In this class, we discuss Huawei’s tech ban and what the company should have done.

You can listen here or at iTunes and Himalaya.

Part 2 for this lecture is located here.

• B2B Customer View: Necessary vs. Critical vs. Strategic
• Competitive Advantage: Switching Costs
• Competitive Advantage; Economics of Scale
• Operational Marathon

Companies for this class:

• Huawei

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——transcription below

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Welcome, welcome everybody. My name is Jeff Towson. I teach at Peking University and this is Jeff’s Asia Tech class. And the question for this class is, what should Huawei have done in response to the US tech ban of last year? Now it’s a pretty complicated question. There’s a lot of politics involved in that. I’m going to kind of avoid those and basically focus on the executive level decision making. If this was you. If you were an advisor and this had happened, what would you do? What would you advise the company to do? It’s a pretty amazing sort of situation that the management did find themselves in. So that is the question for this class. But first, if you haven’t subscribed, please do. You can go over to jefftowson.com or iTunes and sign up there. On my website there’s a free 30 day trial. I’d really appreciate it if you’d sort of subscribe, join in, support the course. We’re moving forward much quicker now. Couple housekeeping items before we get into the case. I’ve spoken to several of you, quite a few over the last week or so, about the class, your experience, what’s working, what’s not, what you expected to get out of this, what you hope to get out of it. And it’s really been a great pleasure. I mean, it’s just been a lot of fun, very fascinating, learning what people are doing in their lives, what they’re hoping to learn, where they’re hoping to go, all that, it’s really been great. So I appreciate that. Thank you to everyone who took a couple moments to talk to me. Based on your feedback, I’m gonna do some pretty decent size changes to the course over the next week or two. There seems to be a pretty good consensus on what people like and don’t like so that’s good. And I think it’s going to hopefully take a big step up in terms of value and such in the near future. So great. One other housekeeping thing, we are doing this sort of 30-day New Year’s challenge for those of you who are doing that with me. We’re about one week into it. This is where we… You know, try and create a new daily habit over about 30 days. Hopefully that moves you towards a big goal in your life, fitness, financial career, something like that. And by doing sort of a daily habit for the first 30 days, hopefully you make some progress and create a pattern that’s going to get you closer. So if you’re involved in that awesome, keep going. I’m working on a valuing companies every day, five days a week, which is really getting my, my sort of skills back up to par, which is great. And if you’re doing that, that’s great. If you wanna get involved, it’s not too late. Just go onto my webpage and look for New Year’s Challenge. You’ll see there’s a little video and there’s a little article about it, but it’s been a lot of fun. Okay, on to the case. So let’s talk about Huawei. Now this is a fairly complicated company and it’s a really complicated situation. So we’re gonna do sort of a simplified version. of the company and the situation. In this podcast class, we’re gonna just talk about telecommunications equipment. In the second one, we’re gonna talk about smartphones, smart devices, because Huawei really has several businesses, but the two big ones are telco equipment and smart devices, mostly smartphones. But for this class, we’re gonna talk about telco equipment. Now, some of the feedback I got from subscribers was, to have a more clear path on what we’re doing, the pathway, the learning goals. Okay, so within today’s class, and this will be pretty much the process for all of them, will be three sections. First section, I’m gonna talk about the company itself. Some of the basic information, some of the history, just background to understand this company a little bit better. Part two, I’m gonna lay out a couple key concepts through which to look at this situation. And… I think this is really actually important when you look at a situation this complicated what really helps is to ask the right question. Because there’s so many factors and there’s so many variables and you want to try and get it down to asking the right question and you know the key ideas the key concepts that I view that is the toolkit I always look in the toolkit for the right tool for a particular situation so I give you a couple key concepts part three. uh… will all just sort of give me my take a conclusion on on how i view this doesn’t mean i’m right it’s uh… evolving over time but uh… before i give you that i’ll encourage you to uh… take your own stab at it so that’ll be the framework for this class which is background for the company and the situation a couple key concepts uh… then make an effort answer the question what would you do and then i’ll give you my take the entire course, what we’re gonna be doing here is I’m gonna lay out a beginner, intermediate, and more advanced level depending on where people are in their sort of understanding. And you can sort of self assess where you are in that. And then within that, I will lay out about 10 key concepts and learning objectives for each level. and then you can just sort of run down the path and that will be going back and looking at various podcasts. I’ll tie each podcast to certain concepts. But in therefore, basically everyone should have a sort of pathway that if you’re at the beginner level, that’s awesome, great, everybody starts somewhere. Here’s the 10 key concepts, 10 key steps you should finish. And I’ll give you the checklist. If you’re at the intermediate level, here’s the 10 for you. If you’re at the advanced level, here’s the 10. So everyone will have a sort of pathway to walk. very specific learning objectives and which courses, lectures, readings to do. And I should have that up in about the next week. The big problem with that right now is I don’t have enough content up in the library yet to really do that. This is lecture 14, so it’s kinda like, I need about another 10 or 15 before that’s gonna work. But we’ll start doing that this week. Okay, let’s talk about Huawei Telco Business. Now, Huawei is really an interesting company. in the sense of, you know, they started out as a pure telco manufacturer. This is back in 1987. This is Shenzhen. When you’re looking at China in the 80s, you’re really looking at Shenzhen. That was the boom town. That was the first opening of the economy to the world. It was the first time that people could have a career besides I’m going to be in the government or a research bureau or a teacher or the military. I mean, there weren’t a lot of… career options prior to this. But then suddenly the idea of you can work in private enterprise emerges in the early 80s. And so you see a lot of people jumping into business at that point, almost always coming from government jobs of some kind. And you know, it’s very funny, like Ren Zhengfei, the founder of Huawei, I mean, he very openly says, I didn’t even know what private enterprise was. Like it was just a new thing. We’d read about it, we heard about it, but no one had ever seen it. Shenzhen was kind of the boom town of this because you had so much cross border trade coming in from Hong Kong and the world there. So that was one of the main areas. So when you look at the first wave of really successful entrepreneurs of China like Fung Ke, that’s Wang She, Hua Hui, that’s Ren Zhengfei, so many of them and like half of them did real estate. You know, that really came out of, you know, most of them were in Shenzhen in the mid to late 80s. They, you know, a lot of it was being in the right place at the right time. And then within that, you could do manufacturing, you could do real estate. There wasn’t a lot of tech back then. People didn’t have a lot of advanced degrees yet. That happened more in the 90s. We saw the first wave of more tech focused entrepreneurs. But a lot of them, you know, did what Ren Zhengfei did. He started