The story of Ren Zhengfei, the media-shy founder who turned Huawei into a global brand

Huawei’s global success appears to be the result of a very smart application of China’s manufacturing advantages against specific international markets. Zhengfei also implemented certain guidelines that defined Huawei for much of its 20-year history.

The following is an edited excerpt from The One Hour China Book (2017 Edition): Two Peking University Professors Explain All of China Business in Six Short Stories by Jeffrey Towson and Jonathan Woetzel. You can buy a copy here.

Huawei founder Ren Zhengfei was born in 1944 in Guizhou, southwestern China. Zhengfei was born the son of two teachers, both of whom worked at the number one middle school of Duyun.

The decisive move came in 1987 – at the age of 43, Zhengfei decided to start a new life in Shenzhen. He arrived in booming Shenzhen and founded a tiny electronics company named Huawei. The initial registered capital was about US$5,000.

Huawei initially acted as an agent for products being brought into China. Its first contract was as a sales agency for a private branch exchange (PBX) made by a Hong Kong company. PBXs are basically internal phone switching stations. It lets a company connect many internal phones lines with just a few external phone lines (i.e., not every phone in the company calls outside on its own line).

Zhengfei used them to learn more about technology. His goal was to establish his own technology company, but foreign companies had far greater expertise. So Zhengfei and his co-workers reinvested most of their earnings back into the company and focused on the development of their own telecommunications products. By 1993, Huawei had developed its own PBX product for the Chinese market.

Fortunately for Huawei, both manufacturing and the telecommunication equipment market were surging. Huawei expanded its product line and became adept at targeting small niche markets. Competing with multinationals like Ericsson in Beijing and Shanghai would have been impossible. So it focused on rural and third tier cities, where the demand was less but so was the competition.

Huawei grew rapidly, and by 1995, it was earning annual revenue of $163 million, mostly from selling its telecommunication equipment to small enterprises and hotels in the rural areas of China.

In 1997, Huawei made another decisive move: it turned to international expansion. This both opened up new potential markets and avoided difficulties in the domestic China market. It did its first international contract (fixed-line network products) with Hutchison Whampoa in Hong Kong. And from there, Huawei expanded globally like no Chinese company had before.

It went across Asia. It went to the Middle East. It went to Africa. In many ways, Huawei’s strategy for global expansion resembled its domestic market strategy. It targeted less-developed areas, where sales were lower but so was competition. Many of Huawei’s early sales came from Southeast Asia, Africa, and Eastern Europe – all areas somewhat neglected by major global players.

Its primary strategy was to use Chinese manufacturing scale to offer products at low prices. In some cases, Huawei even offered the initial system for free for an extended period of time, and it only received money once the user count reached a certain number.

How Chinese manufacturers use their economic scale to defeat multinationals is an important topic. Yes, they have a the advantage of low cost and this can be devastating. But they also have an ability to customize products as they use labor instead of automated factories. Such customization is difficult for multinationals to match, as it requires doing costly reconfigurations to their automated factories. So Chinese manufacturers will often use a “low cost + customization” strategy against multinationals. This is particularly effective when the target is a smaller niche market, such as the Middle East or a third-tier Chinese city. Multinationals facing this situation will often decide it isn’t worth it.

Huawei started to gain global market share in the late 1990s, and by 2002, international sales had reached $552 million. In 2005, international contract orders exceeded domestic sales for the first time. By 2009, Huawei was the number two player in the global telecommunications equipment market, behind only Ericsson. By the time Huawei became number one in 2012, it was earning over two-thirds of its $36 billion in revenue outside of China.