Reviewing China Inc.

There is an article in The Register today on Huawei hiring consultants to help the company with M&A in the US.  I think this confirms the strategy if you want to emulate the western business model, hire some consultants to tell you what do.  I think I am probably alone on this view, but if you need consultants to tell you how to run your business you must have hired the wrong employees.  I understand assigning a side project that is not a corporate priority to a consulting firm, but who would know your core business better a consultant or your employees?

I wrote about China Inc back in 2006 and I put that post below.  I ended the post by asking the question “Will technology companies from China Inc. replace US and European technology companies as preferred suppliers and trading partners because the government of China offers a less intrusive form of foreign policy and regulatory compliance?”  We are still waiting to determine the answer to that question, but it appears that the US is living up to the promise of defending their home market.

With the publishing of Huawei’s annual results, $22.8B in FY2010, a number of sell side analysts wrote worrisome notes on the impact that Huawei is or might have on western tech companies.  Paul Silverstein of CSFB wrote “A growing issue for ALL suppliers, Huawei’s and ZTE’s historical rev mix suggests that their historical impact and future threat is most acute for SP-focused suppliers of wireless and transport infra, and increasingly for layer 2-3 switching & routing suppliers.  We believe that LT, Huawei and other Asian suppliers represent the most significant threat to CSCO and JNPR.  Further, we believe that Huawei already has impacted CSCO more than investors suspect.  While virtually all major suppliers to SPs of layer 1–3 infrastructure have suffered eroding GMs and OMs over the past 5 yrs, Huawei increased its GM, OM, OCF and net cash balance.

I think the area that western technology companies need to defend in order to compete with China Inc or Japan Inc or Korea Inc is software.  Hardware is easy these days, unless you have made a real technology innovation at the chip or photonic level.  Building another hardware box like a switch or server or router or appliance is just too easy.  To compete with the low cost supplier, western companies need to innovate through creativity and creativity is best exploited in software.  No consultant is going to tell a company how to be creativity in software development.  The same is also true for companies looking to take market share.  Market share in networking and compute is won with software – not selling architectures.  Ask yourself what do FFIV, RVBD, STAR and APKT sell: hardware or software?  The answer is software.  What does AAPL sell?  I would submit that it is software again.  Software wins and yes it does need a hardware platform and there are packaging innovations to be had, but at the end of the day software matters the most.  CSCO was not built on hardware.  It was built on IGRP.


** It is all about the network stupid, because it is all about compute. **


Friday, August 18, 2006

China Inc: Technology Companies, Foreign Policy and Making Friends

A framing exercise:

Frame 1:

There was an interesting interview yesterday, by Carrie Gracie of the BBC with Sha Zukang, who is China’s ambassador to the UN. During the interview, Sha Zukang stated (I am paraphrasing) that China is not at war with any country, Chinese armies are not in the Middle East, Chinese armies are not in Korea, Europe and China has not fought a war in fifty years. It is America who has armies marching in foreign countries. A direct quote was “It’s better for you to shut up! To keep quiet! Don’t tell us what is good for China!” Sha Zukang, Chinese ambassador to the UN talking about the United States.

Frame 2:

Why is Huawei a private company? Every year they publish a nice, but short annual report with pictures of smiling people telling the world how well the company is growing. According to the report sales have grown from $2.1B (2001), $2.6B (2002), $2.6B (2003), $3.8B (2004), $5.9B (2005) and projections for $8B in 2006. If sales are that good, why not go for a public listing on a US stock exchange? That would be a statement: a Chinese technology company listing on the NYSE or on the NASDAQ right next to MSFT and INTC. I have a thesis on why they are not public company. They are not a public company because sales are not as good as they state, profit margins are terrible, the company is subsidized by the government and Huawei does not want to stand the scrutiny of becoming SOX compliant. I do not think it is a negative that Huawei wants to stay private – I think it masks the real issue which is they have been buying the international business and relying on domestic business to grow the company. As supporting ecosystem data points, UT Starcom has seen its revenues plunge from $900M a quarter in early 2005 to just over $500M. ZTE revenues have also flattened after growing from 2001 through 2004. Recently there have been reports of a slowing in domestic technology sales in the China market.

Frame 3:

The evolution of US Foreign Policy from the Kennedy Administration through the present day has had two overall macro drivers. (1) Insuring human rights and promoting democracy started to become al US foreign policy theme in the Kennedy administration and clearly became a central theme of US Foreign Policy in the Carter Administration. (2) Subsequent administrations developed additional corollaries adding requirements for banking laws, property rights, legal systems and western democratic business structures. Going back to the BBC interview with Sha Zukang, there is an interesting quote in the article. The article states that China is on the move in the global market with emphasis on Africa. They are seeking to create international trade and development agreements that have far less stipulations and requirements then the US. “In Africa the impact is particularly stark. Garth Shelton of South Africa’s Wits University welcomes the attention, saying there is a lot of optimism about the renewed Chinese interest in his continent. ‘If we deal with the United States or West European governments they would bring a list of 33 items requiring restructuring of your democracy, your human rights issues,’ he said. ‘China would arrive and say we accept you as you are. And that’s a refreshing change.’”

Frame 4:

The contemporary US foreign policy post 9/11 has centered on an interventionist core policy that has not been seen since the Vietnam War ear. The case can be made that Reagan Administration had an interventionist foreign policy, but this was more directed at the Soviet Union then global conflict zones. The result of the current US Foreign Policy has been the polarization of the US and its allies on one side and the many nation-states who now view the US as not the beacon of democracy and hope – but rather the leader of a global militarized nation-state on the other side. In the microcosm of the technology industry, the Chinese companies such as Huawei see this as an opportunity to offer technology solutions without the intrusive aspects of US social, economic and legal requirements.


Combining the polarization effect of the present day US Foreign Policy with our requirements for human rights, legal, financial infrastructure and accounting standards and SOX requirements for a public listing, the US is creating a challenging mix of policy, cultural and regulatory requirements for international commerce. Will this mix extend to the public markets? Will the US stock markets decline in attractiveness for multi-national companies and stock exchanges in Europe or Hong Kong rise in attractiveness? Will technology companies from China Inc. replace US and European technology companies as preferred suppliers and trading partners because the government of China offers a less intrusive form of foreign policy and regulatory compliance?