Huawei’s Offshore R&D in the Global Context
The publicly available data on Huawei’s offshore R&D is neither detailed nor consistent, therefore I use patent and scientific publication data to track the company’s activity. Figure 1 provides an overview of activity at Huawei’s main offshore locations. Differences in patent regulations between the USPTO and the EPO make it impossible to directly compare the number of patents filed between them, although I am able to illustrate in the figure Huawei’s intense R&D output, especially in the US, which is remarkable given that the company has very few sales in that market.
The interviews make clear that Huawei’s R&D location choices abroad often followed the location of competitors. The downsizing of a rival could mean an opportunity for Huawei to hire experts without running into non-compete agreement problems. The company targeted Ericsson experts and set up its own facilities in Stockholm and San Diego when the Swedish firm downsized in those cities. Huawei also appears to have been motivated by the bankruptcy of Nortel to open a facility in Ottawa where it was able to hire entire teams that lost their jobs.
Moreover, following the location of competitors provides access to established infrastructure for a particular technology at a given location, such as university departments focusing on technology in which Huawei was interested in the case of Ottawa and Munich. In San Diego and Dallas Huawei was able to tap into supplier and customer networks. Hiring from competitors is not uncommon in the industry, but interviewees emphasized the extent to which Huawei used them was unusual. In some cases, Huawei located offices only meters from competitors. That was seen by some in the industry as being aggressive, but many employees welcomed the job option at Huawei after losing their previous job. Depending on the shortage of local alternatives, such as in Ottawa compared to the many opportunities in San Jose, many of them did not have to relocate because of the job at Huawei. This is not to say that all experts were “pushed” to work for Huawei. Huawei was offering higher salaries and a range of perks including more professional freedom.
Each of Huawei’s offshore labs specializes in a different portfolio of technologies. As it follows the competition, those portfolios are driven by the focus of competitors and by extension by the key personnel Huawei might be able to hire. In other words, Huawei’s offshore experts influence the company’s local specialization. For example, in Dallas, the primary focus is on telecommunications, whereas in Silicon Valley it is on Internet products. Likewise, in some locations there is more cooperation with universities than in others that tend, for instance, to concentrate on work in standardization.
Figure 2 distinguishes between three different phases in Huawei offshore R&D output, starting with the first from the Stockholm lab in 2004 followed by smaller labs in Dallas, San Jose, and San Diego in 2006. Interviewees from Stockholm explained that Huawei started there under the name Atelier Telecom to avoid attracting attention; it was renamed Huawei in 2004. The oldest locations in the US are Dallas, San Diego, and some minor activities in Silicon Valley. Between 2009 and 2013, Huawei started to expand its offshore R&D more rapidly and, early in this phase, major locations in Munich, Chicago, Bridgewater, and Ottawa started generating output. In addition, Huawei’s labs in Silicon Valley became more active around 2011. After Huawei overtook its competitors in terms of revenue in 2014 (the take-over phase in Figure 2), there was another surge in output, but fewer new locations. This coincides with heavy recruiting by Huawei to take advantage of some industry incumbents cutting back as the fourth generation of wireless systems (4G) was at the end of its technological life cycle and the fifth (5G) not yet ready for the market.
Very early in its R&D internationalization process, Huawei emphasized patenting to increase its portfolio and improve its position in negotiations for license fees. The company filed a tremendous number of them, primarily to signal technological competence. Recently, Huawei has changed course, not concentrating on their quantity, but filing patents for high-quality ones.
The Role of Offshore Experts
The role of the offshore experts during Huawei’s entrée in the global industry fall into five categories: contacts, perceptions of reliability and reputation, experience, technical knowledge and language. The first two of the five are related to embeddedness while the latter three correspond to skills. Table 3 in the Appendix provides a detailed overview, while Figure 3 gives an overall picture.
Hiring embedded offshore experts contributed to overcome the vicious circle of barriers, such as lack of skills, reputation and contacts, that blocked it from competing in the industry and contributed to reverse this process. Figure 3 shows how hiring those experts started a recurrent process, similar to the upward spiral of the springboard perspective (Luo & Tung, 2018), that gradually helped Huawei to improve its position in the global telecommunications industry.
