Tuesday, April 24, 2012
Monday, April 23, 2012
Insight: Outsider Ren pits Huawei against the world
(Reuters) - In the 1990s, Huawei CEO Ren Zhengfei visited the United States several times, hoping to learn from its leaders of industry about how to turn his Chinese telecoms equipment maker into a global company. On one trip in 1992, in the days before China had credit cards, he paid all his bills with cash from a $30,000 stash in his briefcase.Sixteen years later, Ren was listed among Forbes' 400 richest Chinese
and Huawei was one of the world's largest telecoms gear vendors, but the United States still treated him as an outsider. He was keen to win customers like AT&T, Verizon and Sprint but had secured just $200 million of business in the U.S. in 2007 — in a $23 billion global market. Early that year, the United States effectively vetoed Huawei's bid for U.S. networking equipment manufacturer 3Com on security grounds.In March 2008, according to a U.S. cable leaked to WikiLeaks, Ren visited the U.S. consulate in Guangzhou to complain he was issued only a single-entry visa. He was exasperated at U.S. suspicions that his company was close to the Chinese military and government. He pointed out that his parents were sent to labor camps during China's Cultural Revolution and the only reason he was allowed into the People's Liberation Army (PLA) was because they were short of skilled technicians.
While controversy over Ren's supposedly cosy links to China's officialdom has doggedHuawei's global expansion plans, his own story suggests the firm's success is largely down to a strong individualistic streak that pits Ren against the world.
Ren declined to be interviewed for this article. However, he has written numerous letters and articles which have been shared with Huawei staff, and, in some cases, with the public. Sources in the company have confirmed the authenticity of the material, allowing Reuters to piece together the most comprehensive profile to date of one of Asia's most reclusive business leaders.
Ren remains an aloof, enigmatic figure, even to the 40,000 workers at Huawei's headquarters. There are few photos of him on the walls, and for most their only contact with him has been via his missives, laden with flowery historical references, which arrive by email and prompt as much amusement as reverence. "He's a very smart guy who has a vision," one staff member said. "He sees it as his challenge to make his staff see his vision, so he spends a lot of time motivating people."
He certainly began life as an outsider.
Born on October 25, 1944 to a rural family in a remote mountainous town in Guizhou province, as the first of seven children, life was harsh. His parents were schoolteachers, and his mother often had to borrow money to make ends meet, he wrote later in an article published in an internal magazine. "Until high school," he wrote, "I never owned a proper shirt." His father fought for the nationalist Kuomintang against the Japanese in the 1930s, only later joining the Communist Party. This and their "intellectualism" condemned both parents to labor camps during the Cultural Revolution.
Ren graduated in 1963 from the Chongqing Institute of Civil Engineering and Architecture, and in 1974 the PLA, strapped for engineers, overlooked his background and put him in the Engineering Corps. He later said he was excluded from an inner circle. "I was unable to join the Communist Youth League when I was at college and failed to join the Communist Party when I served in the army," he wrote in a letter emailed to his staff late last year. "There was always adversity in my life, and I became isolated."
Despite this, Ren excelled. He rose to deputy director, the equivalent of deputy regimental chief, and was invited in 1978 to the National Science Conference and, in 1982, to the National Congress of the Communist Party of China. His army career ended with Deng Xiaoping's cutbacks the following year.
Ren flitted through various jobs, realizing his technical and scientific knowledge was being outpaced by rapid changes in technology. Armed with 21,000 yuan (now worth $3,300), he and some friends set up Huawei as a third-party re-seller of telecom devices in Shenzhen. Ren pushed the company to quickly move up the value chain, emulating other companies' products until, in the early 1990s, Huawei was producing its own designs. In 1993, it introduced the C&C08, a digital telecoms switch which was both reliable and much cheaper than other systems.