in 1987, small office. in Shanghai. He was in his 40s at that time. He wasn’t a young man. And, you know, he had sort of been downsized out of the military. So, you know, he was maybe into some degree forced to be an entrepreneur. And he chose, you know, he was in the right place at the right time, which is like 50% of business often. But he also chose a very, very difficult field which is telecommunications equipment. This is Warren Buffett, Bill Gates, when they get asked what was the biggest factor for your success, they say it was focus. That they did the right things, they focused on the right businesses. Because it turns out most businesses are actually pretty hard. Most businesses don’t grow easily, they don’t grow quickly, they don’t throw a lot of money. Most businesses are kind of just like this never ending marathon, where you just try and stay alive. I mean it’s… You know, when people talk about, oh, businesses make so much profit, you know, most businesses make 3%, 5%. I mean, think of all that work, effort, activity, and you make 3%. I mean, it’s not that, you know, profits are often usually very, very small. And then if you choose the right business, which Warren Buffett is like the master at, you know, you get into Coca-Cola and suddenly you’re making plus 20% return on invested capital, what they call economic profit. and Bill Gates is in software and he becomes a billionaire. I mean, so choosing the right business is incredibly important. And they basically chose a very, very difficult business to go into. And Ren Jung-Fei jokes about this now. He says, you know, the reason we went into telecommunications equipment is because we didn’t know any better. And it’s a really hard business because it’s basically a lot of very complicated manufacturing. You have to do a lot of research. The products you do that are successful don’t have a very long lifespan if you come up with a nice soda Coke a good candy bar You can sell that thing for 50 years and people are still buying Snickers and coke you have a good Telecommunications router you’ve got a couple years of sales before that thing becomes obsolete So you’re always having to create the next wave of products sell them and then selling them is quite hard, generally speaking, because you’re mostly selling, let’s say, early days, Huawei was selling, like, the first, the way Huawei started was they had a sort of a cross-border contract with a Hong Kong company that let them import PBX machines, PBX routers, which are these little, you know, devices you put in a hotel, so the one phone line that comes into the hotel can be divided up into 30 or 50 phone lines to each room. You know one line into many these routers and you know they had that so they imported those and they would go around selling them and installing them and if they broke maintaining them but mostly a sales force based on a foreign contract. Because china didn’t have really any of the tech to do that at that point. There’s a lot of this happening in shenzhen at this time a huge amount of trading going. So, you know, they do this business, they get into telco, and because they’re so small, they basically couldn’t compete in the main markets because you had these foreign companies like Ericsson, and I think Nokia was doing telco back then. Ericsson was, I’m not totally sure when Nokia switched into it. Alcatel, these major foreign companies that are very large, deep pockets, big resources, lots of technology, and you’re a couple people sitting in an office with one importation contract. I mean, how do you compete? Well, there’s only really one way to compete, which is you have to avoid the competition because you can’t beat them. So they go to Shanghai and Beijing and you go to Western China. They go for the major companies, the state-owned enterprises, you go for the little hotels and office buildings. I mean, you basically have to live on the edges and fringes and kind of live on the scraps. And that’s pretty much what they did for several years. Very difficult. And… No they weren’t necessarily backed by anyone huge there rumors about this always back back then they were a small group of people know had any idea who they were. Okay so this goes on early on they get their one importation contract canceled which is technically the first time they faced a tech ban. And this gentleman I interviewed whooping who’s now the rotating chairman but they change pretty fast so I don’t think he’s the rotating chairman this month I think it’s Eric shoe again. You know they started basically doing R&D because they had to build their own devices so this goes on in the nineties I talked about this in the previous podcast I’m not gonna reiterate that. 1997 they start going international now why would a chinese company go international. So the bad part of this equation is they chose a very difficult business to be in and I’ll explain more why it’s so difficult. They were in the right place at the right time and they were in a rapidly growing industry and it turns out if you’re in a bad business but the whole market’s growing at 10 to 20 percent a year just because there’s so much growth, you can actually do quite well. The whole issue of I’m a weak competitor and you’re a strong competitor. doesn’t really play out in rapidly growing businesses. It tends to play out when the business slows and then you don’t grow by just doing more because the market’s booming. You grow by killing your competitors. And that wasn’t really happening that much back then. It was a rapidly growing market, lots of opportunities across China. So that part was pretty good. Anyways, but they still go international starting in 1997. They go to Hong Kong. They start going to Southeast Asia. They showed up in Saudi Arabia and the Middle East very quick. And this had a lot to do with the fact of they had a hard time competing back in China. They were just too small. So to some degree, they went international with the same strategy of we have to go where others won’t because we can’t beat them in a fair fight. So we’ve got to go where they won’t. We have to do what they’re not willing to do. We have to go take that contract in Ghana that nobody wants because, you know, that that is kind of their motto. And a lot of their culture came out of this sort of. We can bear any burden, we can take any hardship, we can go where anyone else is, where no one else will go. There’s a book I was reading about like Huawei adventures where they were the people that would put routers in the Himalayas and all these crazy adventure stories. But they’re reinforcing this thing of, look, we have to go where others won’t. So anyways, that’s a lot of Huawei, that’s 1990s. You get to the 2000s and they start getting bigger as a company, still selling telecommunications equipment, but it’s gone from selling wireline equipment, routers, to starting to sell mobile equipment, wire less equipment. So 2G, 3G, 4G, more and more complicated, putting these routers, putting these base stations on top of buildings. A lot of it in China, a lot of it in Southeast, a lot of basically developing economies. And they eventually break into Europe. by getting some contracts. I think their first one was in, I think it was British Telecom, no, they told me the story. I think it was the Netherlands. They managed to finally break into Europe, get their first contract, and putting these sort of base stations around. So this is going on for 20 years. And mid-2000s, their international revenue for the first time exceeds their domestic revenues. They’re more international than domestic. And you get all the way to about 2011, 2012, a good 25 years after they were founded. And they finally catch Ericsson, the market leader in revenue. I mean, finally, it was a 25 year slog. And they get their, I think it’s 2012. And it’s about $25 billion per year in revenue. Okay. They meet, they start to exceed their rival. who were they they were so far behind forever. Okay, now jump forward to today, 2020. Their latest revenue numbers were about $118 billion. When they caught Huawei, they’re about 25. Today, they’re about a hundred and I believe it’s 18 billion. Okay, Huawei, I’m sorry, Ericsson is about 23, 24. That’s how much they’ve pulled away from Ericsson. Now that number is a little