B uilt on Value The Huawei Philosophy of Finance Management Weiwei Huang Built on Value “Huawei is an enterprise that deserves respect and is worth learning from. The great importance placed by this tech company on financial management offers us inspiration and insight.” —Liu Chuanzhi, Chairman of the Board of Legend Holdings Corporation, and Founder of Lenovo Group Limited “Enabling ‘lead to cash’, engaging in project operations, ensuring internal and external compliance, using the certainty of rules to deal with the uncertainty of results, allowing flexibility while also ensuring standard operations, rapidly striking a balance and then actively disrupting the balance, and inspiring dedication based on customers’ interests… These are what Huawei Finance has done. Huawei’s financial management practices have redefined the logic behind traditional finan- cial management, and opened a door to a broader world for Chinese enterprises that are working hard to catch up and overtake their global competitors.” —Wu Xiaobo, Director of the National Institute for Innovation Management, School of Management, Zhejiang University “Huawei is a world-class Chinese company that is capable of going head-to-head with the best in the global market. To compete successfully, Huawei focuses on delivering value to customers rather than just reducing costs. Huawei is also able to create value by leveraging the strengths of China. This does not only refer to cheap labor, but also to talented R&D employees who truly grasp core technolo- gies. However, just hiring these talented people isn’t a guarantee to unlock their potential. That’s why Huawei chooses to distribute shares to its employees. The company knows how to fully motivate employees and inspire dedication. These three points are what have made Huawei what it is today.” —Yang Guoan, Management Professor at the China Europe International Business School Weiwei Huang Built on Value The Huawei Philosophy of Finance Management Weiwei Huang School of Business Renmin University of China Beijing, China ISBN 978-981-13-7506-4 ISBN 978-981-13-7507-1 (eBook) https://doi.org/10.1007/978-981-13-7507-1 © The Editor(s) (if applicable) and The Author(s) 2019 This book is an open access publication Open Access This book is licensed under the terms of the Creative Commons Attribution- NonCommercial-NoDerivatives 4.0 International License (http://creativecommons.org/ licenses/by-nc-nd/4.0/), which permits any noncommercial use, sharing, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if you modified the licensed material. 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Cover Image: © Sean Pavone / Alamy Stock Photo This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21- 01/04 Gateway East, Singapore 189721, Singapore The goal of any enterprise is to make itself more competitive, build trust among its customers, and survive market competition. Huawei’s Board of Directors has made it clear that its goal is not to maximize the interests of shareholders or stakeholders (including employees, governments, and suppliers). Rather, it embraces the core values of staying customer-centric and inspiring dedication. This is the foundation for Huawei’s survival. – Ren Zhengfei F orewords “Don’t solve problems.” So advised the late patriarch of management theory Peter Drucker. What could Drucker have meant? Problem-solving is the chief preoc- cupation and agenda of nearly all business managers and their companies. But when you solve problems, as this timely book shows, you tend to feed your failures, starve your strengths and sink into costly mediocrity. Problems orient you toward the past. Entrepreneurship is about the future. “Don’t solve problems,” said Drucker. “Instead, pursue opportunities.” When you pursue opportunities, as Huawei’s amazing history demon- strates, you can transform your entire competitive environment. You can turn your previous “problems” into the maps and matrices of a new busi- ness strategy. You can launch a juggernaut of innovation and growth. Exemplifying this transformative wisdom are Huawei’s leaders Ren Zhengfei, founder philosopher, and his extraordinary daughter Sabrina Meng, Huawei Chief Financial Officer and guiding light of this book, which launches with her preface. Grasping its visionary principles of finance, you can gain new Druckerian insight into the miracle of Huawei. You may even understand how Ren Zhengfei in just three decades could turn the equivalent of $3 thousand into not just China’s telecom equip- ment champion but into a multinational colossus. It now commands $107 billion of revenues, operations in 170+ countries and regions, and 180+ thousand employees from around the world, 30 thousand of them non-Chinese. Its finance division, guided by Meng, commands hundreds of experts and managers from such schools as Harvard, Cambridge, Wharton, and Yale. vii viii FOREWORDS In the United States, anxious experts and rivals have