Ren Zheng Fei’s Corporate Management: Why the U.S Fears of Huawei?
On August 29th, 2023, Huawei quietly released its latest flagship mobile phone product- Mate 60 Pro, accompanied by over 80,0000 orders on the same day. The product’s release by Huawei immediately evoked a carnival of public opinion, and it even worried the White House about the Chinese tech tycoon.
According to a report on September 2nd from the Washington Post, the release of Huawei’s newest mobile phone model “resonates with the concern from American chip corporations, which is that the sanction will not stop China, but stimulate it to pay much more effort on developing the succedaneum that can supersede the American technology.”
During the five years of American sanctions, Huawei completed the development of over 13,000 components and over 4000 repeated circuit boards. Nevertheless, the boards’ stability remained volatile until domestic corporations provided sufficient accessories. At the 2023 HDC developer conference, Huawei terminal BG chief executive officer Yu Cheng Dong said: “the canoe has already passed thousands of mountains.”
The Huawei Mate 60 pro’s return demonstrated that “God helps those who work hard” and illustrated the forward-looking of Huawei’s management at different stages. Just like the professor of Peking University, chairman of the Digital Industry Innovation and Research Center, Ministry of Industry and Information Technology Dong Xiao Ying said: “Huawei is the representation of the thinking of why there have been no world-tier corporations in China for thousands of years, the introspection of Chinese culture, and setting the development path and pattern of the corporation based on the in-depth understanding and analysis of western multinational corporations.
The founder of Huawei, Ren Zheng Fei, said :“The primary and imperative managing premise of a corporation is the kind of thoughts that the manager utilizes.” Simultaneously, he repeatedly emphasized in many scenarios that “senior leaders should learn some philosophy.”
Now, Huawei has already become the banner of the Chinese high-tech industry, representing Chinese private corporations. Other Chinese corporations have fathomed and meticulously emulated Huawei’s experience, lessons, and innovations in strategy, management, marketing, policy, and culture. However, when it comes to business philosophy, individuals who investigates and learns from Huawei’s fundamental assumptions of strategy and management are unheralded tributaries.
Importance of basic assumptions for enterprises: Schein’s “Water Lily Model”
The importance of basic assumptions can be explained by the Water Lily Model ” by Edgar Schein, the “father of corporate culture”
The “Water Lily Model” by Edgar Schein
The leaves on the topside of the water lily symbolize the explicit representation of the corporate culture, such as flags, clothes, songs, slogans, and architectural decorations.《Huawei People》，《Management & Optimization report》, the voice community (an Huawei app that provides a platform for Huawei employees to communicate and pour out their thought), and well-decorated buildings are the leaves of “Huawei Culture”. The stalk of the water lily represents the missions, expectations, values, ideas, and corporation’s code of conduct. The well-known Huawei quote, “Customer service as the center, hard-working workers as the foundation, keep working hard and introspecting,” is the branch of Huawei. The roots at the bottom is the basic assumption of the corporation, which are the subconscious beliefs, concepts, and esthesis——like the renowned Huawei motif: ” Customers are the only ones that give us their money; Huawei has nothing” (this line was a self-mockery proposed by Huawei when it was in its initial stage of development), and other “distrust” assumptions that were built based on this motif.
Nevertheless, things constantly change and develop, and the cognition level gradually evolves. In recent years, Ren emphasized multiple times that Huawei should “break the pyramid,” growing from “distrust” to “trust” assumptions. This change of view highlighted the embedded experiences and observations of corporations’ living environments and the motivation for Huawei’s evolution.
In fact, the basic assumptions of strategy and management are the core of a world-class enterprise, such as Huawei’s strategy, culture, and system, which can be called “one small change will affect the whole body.” In January 2024, the well-known Chinese finance and economics scholar, Huawei research specialist, Cheng Dong Sheng published a series of books called Huawei Business Philosophy. As the author of one of the series The Symbiosis, I will analyze how Huawei keeps up with times and achieves self-evolution by reviewing the history of changes in Huawei’s strategy and management assumptions.
The “Huawei Business Philosophy”
Refusing “Shared happiness and hardship”: Ren’s initial approach toward corporate management
From 1987 to 1995, Ren took less than ten years to expand the number of employees from 6 to 1750, and sales revenue skyrocketed from 0 to 1.5 billion Chinese Yuan. At that time, Huawei’s management philosophy had yet to take shape, but Ren possessed strategic and managerial assumptions that were entirely different from those of temporal entrepreneurs.
