Competing Through Joint Innovation
The Chinese telecommunications company Huawei recently has made significant inroads into European markets using a strategy of innovation partnerships with customers and governments.
Emerging markets such as China and India have become the growth drivers of corporate R&D initiatives from all around the world.1 Although there is growing evidence that Chinese companies are shifting their innovation focus from cost savings to knowledge-based research, the view by many in the West remains that companies based in emerging markets are not ready to take over the role of leading innovators from their Western competitors.2 As a result, Chinese multinationals have been at a competitive disadvantage, particularly in strategic technology industries.
What can Chinese multinationals do to overcome Western barriers to entry in strategically important technology industries in which “Made in China” or “Designed in China” are viewed as negatives? What dynamic innovation capabilities — or, put another way, what culturally specific processes3 — should companies focus on to gain acceptance in the competitive global marketplace?4
To answer these questions, I studied Huawei Technologies Co. Ltd., the Chinese telecommunications company that has recently made significant inroads in Europe’s mature and strategically important telecommunications industry. (See “About the Research.”) Huawei, which is based in Shenzhen, is one of the first Chinese multinationals to be competitive in the West in a strategic technology industry, making it a potential role model for companies in China and other parts of Asia that hope to transition from being a follower to being a market leader.5
To achieve its position, Huawei has aggressively pursued a strategy of joint innovation with leading European customers and governments. In this article, I will discuss how Huawei worked closely with European customers to develop joint innovation capabilities. In the process, the company was able to emerge as a leader in telecommunications in Europe.
1. “Asia Becomes the Top Region for Corporate R&D Spend, According to the 2015 Global Innovation 1000 Study, From Strategy&, PwC’s Strategy Consulting Business,” press release, Oct. 27, 2015, www.strategyand.pwc.com; also see S.K. Jha, I. Parulkar, R.T. Krishnan, and C. Dhanaraj, “Developing New Products in Emerging Markets,” MIT Sloan Management Review 57, no. 3 (spring 2016): 55-62.
2. See, for instance, S. Awate, M.M. Larsen, and R. Mudambi, “EMNE Catch-Up Strategies in the Wind Turbine Industry: Is There a Trade-Off Between Output and Innovation Capabilities?” Global Strategy Journal 2, no. 3 (August 2012): 205-223; and S. Awate, M.M. Larsen, and R. Mudambi, “Accessing vs. Sourcing Knowledge: A Comparative Study of R&D Internationalization Between Emerging and Advanced Economy Firms,” Journal of International Business Studies 46, no. 1 (January 2015): 63-86.
3. D.J. Teece, “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance,” Strategic Management Journal 28, no. 13 (December 2007): 1319-1350.
4. K.M. Eisenhardt and J.A. Martin, “Dynamic Capabilities: What Are They?” Strategic Management Journal 21, no. 10-11 (October-November 2000): 1105-1121.
5. “Thomson Reuters Names the 2014 Top 100 Global Innovators,” press release, Nov. 6, 2014, www.prnewswire.com; and Interbrand, “Best Global Brands 2014,” n.d., www.rankingthebrands.com. For more on the need for Chinese firms to strategically transform, see the Chinese edition of M. Hensmans, G. Johnson, and G. Yip, ”Strategic Transformation,” originally published in Basingstoke, United Kingdom, by Palgrave Macmillan in 2013 and published in Beijing in 2015 by China Machine Press.
6. F.A. Martínez-Jerez, “Rewriting the Playbook for Corporate Partnerships,” MIT Sloan Management Review 55, no. 2 (winter 2014): 63-70.
7. P. Phan, J. Zhou, and E. Abrahamson, “Creativity, Innovation, and Entrepreneurship in China,” Management and Organization Review 6, no. 2 (2010): 175-194.
8. J.B. Starr, “Continuing the Revolution: The Political Thought of Mao” (Princeton, New Jersey: Princeton University Press, 2015); and C.S.C. Hawes, “The Chinese Transformation of Corporate Culture” (Abingdon, United Kingdom: Routledge, 2012).
9. C.A. Anderson, “Attributional Style, Depression, and Loneliness: A Cross-Cultural Comparison of American and Chinese Students,” Personality and Social Psychology Bulletin 25, no. 4 (April 1999): 482-499; and K. Leung, “Beliefs in Chinese Culture,” in “The Oxford Handbook of Chinese Psychology,” ed. M.H. Bond (Oxford, United Kingdom: Oxford University Press, 2010), 221-240.
10. Y. Zhou, W. Lazonick, and Y. Sun, eds., “Introduction: China’s Transformation Into Innovation-Nation,” in “China as an Innovation Nation” (Oxford, United Kingdom: Oxford University Press, 2016).
