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Supply Chain Management

Sustainability is part of Huawei's procurement strategy and process. It is a prerequisite for our supplier qualification and selection. To be eligible to work with Huawei, our suppliers must be able to comply with applicable laws, regulations, and Huawei's Supplier Sustainability Agreement. We use procurement quotas as a means to continuously drive supplier improvements. We also take viable measures to monitor and control risks, thereby contributing to a more healthy supply chain ecosystem.

In 2016, we more broadly implemented our Quality First strategy. As sustainability is a key element of our Broad Quality Principle, it was assigned greater weight during our materials and supplier qualification, performance appraisals, and procurement decision-making. We strengthened cooperation in sustainability with customers, suppliers, and industry organizations. In addition, we adopted the "Top Four Initiatives" on a larger scale, which aims to achieve IT-based management, promote production automation, develop employee expertise, and retain staff in key positions. Our redline requirements for sustainable development were continuously enforced, and we employed procurement quotas as a tool to help suppliers become more sustainable. All these efforts enabled us to minimize supply risks, increase customer satisfaction, and boost the competitiveness of the supply chain.

In 2016, we focused on the following areas as we managed supply chain sustainability:

New Supplier Qualification

We have a comprehensive qualification process for all new suppliers, including suppliers' sustainability systems. This qualification process examines suppliers' capacity and their compliance with applicable laws, regulations, and the Supplier Sustainability Agreement. This process includes three stages, in which different departments of Huawei shortlist, audit, and review suppliers to ensure fairness throughout the process.

Shortlisting phase: Sustainability requirements are one of the minimum conditions that potential suppliers must meet. Those who fail this phase are excluded before formal selection begins.

Qualification phase: Onsite audits are performed to assess whether a supplier meets the criteria stipulated in the Supplier Sustainability Agreement. The audits include activities such as employee interviews, document reviews, onsite inspections, and third-party information searches.

Review phase: An expert panel reviews the results of the supplier audit. Compliance with sustainability requirements is the precondition for acceptance. Any supplier that fails to meet the standards will not be accepted. Suppliers are also required to conduct regular internal audits to make continuous improvements.

Risk Ranking and Auditing

We divide suppliers into different categories to ensure their continued compliance with our requirements. Every year, we audit suppliers, which combined represent 90% of our procurement spending, and assign them one of three priority levels: high, medium, and low. On this basis, a list of suppliers which require particular attention is drawn up. The factors considered during the audits are: supplier location; product/material category; potentially high-risk manufacturing processes; business volume and relationships; sustainability performance; environmental risks; and risk management systems.

Routine audits are a key part of our approach to supplier sustainability management. Through audits, we discuss with suppliers' management teams about their buy-in and ownership concerning sustainability, find out where problems exist, and then seek to solve those problems and prevent the occurrence of future issues. Huawei performs onsite audits on medium- and high-priority suppliers every year.

If we discover a problem during an audit, we help the supplier analyze root causes, identify ways to mitigate, and take targeted actions using Huawei's Check, Root Cause, Correct, Prevent, and Evaluate (CRCPE) methodology. All problems are logged in Huawei's Supplier Corrective Action Requirement (SCAR) system for follow-up until closure. We are always ready to help our suppliers improve.

Deepening Cooperation with Customers

Sustainability is a key component of customer requirements. To boost transparency across the supply chain, we take multiple initiatives, such as joint audits on suppliers, employee surveys, joint workshops, and supplier capability improvement projects. In 2016, Huawei and three customers ran onsite audits on ten suppliers.

Joint Audit Cooperation

The Joint Audit Cooperation (JAC) is the primary supply chain CSR joint auditing organization established by leading European and US telecom carriers. The 13 carriers that participate in JAC have unified standards, and delegate a third-party auditing firm to carry out supplier audits, share audit results, and collaboratively encourage suppliers to make improvements. This helps to reduce repeat auditing and accelerates improvements along the supply chain.