misleading an 18 number I’m giving you, that’s their smartphone business and their telco business. So that’s actually not exactly the same. Their telco business is about twice the size of Ericsson, but you add on their other businesses, smartphones, smart devices, enterprise business, smart cities, and their overall revenue. That does matter when it comes to R&D spending because they’re spending 15% of all their revenue, which is 118. So about $18 billion per year on R&D. And that really does cross all lines. And I don’t view these as totally separate businesses because really the reason they’re doing smartphones and telecommunications equipment and enterprise and cloud is they’re trying to put together an end-to-end solution where they can provide everything from the device in your hand to the connectivity to the cloud, the whole solution. not just the connectivity part, which is the telco bit. And in some businesses that doesn’t matter so much, but in other businesses like transportation and autonomous vehicles, probably having an end-to-end solution is gonna be a big advantage. So, but basically they’ve pulled ahead. It’s a pretty amazing story. And then the, you know, mid 2019, May 2019, the United States issues this tech ban. which basically cuts them off in theory from any parts made by anyone in the world where the parts are more than 25% sourced from the US. But really the impact is greater than that because, you know, the US government didn’t just do the tech ban, they’re actively going out around the world to various governments and basically saying don’t use Huawei’s equipment. I mean it’s pretty amazing what they’re doing. You know, it’s one company that is basically fighting the US government to a large degree, which is pretty crazy. So why? I mean, this is a lot going on with this. I don’t think we need to take apart all of it. For the purposes of this discussion, I’d say there’s two big effects that if you were the manager of Huawei or if you were advising them, that you had to deal with immediately. And the first one is, okay, you’ve just had a bunch of holes punched in your supply chain. So in terms of your telecommunications business, this is basically manufacturing, right? You design. Hardware routers batteries all of these things base stations and then you source the parts The parts all come to your big factories you put them together then you sell them So, I mean you’re basically got a supply chain You got a ton of people doing manufacturing and then you’ve got a pretty big sales force going out in the world that are putting These things in and they’re also doing maintenance and they’re selling consulting and other services on top of the equipment sales All right. The first problem is you just basically had a whole bunch of holes punched in your supply chain. And I mean, I’m sure they literally had, I suspect they saw this coming. It wasn’t completely out of the blue. They had seen what had happened to ZTE. So, I mean, obviously they’d probably been stockpiling parts ahead of this. And, but I mean, you basically have to go through all the thousands and thousands of parts that you buy from around the world and you got to sort of check them. Do we have this one? Do we not have this one? And. all the people who supply them literally had to do the same thing like where they had to talk to the lawyers had an unbelievably good week. Because all these companies around the world had to have their you know basically their components and their parts checked are these okay to sell or not and the lawyers had to kind of sign off on it which i’m sure they charged a lot for her. Okay so they go through all this. And i never really got a great answer from them on. how significant this was on the telco side. The chairman Lianghua was pretty open about the fact that the consumer side, their consumer devices, their smartphones, smart TVs, all of those, the handheld stuff, that the supply chain really did get hit pretty hard. And obviously, the two that everyone talks about are Android, which was US, as well as semiconductors. but also apparently a lot of the mechanical parts, a lot on the consumer side got hit. But for this discussion on the telco side, it was kind of vague. I kept listening to what they were saying. I was looking for some sort of indication and they didn’t really bring it up. And I went to the press conference they had in Shenzhen in July. So this was about five weeks after the ban. And… You know, the chairman was pretty open about Yara problems are on the consumer side, not on the telco side. So they seem to have been okay on the telco side. At least it appears that way. Who knows? I assume that there’s a real issue. They’re probably not talking about it openly. But everyone thought, what about the semiconductors on the telco side? Now they do have high silicon, right? And the story behind this is kind of amazing. companies in the world, only one of them is based in Mainland China, and that’s HiSilicon. And then they’re all outside. So when people talk about, oh my God, we’ve got to become less dependent on semiconductors out of, say, the West, although some of them are other places, everyone points to HiSilicon. Now, HiSilicon was founded by Huawei. It started as a research division, and then it was spun out into a company. It was founded back in 1991, and I believe it was founded as a response to the first time they got banned by their Hong Kong company that cut off their importation contract. I think it had a lot to do with that, that they didn’t want to be dependent on foreign suppliers because they’d already been cut off. So they started semiconductors, I think, as a response to that to some degree. And here we are 20 years later, where it turns out it’s in the top 10. Now apparently for the telco side, they’re still relying on that high silicon. It appears that that gap has been filled from top to bottom. But it’s not clear. I mean, we’re not getting a huge amount of info on this from them. Okay, so point number one is you just had a bunch of holes punched in your supply chain on the telco side. The other main issue is the trust of the international carriers. Now the foundation of Huawei is not the smartphone business. Telco equipment is not a great business. Selling smartphones is also actually not a very good business unless you control the ecosystem like Apple or Android. Otherwise, that’s actually a really hard business. I’d rather be in telco equipment than selling smartphones. But the foundation of the company is this telco business and that is about carrier contracts. It’s about, you know, going out, you’re not gonna, there are no domestic, you know, telco equipment makers. There’s not an American telco equipment that just, you know, they just sell to American carriers. There’s not a European one that sells just to European. It’s a global business where you have to become, you know, you need 30, 40, 50% of the global market to get to scale to win that games, which means you are absolutely dependent on international carriers. And they have to keep buying from you. And when the telco, when the tech ban hit, I mean, it was a double hit. One, it was a hit because the US government was going around the world saying, don’t use Huawei. And on top of that, they just banned the tech, so all the carriers are wondering if, you know, Huawei can still deliver at the right level. So they took a double hit in terms of the trust of international carriers. And that was really my biggest question. when I was thinking about this is what are the international carriers gonna do? And it’s not even necessarily what is factually true, it’s what do they perceive to be true. Have you lost the trust of international carriers? Because if you do, whether it’s logical or not, suddenly you’re a lot smaller than you used to be and this is a game of global scale. So that was kind of the other issue I immediately looked at when this happened. Is this impacting their international carrier contracts? You can’t survive as a major global telco company just on China contracts, you absolutely can’t. So those I think were the two big impacts, two of the biggest impacts on the company from the ban. And back in May, June, it really wasn’t clear what was gonna happen with either of those. And that’s kind