Xu Danhua, a 37-year-old engineer at China's premier tech company, stays plenty busy. As chief of the "pre-research" department of Huawei Technologies Co., Xu has his hands full developing products for the "digital home" -- all the gizmos and technologies that will soon link PCs, TVs, stereos, and other devices to the Internet and each other in living rooms, kitchens, and bedrooms. "I like to face the challenges of new technology," says Xu, a six-year veteran of the company. "Huawei is a company that very quickly takes on the trends of the industry."
That's just the kind of endorsement Huawei execs -- and China's leaders -- like to hear as they seek to leap into the big leagues of global innovation. Like other Chinese electronics outfits, privately held Huawei made its name as a low-cost manufacturer of equipment first developed elsewhere. With the bulk of their sales in China, Huawei, PC maker Lenovo, appliance producer Haier, TV manufacturer TCL, and others have prospered by selling products with relatively simple technology while capitalizing on close ties with local officials to give them a home-field advantage over foreign rivals.
But with competition at home picking up now that China is a member of the World Trade Organization, many Chinese companies are looking to be more than just local heroes. Huawei, for one, is eager to shed its "me-too" image and recently settled a 2003 lawsuit filed by Cisco Systems Inc. (CSCO) alleging patent and copyright infringement. Now, Huawei aims to move far beyond its Chinese roots by selling sophisticated gear to customers worldwide and tapping talent in Europe, India, and the U.S. "Huawei is a global company with global markets in mind," says Li Xiaotao, the company's 36-year-old head of research and development.
Li and his colleagues are attempting to create something the world hasn't seen before: a developing-world multinational that is broadly based, research-intensive, and able to stand up to the best in the business. And Huawei's leaders want it all. Rather than sticking to one segment of the vast world of telecoms, the company's engineers are designing their own semiconductors, developing next-generation networking equipment for telecom operators, and creating new third-generation (3G) mobile phones for consumers.
Huawei's global innovation drive dovetails nicely with the government's goals. Beijing is keen to make China a leader in technology to reduce manufacturers' reliance on foreigners for key components, and to narrow the gap with Taiwan, Japan, Europe, and the U.S. China's leaders figure the local heroes can take advantage of the country's large home market and talented engineers to help set the standards for emerging technologies such as 3G, the digital home, and the next-generation Internet. "[The Chinese] want to become more influential," says Charles Yen, managing partner at Deloitte Touche Tohmatsu in Beijing.
So far, Huawei has made the biggest global splash. It's a market leader in DSL equipment, used for high-speed Net connections, as well as next-generation networks, which let telecom operators send voice, data, and multimedia messages over the Internet. Huawei has A-list partners, including Intel (INTC), Microsoft (MSFT), and Qualcomm. Overseas sales doubled last year, to $1 billion, while total revenues increased 41%, to $3.8 billion. That's peanuts for Sony or Microsoft, but it puts Huawei in the top league of Chinese tech companies. And Huawei this year is likely to spend $500 million on R&D. Again, that's small by international standards, but it's more than 10% of revenues -- a hefty commitment for a Chinese company and enough to pay for more than 10,000 engineers. Huawei "is becoming a powerhouse because it is investing in its own technologies," says Albert Lin, an analyst at American Technology Research Inc. in San Francisco.
All those engineers are staying busy. A big chunk of R&D money is being used to develop equipment for an upgraded version of the Net called Internet protocol version 6 (IPV6). Beijing is heavily pushing IPv6, an initiative that could help China catch up with the U.S., which has dominated Net development so far. Another project is a partnership with Siemens (SI) to devise phones and gear for a Chinese-developed 3G standard called TD-SCDMA, which Beijing hopes will sell big in China and abroad. And Huawei is a world leader in next-generation networks, along with Alcatel (ALA), Nortel (NT), and ZTE.