GUERRILLA TACTICS
Despite the perception that Ren profited from his PLA connections, only a fraction ofHuawei's early contracts were from the military, according to Mike W. Peng, professor of global strategy at the University of Texas at Dallas and author of a book on global business strategy. Instead, Huawei battled its better-connected rivals by adopting a quasi-military strategy since eulogized as the 'wolf spirit'. If multinational corporations were elephants, Ren said at the time, Huawei was a mouse - so needed a keen nose and a strong competitive instinct allied to a spirit of cooperation and sacrifice.
Ren outwitted his competitors by focusing on rural areas, deploying sales people to win contracts there before moving into the towns and cities. He called these local managers "guerrilla heads" and gave them great autonomy, but later admitted he had no great understanding of how to manage them. But it worked.
Huawei won local and provincial telecoms contracts by agreeing to set up joint ventures, enabling those authorities to recoup much of their investment through annual dividends. By 1996, Huawei had the second largest share of China's telecoms switches market. The following year Ren ventured abroad, targeting under-served markets in Africa and Russia, according to "Run of the Red Queen", a study of Chinese economic expansion by academics Dan Breznitz and Michael Murphree. In most cases Huawei offered soft loans to cash-strapped developing world carriers. In 2004, for example, Huawei used a $10 billion credit line from China Development Bank to offer loans, undercutting rivals' bids by as much as 70 percent, according to a paper written by JETRO, a Japanese trade organization.
Ren pushed his workers hard, particularly in research and development. Citing Siemens data, Peng wrote that European R&D workers work about 1,400 hours a year, while Huawei's Chinese R&D workers put in twice that - at as little as a sixth of the cost. Huawei became known for its "mattress culture", where engineers would put in long hours and sleep in the office.
Annual sales rose tenfold between 1995, when it served only China's rural markets, to $2 billion in 2000. But, to Ren, Huawei's future remained precarious.
He had promoted Li Yinan, a bright young optical engineer nearly 30 years his junior, to vice president, only to see him leave in 2000 to set up a rival company. By then the dot.com bubble was beginning to burst, and with it the boom years of investment in telecoms driven by a wave of deregulation.
Ren was facing his own personal demons, too.
On January 8, 2001, while on a trip to Iran with then Vice President Hu Jintao, his mother was hit by a car when out buying cabbage. A six-hour layover in Bahrain, a storm and a missed connection in Bangkok delayed Ren's arrival at her bedside. By then, according to an article by Ren published in an internal magazine and whose authenticity has been confirmed by sources within Huawei, she was on life support. He blamed himself. Had he phoned her before boarding the plane, he wrote later, she may have left the house later and lived.
"HUAWEI'S WINTER"
The following month he wrote another article, entitled "Huawei's Winter", in which he warned against complacency in the company, which he said could trigger bankruptcy in the face of a coming crisis in the telecoms sector. "It is spring now, but that means winter is not too far away, so we will have to ponder about the problems in winter during spring and summer." Huawei, he said, must prepare itself. "One will freeze to death without any premonition or preventive measures," he warned. "When that happens, whoever has a woolen jacket will survive."
To protect Huawei he sold off a California subsidiary, Avansys Power Co, to Emerson Electric for $750 million. Shaun Liu, an IBM consultant to Huawei who had just started working out of the company's Shenzhen headquarters, recalled how Ren often asked his employees to be prepared for the crisis.
Behind the scenes, all was not well. With the company expanding rapidly, it was unable to absorb new hires, causing chaos. Ren was trying to run the company himself, working long days, his suit wrinkled, as problems stacked up on his desk. For six months he had nightmares and would wake up crying.
The IBM consultants made him realize how much needed to be done to transform the company. Ren later wrote he recognized the company had no viable long-term strategy and sorely lacked organizational expertise. The consultants told him the future was in R&D and services, not manufacturing, but Huawei must shed its image of being cheap.
Between 2000-2003 Ren "became fatigued," he wrote last year, "collapsed, suffered from many diseases and had cancer surgery twice." In 2002, he wrote "Huawei was on the verge of collapse."