11. C. Dongsheng and L. Lili, “Huawei Zhengxiang [The Truth About Huawei]” (Beijing: Xiandai Zhongguo Chubanshe, 2003), 5; T. Tao and W. Chunbo, “The Huawei Story” (Mountain View, California: Sage Publications, 2014); L.V. Gerstner Jr., “Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround” (New York City: HarperBusiness 2002); and M. Lagace, “Gerstner: Changing Culture at IBM — Lou Gerstner Discusses Changing the Culture at IBM,” Dec. 9, 2002, http://hbswk.hbs.edu.
12. In a 2012 interview, John Lord, chairman of Huawei’s Australian division, described its approach: “We’re developing a model and once that model is mature, that model will be exported to other regions and countries around the world.” See “China’s Huawei Vows to Become More Transparent,” Oct. 24, 2012, www.reuters.com.
13. “Huawei Technologies Has Been Selected by Dutch Operator Telfort B.V. for Its UMTS Roll-Out,” news release, Dec. 9, 2004, http://pr.huawei.com.
14. This was part of a policy of offering extremely high rebates (anywhere from 35% up to 95%) in return for a long-term relationship. Huawei’s top management initially came to Europe to personally offer discounts to potential customers. This practice was considered illegitimate by leading European customers, however, as well as proof of the low-quality, “imitation” reputation of Chinese technology companies. Huawei subsequently hired local account managers. Based on their input, the company ended its discount practices and upgraded its price offering to be in line with European expectations of a quality offering.
15. According to the companies’ annual reports, Huawei has outspent its main European competitors of Ericsson, Nokia, and Alcatel-Lucent in absolute terms since 2010, beating Ericsson even in relative percentage terms since 2015. Nevertheless, Huawei obtains an increasingly large share of its revenues from the less R&D-intensive B2C segment of smartphones.
16. T. Wei, Huawei Technologies vice president of delivery management, interview with the author, Jan. 10, 2015.
17. Ericsson executive, interview with the author, June 5, 2015.
18. See, for example, J. Cherry, “Korean Multinationals in Europe” (Surrey, United Kingdom: Curzon Press, 2001); and M. Mason and D. Encarnation, eds., “Does Ownership Matter?: Japanese Multinationals in Europe” (Oxford, United Kingdom: Oxford University Press, 1994). On lobbying and localization of personnel, see Y. Hamada, “The Impact of the Traditional Business–Government Relationship on the Europeanization of Japanese Firms,” Journal of European Public Policy 14, no. 3 (April 2007): 404-421.
19. R. Ding, “Open Innovation for a Better Connected World,” November 2015, www.huawei.com; and C. Gnam, “Munich Becomes Europe’s Leading Hub for IoT,” Invest in Bavaria (blog), March 21, 2016, www.invest-in-bavaria.com.
20. “Beijing Considers Hungary Bridgehead to Europe, Says Chinese Formin,” Oct. 29, 2014, http://dailynewshungary.com.
21. “Hungarian PM Welcomes Upgrade to Huawei Logistics Center,” Dec. 3, 2013, www.chinadaily.com.
22. Sénat, “Rapport d’information de M. Jean-Marie Bockel, fait au nom de la commission des affaires étrangères, de la défense et des forces armées,” July 18, 2012, www.senat.fr.
23. See, for example, “The Company That Spooked the World,” The Economist, Aug. 4, 2012; and M. Kan, “China’s Huawei and ZTE Grilled by U.S. Committee Over Spying Concerns,” Sept. 14, 2012, www.pcworld.com.
24. S.R. Weisman, “Sale of 3Com to Huawei Is Derailed by U.S. Security Concerns,” The New York Times, Feb. 21, 2008.
25. M. Kan, “China’s Huawei to Reverse Controversial Deal for 3Leaf,” Feb. 19, 2011, www.pcworld.com.
26. L. Lucas, “Huawei’s Smartwatch Tries to Win the West,” Financial Times, Sept. 26, 2016.
27. B. Grubb, “Telcos Could Face Huawei Ban, Malcolm Turnbull Confirms,” Sydney Morning Herald, July 27, 2015; and A. Coyne, “Australian MPs Still Scared of Huawei,” Oct. 17, 2016, www.itnews.com.au.
i. See also M. Hensmans and G. Liu, “How Do the Normativity of Headquarters and the Knowledge Autonomy of Subsidiaries Co-Evolve?” iCite working paper WP2016-020, Universite Libre de Bruxelles, Bruxelles, Belgium, Oct. 11, 2016, https://ideas.repec.org.