Ren always said that Huawei entered the communication industry because it was “ignorant.” When Huawei was agenting switches, he realized that the market space was enormous. Based on the frugal strategic assumption that “China was a big country, its communication market will not be permanently manipulated by foreign enterprises,” he decided to pursue independent research and development.
At that time, “profiteers” were rampant in China, the theory of “knowledge is useless” prevailed, and their prevalence even surpassed the Cultural Revolution. People whose work was about technology were called “fools.” Nevertheless, Huawei relied on the tools of multimeters and oscilloscopes to lead a group of college students to successfully develop C&C 08 switches in line with the world’s most advanced tier. Ren recalled: “At that time, we were fearless and ignorant. Not a single company in the world had conducted research like Huawei, which utilized many innovative technologies simultaneously. Also, there were no prototypes for reference, and we designed it from scratch in just one step. Luckily, it succeeded; if not, the consequences were unimaginable.”
While encouraging intellectuals to “serve the country in terms of industry,” Ren broke the Chinese tradition of ” relationship over profits” and unabashedly compared Huawei’s profit-sharing mechanism to the “pirate culture” and “sharing the spoils.” The “pirate chief” is the commander of the robber, the soldier who charges at the front, and the distributor of the acquired treasures and spoils. He climbed the wall and led hundreds of thousands of tiny pirates to rush to different ships in the ocean. The faster you rush and the more valuable the spoils are worth, the more share you get from the chief.
Huawei’s corporate management, in its early stage, resonates with the “pirate culture” in terms of profit distribution
This analogy reflects Huawei’s basic management assumption in its early days. Throughout the history of Huawei’s competition, it utilized its advantage of considerate customer service to remedy the deficiency of its product while achieving a breakthrough in the market via the strategy of “surrounding the cities with rural areas.” ; The establishment of Mobeck and the joint venture with 3Com is a breakthrough with the help of allies. The listing of Sniper Port, making it possess sales but preventing it from earning profits, is a breakthrough via the most vulnerable aspect of the competing corporations when it was in its most challenging time: Paying attention to mid-to-high mobile phone market and releasing generational products around “thin, large screen, and photography is a breakthrough via the most sensitive place of the customers. Ren recognized himself as a person who “basically never made mistakes in dividing revenues,” which is the key of integrating internal and external resources of the corporations and uniting all forces that can be united, and eventually succeeding in the market.
The classical utopian “fairness” of “drinking in a large bowl and eating meat in a large bite,” “sharing happiness and hardship,” and “employing people without doubt and suspecting people without use” is adherent to the principle of “working more, gaining more.” It can also ensure the ultimate efficiency and measurable results. But even more surprising is that Ren completed the sublation of the “pirate culture .”While retaining the positive factors, such as risk, desire, and flexibility, he abandoned the negative factors, such as the jungle law, mutual deception, personal attachment, and benefiting oneself at other’s expense. Ren Zheng Fei transformed the classic “culture of dividing spoils” into a “performance-oriented” and “result-oriented” culture that aligned with modern industrial civilization.
Two demonstrations of this amendment are the start of the ESOP (Employee Stock Ownership Plan) in 1990, and the debate called “Huawei’s up and down is my responsibility” held by Ren in 1995. The former is a far-reaching event in Huawei, making Huawei a typical representative of the implementation of equity incentives in China. At the same time, the latter has opened a series of far-reaching management changes in Huawei.
At that time, Huawei entered its stage of rapid development; the first product, the C&C08 digital program control switch, started to become dominant in the market, resulting in explosive growth in the size of the enterprise. However, management efficiency fell sharply, and employee assessment, especially the evaluation of the performance of the market system, became the focus of contradiction. Phenomena emerged, such as being picky in the workplace, formations of different internal forces, beggar-thy-neighbor, and the prevalence of pride and complacency. Corruption, laziness, and other behaviors have also started to appear. Therefore, Huawei set up a wage reform group, but the group failed to develop a practical solution. In desperation, Ren held an internal debate on Huawei’s culture, but until the end, everyone still needed to discuss a reason.
Hence, the negative factors of the “pirate culture” were gradually exposed, and Ren personally stated that most people agreed that “sharing happiness and hardship” and “employing people without doubt and suspecting people without use” should not become part of Huawei’s culture.
