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Letter from the CEO

Apply the spirit of the tortoise to catch up with the Dragon spacecraft

用乌龟精神,追上龙飞船

There is a fable about the race between a tortoise and a hare. The hare was born a fast runner, but during the race, it had a rest from time to time, taking an afternoon tea or having a nap on the grass. The tortoise surpassed the hare and won the race in the end.

Huawei is like a big tortoise. In the past 25 years, we have crawled along, not seeing the flowers on the road. While many people have become rich, riding on the rising economy over the last two decades, we still are on our journey of hard work and dedication. When we look up to find in front of us the likes of Dragon spacecraft and Tesla, and look at ourselves – the clumsy way we move ahead, we can't help but think, "Can we catch up and surpass them?"

I. Large companies are not necessarily synonyms for complacency or conservativeness; it is not inevitable for them to perish, or otherwise we would not strive to be one.

Can BMW match Tesla's pace? This has been an issue of debate for some time at Huawei. Most believe that Tesla vehicles represent a disruptive innovation and will surpass BMWs. I think that BMW may not lose the game if they take an open approach to improve themselves. We know there are several elements of a car: powertrain, smart driving (from on-line map, automatic shifting, bump shielding, all the way to unmanned driving), mechanical wearing, and safety and comfort. BMW is strong in the last two areas, and they can catch up too on the first two if they are open and progressive. You could argue of course that Tesla can buy the capabilities they don't have, but I'm not saying BMW has to reinvent the wheel to establish themselves in the first two areas. BMW needs success, not a narrow sense of pride that everything has to come through its own innovation.

Huawei is like BMW, in that we are also a big company. We live in an information society that is fast-changing with lots of disruptive innovations. Can we continue to survive? Admit it or not, this is a question right in front of us. It took us 25 years to build a good platform and accumulate some resources. Those are our treasures, as they came after loads of money being wasted by our executives and experts into projects and products that had failed. Of course the money wasted comes from what you have earned in the first place, and more importantly without such wastes, we would not be where we are today. We value the success we have gained through learning from our failures. If we continue to be progressive, with the courage to shatter our own vested interest and embrace new things, Huawei may not necessarily lag behind. When we spot a strategic opportunity, we can catch up quickly by pouring in tons of resources. Different ways of investment can be used, not just by piling up people. This is quite different from the way small companies approach innovation. People are the most valuable. Employees who are open-minded, progressive, brave to break established advantages and keep up with the times are our most solid cornerstone. With such people in the company, we can possibly catch up with the Teslas of the world.

1. We must stay focused. We are a company with limited capabilities and resources. We can only catch up with or surpass US companies within limited areas. A force applied over a smaller surface area can get us larger pressure, and then breakthroughs would be possible. The Strategy & Development Committee proposed the idea of surpassing US companies and enjoying the ride, and I guess maybe that's because they are confident in our profitability in the next few years and want to invest more in the strategic areas. However, we can possibly surpass US companies only when our area of focus is as big as the tip of a needle. If we enlarge the focus area to the size of the head of a match or the end of a stick, surpassing US companies will be out of the question.

We only allow employees to leverage their initiative and creativity along the main route, or in other words in areas of our strategic business focus. Blind innovation would simply disperse our investment and energy. Businesses that are not on the main route have to learn from successful companies, maintain stable and reliable operations, and keep the management system rational, effective, and simple. We must avoid innovating blindly. If there is cry for innovation everywhere, that will be a death song for us.

The age of Big Data might be terrifying, because nobody knows exactly what is Big Data, and data traffic will be incredibly huge. The Big Data I've been talking about is different from the industry definition. The industry looks at Big Data from information search, not data size, point of view. As Wu Hequan from the Chinese Academy of Engineering said, data creates value only when it is mined, analyzed, inducted, and utilized. By Big Data, I mean the surging and overwhelming data streams, and the fact that no one knows how much data has to be transmitted and stored. Of course, we hope what is transmitted is all useful information, but we cannot stop garbage from being transmitted and stored back and forth, which makes Big Data even bigger. Don't get lured by the success of the Internet. We are an Internet company too, in the sense that we produce "iron sheet" for pipes that transmit data streams for the Internet. Moving forward, there will be fewer companies that can produce "iron sheet" for pipes as wide as the Pacific Ocean; companies that run the pipes will be in the number of hundreds, and companies managing information in the number of thousands. Don't envy the prominence of others; don't get so stirred about the Internet. Employees who have such passion should come down-to-earth and try to use the Internet approach to optimize our internal supply transactions toward higher efficiency and timely and accurate operations. Our annual turnover of commercial notes, including internal handovers, has exceeded CNY2, 500 billion, expected to reach 5,000 billion pretty soon. And we have more than 5,000 points of supply. There is significant value there, from improving contract accuracy and reducing waste via thorough analyses of contract scenarios. Why not do the "Internet" internally to better connect our operations? We have to remain focused, for decades, on improving our capability for the information pipes. Don't tow our huge ship away from the main route.