of the situation I want you to put yourself in. It’s May or June. Those are kind of the two big impacts and we’re talking about the telecom business. Okay, so that’s gonna be the question, but before we sort of take a crack at it, let me give you some sort of frameworks to think about it. So part two, let’s talk about key concepts, frameworks for how to think about this. Now, when I teach my class on private equity, what I do with students is basically I give them a 10K, which is your typical annual report, SCC filing 10K is like 200 pages. It’s a huge amount of data. I don’t give them summaries. I don’t give them nice little Harvard business cases. No, I give them a big 10K, which takes actually a lot of printing. And the lesson in that is, look, there’s a sea of information in the world. There’s a sea of data. There’s so many factors you can think about with this company. The key is not to read every little factoid and try and weigh all of them. The key is to have the right question to ask. the right framework such that you can then dig in that 10K, not to understand every aspect of it, but to answer one or two key questions. And that’s what my students do in the class is they spend the class digging through the 10K, trying to get to a couple answers such that maybe they can come to a decision about this company. And a lot of times you can’t. A lot of times the answer is I don’t know or too hard. Okay, so. I give them a lot of frameworks. I usually give them frameworks from people like Warren Buffett, Mario Gabelli, Seth Klarman, sort of my heroes in life. Now when I think about Huawei, I run my questions. Takes me about two hours. I usually do it while I’m taking a walk. I end up writing about 20 pages and I run my checklist. And within that I end up flagging a couple things I think are more important. Now within Huawei, really the telco business. Three questions are sort of at the top of my list. And I thought we’d talk about those right now and that can go in sort of the checklist and I’ll put those in the key concepts, key ideas for this class. Okay, the first one is, I always look at it from the customer side. What does the customer want? How do they feel about it? What’s important to them? What is their buying usage and re-buying process? And I really spend a lot of time thinking about this. Now in this case, the key customer is international carriers. And the three words I always use are necessary, critical, and strategic. If someone’s selling tables, and I’m a university and I’m buying tables, so one, this is for B2B businesses, not B2C, which is different, more complicated actually. If I’m a university buying tables, that’s a B2B transaction for a physical good. Is it strategic, necessary, or critical? And usually it’s a mix of both, like different colors. Now I think buying tables as a university is a necessary cost. That’s how I perceive it as the university. And that’s generally not a great thing. If it’s a necessary cost, that basically means, okay, it’s on my books, I have to buy it. It doesn’t really impact my business in a major way. It’s not a risk to my business. It’s not going to help me make money. It’s just one of the thousands of costs I have. So let’s get a really good deal. It’s hard to make big profits on something like that, because they’ll look at the table, they’ll go to someone else and say, okay, do you have a table that’s as good how much? They go to someone else, do you have a table that’s as good how much? And if I go to them and say, hey, you should buy my tables and I won’t drop my price, they’ll basically say, okay, get lost. Because it’s just a necessary cost, not unlike buying carpet, socks. basketball is I mean we just there’s not a lot going on other than quality versus price it’s a very rational decision it’s hard to make a lot of money on rational decisions I don’t like businesses b2b that are generally selling necessary items. Now let’s say it’s critical. Let’s say I’m a hospital and I am buying heart valves to put into my patients who were operating on okay I don’t view. to some degree that’s necessary, even though it sounds kind of scary. But I would put that as 50% necessary, 50% strategic. I’m sorry, 50% necessary, 50% critical. Look, if I’m buying heart valves from, I don’t actually know who sells heart valves. If I’m buying from them and I’m getting a decent price and the quality’s good, and then they say, we’re gonna raise our prices 5%, I can definitely go to another competitor and say, what’s your price on the heart valves? And they say, well, we’re 10% cheaper. I have to weigh in my mind the cost benefit as the purchasing manager of the hospital. How much do I save versus what’s the risk? Well, the risk is we buy a bad heart valve and someone dies. That’s a human cost. Why would I take such a human cost for 10% savings? It’s also kind of a company reputation cost if you have a bunch of people dying in your hospital, your whole company’s at risk. So the more critical the component, the less it becomes about I can shop around and generally the B2B business does well. Bourn Buffet buys a lot of B2B businesses that I would consider critical products like the company that makes the frame for the aircraft, like the 747s, the company that makes basically the metal frame underneath the plane that holds it all together. And it’s actually very, very hard to see how that’s going to age and wear over 20 years. So you don’t want to take chances on that one. It’s hard to test whether a competitor product is as good. If you have any issues and you have a couple of planes fall out of the sky, you’re basically done as an airline and you’re probably done, you know, Airbus and Boeing that there’s a lot of critical aspects going on right now with them. So in those situations, you know, the critical products tend to be very, very good. The third category I think about is strategic, which is, is this something where if I spend money it’s not just a cost, which has certain risks associated, but it actually helps me make money. Marketing is a strategic cost. I actually don’t want to cut my marketing budget. I want to increase my marketing budget as long as I’m doing it well over my competitors because it will make me more money. It’s strategic. Oftentimes research and development can be considered a strategic cost. If Apple is outspending Xiaomi on smartphone handsets R&D, which they absolutely are, that helps them generate the next benefit. So it’s not just a cost. It’s sort of a strategic cost. And people like 3G capital, these, these great Brazilian investors, George Epaulo and them, you know, they talk about we are ruthless cutting our necessary costs, but we maximize our strategic costs. in up and down markets. Okay, so strategic, critical, necessary. I try and sort of write in my head how much of this business is, how much of each of those, if any. Okay, so think about that. How much of selling telecommunications routers, base stations, is strategic? Does it let the carrier charge more money or make more money because of this? And I’ll basically give you the answer to that one. The answer is no. That carriers have a very unenviable business of having to upgrade their networks every year, or just about, because users, consumers, you and me, we always want faster speed, but we’re never willing to pay anymore. Their revenue is fairly flat, and they have to keep upgrading their system all the time. So there’s not a lot of strategic costs on the carrier side. No, it’s a question of necessary versus critical. And this is where you have to kind of break their business into the different components. The core network, you know, the part that runs all the data, the operating center, is that critical? If that crashes, what is the impact? If the whole thing goes down, what’s the impact? If the data gets leaked, if it turns out you have to replace the equipment because the stuff you bought just isn’t good. Is that a problem versus more, you know, maybe the access network, which is all the little base stations around town. Is it easier to replace those if you have a problem? Like if you’re selling automobiles, if you’re, if you’re Volkswagen, uh, your necessary cost might be the tires. You know, if you, and if you have a problem, okay, we can just tell everyone to buy new