In 2016, Huawei designated eight suppliers to participate in JAC joint auditing, with expert groups from a third-party auditing firm carrying out onsite audits. The auditing experts and customers expressed satisfaction with the results of the audits on the eight suppliers. In particular, the suppliers were found to have incorporated customer CSR requirements into their internal operations. By making improvements related to social responsibility, the suppliers enhanced internal operating efficiency, customer satisfaction, and employee satisfaction.

Using Improved Mobile Technology to Strengthen the Link Between Employers and Workers within the Supply Chain

Using innovative technology and methods to drive supply chain sustainability has become a trend of development in recent years. As mobile phones have become more prevalent, using mobile technology to conduct surveys of employees has facilitated a better link between workers and employers. This has resulted in more transparency within the supply chain.

In 2016, in collaboration with two customers, we invited a third-party organization to promote the use of a mobile phone-based communication platform at ten suppliers as a way to better connect workers and employers through employee surveys. The brief training gave employees the knowledge they needed to use the platform wherever and whenever they wished to provide anonymous responses to questions about overtime hours, working conditions, and living conditions. Survey results collected in this confidential manner have provided a more objective reflection of actual factory conditions and sentiments of employees. The approach has improved the transparency of the supply chain, and made it easier for customers and suppliers to assess the strengths and weaknesses of factory management, allowing for the formulation of targeted improvement measures.

Supplier Performance Management

We appraise suppliers' sustainability performance annually based on their onsite audit results and improvements.

Performance appraisals cover key factors such as labor, health and safety, the environment, business ethics, and management systems. Suppliers are classified into four grades (A, B, C, and D) based on their performance, which represent their performance level in descending order. In 2016, we appraised the performance of 951 suppliers and rated 488, 366, 95, and 2 suppliers as A, B, C, and D, respectively.

The amount of business we do with each supplier depends on their performance, which is also a factor considered in our tendering, supplier selection, portfolio management, and other processes. Suppliers that perform well are given higher procurement quotas and more business opportunities, while the reverse is true for low-performing suppliers. Depending on the situation, we instruct low-performing suppliers to correct existing issues within a specified timeframe and may even terminate business relationships with suppliers that display exceptionally poor performance. In 2016, we restricted the tendering rights or reduced the quotas of two suppliers due to poor sustainability performance.

Supplier Capability Development

Sustainability awareness and capability development are essential to ensuring suppliers are managing their own operations effectively. We provide training and coaching for suppliers as necessary. We also encourage them to embed sustainability into their business models and strategies, and to view sustainability as the key to reducing their business risks and enhancing operating efficiency. Alignment of understanding among peers and learning best practices are low-cost and efficient ways for capability development.

Sharing Best Practices, Improving Supplier Capabilities

In April 2016, Huawei held a workshop that asked the question: "How can the turnover, work quality, and productivity of factory employees be improved?" Huawei invited suppliers to share their best practices, and some beneficial ideas were discussed about how to address the common issues faced by modern manufacturing. The discussions provided a good framework upon which to pursue subsequent improvements to factory efficiency and to reduce employee turnover.

In June 2016, to address the popular topic amongst suppliers of how to prevent factory fires, Huawei invited industry experts to provide special training to 64 suppliers. The training gave new perspectives to safety engineers, and explored the use of proactive safety management approaches through the combination of safety management and factory operations. Safety management was used as a way to reduce risks and improve efficiency.

Workshop on improving employee turnover

Special training on prevention of factory fires

Joint Workshop on Supply Chain Sustainability

In April 2016, Huawei and Deutsche Telekom held a joint workshop on supply chain sustainability titled "Creating

Value for Business Through CSR and Sustainable Development". In attendance were over 40 customers, experts, and supplier representatives, including individuals from Orange, GE, the Ethical Trading Initiative (ETI), Social Accountability International (SAI), and the Association Connecting Electronics Industries (IPC). Attendees discussed the challenges and opportunities relating to sustainable development, and exchanged insights, experience, and case studies. Attendees also committed to working collaboratively to accelerate tangible progress for sustainable development.