From the outside, though, it didn't look that way: while telecom infrastructure investment around the world shrank, Huawei's international revenue grew to $552 million in 2002 from $328 million in 2001. It now had a foothold in 40 countries.
SUICIDES AND DEPRESSION
IBM's emphasis on quality service — coupled with Ren's insistence on worker dedication — created a workforce pushed to its limits. Huawei's former head of operations in Africa, Wilson Yang, recalled for a case study by the University of Pennsylvania's Wharton School how customers knew they could call a Huawei technician 24 hours a day, seven days a week. A sales manager, quoted by Jie Xiong of France's EMLYON Business School in a letter written in 2011, said he would often celebrate Christmas with colleagues while fixing a client's server. "Christmas," he said, "is not our holiday."
In late 2007, Huawei asked 7,000 employees to resign so they could be re-hired on short-term contracts that were not subject to China's Labour Contract Law, according to Hong Kong's China Legal Bulletin. Worse: The mattress culture was apparently contributing to a spate of suicides. A baffled Ren wrote to a senior member of the Communist Party, according to the Xinmin Weekly, asking what to do. "What can we do to help our employees have a more positive and open attitude towards life?," the paper quoted him as writing. As an outsider, he was sympathetic — "I used to have serious depression and anxiety disorder," he wrote in a missive to staff, "but with the help of doctors, along with my own optimism, my illness is completely cured."
An industry source who met Ren earlier this year recalled that he looked pale, with a nurse popping in to check his blood pressure.
As Huawei has grown, so has concern over its future.
Reports in Chinese media about boardroom battles in 2010 suggested Ren was planning to hand over to one of his sons — a rumor Huawei denied. These, and questions about Ren's PLA connections, have forced the company to be more open, last year publishing for the first time a list and biographies of the people who run the company. This only partially dampened talk of a family-run business. It showed Meng Wanzhou, Ren's daughter, was chief financial officer. Ren's younger brother, Ren Shulu, was appointed to the supervisory board in January 2011.
At the end of last year Ren gave some insight into the structure in place at Huawei, explaining a system in which eight executives took turns as chairman for six months. It was this system, he said, which prevented any one division or figure from becoming too dominant, or, as he put it, "internal hilltops had been unconsciously leveled."
In early February, Huawei's internal communications team produced a copy of their Huawei People magazine emblazoned with a sunset photo of an estuary, headlined "The Spring River Flows East". Inside, Ren's 2011 letter was carried in English in full, complete with explanatory footnotes, where he warns of coming catastrophe when "an economic bubble caused by excessive leverage will ultimately burst."
He concludes: "Tides rise and fall in the sweep of history and the spring river flows east, into the Pacific Ocean, into the Indian Ocean, and will never return ..."
Around the time he was writing that, Australia was preparing to block Huawei from bidding on the country's $39 billion national broadband network, one of the largest telecoms infrastructure deals in years, citing security concerns. ($1 = 6.3030 Chinese yuan)
China Internet firms face venture capital funding squeeze
SHANGHAI/HONG KONG (Reuters) - China's hot Internet sector is facing a problem it is unaccustomed to: a lack of money.
The world's largest Internet market, with nearly half a billion users, gave birth to some of the world's most vibrant Internet firms, such as Baidu Inc and Tencent Holdings. Venture capitalists bankrolled them, making knockout returns after the firms' successful U.S. listings in the mid- to latter half of the previous decade.
But a slew of accounting scandals and fears that the corporate structures used by China's Internet firms could face greater scrutiny from Chinese authorities have spooked U.S. investors in the past year, dulling their appetite for initial public offerings.
With IPO exits blocked, venture capital funds have dried up.
"It's sort of winter time for Internet companies in terms of getting finance," said Q.D. Wang, chief executive of Internet mobile startup Datou.
In the first quarter of 2012, venture capital firms invested just $138.5 million into China's Internet sector, an 84 percent fall from the $866.5 million invested in the year earlier period, Thomson Reuters data shows.