Amid the confusion, Sun Yafang, the temporal head of Huawei’s Marketing Department, stepped forward to lead Huawei’s 26 national office directors to resign and re-compete for the positions. 30% of middle and senior cadres in the Marketing Department withdrew from their leadership positions, setting a precedent for Huawei cadres to be able to go up and down;
The action led by Sun Yafang is Huawei’s version of “drinking wine to release military power.”(a Chinese allusion that refers to an emperor named Zhao Kuang Yin in the Song Dynasty who set up a banquet to force the senior generals to resign their leading post and give up their power）Ren believes that the impact of this behavior is earth-shattering for Huawei. Otherwise, it would be impossible for Huawei to develop to its recent phase.
Huawei Basic Law: Managing system based on “distrust”
In 1995, Huawei began to draft a programmatic document. In 1996, it was positioned as a management outline, and in 1998, it was officially accepted, which is the well-known Huawei Basic Law. Its first article states: “The internal mechanism is always activated through the transmission of independent market pressure.”
Starting from the “Big Resignation of the Marketing Department,” Ren spent more than ten years getting rid of Huawei’s dependence on “intellectuals” and “heroes” in the early days of entrepreneurship and built a management system based on the basic assumption of “distrust.” In 1999, Huawei introduced the IPD (Integrated Product Development) process to IBM, emphasizing “cutting feet to fit the shoes,” “first rigid, then optimized, and then solidified.” Since 2008, Huawei has carried out the “employee number switching” activity every year in an institutionalized way, which automatically notified employees with eight years of service or more to re-sign their contracts. These are all typical examples of management systems based on the assumption of “distrust.”
The culmination of this stage is the “Huawei Human Resource Management Outline 1.0” (now referred to as “Outline 1.0”), which was officially released in 2014. The document, which took four years to draft since March 2010, aims to summarize, identify, summarize, and guide Huawei’s human resource system, a management system based on the basic assumption of “distrust.”
Hence, “The bench should sit cold for ten years,” “The bird that bears the fire is the phoenix,” have become the basic requirements for Huawei employees and the management layer. “Wolf culture” and “last place elimination system” also gradually spread from Huawei to the IT industry, the Internet industry, and even the entire Chinese business community during this period. The enforcement of “Outline 1.0” brought Huawei a round of rapid growth, but it also made Huawei start to become “bureaucratic like state-owned enterprises, exploitative like private enterprises, management like foreign enterprises.”
Also, during this period, Huawei formed its strategic assumption, which lasted more than 20 years: “Relying on the global platform, focusing on all forces, attacking a ‘wall mouth,’ and implementing strategic breakthroughs.” The original basic assumption of this strategy will be easier to continue once the United States blocks it.
“Outline 1.0” to “Outline 2.0”: Transition to “trust-based” management system
The “Outline 1.0” aligns with the managing system based on “distrust,” but Ren was keenly aware that it was outdated when it was drafted and released; In 2009, confronting the increasing internal rigidity, Ren called for “letting the people who are able to make decisions to make decisions ” and began reconstructing Huawei’s grass-roots organizations. In 2011, Huawei’s organizational structure was considerably adjusted from a single operator BG to the “three carriages”: operator BG, enterprise BG, and consumer BG, which further illustrated that the past successful experience has failed to adapt to the future. This sense of urgency has become more evident after 2016 and critical after 2019.
In May 2016, when Ren spoke at the National Science and Technology Innovation Conference, he pointed out that Huawei was gradually entering the “depopulated zone” in the industry and was in the dilemma of no navigation, established rules, and followers.
In September 2017, Ren emailed all employees to apologize to Kong Lingxian, a former Huawei employee, saying, “It is the company’s mistake, not your problem.” Since the second half of 2017, Huawei’s senior management has begun to incubate and discuss human resource management reform to “remove the problems accumulated over 30 years and help the organization rejuvenate.” Ren Zhengfei believed human resource management is crucial to Huawei’s commercial success and sustainable development. Still, it was no longer in line with the future development trend and needed to be changed urgently.
In March 2018, Huawei promulgated the “Huawei Human Resource Management Outline 2.0” (now referred to as “Outline 2.0”). The core point of this document was that Huawei proposed a concept of human resource management based on trust, emphasizing employees’ trust based on rules and systems, removing the shackles of manipulation, and reducing unnecessary management levels and reporting actions.