Joint Workshop on Supply Chain Sustainability

Prohibiting the Use of Conflict Minerals

"Conflict minerals" refer to tantalum, tin, tungsten, gold, and other minerals that are mined under conditions of armed conflict, notably in the Democratic Republic of the Congo and adjoining countries. The profits from the sale of these minerals finance ongoing armed conflicts in the countries where they are mined or smelted. The problem of conflict minerals has drawn the attention of the electronics industry and other sectors. Governments in the US and Europe have passed laws to address the problem. The types of conflict minerals and the regions involved are expanding. The problem is complex and will only be resolved through collective commitment and close cooperation between businesses, governments, and NGOs.

Huawei takes the problem of conflict minerals very seriously, and has taken solid action in this regard. We began to address this problem in 2002, and have released an open statement announcing that we will not procure or support the use of conflict minerals. We require all suppliers to not procure conflict minerals. We also ask our suppliers to cascade this requirement to their suppliers. Through the Conflict Free Sourcing Initiative (CFSI), we work with companies around the world to jointly address this problem, using the CFSI conflict mineral questionnaire and the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas to survey the supply chain and share results with our customers. In 2016, we shared the survey results with over 10 customers, including the survey results of the company and products. We are also an active participant in the projects of multiple industry organizations, seeking to jointly work out viable solutions to conflict mineral issues.

Huawei Statement on Conflict Minerals:

We are aware that when it comes to conflict minerals, the international community is setting its eyes beyond tantalum,

tin, tungsten, and gold (3TG) and the Democratic Republic of the Congo. With this in mind, Huawei proactively works with other members of the IDH Indonesian Tin Working Group in pursuit of effective solutions to tin-related issues. To help reinforce governance in the cobalt supply chain, Huawei – as a core member of the Responsible Cobalt Initiative (RCI) – drives the supply chain's due diligence system and standards. We also partner with other industry players to design sustainable solutions aimed at addressing human rights and labor issues in the cobalt supply chain. Moving forward, Huawei will seek to play a bigger role in industry organizations like the GeSI, IPC, and CFSI. Together with our customers, suppliers, and other industry players, we will continue to explore sustainable solutions to conflict mineral issues.

Industry Cooperation

Cooperation with industry players is a key factor for building a sustainable supply chain. In partnership with industry players, we can better address sustainability opportunities and challenges. Through industry organizations, we engage in cross-sector dialogs and initiatives to align understandings, take well-coordinated actions, and share resources. In a nutshell, collaboration allows us to combine strengths and gain leverage to boost industry competitiveness.

In 2016, Huawei experts played a central role in the development of the CSR standard for China's ICT industry, which has incorporated Huawei's proposals. This standard uses the framework of the ISO 9001 quality management system, and demands that social responsibility – as customer needs –should be embedded into products and their lifecycles as well as into the value chain. The standard was released in 2016.

Leading the Development of the IPC-1401 Supply Chain Social Responsibility Management System Guidance

Electronics Industries (IPC) named Huawei and Flextronics as leaders in the development of the organization's Supply Chain Social Responsibility Management System Guidance. Over the past three years, Huawei has organized over 10 workshops with more than 160 volunteer experts from nearly 80 electronics companies and 10 industry associations. Together with these experts, we analyzed how supply chain social responsibilities have evolved over the past two decades – as well as the actions, challenges, and needs of customers and suppliers. All participants agreed that it is necessary to adopt compliance audit models beyond traditional approaches; implement ISO management systems and frameworks; leverage industry best practices; regard social responsibilities as customer requirements and as requirements for products and production; and integrate social responsibilities into procurement strategies, procurement processes, material qualification, supplier qualification, and procurement decision-making. It is widely accepted that procurement quotas should be used as a means to drive the continuous improvement of suppliers, and that social responsibilities should be fulfilled to improve business competitiveness.

The IPC-1401 Supply Chain Social Responsibility Management System Guidance has passed three rounds of review and will be published and enacted in 2017.

IPC-1401 Supply Chain Social Responsibility Management System Guidance (2017.06)

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