The network might loosen what has kept people within bounds. Without this bondage, can we still press forward like a torrent? Many people are amazed when they hear us sing the song Huawei People. They wonder why so many people are still singing such a song in such an age. At Huawei we still have a nucleus of several thousand people. United together, they rally and lead the rest of 150,000 employees. We will definitely win.

2. We must continue to be dedicated. The tortoise in the fable is a symbol of persistent effort, and such a spirit of Huawei must not change. The tortoise spirit also means that our effort and dedication should be sensible. We don't need our people to have their blood boiled up because that cannot power up the base stations. What we need is a controlled passion that allows our people to work intensely but with order. Value creation has to be the yardstick for everything we do.

We must be conscious of the power of the United States. They have advanced systems, flexible mechanisms, clear property rights, and respect and protection of individual rights. With such a sound business ecosystem, the US has attracted the world's best talent, in the number of hundreds of millions, to invent and innovate on the American soil. The light that never goes out in the Silicon Valley continues to shine. The US is not lagging behind; it is still a model for us to learn from. Isn't Tesla a good example? Catching up will never be as easy as coining catchwords. Too many catchwords are a waste in management. "Enjoying the ride" as Eric Xu put it, means we make constant effort for development, fearless of failures or sacrifices. All the work has to be measured by the value created.

Will ultra-broadband be the last battle in the electronic equipment manufacturing industry? I don't know what others think about it; but to me, it will. If we fail in the ultra-broadband age, we will have no more chance to turn it around. I was in Moscow not long ago. I told our people there that the city of Moscow is one circle after another, and the country's most powerful and wealthiest people live in the area encircled by MKAD (the Moscow Ring Road). For more than ten years however, no Huawei equipment has been deployed within MKAD. Can our ultra-broadband prosper in Siberia? If we cannot grab opportunities in high-value locations with massive data traffic, then our business in that market will eventually shrink and we will be marginalized. Today the paradigm of value distribution is being redefined. To survive, we must strive to establish ourselves at high-value regions with massive data traffic. Our technology is being used in Tokyo, London, and many other major cities. I believe we will also build our presence within MKAD of Moscow.

3. Self-criticism is the most important behavior for survival. It has started in our company since we embraced the beliefs that "from the ashes the phoenix is reborn" and "those who climbed out of the pit of setbacks are sages". Such self-correction has helped us to maintain steady growth over the years.

Our company moves forward on two wheels: technology innovation based on customer needs, and scientific exploration into the longer future. Huawei must have the courage to embrace disruptive innovations through self-reinvention and self-criticism. While fully tapping into the value of our installed business, we should not be pushing away disruptive innovations in the fear they might smash our "golden bowl".

With the establishment of the 2012 Laboratories, we intend to use the tool of self-criticism to question ourselves, our status quo, our future thoughts, and the questioning itself. 2012 Laboratories is studying the approaches of adapting to disruptive technical innovations, as well as the ways of applying sustaining innovations to today's technologies in order to make them future-proof. In the age of Big Data, we must move decisively to seize the high ground and create high-end products that meet customer needs. With regard to our low-and-mid-ranged products, consumer electronics from Germany and Japan should be the benchmark for the hardware, which ideally does not need any maintenance throughout the service life; the software can be upgraded online. Our high-end products are not absolutely stable, so our services have to come along.

The times are moving way too fast. If we are complacent and stand still just for three months, we will be erased from history. We survive till today because we have been embracing self-criticism since a long time ago. In 2013, our Board members reflected on the company's problems in the Bombarding Huawei series; our mid- and senior-level managers wrote and published Management Issues in Our Eyes. There were a mountain of such introspective articles. I reviewed and edited every piece of them before being published. Our people can also post their critical opinions at our online forum. Sooner or later there will be departments coming out to resolve these issues. The company will keep improving itself.

II. Core values are the heart and soul of an organization. The organizational structure in the future must fit in with the information society. Organizational setup is meant to serve nimble strategies and tactics.