tires. But if we have a problem in say the engine management system, we may have to recall all the cars. So there’s different variances of necessary to critical. Okay, so within the carrier’s viewpoint, what’s necessary, what’s critical, and kind of see where you are in that one. Okay, so that’s sort of concept number one. I do this for all businesses. I’ll tell you, I’ll give you an example. Like an old student of mine, he was looking at a business, I think it was German or Swiss. And he told me like the business he was looking at, to do an investment was they only make one thing. They make the pellet in the airbag of cars that explodes. And that’s it. Like, you know, not the airbag, not the electronics, just the little pellet that explodes when you have a car crash and inflates the bag. And one, I would consider that highly critical because if it gets out that so-and-so’s cars, the airbags don’t work, you’re in deep trouble as a company. I would call that critical. The other interesting factor is it’s also incredibly low cost. Like when you’re the car company Volkswagen, whatever, and you’re buying the pellet, the pellets like $4. Like the cost of the pellet. I think they charge $20. So they have a huge margin on the pellet. But from the cars perspective, the you know, the manufacturer, it’s a tiny percentage of their cost structure for selling a Volkswagen. So why would I mess around? and try and get a cheaper price or go with a secondary product for a tiny percentage of my cost structure that has huge risk. It’s a beautiful business. Anyway, that’s a really extreme example of critical at a very low cost. Okay, there’s lots of variations on critical products, but that’s the main idea. Critical versus necessary versus strategic from the perspective of the carriers, the international carriers. Okay, idea number two. Switching costs. I look a lot at competitive advantage. There’s kind of, those of you who are my students in class know that I talk about competitive advantage all the time. I’m obsessed with it. And one of them is, you know, what we call switching costs. Like, we also call it customer, a type of customer captivity. Where basically it means that like, look, you can go with someone else. I’m, you know, let’s say I’m your accountant. and I’m gonna tell you, hey, we’re raising our prices 5% this year. You have to weigh in your mind as the customer, say you’re a small business, am I gonna switch accountants and save 5% or is it not worth it because I have to migrate all my information, this accountant knows me very well, I’m comfortable with them, they’ve done my books fine before. You know, there’s a lot going in there such that you’re gonna stay and pay the extra 5%. Now, if I say 100%, you might leave. But generally a switching cost is something that if you raise the prices 10% your customers stay. And if you raise your prices 10% and you’re a 10% margin business, well, let’s say a hundred dollar item and you make $10 profit, and I just boosted the price to 110, and that’s all profit. Now the profits 20. So I doubled the profits by that little goosing of revenue 10%. So switching costs can be very effective. You hear about it all the time in all these SaaS companies being built, Microsoft, all these new Slack. Basically all these B2B SaaS companies that are being launched are based on building in switching costs by getting in your business and becoming integrated into your business, such that they’re very difficult to switch out. The greatest of all switching costs was Microsoft Windows. Like try, if you own a PC, which would be a B2C case, try and switch out Windows for any other operating system. It’s like impossible. Anyways, but this is more B2B. Switching costs can also be things like perceived risk. Like I’ve been with my doctor for a long time. I could find a better doctor and save 10%, but I’m comfortable with them. Plus I have a condition, he or she knows my condition. It feeds into that critical aspect a little bit. Like critical is a lot about a perception of risk. And that turns out into a switching cost where look, it’s not worth it to me. It could be things like we have lots of engineers that are trained in this at our company or in the taste of carriers. We have lots of maintenance peoples that are already trained in how to fix this type of equipment. And if we switch out the equipment to someone else, they might have to retrain. So that would be a type of switching costs. So there’s a lot of these going on, but basically that means if you’re a business and you’re doing B2B, if a customer has zero switching costs, it’s very easy for them to come to you every year, every six months, every three months, and just say, what’s your deal? You know, what’s your give me a price, you know, and they put out purchase orders every month. Like if you’re selling tires, they can put out purchase orders every month. Give me a better deal and they never will. They’re never going to commit longer than a month because they’ll just hunt around. If you’re buying commodities, no switching costs. If you see a company with one year contracts, two year contracts, a long backlog, a big backlog of orders, they’ve probably got some costs built into that. Okay, so that’s switching costs. There’s a lot more to that. I’m gonna, well, I’ll keep hitting this different versions as we go through classes. Third idea, economies of scale, which I’ve talked about before. Economies of scale is, in theory, the pure version of it is you have certain fixed costs, certain variable costs. If you are larger than your competitor by say a factor of three in terms of volume, your variable costs are probably three times theirs. You know, I’m a retailer. I’m buying and selling socks. I sell three times as many socks as you, but we still more or less pay the same price to buy the socks. So our cost of goods sold, my cost of goods sold are probably three times yours. Now, if you’re Walmart, you get some discounts, but for most people, that’s the case. But if you move into fixed costs, like I have a store that sells stocks, this is a really bad analogy, but if I have a store that sells socks and you have a store that sells stocks, sells stocks. If you have a store that sells socks, our rental costs are probably pretty equivalent. So we’re both paying the same rent, but I’m moving three times as much product. So when I take the cost of rental, my rental cost per product, my number is one third of yours. You divide it by the volume. That was a really bad example of economies of scale. A more standard one would be something like a factory. If I have a factory that’s making tables and you have a factory that’s making tables and my factory has three times the volume of yours, I am probably more efficient and my per unit costs are probably lower. Now it’s probably not three times because costs do go up somewhat as you increase in scale, but they don’t go up linearly. They’re more fixed than variable. So I’m probably cheaper and that’s by and large true. Larger factories tend to be able to produce more cheaply than smaller factories in terms of volume. It doesn’t go on forever. If you build a factor that’s 100 times bigger, that effect wears off. You have some transaction and coordination costs that go up. You have bureaucracy costs that go up. But generally it’s true. So you look at items on the income statement that are fixed, like a factory, like a retail space, like marketing spend, like research and development. logistics costs tend to be that way. You know, FedEx and DHL have a fixed cost where they’re running a huge amount of volume through it and they tend to be more efficient on a per unit basis than a smaller logistics network. Coca-Cola, I forget how much they spend on their marketing per year. Is it 5%? I think it’s 5%. You know, they’re spending 5% of their revenue per year on marketing. So if you’re a competing coal on your one 10th the size, you’re spending 5%, they’re spending 5%. Their 5% is a lot more money in advertisements around town. So R&D is the same, 10%, 15% if you’re spending on R&D per year and you’re three times bigger than your competitor, you’re just outspending them on R&D. And sometimes that can be a big, big deal. Now that implies you have to spend it effectively. You can’t just squander it. And