offered many explanations and alibis for the Huawei miracle. They depict Zhengfei as an ex-army officer with sinister ties to the Chinese government. They imply he created his company as an elaborately mounted Trojan horse for com- munist hackers and spies. As the story goes, huge subsidies and gigantic heists of intellectual property account for Huawei’s meteoric ascent as a state-owned and state-ruled enterprise. Zhengfei’s army career, however, was routine for Chinese youths of his era and devoted to engineering. As the son of a “capitalist roader” pillo- ried during the “cultural revolution,” Zhengfei launched one of the first fully private firms in mainland China. Long before the creation of any Chinese stock exchange, he founded Huawei with a major financial inno- vation, what is called in the US an ESOP (Employee Stock Ownership Plan). Far from leaning on the government, Huawei triumphed by out- performing all the state-owned enterprises previously dominating China’s telecom industry. Huawei’s accountants, KPMG, report no major state subsidies and verify Huawei’s private ownership structure with 98.86 per- cent of the equity owned by employees and 1.14  percent retained by Zhengfei. Ren Zhengfei built Huawei in admiration for American openness, now ironically in danger of being lost in a siege of xenophobic fear of Huawei. This book quotes his 2014 riff on American success: “Openness is one of the factors that contribute to the success of capitalism. There was no eco- nomic success in China when it shut its doors to the outside world. Therefore, we must open up. “Currently, many people in China hope to grow stronger behind closed doors. This is a mistake. Throughout history, China has shut itself away from the outside world for long periods of time, making it impossible to become strong. The US is the world’s most open nation, and thus the world’s strongest. Though the US may fall behind from time to time, it has seen constant waves of innovation: Apple, Facebook, and others. As long as the US remains open, who can stop it from moving forward?” (Ren Zhengfei: “Absorbing the Energy of the Universe over a Cup of Coffee,” 2014). Ren Zhengfei is also a supply-sider: “Reducing taxes encourages invest- ment. It is like digging a trench in the ground, which makes it easy for water to flow…Benefits from increased investment can offset loss of revenue from tax cuts for the government.” FOREWORDS ix All major business competitors, necessarily imitating one another and using common components under industry standards, provoke tensions over intellectual property. In Huawei’s case the charges of theft mostly reflect rivals’ shock at Huawei’s success in entering a market shaped by standards and inventions from the United States, made by such companies as Cisco, Bell Labs, and 3Com. Although one would never know it reading American journals, more than 15 years ago the claims of stolen IP were fully ventilated and liti- gated. It was an episode that rivals should study today—along with this book—before they disparage Huawei’s current constitutional challenge to the U.S. ban of Huawei equipment in U.S. networks. In January 2003, the American router pioneer Cisco shocked Huawei with a wide-ranging suit for property rights infringement. To prevent any effective response, Cisco unleashed its 70 pages of complaints in a famously patent-friendly venue in a remote District Court in Marshall, Texas. A Cisco executive in Asia was reported to have declared: “This time we need to make Huawei go bankrupt.” To most company leaders, this move would have seemed an insuperable “problem,” solvable only by capitulation and retreat to niche markets in China. But in his characteristic inspirational leadership, Zhengfei saw the Cisco suit not as a problem but as a giant opportunity. Declaring that he trusted the fairness of the U.S. court system, he sent Huawei lawyer to Texas to defend his company against all charges. In the end the court vin- dicated Zhengfei’s confidence by upholding the Huawei defense on all key points and barring Cisco from raising the issues again in another venue. Huawei is now a leading player and stakeholder in the global system of intellectual property rights and standards organizations. In recent years, Huawei has paid Qualcomm of San Diego more than a billion dollars in royalties. Last year Huawei bought $ billions worth of microprocessors from Intel, which also benefited from $4 billion of additional Chinese business. Today with some 2.5 thousand patents in the relevant technology, Huawei is the world leader in patents for the new industry standard called 5G and offers the only turnkey system. This new standard, the Fifth Generation of wireless architecture, enables a wide range of future indus- tries, from next generation airport surveillance and security to urban traf- fic management to self-driving automobiles and battlefield robotics, from Internet virtual reality and the Internet