Over the past 25 years, with the help of Western consulting firms and the efforts of several thousand HR professionals, business managers and experts, we have established a pyramid model for human resources management as Ken Hu described. This has helped us to reach almost USD40 billion in sales revenue. The several thousand outstanding managers and experts who have developed and evolved the pyramid model are great ones. We should grant them the honor of "human resources heroes". Without their efforts and success, today's pyramid restructuring would have been impossible. Pyramid-styled management is right for mechanized warfare in the past, in which the cannon-shot was near and communication systems not as advanced. Soldiers as a result must fight face-to-face. When the general on the top of the pyramid signaled "Go" with his hand, tankmen at the bottom drove thousands of tanks onto the battlefield; and soldiers in tens of thousands charged forward fighting enemies eye-to-eye. This was the only way to have enough firepower. In modern warfare however, as powerful long-range weaponry is available, operations are done using satellites, broadband, Big Data, missiles, airplanes, aircraft carriers, and many more. Electromagnetic waves become the new battlefield. Those who call for and command all the resources may not be the general atop the pyramid, but CC3s (Customer Centric 3) right at the frontline. The power projected from a thousand miles away is more effective than the face-to-face fight of soldiers in huge number. The CC3s in our company today are mobilizing the resources they need through prompt and accurate calibration using the corporate platform. And the support to the frontline, be it sales, delivery, services, or finance, is being provided remotely. CC3s are not alone in the field; on project estimation, bidding, delivery, or finance, they have with them the support from hundreds in the back office via the network. This is what Ken Hu has described as "the squad leaders' fight". Leaders at CC3s should have the courage to fight; they should also keep the big picture in mind with the ability of strategic thinking. That's why we put forward the concept of "major-general-company-commanders". Why not colonel-company-commanders? It's a deliberate exaggeration to make it more eye-catching. They are not real major generals of course. Nobody can grant you that title. Unless you buy some buttons and have them sewn on your collar. One button will make you a major general, and two will make you a lieutenant general.

1. The difference in compensation to employees needs to be widened, based on the value they each contribute. "Engines" in the organization have to be fueled to the full so that they can pull the train to run faster and deliver more. To live our core values, we must have a group of people who set the example. People's compensation is not based on their scope of management; it has to be based on their contribution and responsibility-adjusted result in the first place, and then their dedication. Now the direction of our human resources policy has been set. For next steps, we need to allow some flexibility in HR policies at different scenarios, environments and regions.

I introduced the second law of thermodynamics from natural science into social science. The intention is to widen the compensation gap so that we will have a nucleus of several thousand people to lead the rest of us forward. We must always keep our team active to avoid "entropic death". We will never allow the "black hole" to exist in our organization. Slacking off is that "black hole". We must not let it suck away our light, heat, and vitality.

2. We will experiment with the idea of "major-general-company-commanders". Projects should be staffed with the right management and expert teams based on project value and difficulty as well as the value and contribution that the projects have delivered. In the traditional pyramid, those at the bottom are people of the lowest levels. But those are also the people who face customer CEOs, confront complex projects, and deal with extreme difficulties. People that were staffed at this level were far away from what they should be.

We are having people with major-generals' capability be company-commanders. Only the offices that are profitable can have "major-general-company-commanders". I'm not sure whether some of you would like to be Lei Feng-style major-generals, doing all the good things wanting nothing in return. Well I'm not a supporter to this idea. Lei Feng is a kind of spirit; it cannot be used as a mechanism. The experiment has to start from profitable representative offices that can afford senior experts and managers. In this way, high-quality resources are channeled to high-quality customers. To have more capable resources to better serve high-quality customers, you have to make more money from such customers in the first place; or otherwise where you can get the money.

3. The internal talent market and the Strategic Reserves are established as an important means to improve capability. Bench resources are developed through real projects in the field.

The internal talent market is a place for finding Garcia and for dedicated employees, not a cradle for the laggards. The talent flow it facilitates will allow employees to find the most suitable positions and also drive managers to improve their management. When things get moved, vitality is gained.

Through the Strategic Reserves like the "Tiger Teams", the strategic competition department, and project managers, we aim to expedite the circulation of organizations, talents, technologies, management approaches, and experience in the course of project operations. Also from project operations, we can identify more outstanding managers and experts to lead our company toward future progress.

We would like everyone to understand that hope is in their own hands. If they work hard, they will get good results. If they are made of gold, they will shine sooner or later. Do not moan or live in memories; keep striving forward. For those who are united as a team in both good times and bad, their names and their deeds may very likely not appear on the stone tablet of merits; such tablets record the achievements of generals. However, those who have nothing engraved on the stone tablet of merits might become commanders-in-chief in the future, organizing tens of thousands of men. Nobody knows how the inner world of commanders-in-chief develops. Selflessness is greatness.

III. Nimble strategies and tactics come from rigorous, well-organized, simple, and solid management.

Data traffic is growing, and our company is likely to become bigger. We can grow in size, but complexity in management must not increase.

