The Consequences of China’s Rising Global Heavyweights

Since Huawei Technologies Co. Ltd., the Chinese network equipment maker, bid for a minority stake in Massachusetts-based networking equipment producer 3Com Corp. in September 2007, the deal has encountered resistance from U.S. regulators concerned about foreign access to intrusion protection technology supplied by 3Com to the Pentagon and other organizations. Huawei recently withdrew its merger application, and both companies say they are reviewing their options. Meanwhile, it’s worth stepping back and asking a broader business question: How did Huawei get here? The trajectory of one of China’s leading technology companies is a story in its own right — and one that points to the emergence of China’s middle market as the staging ground for a new set of global competitors.

Historically, multinationals zeroed in on China’s premium market, where global competitors could earn decent margins. But the playing field over the last few years has changed rapidly. Multinationals sticking with a premium-only strategy are increasingly under attack from emerging Chinese champions with compelling “good-enough” offerings — good-enough products at prices low enough to attract China’s fast growing enterprise customers and midlevel consumers.

Indeed, China’s middle market today is growing faster than the premium and low-end segments combined. A full 80% of all televisions and washing machines sold in China, for instance, are good-enough brands.

Huawei has used this trend to its advantage, rising from the low end of the market for telecom network equipment to become one of the top global players. Established in 1988, Huawei has consistently invested 10% of its sales in research and development. It developed its own products to penetrate new segments in China and forged technical alliances to further broaden its product mix. With government support, Huawei helped consolidate the domestic market, gaining massive scale in the process.

The company now controls 14% of the local market for telecom networks. Firmly established at home, Huawei has built its brand and reputation with global customers by pursuing top tier customer contracts, establishing 12 R&D centers around the world, developing next-generation technologies and partnering with global brands including 3Com. It consistently has taken advantage of its low-cost China-based R&D and engineering resources by leveraging its ability to outsource some of its manufacturing processes to other players in China.

A little more than a decade ago, Huawei was simply a regional company in a local market that few multinationals had considered important.