The figure displays the dual embeddedness of the offshore hires by visually embedding them into the context of Huawei at the same time as in the context of the established global telecommunications industry. The two arrows represent Huawei’s access to qualified employees, customers, universities, research projects, and standardization organizations: One is interrupted by barriers, such as a negative image, exclusion and government restrictions, symbolizing the difficulties of gaining access; the other arrow shows how offshore experts helped to overcome these barriers with their skills and embeddedness. The dynamic of the model is shown by the arrows that build upon each other and bounce back and forth between Huawei and its offshore experts and the industry, in a recurrent process that facilitates more and more access with every iteration. For example, hiring highly skilled employees provides state-of-the-art knowledge used to create new technology, which can be patented and become part of standards, and thus improve Huawei’s reputation and attractiveness for potential new highly skilled employees. Therefore, the need to bridge disadvantages through offshore experts decreases over time as the company builds its own network and reputation abroad, catches up on technical skills, and gains more global experience.
Overall, Huawei seeks technology as well as legitimacy by hiring skilled and embedded experts abroad. Even if most offshore experts fulfill both roles, it makes sense to distinguish between these two hiring motivations.
The Role of Skills
Huawei hires senior experts with experience in the industry or with doctoral degrees from foreign universities. The company is unusual in that it does not provide skills development opportunities for experts outside of China, which is unusual, compared to other employers. In contrast, Huawei hires at home mostly young university graduates, who are described as very smart but still inexperienced by some of the interviewees. Offshore experts are implicitly tasked to share their experience with young hires as they work on joint projects, for instance attending together standardization meetings during which those with more experience might tutor those with little on how to negotiate successfully. However, offshore experts, from Canada and the US in particular, emphasized that they are not allowed to share restricted technologies, for instance those with military relevance, with their Chinese colleagues.
I list in Table 2 print media about foreign retired officials and politicians working for or with Huawei. The company seeks political expertise about host markets, in particular for its market-seeking offshore activities in Australia and the UK, mostly from individuals who have a background in the areas of trade and investment, IT technology, foreign or domestic policy, and defense or cyber security. They have helped Huawei with strategic issues and with bidding for government contracts.
In a similar way, technical offshore experts have used the skills they have honed through longstanding experience in the industry to help Huawei’s catch up by facilitating the company’s participation in standardization committees and in EU-financed research projects. In short, Huawei has been able to make use of its experts’ knowledge about informal industry policies and customers technological requirements. Offshore experts have also helped make up for a lack of English fluency, which is an industry requirement that many Chinese engineers cannot meet in spite of English being the official language of the company. Offshore experts have also brought to bear their technical knowledge, by which I mean the kind of knowledge gained through university education, to generate patents, and state-of-the-art technical solutions for customers, represent the company at conferences, and contribute to industry standard-setting committees. Each of these was important in bridging the knowledge gap between Huawei’s domestic R&D and that of global industry competitors. Nonetheless, interviewees report that while that gap is rapidly closing, Huawei remains behind when it comes to innovative skills. Thus, one of the main tasks for offshore employees is to create novel product ideas—ones that can be developed and produced by a larger and less costly workforce in China. Locating the more work-intensive task of development in China not only saves costs but allows for better alignment of development and production. Such division of tasks enables Huawei to make better use of its competitive advantage, but on the negative side, it exposes the company to knowledge spillovers, loss of information in the transfer process, and political risk in host countries.
Putting these findings in the context of the literature, the interviews confirm that leveraging the experience and the product knowledge that offshore experts gained while working for top competitors enables Huawei to produce state-of-the-art products without having to first learn how to create them itself. The extant literature holds that while companies can gain output capabilities by acquiring technologies directly related to a specific product, experience and knowledge of the overall technology is needed for innovation capabilities (Awate, Larsen & Mudambi, 2012). Singh and Agrawal (2011) also challenge the idea of learning-by-hiring, as they find that companies use their newly hired employees’ knowledge directly instead of integrating it. At the same time, it may be more attractive for firms to invest in output capabilities in the early stages of internationalization because that is likely to provide quicker returns than the longer-term process of acquiring innovation capabilities by integrating the knowledge of experts. Huawei relies on the innovative ideas of its foreign experts and uses them to bridge its own lack of innovation capabilities.
Hiring experienced and knowledgeable offshore experts can be a means of directly accessing the innovative input needed for developing state-of-the-art products—even before the rest of the company has caught up on innovation capability.