We aim to transition our corporate governance from a centralized model to a new one. Under the new governance model, those who can hear the gunfire call for support; frontline organizations have both responsibilities and authorities; and corporate functions provide enablement and supervision. Such a model must be built on an effective management platform including among others, processes, data, information and authorities. Over the past twenty-plus years, with the help of Western consultants, we have established a rather integrated platform that provides guidance and support to the frontline. In the next five to ten years, we will build on this foundation and gradually move decision making closer to the frontline with the right level of support for them to exercise authority.

Guo Ping said our growth should no longer be driven by scale, but efficiency and effectiveness. Project operations management is an important way to get there; it is also a basic skill required of all the managers. Performance management both embodies and supports improved leadership management and business transformation. We should take a broader and longer perspective in understanding responsibility-adjusted result and performance. We have already optimized the performance metrics and we will continue to reduce the number of in-the-course metrics. Results are more important than the course. We must go in the right direction on finance management transformation. Finance management is about value creation, not value distribution. We must continue to strengthen our customer and supplier interfaces and simplify internal accounting and measurement.

Huawei's management improvement, as Guo Ping said, has to be built on the improvement in project management. The eight critical roles for project management should be well selected and developed. Mature procedures and a large management team with high caliber have to be established. We need to build a pool of managers and experts on project management through the Strategic Reserves. As people in the pool move from project to project, good methods and capabilities are passed on to representative offices. We should be good at identifying the "golden seeds", and have them blossom out at different locations. These transformations represent opportunities for various organizations to create value; they are also the test bed to identify and develop future leaders.

The company's management transformation over the years has produced a lot of outstanding people. We will begin to select and commend the "Ten Whiz Kids" to encourage those unknown heroes who have contributed to the company's development. Guo Ping said we should look for those "Whiz Kids". And I think we have to find them and honor them with recognition; such search and commendation should cascade down the organization, so that those who have contributed to our success will feel inspired. While we select outstanding talent for the future, we should not forget those who have made contributions in the past. Only in this way can our steps toward the future be more solid. It is a law of history for the new to replace the old. However, we should never forget those who have put their best times, their health, or even their lives into Huawei, and the role they have played in paving the way for the company's sustainable development.

We must take a holistic view to advance the overall management system. It should be systematic, constructive, and simple. The management system has to be well connected, and processes be harmonized from end to end, to avoid silos from isolated transformation. We must respect facts and ensure the match between the financial book and the physical assets. We allow no lies. Whenever possible, we should try to skip one hop in the handover of our internal operations data, provided necessary separation of duties are observed, so as to increase the operating efficiency.

Further progress is expected not only in technology and the market. We must also make our management rigorous, well-organized, and simple. Internal transactions are to be done electronically over time, built on transparent data. A closed-loop management of planning, budgeting, and accounting will be implemented to ensure sustainable business development. There has to be a balance between making investment and mitigating risks.

Managers should get to know each other's area. Financial managers should know business and business managers know finance. We will have well-organized exchange of managers to facilitate such knowledge transfer. Frontline teams with mixed knowledge and experience are better positioned to seize opportunities in an efficient, timely, and solid way, to balance project wins with healthy business operations, and to take advantage of the LTC and IFS processes that have been deployed. The closed-loop management will be used to improve the appraisal and selection of managers.

When we had the management conference back in 2002, the IT bubble just burst and Huawei was on the verge of bankruptcy with low level of confidence. The Board of Directors believed in changing the industry landscape during the hard winter; we chose the "chicken rib" strategy, increasing the investment into areas where others were stepping back. In the end we caught up. That was a difficult time for the world, and even more so for Huawei. Without the courage to change, we would not be here today. Now we are seeking changes again, but the situation we are in is much better, and this time we change for prosperity and effective growth. We should have more confidence to overcome any hardship and difficulty, and more importantly to surpass ourselves.

From the east of the Pacific to the west of the Atlantic, from the north of the Arctic Ocean to the south of Southern South America, from the high plateaus of Bolivia to the low lands of the Dead Sea, and from the boundless tropical rainforests to the scorching deserts... Tens of thousands of Huawei people, leaving behind their home and family, work diligently in every corner of the world to bring network coverage to all. Where there are people, there are dedicated Huawei employees. We take on the mission of supporting communications services to nearly three billion people. Such a mission keeps inspiring us to move forward.

The road ahead is broad and wide; our prospects are brighter than ever. It's a grand cause to be engaged, a cause that gives us unmatched pleasure and glory.

ren_siger

Ren Zhengfei
Chief Executive Officer