Today, I want to focus on discussing about the moat from my perspective. Moat analysis is very important for value investment, since it can provide you an insight for how long this company can enjoy wonderful profits.
After witness Huawei fast development in the past years, I think the moat of Huawei concentrates on the following aspects.
1. Unwavering PIPE strategy.
Since the beginning of Huawei, pipe strategy is built by the management. Huawei is dedicated to be the leading network solution provider in the world. After invest 10% revenue into R&D every year in the past 28 years, Huawei become the largest Network infrastructure vendor globally. Even Huawei is so successful today, Huawei still only concentrate on how to provide best class network infrastructures for customers, how to rich people communication and lives. In contrast, numerous companies in China always looking for fast money business, for example, real estate and stocks. They don’t have the same patience to build their core business competitive in long term.
2. Formidable business moat that small companies can not cross.
As we know, since we entered in the Internet era, technology disruptive makes small companies easily overrun large companies, especially in Internet and software industry. However, in the telecom industry, there are much fewer players than before, mainly 5 vendors and they are Huawei, Cisco, Ericsson, Nokia, and ZTE. With the prosperity of information age, large traffic requires vendors put large investment into R&D to develop and manufacture the leading telecom infrastructure. Once vendor takes large share of market, they can enjoy network expansion profits every year. This industry is capital intensive, and small companies are hard to enter. For Huawei, on the one hand, they get huge cash flow from carrier business; on the other hand, they invest large amount money into strategic area to provide competitive technology and boost further business growth, such as enterprise network and mobile devices.
3. Organization based on E2E process to ensure long term business success.
In 1998, Ren Zhengfei considers learning from western management, since Huawei had more than 1000 people at that time. If there are more than 1000 people in a company, then management process should be relied instead of people. The company future will not be affected by certain people come and go. At first, Ren Zhengfei directly implemented process from IBM into Huawei, such as LTC (Lead to Cash), IPD (Integrated Product Development). With the development of Huawei, other processes are introduced to complement management, such as ITR, ISC, etc. Today, there are 14 level one process to support Huawei global business and organization, such as sales, service, financial, supply chain. One notable benefit is that people from different department will follow the process rules to finish service tasks, not from the boss commands like most Chinese companies.
Let me just specify one example, LTC. Huawei building an iron sales and service army across most countries is based on LTC process. LTC provides same language for front line to cooperate with each other towards business success. And each project will not be affected because of someone leaving. Customers requests can get fast response from Huawei front line.
4. Excellent product quality and local service team.
As telecom solution provider, Huawei focus on improving product quality relentlessly and building a strong local service team for fast responding customers request. Because once there are one device failure in network, the network service may be interrupted, and will cause severe losses for carrier operators. So the product quality and solving problems speed that vendor provide are the top priorities that carrier operators concern. Huawei has built strict process IPD to ensure product function and quality, and local service team in most countries to solve problems for customers. That’s the key reason that Huawei has already taken most of carriers market now and still fast growing.
5. Huawei Core Value: staying customers centric and inspiring dedication.
Every one will attend one week training about Huawei core value and culture when they join Huawei. Huawei core value is running in the blood in each HUAWEIer. Fast response, dedicated to help customer success are labelled of every HUAWEIer. In Huawei, the requests from customer are most important, for example, each frontliner can directly call the R&D boss to assist to solve problem for customers.
Huawei also build internal incentives to encourage employees working hard, such as virtual stock, TUP, etc.When you come to Huawei, you will find most of HUAWEIers are working hard always for company and customers success. The higher position you are, the more pressure you will have, and the more work you will do. If companies grow in a degree and take a large market share, most of them will become lazy and enjoy good lives, however, this case is definitely not suit for Huawei.
6. Low labor cost and focus on long term growth.
Today, Huawei employees salary is already aligned with the western vendors. Why I still mentioned about low labor cost? It’s because that HUAWEIers are working very late every day, even including weekend, in contrast, most people just work in standard work time in western companies, if they work over time, the company should pay them higher salary. So Huawei can fast respond to customers request. With the increasing labor cost, Huawei created IT tools to do specific tasks to reduce the workforce. For example, as the most matured business, Huawei designed three cloud to make fewer frontline employees to handle carrier operators business in future. Another part is that Huawei is a private company, so Huawei don’t need to focus on improving every project profits like other public companies, instead, Huawei will sacrifice profits first to take more market share for strategic reasons.
7. Self-criticize propel internal operation efficiency improvement consistently.
Ren Zhengfei is very keen to self-criticize, and he believes that we can improve ourselves by self-criticize. Because of self-criticize, numerous improvement experience for internal operation were summarized, similar mistakes will be eliminated next time, and Huawei is catching up with its competitors and even beyond. As we mentioned about the financial performance before, we can see the operation efficiency indicators improved every year, such as DSO, ITO, etc.
8. High efficient supply chain and developing key components.
As high-tech manufacture company, supply chain is vital to the business. Huawei manufacture is based in Shenzhen, which has the world most complete electronic components industry chain. So it’s very efficient and low cost to produce telecom products. Additionally, Huawei also build some supply chain center in Europe and America, when customers place an order, Huawei can manufacture and deliver the products to customers very quickly.
The demand and supply requirements are always big issues for every manufacture company, many companies died for cash flow problems because of high inventory issues. Huawei make very strict rules for frontline to make the demand forecast every month, which is to make sure that most of products will be delivered to customers and minimum inventory.
Today, Huawei provide various products for carriers, enterprises, and consumers. These products includes complex components, and some are very expensive and patented, such as chipset. For these important components, Huawei make huge investment to develop by themselves. For other common components, Huawei will cooperate with partners to develop. This strategy enable Huawei products not rely on other companies with stable costs.
9. Ren Zhengfei and his high management team.
Ren Zhengfei is the founder of Huawei , and he is keen to design the complete processes and culture to make Huawei grow in the future without the impact of some people. Even he is 73 years old, he still travel all over the world to meet customers and approach business by himself. If Huawei is a big ship, Mr Ren is the engine.
As I have also discussed before, the high management team of Huawei is young, but most of them work in Huawei more than 20 years. They share the same value of Ren Zhengfei and make Huawei successfully grow in the past 2o years, and they are still the concrete cornerstone for Huawei future growth.