Huawei Strategy Analysis

Topics: Telecommunications, Telecommunication, Economic growth Pages: 8 (2611 words) Published: March 16, 2012
External Analysis
Threat to Entry
China was facing a boom in the industry of telecom equipment, and the growth was continuing. Discovering such great potential in China’s market size, foreign companies started to see advantages in entering China; however, their entry was restricted due to government policy. This ownership restriction by the Chinese government largely raises the entry barrier, forcing most foreign firms to set up joint ventures with local Chinese companies to enter the industry. Should a firm decide against forming joint ventures, they would be completely barred from the Chinese market. Secondly, the industry involves a high level of capital investment for manufacturing, engineering, research and development, equipment, etc. This huge financial pressure prevents firms from entering the industry. Therefore, the threat to entry is low. Supplier Power

Suppliers of the telecom industry include raw material providers and equipment manufacturers. Suppliers’ power has been increasing over the years, due to the development of technology and the demand of the changing market. In the early years between 1960 and 1980, since a large amount of suppliers existed in the industry with great specialization, the telecom manufacturers always needed to find a specific supplier for a certain part of production. However, as digital technology, the Internet, and networking advanced the pace of telecom services and the range of products demanded, the suppliers were required to be more diverse than ever. To remain competitive, they had to produce this large range of products, causing smaller businesses to be integrated into larger, concentrated companies. Therefore telecom manufacturers have many more options to choose from along the production line, and the suppliers hold less power. Rivalry

The intensity of rivalry is medium. For one, the number of main competitors is large without significant differences in the market share held. According to Table 2, Huawei possesses the leading position with a market share of 13.5%, followed by ZTE and Ericsson both with 12%. Seven other major players, including Motorola, Nokia, Siemens, and others, also occupy a considerable market share ranging from 4% to 7%. The competition is intense among the players due to a large amount of major players with roughly equal size. Also, it is important to note that the exit barriers are high due to high level of capital investment in specialized assets for this high-tech production. After investing numerous funds into R&D, human resources, and engineering technologies, no company would find it easy to exit the industry. However, a large market for telecom equipment had recently cropped up in China. In 2002, China became the largest telecom market, and it continued to grow at an annual compound rate of 10.9 percent between 2004 and 2008. This rapid market growth lowered the intensity of rivalry, since companies did not need to fight for a limited market and could enjoy the increasing amount customers. As a result, the intensity of rivalry is medium. On the other hand, the nature of competition is based on price, due to high fixed cost and low marginal cost of telecom products. All the major players in this sector are public companies. They have the access to external capital market for funding. The access to funding is critical to telecommunication equipment companies, as R&D requires large amount of capital investment. Also, the products of the telecom industry are quite standardized, which leads to a low switching cost. Customers are price sensitive, merely caring which company provides the most economic services. As long as they are able to make phone calls or surf the Internet by their cell phones, they tend to choose the cheapest one. Therefore the companies have to compete by achieving economies of scale to price the products as low as possible. As the nature of competition spells out a competitive scene especially as the market grows...
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