Taking this as the demarcation point, the founder of Huawei launched a series of changes in Huawei’s organization, culture, and system.
In 2018, Huawei established the General Cadre Department, which is separated from the Human Resources Department. As a result, the human resources department was responsible for “cases,” while the General Cadre Department was responsible for “people.” Eventually, the human resources system shifted from the front desk to the back office and from the power center to the service support center.
At the same time, Ren repeatedly mentioned the “last place elimination system” inside Huawei, believing that this system he invented was influential in the early days. Still, it has become more and more rigid. Eventually, Ren Zhengfei adjusted it into three categories: First, the staff system, which implemented absolute assessment and did not require relative assessment with the last place elimination; The second is the expert system, which encouraged cycling growth, continuous assessment, and examination. Employees’ rank will decrease if they fail to pass the exams and lack contributions. The third is the administrative management system. In this system, if being the administrative cadres, regardless of their positions, chief officer the supervisor, there must be 10% forced elimination of the last place every year; the eliminated employees must enter the strategic reserve team to search for a new position, even if everyone is doing well.
In 2019, Huawei launched the ESOP1 system. ESOP is the abbreviation for Employee Stock Ownership Plan. Compared to ESOP, it had higher requirements for the service age of the granted object, and the retention conditions were more relaxed. However, the performance requirements were also lower. Employees with more than five years of service were eligible to be issued shares as long as their performance was not ranked at the end of all employees, and they did not have to wait until the age of 45 retirement. Instead, they only needed eight years of service to retain their ESOP1.
The ESOP1 aims to achieve employee retention, demonstrating Huawei’s intention to work together to overcome difficulties. ESOP1 allows employees to receive long-term dividends, which also means compensating employees for the inevitable decline in dividends during difficult times. This is the main reason that after experiencing sanctions, Huawei did not collapse and united. Many employees who had retired, left, or received new offers were willing to advance and retreat with Huawei and even return to Huawei.
In 2020, Huawei established Cloud &AI BG. From 2021 to 2022, Huawei set up 20 “legions,” covering 20 industries such as coal mining, intelligent roads, customs and ports, smart photovoltaics, and data center energy. Ren Zheng Fei explained that this was an organizational structure learned from Google, and the purpose of utilizing this structure was to break the existing organizational boundaries through corps operations.
The so-called “legion” is an integrated team whose positioning includes strategic research, campaign research, and empowerment. Each team is targeted at a specific industry. The Legion emphasizes breaking the conventional functional organization pyramid, shortening the management chain, and having global replicability. The CEO of the Legion possesses enough command power to engage in pre-approval and monitoring during and after the incident. Though the team was small, the leadership level was very high, which could be described as the “major general company commander” who “established the command post in the place where the sound of artillery explodes.”
Other quotes include “Increasing soil fertility,” “Walking into no man’s Land,” “Blowing up the pyramids,” “Canceling the Strategy Ministry,” and “The Revelation of Bdelloid rotifers.” Ren Zheng Fei’s forward-looking, anxious, and enterprising sentiments are undoubtedly apparent in speeches he gave , in countless documents he signed, and in scenes of adjustment he made.
In his June 2020 speech, Ren demonstrated his determination: “The Time has confirmed that our past strategy is skewed, is not completely correct, and our ability is not in line with the needs of realistic survival and development.” But we are confident and determined to survive.” At the same time, he clarified that “the purpose of our reform is to be able to operate flexibly without a central headquarters.
Mr.Ren Zheng Fei, the founder of Huawei.
Evolution behind the changes of assumptions
The change from “distrust” to “trust” as the basis of Huawei’s management assumption could be attributed to the sanctions that the U.S. imposed. These sanctions immensely curbed Huawei’s globalized strategy so that its “dependence on the global platform, attack the ‘wall mouth’” strategic assumption could not be sustained—at least the most advanced American platform did not support Huawei, and it must rely on its own to build products.
However, the fundamental reason was that times had changed, and Huawei had to complete its evolution. As early as 2004, when Huawei’s overseas revenue was about to exceed the domestic market, Ren made the ultimate survival assumption: “Others can’t choke the throat; 10 years later, we will face intensive conflicts with American companies; we must be ready.” To this end, Huawei established Hisilicon Semiconductor Co., Ltd. and began the most tragic “Long March” in Chinese science and technology history to create a “spare tire” for survival.
