fact, the book on their HR book is titled Dedication. According to Ren, “we value dedication, contributions and potential.”
Once assessed, how do you reward performance?
High-performing contributors are given higher bonuses of course. But they are also identified and given more opportunities (and responsibilities). They are given more training. And they are given the option to participate in the employee share ownership program (very important). Low performers, in contrasted, are demoted or exited. Meritocracy works in both directions.
Trying to get maximum, sustained contributions over the long-term creates some interesting issues with different types of employees.
- For new employees, you want them to believe the company offers opportunities to develop their potential – and to make their own wealth. So there needs to be room for younger employees to rise up the ranks. That means the company either needs to keep growing – or it needs senior people to leave. Probably both.
- For more senior employees, you want them to keep contributing their superior expertise and experience – and to not to lose their motivation as they become wealthier. You need to keep offering them mountains to climb. But you also don’t want them to have any sort of lifetime tenure.
- For ex-employees (i.e., veterans), you want to reward them for the contributions they made in the past (which probably still benefit the work today). But you don’t want this to be at the expense of the current staff. One of the interesting aspects of the employee share ownership program is that most employees must sell their shares back when they exit.
- And there is the problem of the founders, who tend to be overly emphasized and overly rewarded in tech companies. You don’t want famous founders to be rallied around too much, to create internal politics or to soak up too much of the value created. Note: Founder Ren holds only about 1% of the company’s shares.
And this brings us back to the main point of this article.
- Does the US tech ban impact any of this?
- How does it impact an HR system for motivating the +190,000 employees that continually recreate the company and ensure its survival?
In the long-term, it doesn’t.
Yes, the company took a big hit in terms of its access to tech (especially in semiconductors and in the consumer business) and to some international markets. But the core of the company is still churning along like it has for 30 years. And, ironically, the current crisis is probably resulting in increased motivation and dedication across the company.
That’s it for Part 1. In Part 2 and Part 3, I’ll go more into Huawei’s employee ownership program – and into the question of who actually owns the company.
Thanks for reading, jeff
- Huawei’s Employee Stock Ownership Plan (ESOP) is “Meritocracy Plus Partnership” in China Tech at Scale. (Pt 2 of 3)
- Who Really Owns Huawei? Their Carrier Customers (Pt 3 of 3)
I write and speak about digital China and Asia’s latest tech trends.
I also run Asia Tech Strategy, a podcast and subscription newsletter on the strategies of China / Asia tech companies.
My subscription newsletter offers:
Deeper insights into the strategies of the tech giants of China / Asia. I help investors see around the corner – both with tech giants and rising companies.
See the big picture. Get a better understanding of Asia’s digital ecosystem. What are the important tech themes? What will the future look like? Where to hunt for opportunities?
A unique view from on the ground of digital China / Asia.
Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.