R&D… management quality is a big deal in terms of effectiveness of research spending. But generally that is how that works and we can see a lot of these in digital businesses. Okay, so the question for Huawei then is, you know, do they have a major fixed cost that is giving them an advantage over a competitor who is smaller than them? Now the definition of economies of scale is it only works if you’re bigger than the other person. if they get to your, this advantage goes away if they match you in volume. So Coke used to be much more effective at marketing than Pepsi for a long, long time, decades, because they were so much bigger, they could outspend them all the time on marketing, which is a big deal for pushing, you know, water with sugar and caffeine in it. Eventually Pepsi caught up, Coke didn’t really defend their market very well. Pepsi caught up and then when Coke did turn their guns on them in marketing spend, Pepsi could turn their guns right back at them and it was a stalemate. They had a price war in the 80s and now they just kind of get along and don’t do that anymore. They still spend a lot but they don’t generally get into price wars like they used to. Okay, so economies of scale. Now I kind of already teed this up a little bit because I said La Cuawe is a big spender on R&D. 15, 18 billion dollars per year. They systematically spend 15% of their revenue on R&D year in and year out, and they’ve been doing that for decades. I mean, Ren Zhengfei talks about, not even that long ago, like 10 to 15 years ago, like he wasn’t taking a salary and he was living in a very small apartment because they were putting every dollar they had into R&D. Now, is that true? Is it lore? I don’t know. But they do have a history of like, really since that first tech ban in 19… I believe it’s 1990, I don’t know the exact date. From that date of systematically pushing money into R&D year after year after year. Okay, so those are kind of the three ideas to think about. And we thought critical versus necessary versus strategic as the viewpoint of the customer in a B2B business, switching costs and economies of scale. Okay, so here is the assignment, the exercise. Pause the recording in just a sec and make your best guess of, based on where Huawei was in May of June, right after the entity ban, what should they have done? What would you do based on for the telecommunications business? Do you stay the course? Do you keep doing what they’re doing? Do you change course? Do you look for a partnership? Do you try and muscle through? Do you exit some of your businesses? Do you close down and say, look, we’re not going to do, well, we’re not talking about smartphones. I mean, what would you do? I mean, it was, and it’s a really amazing business question to be asked because it is hard to think of a business being confronted by a more seismic change in their business. then this by the US government one random day. I mean, it’s about as big a hit as you can take in a business is this. Usually if you get hit, it plays out over time. It doesn’t happen one random Tuesday or whatever it was. I mean, it was a body blow and it came on so suddenly. I mean, it’s kind of historic. Anyway, so within that scenario, you get called down to the CEO’s office. They tell you, hey, we hear you’re good at this stuff. We hear you’re a good digital thinker. What should we be focused on? Try and take apart that question with the three concepts if that helps you. Okay, that’s it. Pause the tape or pause the recording. Write it down, maybe do it in the notes of your phone. Maybe pull out a piece of paper, do it. Maybe just sort of speak to yourself. Count it off on your fingers, point one, point two, point three, 30 seconds, this is what you’d say. Well, not 30 seconds, three minutes is a typical CEO pitch. Okay, so do that and then come back. So how did you do? Did you try? I’m telling you, the more you try yourself, the more you’ll learn. It’s really, it’s a big, big deal. I mean, I’m joking about it, but it’s, you know, anything you try and do yourself, I guarantee you, that’s the part you’re gonna remember and you can, it’s gonna, it’s the thing you’re gonna build on, much more than listening to me, although I appreciate that. Okay, anyways, I will give you my take on this. Now we’re talking about a very simplified version of this. So, you know, and also I am not a, I’m not a telco analyst. I am, I am overwhelmingly, I sit at the intersection of sort of business and software, digital data, things made of ones and zeros. Uh, so Hawkeye is actually not a company I would normally look at. I do look at a lot of other companies, you know, telco pipelines, whatever, but I don’t feel like I’m, I’m a particular expert in that, but. You know, when I went through Huawei. You know, the first questions I always ask are, you know, how good of a business is this? And I go through from the customer perspective, from the competitor perspective, and from the customer perspective, what do they care about the process? You know, when I’m looking at a B2B question, I always ask my this necessary strategic critical thing. And yeah, it’s not really attractive. It’s like… you know, most telco equipment is, it’s not strategic, traditionally. Let’s go back a little bit in time. Let’s not talk about telco today. Let’s talk about like 1990s. Okay, not strategic at all. And you know, you can sort of break the network, whether it’s a wire line or a wireless network into the critical components, which are actually very few. And then the rest of the network, which is just a lot of machinery. I mean, Huawei was a basic manufacturing company more or less. Now there are some critical components. I remember when Huawei opened in Saudi Arabia, I was actually in, in Riyadh, Saudi Arabia working for a prince. And I remember like, um, when this Chinese company opened just down the road on, uh, what was then King Fahd road. I think they changed the name. And it was Huawei. They were like the first Chinese company in Saudi Arabia, as far as I can tell. And I went down, I kind of met them, and they were selling telco equipment around the Middle East. It was one of the first places they went. And they were having a lot of the experience that so many Chinese manufacturers had. Chinese manufacturers were going out into the world and saying, we’re cheaper, which was true. And… Buyers around the world were all kind of saying the same thing, which was, okay, we’ll buy the Chinese manufactured goods for the non critical stuff, the necessary stuff. But for the critical stuff, we’ll buy from Ericsson or British Aerospace or a Western company. They were all saying this because they didn’t quite trust the quality. It was a big bet for them. They didn’t know the companies. And that was, you know, that was kind of the fight for a lot of these Chinese manufacturers to break into the core technology. Not necessarily because it was bigger. In fact, more money is often spent on the necessary equipment, not the core stuff. But that critical aspect got you a lot better profits, a lot better, it’s better to sell critical components. Anyways, so that was kind of Huawei’s thing. And they were basically selling basic equipment that was cheaper than the Western versions. And most carriers, I don’t know the carrier situation, but a lot of buyers back then were just buying the critical stuff from the West and the necessary stuff from China. Because if it had a problem, it wasn’t that big a deal. Okay, and that was kind of most of Huawei for a long time. Now, in the last 10 years, they’ve definitely started to move, let me say recent past, they’ve started to move into more critical areas. they’re doing 5G. I mean, they’re much more advanced technologically now than they were in 1995, 1997. So they have shifted that way and they slowly fought their way in from, you know, by the necessary basic stuff from us, but by the other stuff from Ericsson, they’ve slowly fought their way into that, which is pretty common across a lot of Chinese manufacturers. Okay, but generally speaking, I didn’t like that very much as a business and it’s a durable good. You know, you buy once and you know, you have to, you don’t sell again for a while. The products become obsolete very quickly. So you, you know, it’s not like making a Snickers