So far, three changes in Huawei’s strategy and management assumptions in its history have corresponded to the barbarity of the market economy, the scarcity of the industrial age, and the abundance of the digital age while actively embracing globalization. Huawei has been on the digital train since the 1990s, mainly relying on mathematics to build an advantage in electronic technology and succeed in its products and services. The relevant background of the era is that the information and communication technology revolution that occurred around 1990 reduced the cost of the exchange of ideas around the world and then set off the “global value chain revolution” represented by outsourcing, demarcated the international boundary of knowledge, and promoted industry competition to be determined by the international production network boundary rather than the national boundary.
Huawei is the beneficiary of this evolution. Nonetheless, as it entered the “depopulated zone” and experienced pressure from the United States, Huawei was forced to adjust its strategy and management assumptions, which had lasted for almost 30 years. At the same time, the arrival of the digital era, the development of Artificial Intelligence, remote presentation, remote robots, other technologies, and the rise of social networks not only integrate the traditionally separated production, circulation, and consumption but also let individuals provide mental and manual services without going abroad, and even unbound the ties between physical location and labor force services.
The former U.S president Donald Trump signed presidential orders banning Huawei in May, 2019.
It is possible that the traditional structure of “human-organization-society” since the industrial period can be replaced by the structure of “human-data-society.” On the one hand, this trend has brought up an increasingly serious “Digital Gap” problem; on the other hand, it also empowers consumers, employees, and individuals, which consequently affects the traditional corporate governance concepts and organizational structures.
A typical example of the proposed analysis mentioned above is the emergence of super-individuals who challenge corporate governance. Whether the “two choices” problem between Dong Yuhui and Huawei CEO in the Eastern selection event, the whole network group mocking Dong Mingzhu while supporting Meng Yutong in the Gree public opinion storm, or the mutual damage between IP and the company in the Li Ziqi event shows that the traditional, outdated management theories and methods can no longer adapt to the new situation. Even Huawei itself has seen scandals such as the “251 incident” and the “Hu Ling Incident” in recent years.
Therefore, behind the changes in strategy and management assumptions, Huawei’s self-evolution is to face the changes in time. Under the influence of the concept “A few people can’t design Huawei’s strategy,” Huawei achieved the actions of eliminating the strategy Department, learning Google’s “self-organized” corps system, encouraging employees to get courses, and setting up a training company system to export Huawei’s methodology and values that were unimaginable for the enterprise in a decade ago.
The trend behind the self-evolution is that while Huawei is expanding, the organization is shrinking, becoming increasingly autonomous, flexible, and “borderless.” This kind of contradictory demand can only be fulfilled through organizational innovation, which requires changes in basic assumptions of management.
In this sense, outline 2.0 represents Huawei’s future-oriented trust management system, which hopes to stimulate the internal motivation of employees to seek improvements, pay more attention to the balance between long-term incentives and short-term incentives, and balance the interests of new and old employees, especially the contradiction between labor profits and capital profits. Today, nearly 60 percent of Huawei’s employees possess stocks, and Huawei has become a 100 percent employee-owned private enterprise.
As we all know, Ren Zheng Fei is an individual who opposes entrepreneurism and advocates entire shareholding. His proportion of personal ownership of Huawei is only 0.88%. Huawei Basic Law stipulates four elements for value creation: labor, knowledge, entrepreneurs, and capital. Ren Zhengfei puts labor first and emphasizes the capitalization of labor and expertise. The coordinating system design and management practice are unprecedented in the history of world management, like the rotating chairman system. Huawei is the only large enterprise in China that has adopted this new governance structure. The various adjustments made at present, which are the evolution from the employee interest community to the relevant stakeholder community, from the “distrust” system to the “trust” system, from the pyramid structure to the network structure, from the hardware manufacturer to the software service provider… are also measures that any entrepreneurs never took in the past.
Huawei’s management practices reveal a different possibility compared to the cyberpunk society: the ideal home of Drucker’s “knowledge society.” Huawei’s transformation from “a big tree” to “a forest,” and from “sword fighting” to “value symbiosis,” is a challenge for all Chinese enterprises aiming for global expansion in the digital age.
Hence, the profound meaning and adjustment measures behind Huawei’s strategy and management assumptions change are worthy of in-depth thinking and careful contemplation by the Chinese business community.