Now, Huawei is making its innovation effort a global push. China has long envied India's software services, so Huawei has sought to tap the engineering talent that has made India so successful. A few years ago, the company started recruiting engineers from India, and today 100 of them work at its headquarters in Shenzhen, the boomtown adjacent to Hong Kong. At the same time, Huawei understands it's more efficient to hire Indians in India than to bring them to China. So in 1999, it opened a development center in Bangalore, where 700 researchers now work. By the end of next year, it hopes to expand the Bangalore operation to 2,500 engineers. The company also has smaller labs in the U.S. and Europe.
The next step is to raise Huawei's international profile. The company is encouraging its engineers to contribute more to organizations such as the International Telecommunications Union that establish standards for new technology. This year, Huawei will submit some 200 proposals on standards to such groups, up from just 17 in 2001. And it's pushing engineers to apply for more patents. Last year, the company's worldwide patent applications grew by a third, to 1,590. Overall, Huawei has received hundreds of patents, but just a handful come from the all-important U.S. To crank up the pace of innovation, the company designates employees who come up with patentable ideas as "Huawei Innovators" -- and gives them a medal and cash awards of as much as $1,200.
That might not seem like much to an engineer in San Jose or Stockholm, but in Shenzhen it goes a long way. Thanks to China's low costs, R&D chief Li boasts that Huawei gets more bang for its R&D buck than foreign rivals do. The starting salary for a Huawei engineer is about $6,600 a year, and its top performers earn up to about $22,000, compared with the $180,000 they might earn in the West. "In North America and Europe, where they have one engineer, in China we can hire 5 or 8 or 10," he says. Many of Huawei's researchers live in a complex of 3,000 apartments adjacent to the company's 320-acre campus -- which makes it easy for them to stay focused. And Huawei's engineers are a talented bunch, says Lawrence B. Prior III, who until September served as CEO of LightPointe Communications Inc., a San Diego manufacturer of optical wireless equipment, in which both Huawei and Cisco own a stake. Huawei is "full of technical overachievers," Prior says.
One of those overachievers is Teresa He. She's the head of r&d for asics, semiconductors that are tailored for specific tasks in devices such as Huawei routers and switches. In the mid-1990s, Huawei could barely afford the basics to do the work. Without enough equipment to go around, He had to make time-sharing deals with colleagues to use key testing gear that went for the extravagant sum of $60,000. "You could use the machines for only two or three hours, and then you had to give way to the next person," she recalls. No longer. When He needed a $3 million machine for testing Ethernet switches recently, she had no problem getting the cash.
Not everyone is convinced that Huawei or other Chinese companies have what it takes to make the leap to the top ranks of global innovators. "They are a very strong, capable company," says Hong Lu, CEO of UTStarcom in Alameda, Calif., one of Huawei's biggest competitors in China. But, Lu says, "they are followers, not innovators. In the past, they have always done things that others have already done." And while Huawei and its compatriots have made progress in R&D, some say the real innovation will come from foreign companies opening their own research facilities on the mainland. On Sept. 10, Motorola (MOT) said it would spend about $90 million on an R&D center in Beijing. A few days earlier, Lucent Technologies (LU) announced plans to invest $70 million in an R&D center for its 3G cellular unit in the eastern city of Nanjing. "The Chinese haven't created a culture of innovation," says Dave McCurdy, president of the Electronics Industry Alliance, a lobbying group for the U.S. electronics industry. "Foreign-owned enterprises in China will be the centers of innovation."
R&D chief Li counters that the foreign investment actually helps Huawei. The competition, he says, raises the overall level of available talent. "The usual practice in the past was to recruit people from universities and then train them to be good engineers," says Li. Now, Huawei can raid other companies for talent, he says. That trend cuts two ways, though. With more competition, salaries are going up. Nonetheless, Huawei is betting that those newcomers, combined with its current stable of engineers, will propel it into the ranks of the global innovation elite.
By Bruce Einhorn
With Manjeet Kripalani in Bangalore and Jack Ewing in Frankfurt