bar where you, you know, you know, Britney Spears had like one hit song and she can make money on that forever. You have a really good router PBX thing. I mean, nobody wants it three years later. I mean, you have to continually just charge ahead and invest and create the next. You know that you never win forever. You only win for a short period of time, then you gotta win again. So I don’t like products with a lot of rapid obsolescence like that. So I didn’t like that. And really, I mean, that’s kind of my opinion on a lot of basic manufactured B2B goods. They’re not very attractive, I think, as businesses. You’re always having to refight and re-win. Okay, so then we look at. that would be sort of the customer view. Simplistic, very, very simplistic, because actually they were doing some other things on top of that. They were offering training and services. There was actually more to that. But generally speaking, that’s how I feel about manufactured goods like that. Okay, switching costs. Do they have a, from the competitor side, the competitor view, is there an advantage? Is there a barrier that’s gonna keep a normal competitor out? A well-funded, well-run competitor, can they break in or not? If you have a barrier, which is kind of the Warren Buffett thing, then you can make a lot more profit. So I gave you switching costs type of competitive advantage. Are there switching costs from carriers? How is it, you know, you can’t swap in and out your equipment every month. But generally it’s not that hard to switch out a lot of it. You know, these things are all built to industry standards typically. And you can, you know, replace this base station on the top of a building with, if it breaks with another one. There are some, I mean, I think there’s some interesting stuff here. I don’t know enough about the business, but I think there are, you know, there’s a lot of training involved. There’s a lot of relationships involved. This is B2B. It’s long-term relationships. You know, the purchasing party is depending on the supplier. You know, people know each other. They like to have multiple options. You know, if there’s only a couple people that make this, you want good relationships with all of them. So there is probably some soft switching costs in there. They’re not locked in to a huge degree, I think, but I think there’s probably something going on there. Even though it’s B2B, business to business, it’s always person to person. So you know the person, you work with them, and so on. Anyways, but I don’t think, not hugely powerful, in my opinion, but I’m looking at this as an outsider. Economies of scale. Okay, this is the one that got my attention. If you are a global manufacturer of telecommunications equipment and you have 10 times the volume of a competitor, you’re going to be cheaper. And Ren Zhengfei has talked about this openly that their goal in the early days was to get big. It wasn’t to make a lot of money and it wasn’t to have a big IPO and a payday. It was to get to scale because when you get to scale, you can be cheap. At least if not cheaper you can be no one’s going to be cheaper than you So you get to scale because if you actually look at their headcount and you look at their income statement You see that they have a huge number of people in manufacturing They have a huge number of people in sales and they have a huge number of people doing R&D if you get to Massive scale in manufacturing which Chinese companies are known for you can generally be cheaper due to economies of scale And if you’re the low cost producer, that’s a pretty good place to be. Others can maybe match you, but nobody can get under you. No one else can come bid for your client and say, I’m cheaper. So they were a lot about getting to scale by getting to global volume, not just the Chinese sales, not just the Asia sales, but global sales get you to scale. You have a cost advantage on the manufacturing production side. Okay, they were clearly going for that from day one. The other thing they were going for was we have to outspend our competitors on research and development year in, year out. That’s another game of economies of scale. And they mentioned this all the time. We spend 15% of our revenue on R and D. It’s in all their press releases. We spent $18 billion on R and D. You know, if you have a product that becomes obsolete very rapidly, that is pretty powerful when you’re outspending your competitors year after year after year. which they are doing and that appears to have been there, you know, a lot of their strategy for the last 20 years. Get to scale, systematically outspend everybody on research and development and we’re the cheapest player. Okay, pretty basic. Not unlike a lot of manufacturers out of China had the same game plan. Now, so in theory, they could achieve some degree of competitive advantage over the years, but they definitely didn’t have it in the 90s. They didn’t have it for a long time. Now, when I look at a business and I kind of decide, okay, is there a competitive barrier here or not? And the answer is mostly no, which I think it was for Huawei. Definitely in the 90s, the answer was no. Now I think they have some real advantages. But if you don’t have a competitive barrier, which is the case for most companies, then you really only have one play. And your one play is what I call operational marathon. We have to work harder and longer than anybody else every day. It’s like we’re running a marathon in terms of operations. Every year, every week, every month, we have to become more efficient. We have to get a little bigger. We have to become more effective. Our product development has to be better. Our marketing has to be better. I mean, it’s always just incremental improvements in your ops and efficiency effectiveness and scale. And you do that every day forever. And if you ever fall down and screw up, your competitors catch you. It’s like a long marathon, and your only strategy is to just keep running faster than everyone else and slowly you pull away from the pack, step by step, year after year. That’s your only play. And I think if you look at Huawei today, how they are described, it looks very obvious to me in the 90s, their default strategy was that, which is we’re too small, we can’t compete, we just have to work harder than everybody. We have to go where they don’t go. We have to take the clients they don’t want. We have to meet the expectations the clients demand that everyone has said no to. And we just have to work harder. And you can see this in their kind of militaristic culture that they always talk about. That they have their battalions of engineers and they have their sales teams. I mean, the company’s really broken into two big groups of people. It’s sales teams and it’s R&D. That’s who gets all the bonuses. Well, I think a lot of the bonuses, that’s the two cylinders that this engine fires on. And both groups are known for being the hardest working people you’ve ever met. Even by like Chinese 996 culture, everyone’s like, oh my God, the people at Huawei work really hard. I think it was from this strategy, you just had to outwork people. They went to Saudi Arabia before anyone, they put base stations on the Himalayas before anyone. They work harder, they work, I mean, you can even hear that today, we’re in battle mode. We’re fighting for survival. I think that core aspect of their culture was created in this sort of 90s era because of this. You had to. And that’s pretty much how they got to scale against a lot of competitors that nobody talks about anymore. So they had this very aggressive, hyper, almost like, they call it militaristic culture that is very unique to Huawei. They fought, fought, fought, they finally got to scale and they started to get some economies of scale and R&D and production. And I think that’s a lot of the Huawei story. That’s kinda how I look at them. That’s why I think it’s a really hard business because you had to fight your way to the top over decades. Now compare that to a company with a really powerful competitive advantage like Facebook. You know, Mark Zuckerberg worked hard for a year and a half and then he was done. He hasn’t had a competitor since like 2008. and Microsoft was dominant without a lot of work after the first period. I mean, they