of Things to smart cities and x FOREWORDS intelligent grids. Huawei now has a deep interest in the maintenance of intellectual property rights. So let’s sum it up. The U.S. has chosen to attack arguably the most creative and powerful and best-led capitalist company in China. The leading supplier of telecom equipment in the world, it is led by Ren Zhengfei, a charismatic philoso- pher king of global industry with a natural eloquence and insight. The U.S. government regards Huawei as such an immediate threat that it has reached into Canada to put CFO Sabrina Meng, the founder’s ele- gant daughter, under house arrest in Vancouver. It is no way to treat a lady, regardless of whether Huawei blurred the murky rules of the interna- tional boycott of Iran. In spite of major royalty payments to US companies, it is being indicted for stealing US intellectual property. It is said to be concealing surveillance devices in its smartphones, worldwide best sellers behind only Samsung. It is said to be hiding chips in its routers and switches that enable them to be controlled from China, jeopardizing our networks and power grids. Now the US is backpedaling the claims, making the more general argu- ment that as a Chinese company Huawei is necessarily under the control of the Chinese government. Chinese law imposes a requirement that busi- nesses comply with the needs of national intelligence bodies. A flagrant example of “problem” paralysis, this U.S. claim is even more dangerous than the specific smears of Huawei. Such a rule would apply to any nation, including the U.S., and would render impossible most inter- national trade in technology. It would cripple the international fabric of supply chains and standards that underlies most world economic growth and opportunity. In a letter to his employees in the midst of the crisis over the arrest of his daughter, Zhengfei outlined how to turn this “problem” into an opportunity. He wrote: “We must be open, transparent, active and coura- geous to reveal problems and actively promote improvements. Software devel- opment is a creative and artistic work that takes full advantage of our ingenuity and potential. We need to improve and enhance the transparent, traceable and auditable full process management mechanism to enhance soft- ware engineering capabilities and practices from initial design and complete build to product lifecycle management from a credible perspective.” It is up to telecom companies and other network managers to do their jobs and negotiate open and defensible contracts for sensitive equip- ment. If they harbor suspicions, Huawei’s carrier customers can entrust FOREWORDS xi independent third parties to view the software source code and conduct security testing. Firmware programming for network hardware systems should be cryptographically signed, just as no iPhone or Huawei app will boot unless it is cryptographically signed. If the U.S. can’t deal with Huawei without craven bars and bans, it might as well retreat to a fetal curl, sealing off its “infant industries” and illusions in a commercial theme park. But let’s take inspiration from Peter Drucker. Huawei is not a problem for American technology; it is a huge customer and huge opportunity. It offers a chance to revitalize the U.S. economy and infrastructure with a new competitive challenge and innova- tive resource. Tyringham, MA, USA George Gilder Looking back on the path from whence we come, we see only the verdant green shimmering in the majestic setting sun. – Huawei CFO Sabrina Meng’s 2017 New Year Greeting At year-end, our Finance Department generally falls into a flurry of activ- ity. There is an enormous amount of data to review, and it all has to be calculated, tracked, analyzed, verified, and measured. Beginning in October each year, Finance will face a period where overtime becomes the norm. Annual accounting and auditing work begins at the company’s sub- sidiaries around the world. The next year’s budget preparation and review also happen during this period. All our finance organizations are generally up to their eyeballs with work relating to these two tasks, sometimes almost drowning in an endless sea of numbers. As the old Chinese poem goes, “Looking back on the path from whence we come, we see only the verdant green shimmering in the majestic setting sun.” As we wave goodbye to the past year, we are filled with unforgetta- ble memories and fruitful results. Especially when we look at where we were a year ago, we will be aware of how much progress we have made over the past year. I am sure that many of our teams and colleagues now have a strong sense of pride. Looking back at the challenges we have overcome and the peaks we have climbed, it is hard not to feel proud of our hard work. Thinking back on the twists and turns of the past year, how could we not feel inspired by our own perseverance? Of course, our present position only marks the beginning of our next journey.