Starved of funds, scores of startups face an uncertain future. Many are turning to unusual financing sources.
Some have dipped into their own funds. Others have tapped family and friends for the capital they need to stay in business.
It was once a joke that all a Chinese Internet entrepreneur needed to raise money from a venture capitalist was a piece of paper with a business plan scribbled on it.
The joke is no longer true.
Wang of Datou said he raised cash last year, declining to give the amount, but he will not look for more this year. Given the current harsh fundraising climate, he feels his time is better spent honing his business instead.
Song Li, chairman of photo-sharing website Digu.com, said he knows of entrepreneurs who had to turn to their families and friends to raise the capital that was once readily available from venture capital firms.
RISE, AND DECLINE
As U.S. IPO investors caught the China Internet bug, venture capital firms poured more money into startups, backing new companies to feed the IPO frenzy.
Venture capitalists poured $3.6 billion dollars into China's Internet sector in 2011, Thomson Reuters data shows, more than double the year earlier figure of $1.7 billion.
China's online coupon companies became particularly hot.
Lashou.com, founded in March 2010, had raised $166 million in venture capital by April 2011, and was valued at $1.1 billion.
In the same month, China's largest business-to-consumer website 360buy said it had raised $1.5 billion in new money, including $500 million from Russia's Digital Sky Technologies, a Facebook investor.
Chinese Internet firms always favor the U.S. markets for an exit due to the lack of a profit requirement to list and the high valuations they can command.
But from mid-2011, a series of accounting scandals hit Chinese firms listed in North America, leading to trading halts, delistings, lawsuits and regulatory probes in both the United States and Canada.
The scandals dampened sentiment for Chinese listed stocks among U.S. investors, and new entrants to the market face skeptical investors and tougher Securities and Exchange Commission rules.
Listing documents now also contain more visible disclosures about the structures these companies use, the so-called VIE or variable interest entity, which allows Chinese companies to get around certain rules forbidding foreign investment in sensitive sectors, like the Internet.
As a result, there were just six exits through U.S. IPOs in 2011, data from Chinese research firm Zero2IPO shows.
Recent listings have failed to dazzle.
In March, online retailer Vipshop became the first China tech stock to list since August, but its shares fell as much as 12 percent on its New York debut. Even a sharp cut in the offer price failed to overcome concerns about mounting losses and its complicated corporate structure.
With their capital trapped in companies like Lashou and 360buy, venture capitalists have naturally turned cautious.
"Chinese Internet companies, their main option is to go list in the U.S., so when that channel is blocked, venture capital firms are a lot more cautious," said Jay Chen, founder of venture capital research firm, China Venture.
SELECTIVE ABOUT INVESTING
Venture capitalists have not turned away entirely from China Internet firms, but they are far more selective about where they will invest. Ecommerce firms took the lion's share of 2011 VC money, but that will not be the case going forward.
"In the first wave of capital that goes into a sector, there's a lot of relatively dumb money, says Gary Rieschel of Qiming Venture Partners. "The assumption on ecommerce was that everyone is going to be like Amazon, and it's starting to be clear that that's not going to be the case," he adds.
Venture capital is looking for areas where barriers to entry are high.
Rieschel sees a shift towards areas like analytics and cloud computing, where intellectual property and technical skills create natural barriers to entry, and protect investment.
"I think we will have a percentage shift in that direction."
China policy battles boost South China Sea strains
BEIJING/MANILA (Reuters) - Jockeying by Chinese agencies over policy fiefdoms and budgets threatens to intensify tension in the disputed South China Sea, a respected think tank warned on Monday, with the Philippines seeking more patrols to guard against China's claims.China has territorial disputes with the Philippines, Vietnam, Brunei, Malaysia and Taiwan across the South China Sea. They worry over what some see as growing Chinese assertiveness in staking claims over the sea's islands, reefs and shoals.
On Sunday, the commander of security forces on the western Philippines island of Palawan said he had asked for more ships and aircraft to step up patrols in his area, fearing China may build on uninhabited features there.