worked, but it wasn’t like they were fighting for survival year in and year out. They weren’t in this sort of operational marathon because they had huge barriers. I mean, who is WeChat competing against right now? Who is Coca-Cola competing against? Pepsi? Doesn’t mean you have a monopoly, but you’re facing three or four competitors, not 100. Anyways. So that’s sort of the three, the ways I look at this, which was the critical versus necessary versus strategic, doesn’t look very attractive for this B2B business in the early days. Some switching costs because B2B, like this tends to be a lot of relationships, which are important. Economies of scale was their refuge, that’s where they fought their way to, but really it was their sort of operational marathon, you know, deep cultural, very unique culture that got them there. They fought their way there. And that’s kinda how I look at them. Now. One last point on this. Now, one of the reasons I got into Huawei, because I don’t usually cover equipment companies, was because I was curious if this was changing, because their business is becoming a lot more digital and software. Now, they’ve always done software. Even in the early days, this equipment always had software. But I think the nature of their business is becoming a lot more like a software company than just an equipment manufacturer. You know networks used to be we put in the landlines you can call the hotel and call the room and it carries voice and maybe a fax machine. Then it gets to wireless now we’re connecting smartphones. Now we’re not just doing fault calls we’re doing data now we’re getting to what they call ubiquitous connectivity where everything connects to everything. Every phone connects to every building to every sensor to the smartphone to the smart TV to the car everything is. to the IoT sensors, everything is becoming connected to everything. So connectivity is changing and it’s no longer just about voice and data. Suddenly the data is running up into the cloud and AI is looking at the data and making decisions. So the network is becoming increasingly intelligent in its own right. And that’s kind of the Huawei slogan of this year is ubiquitous connectivity, pervasive intelligence. So I think the nature of networks is changing. That’s why it got my attention, because this looks a lot like a software business to me. Hey, we’ll all get into that more in a later lecture, because that’s kind of a different subject. But a little bit of software in a traditional business can really change the economics. If you made and sold bicycles, or if you rented bicycles, the economics of that were very, very simple. And then you put a little bit of software in it, and you get Mobike. and suddenly the economics get really interesting. Like, oh, that’s crazy. So a little bit of these smart products that we see emerging all over the place, whether it’s drones, robots, smart cars, smart scooters, in many cases it’s taking a business that had not terribly interesting economics, a lot of manufactured products, and they’re getting a lot more interesting because of the software side. And anyways, that’s a. Kind of how I’m thinking about this right now, but I’m looking at it a lot. Okay. And I guess that brings us back to the question for the class is what should Huawei have done in response to the US tech ban? And speaking about the telco side of the business, I think they had to go back to basics. I think they go back to the strategy that got them to where they are. First of all, telco is the foundation. Telco is everything. If they lose telco, they’re a smartphone maker. You don’t really wanna be a smartphone maker. That’s the engine. So you have to make sure that’s solid, which means filling the gaps in the supply chain. That’s a technical thing. I don’t really know much about that. You have to go to the customers, which are the international carriers. I mean, this is a game of scale. You outwork everybody and you get to scale. Well, the only way you get to scale is by being global. So they have to at all costs retain the international carriers and you have to retain their trust. which is, it’s a matter of perception. It’s a lot about communication. And you can see that Huawei has really done that. They’ve launched all these initiatives around the world. They’re meeting with their carrier clients. They’re open sourcing their code, I think they’ve offered to do. They’re starting centers where the local government will have full visibility into the telco system. And they’re doing all these initiatives to make their customers, the international carriers comfortable. And that appears to be working because the number of 5G contracts they’re signing is going up and up. So, so far it looks like they have retained their international carriers. From there, you flood as much money into R&D, which is what they did back in 1990. Now that looks like what they’re doing again. They’re putting a ton of money into R&D. And they’re not just doing the same thing. One of the interesting things about the R&D is they’re R&D for… to a large degree has been a game of fast follower, of sort of being second or third in the market, but good at the tech side in terms of leadership. That’s kind of an easier game, but now they’re trying to be tech leader, which is actually a little bit different. And you can see them starting to change the human resources strategy they use for R&D, where they’re starting to hire what they call geniuses. I think they hired 20 or 30 people at high salaries, these top-notch thinkers from around the world. They’re maybe gonna take that up to a couple thousand. They’ve got this new Euro town campus. It looks like they’re maybe shifting the culture a bit in terms of R&D away from fast follower to more of a tech leader. But definitely they’re going economies of scale on the R&D side. And then I think they’re doing what they’ve. really built the business on was this unique, very aggressive culture that, you know, they, if you go to the campus, there’s, you know, all this focus on we’re in battle mode. It’s a fight for our survival. Everyone’s working like crazy. People are working these crazy hours. They’re getting, you know, big bonuses for working 24 seven. You know, they’ve sort of called on that original culture of, you know, we’re the toughest people here and we can do anything. You know, that has really sort of been reinvigorated, refocused. You know, being sort of the toughest kid on the block, the most hardworking people, that’s easier when you’re talking about a couple thousand people. When you’re at a hundred and ninety thousand people, you know, the bureaucracy can take over. You don’t know everybody. Plus, they’re a really successful company now. So a lot of people are really wealthy. It’s hard to get wealthy people to work that hard. So I think that’s kind of maybe One of the biggest impacts of this is it really has sort of reinvigorated and refocused that original culture. And they are clearly in battle mode, you know, from top to bottom. It’s pretty impressive. So I think that was kind of the right approach is to go back to basics. Focus on the telco business, reinvigorate the culture, work harder than anyone else, and then go for scale. which means retaining your international carriers and flooding money into R&D. That appears to me what they’re doing so far. Anyways, that’s kind of my take on what they should, I mean, this is simplistic, obviously. We’re simplifying a very, very complicated company in a very complicated situation. But I think that’s a pretty solid first pass. And next week, we’ll talk about the consumer business, the smart devices and all that, which is actually pretty different. And that’ll be that. Okay, so I think that’s it for today. One last thing, if you haven’t subscribed, please go over to gifthousen.com and do that. I really do appreciate it. We are trying to scale this up, which requires memberships and subscriptions. We’re gonna staff up some people, do some research stuff, so we’re gonna make this a lot bigger. Right now, it’s a pretty small little team. So it all kind of depends on the… the subscribers and the people listening. So if you could do that, I’d greatly appreciate it. But otherwise, I will talk to you next week. Have a great week and talk to you then.