When the world’s second largest mobile phone giant, Huawei, tried to compete for a multibillion dollar contract to build Sprint/Nextel’s next generation 4G network in the US, it found its path blocked by the National Security Agency. The NSA fretted about the company’s close connections to Beijing and the potential threat to American communications security. The real challenge that Huawei represented, however, was not in the political or military sphere, but in business competition. Sprint/Nextel wanted the deal, because Huawei had the best offer out there.
After years of being a technological leader, the US is suddenly discovering that Chinese products are not only cheaper than the competition in the West, they are also frequently better. Not only are the products high quality, but Chinese companies are showing themselves to be extraordinarily nimble and innovative when it comes to competing in a global free market economy. Huawei is a leading example. The company started by importing telephone switchboard equipment to rural villages, and eventually developing its own technology. It then poured an astonishing percentage of its earnings into R&D, determined to become an industry leader. At least 46% of Huawei’s 110,000 employees are engaged in R&D and the company has at least 20 R&D institutes scattered in various countries around the world, including Germany, India, Russia, Sweden and the United States. It is also the world’s single largest source of new patents.
Today, Huawei sells advanced telecomm equipment and mobile phone systems to more than 140 countries. Barred from selling its most advanced networking equipment in the US, it has focused instead on the consumer market, selling smart phones at prices that Western companies find difficult to match. While traditional players like Nokia and Ericsson smart at the competition, Huawei is offering advanced mobile phones to an economic segment that could never have afforded them before. Global sales for 2011 were more than $32 billion.
In our book, In the Shadow of the Dragon, we take an in-depth look at how China’s newly formed corporate giants, like Huawei, are competing head-on with the world’s formerly dominant multinationals.
The book explores how the leading Chinese players in various sectors of China’s economy have managed to establish a foothold in their own highly competitive domestic markets, and are now being forced to expand internationally in order to find new markets and to keep growing.
Some names, such as Lenovo, which bought the IBM laptop computer business, have already established a global reputation. Others such as Huawei, TCL, which bought RCA and Thomson, are barely recognized by the general public. Some companies such as Haier, which sells low cost air conditioners and refrigerators through discount chains like Walmart, place in between. Haier, which is recognized in China as a major manufacturer of high-end appliances, broke into the American market by selling mini-refrigerators for student college-dorm rooms, and then challenged the major American appliance leader Whirlpool in a competition to buy the failing American appliance brand, Maytag. Although Whirlpool succeeded in taking over Maytag, Haier went on to surpass Whirlpool in global refrigerator sales and then to capture the largest market share for worldwide sales of major appliances in 2011.
The major points covered in “In the Shadow of the Dragon” are:
• While Chinese companies started out by competing on cheap prices and low cost labor, that is no longer the case. Domestic and international competition are forcing these companies to move up the value chain quickly. Western companies need to face-up to the challenge, and to do that they need to understand how Chinese companies operate.
• While Chinese companies have an advantage in talented, highly trained, low cost labor, their real advantages are speed, flexibility, attention to individual customer needs, and in the case of China’s private sector entrepreneurs, rapid decision making.
• The old days when Chinese companies were crippled by bureaucratic red tape are fast disappearing. China’s private sector entrepreneurs today have learned how to survive in a market characterized by cut-throat competition and minimal financing. They are a formidable force by anyone’s standards.
• At a time when the ongoing financial crisis has forced western to cut back, the Chinese are investing heavily in R&D, and they are rapidly moving from copying western technology to developing their own, which in some cases is very advanced. While the US graduates around 40,000 engineers a year, China is now graduating 280,000.
The time when China struggled under an inefficient socialist collective economy is long gone. In fact, China’s development problems in the past have served as a spur to work harder for success in the future. The new China is emerging is highly competitive and it enjoys government support for its most successful companies. For any Western executives who hopes to compete in this environment, it is critical to understand the changes that are taking place in China today. China’s most important influence on the future will be the impact that it has on business. “In the Shadow of the Dragon” explains how and why.
William Dowell is a former correspondent for TIME Magazine, and is currently a freelance writer based in Geneva, Switzerland. He wrote In the Shadow of the Dragon with Winter Nie, who is a business consultant and professor at IMD, a leading business school in Lausanne, Switzerland.