"In the age of prefab materials, they can do it in just one day," Lieutenant General Juancho Sabban told reporters after annual U.S.-Philippines war games on the island.
Sabban's area of command includes the Spratly islands, one of the main disputed areas in the South China Sea.
"We have more patrols now than before and we are asking for more air assets so we can patrol the area," he said.
Sabban said there was growing concern over China's increased presence in the South China Sea, including plans to place markers in contested waters that are seen as an attempt to bolster its territorial claims.
In a report released on Monday, the International Crisis Group (ICG) said weak coordination among the various Chinese government bodies responsible for South China Sea policy has complicated China's attempt at a peaceful rise.
"The escalating tensions since 2009 have dealt a severe blow to Beijing's relationships with its Southeast Asian neighbors and gravely tarnished its image both regionally and internationally," the ICG said.
"While some efforts have been made to patch up diplomatic ties since mid-2011, the longer-term situation in the South China Sea will remain volatile in light of China's internal coordination problems," it said.
China's military, in a commentary in the official Liberation Army Daily on Saturday, warned the United States that U.S.-Philippine military exercises have raised the risk of armed confrontation in the South China Sea.
It was the harshest warning yet after weeks of tension. Peking University professor Jia Qingguo said China may be preparing to take a tougher line on disputes, adding many in China want the United States to rein in the Philippines.
"Quite a lot of people are thinking that the U.S. is encouraging the Philippines to create a problem for China in the South China Sea," Jia said.
"AGENCIES COMPETE FOR BUDGET"
The ICG said at least 11 ministry-level government agencies, and five law enforcement agencies under them, play a part in China's South China Sea management. China's navy, it said, uses territorial disputes to validate modernization.
"While some agencies act aggressively to compete with one another for greater portions of the budget pie, others attempt to expand their economic activities in disputed areas due to their single-minded focus on economic growth," the group said.
"The biggest problem in coordinating the actors - apart from their number - is that most of these agencies were originally established to implement domestic policies but now play a foreign policy role," it said.
Adding to the confusion, provincial governments in coastal regions that border the South China Sea have increased tension by promoting tourism in the disputed waters, it said.
China completed a trial voyage by a cruise ship this month to the Paracel Islands, called the Xisha islands in Chinese but also claimed by Vietnam.
U.S. and Philippine troops launched two weeks of annual naval exercises in mid-April. Amphibious landing drills were set to take place on Wednesday in areas facing the South China Sea. On Saturday, joint marine units simulated an assault to retake an oil rig from militants in northern Palawan.
U.S. and Philippine military officials however said the drills were not directed at China or any other party.
In recent weeks, Philippine and Chinese ships have faced off near the Scarborough Shoal in waters claimed by both countries that are believed to be rich in oil and gas.
On Monday, the Philippines said it had sent a civilian fisheries boat to check on the condition of marine life and water quality in the area, which could anger China.
As the standoff enters its third week, China has a maritime surveillance ship and six fishing boats in the area while the Philippines has a coastguard vessel and a fisheries boat.
"I think the current standoff is a manifestation of a larger threat to many nations," Philippine Foreign Secretary Albert del Rosario said in a television interview on Monday. "The bigger picture is that anybody can be targeted."
Del Rosario and Defence Secretary Voltaire Gazmin will hold strategic talks in the United States next week and will be hoping to get firm backing from its long-time ally and former colonial ruler on the Scarborough Shoal.
The dispute has also moved into cyberspace with websites of the office of the Philipine president being attacked from Internet addresses assigned to Chinese networks, said Edwin Lacierda, a spokesman for President Benigno Aquino.
A Philippine Foreign Ministry spokesman appealed to citizens of both countries to stop cyber attacks saying they were not helping ease tension in the South China Sea.
Two areas in the South China Sea are among 15 oil and gas exploration blocks to be opened by the Philippines for bids later this week.