The Role of Embeddedness
Being an industry outsider initially made it difficult for Huawei to hire the best people, but became easier over time as the company became better known and increasingly embedded. One strategy used to overcome the difficulty of hiring key people was to offer them greater professional freedom, including allowing them to build their own teams, which they often did by recruiting former colleagues. In that way, Huawei gained accessed to experts and other experts known to them. Huawei offered other strong incentives as well like lucrative bonuses and exceptionally high salaries—in some cases doubling what had been earned before. Interviewees reported that such benefits had to be weighed against long-term job market prospects being harmed by working for Huawei as its reputation in the global industry was one of technological backwardness and lacking reliability. There were also push factors, for instance the earlier mentioned experts who had worked for Nortel in Ottawa or Ericsson in Stockholm had few good alternative employment options if they wanted to stay where they were.
Huawei benefited not only from the contacts of former colleagues of their offshore experts, but from their strategic contacts within the industry at large as they served as door openers to customers and to suppliers, such as AT&T and Qualcomm, and to research collaboration with prestigious universities. Some interviewees reported that this was only partially successful as some of their contacts became unusable when they joined Huawei, as former colleagues tended to see the company as unreliable. Huawei tried to improve its image by bringing on board highly respected figures in the industry in order to signal that the company was technologically competent to customers and in standardization (see Table 3). Moreover, the offshore experts’ higher cultural proximity in comparison to their Chinese colleagues improved Huawei’s reliability in the eyes of Western business and research partners.
Huawei appointed ex-military officers, former heads of industry, and retired UK and Australian government officials to be non-executive directors of the local boards of its foreign subsidiaries (See Appendix Table 2). The articles reveal that Huawei wanted the appointees both to advise Huawei’s management and to improve the way in which the company was seen. Huawei also hired lobbyists in Washington in an attempt to change the image of the company among US politicians, an effort that appears not to have been successful.
The analysis of the interviews uncovers that the offshore experts believe that a main barrier for Huawei is its lack of legitimacy among global industry stakeholders. Prior research has shown that negative impressions can in part be due to cultural and institutional distance such as that between China and the West. In the case of Chinese companies, this seems to stem from allegations of excessive government influence on companies (Child & Rodriguez, 2005; He & Lyles, 2008; Si & Liefner, 2014). Western host countries often depend on producing sophisticated technology for the world market and are concerned about losing critical technologies, in some cases even of military relevance, to foreign competitors (Meyer, Ding, Li, & Zhang, 2014). The Chinese military career of founder Ren Zhengfei compounds the problem as the principal Huawei product is telecommunication infrastructure which is particularly vulnerable to foreign intelligence. For these reasons, Chinese attempts to make investments in the West are often received with skepticism if not with outright hostility (Buckley, Clegg, Voss, Cross, Liu, & Zheng, 2018). The US government has from early on blocked Huawei’s acquisition of US companies, claiming national security reasons.
In addition to placing former politicians and other nationally known figures on subsidiary boards, Huawei has tried to overcome liabilities of origin by making greenfield investments rather than acquisitions. Host countries tend to see greenfields as less invasive than acquisitions and more legitimate, and because the investor public profile is also lower they are less likely to attract media attention (Buckley et al., 2018; Meyer et al., 2014). Greenfields not only help Huawei avoid a number of issues, but they even boost its image through the positive reputation and connections of its offshore experts.
Greenfield R&D investments where offshore experts are given a predominant role can help latecomers in sensitive industries gain legitimacy abroad. Moreover, they can signal technological competence and improve firm reputation.
The Scope of Offshore Experts
Huawei went abroad to gain knowledge of the global telecommunications industry because the most powerful players are currently located in the West. Experts in gateway locations are well embedded in a worldwide industry community by participation in cross-border networking and through international standardization and research projects, but they are not very mobile on a global scale. Huawei is not able to hire them in China so it set up R&D labs abroad to leverage their dual embeddedness that provides access to the local context and the global industry network at the same time. In some cases, Huawei hires key experts with extensive international connections even though they are based in areas remote from its existing offshore R&D labs. Huawei also hires experts recently arrived in locations where it has a lab even though they are originally from far away. Another example for the expert’s scope is Huawei’s European R&D center in Munich where many employees come from outside Germany and make regular use of their industry contacts back in their home countries. All in all this shows that Huawei hires experts not only for their local connections and reputation as discussed in the literature (Johanson & Vahlne, 2009), but also for their global impact.
Offshore experts may not be hired solely for their embeddedness in local industry networks, but also for their embeddedness in global industry networks that would otherwise be inaccessible to latecomers.