On December 9, China launched an antitrust investigation into the US chipmaker Nvidia. The company could face fines of up to $1.03 billion, according to the South China Morning Post.

Global Times reported that the investigation primarily concerns an acquisition. In 2019, Nvidia announced its $6.9 billion acquisition of Mellanox Technologies, the largest acquisition deal of that year. The concern was that Nvidia’s purchase of Mellanox would enable it to complete a near-monopoly in the AI industry, a market the US International Trade Administration estimated that will to add $15 trillion to global economy by 2030, which also drew scrutiny from antitrust authorities in the European Union and the United States. However, it seems China is the only country to stop Nvidia’s monopoly.

To understand why, we need to first grasp how Nvidia’s monopoly operates:

To train a competitive AI, three core components are essential: hardware, software, and communication technology. Nvidia has established a global monopoly over the first two.

In terms of hardware, Nvidia’s H100 is currently the best-selling AI training chip worldwide. According to Nasdaq, Nvidia sold an estimated $38 billion worth of H100 GPUs in 2023, as companies raced to acquire the chips for training large language models. This surge in demand propelled Nvidia to the forefront of the AI chip market, securing a market share of over 90%.

Mizuho Securities estimates that Nvidia controls between 70% and 95% of the AI chip market, specifically for training and deploying models like OpenAI’s GPT. The H100, when purchased directly from Nvidia, is priced at approximately $25,000. Nvidia’s pricing power is reflected in a remarkable 78% gross margin—This vividly demonstrates how much Nvidia exploits technology companies after gaining a monopoly position.

In terms of software, Nvidia’s most formidable competitive advantage is the Compute Unified Device Architecture (CUDA).

The competition for AI models initially stemmed from the rivalry between Google and Meta. Engineers discovered that while CPUs excel at general computing and meet the requirements for inference tasks in AI, they were insufficient for handling the large-scale parallel computing tasks required for deep learning, especially for training large models. GPUs, with their powerful parallel processing capabilities, were better suited for this purpose. However, their programming models and memory access patterns differed significantly from those of CPUs, creating considerable development challenges.

To solve this, Nvidia introduced CUDA in 2007, enabling developers to use C/C++ to tap into the parallel processing power of GPUs for non-graphical workloads. This innovation laid the foundation for deep learning, prompting major frameworks like TensorFlow and PyTorch to integrate native support for CUDA early on.

CUDA quickly became the most efficient path to harness the computational power of GPUs. According to the Netflix Technology Blog, using a custom CUDA kernel, the training time for a neural network on a cg1 instance was reduced from over 20 hours to just 47 minutes when processing 4 million samples.

In the academic world, most papers demonstrating innovations in neural networks defaulted to using CUDA acceleration when conducting GPU-based experiments, further cementing its dominance in the emerging deep learning community.

Meanwhile, Qualcomm, Intel, and Google have reportedly teamed up to offer oneAPI as an alternative to Nvidia’s CUDA, but these efforts have largely faltered. The reason for this is simple: once developers invest in the CUDA ecosystem, switching to other GPU frameworks becomes a daunting challenge. It requires rewriting code, learning new tools, and often re-optimizing the entire computing process. These high switching costs make it more practical for many companies and developers to continue relying on Nvidia’s products, rather than risk exploring alternative solutions.

Even tech giants like Google, with the resources to invest heavily in custom ASICs, have struggled to replace CUDA. In 2018, Nvidia GPUs accounted for over 90% of Google’s TPUv2 infrastructure, despite the company’s substantial investments in custom hardware.

In terms of communication technology, Nvidia’s acquisition of Mellanox has raised concerns in China, the US, and the EU.

As AI models continue to grow in size, large language models now require hundreds of gigabytes, if not terabytes, of memory just for their model weights. For example, production recommendation systems deployed by Meta require dozens of terabytes of memory for their massive embedding tables. A significant portion of the time spent on training or inference for these large models isn’t dedicated to matrix multiplications, but rather to waiting for data to reach the compute resources.

To address this challenge, InfiniBand—a computer networking standard used in high-performance computing that boasts extremely high throughput and low latency—has been introduced into the AI training industry. According to The Institute of Electrical and Electronics Engineers (IEEE), InfiniBand now dominates AI networking, accounting for roughly 90% of deployments.

Mellanox has been the leading supplier of InfiniBand technology. As of 2019, Mellanox connected 59% of the TOP500 supercomputers, with a year-over-year growth of 12%, showcasing its dominance and continued advancement in InfiniBand technology.

Jensen Huang met with Mellanox CEO Eyal Waldman

By acquiring Mellanox, Nvidia secures the “holy trinity” of the AI industry—domination in GPU chips, development tools, and communication technologies for distributed computing. This acquisition further strengthens Nvidia’s monopoly in AI, creating a snowball effect that makes it increasingly difficult for competitors to break through.

When China’s Administration for Market Regulation approved Nvidia’s acquisition of Mellanox in April 2020, it imposed additional restrictive conditions. These included prohibiting Nvidia from bundling GPUs and networking devices, and from discriminating against customers who purchase these products separately in terms of price, function, and after-sales service. However, in June 2022, Nvidia explicitly stated in the user agreement for CUDA 11.6 that it bans the use of CUDA-based software on third-party GPUs. This effectively forces developers using AMD and Intel chips to switch to Nvidia’s GPUs, prompting China to launch an investigation into Nvidia last week for potential violations of antitrust law.

By now, many of you may understand why China is investigating Nvidia. However, the question remains: why is China only starting this review now, two years after Nvidia allegedly broke the law? This delay can be attributed to three key factors.

Firstly, China’s chipmakers have finally developed the technology to challenge Nvidia.

The Nvidia H100 GPU is manufactured using TSMC’s N4 process, which is categorized as a “5 nm” process by the IEEE International Roadmap for Devices and Systems. While, ASML is only allowed to sell DUV machines to China, primarily used for producing 7 nm chips.

According to Bloomberg, SiCarrier—a Chinese chipmaking equipment developer collaborating with Huawei—secured a patent in late 2023 involving Self-Aligned Quadruple Patterning (SAQP). This breakthrough allows for certain technical achievements akin to those seen in 5 nm chip production. Business Korea argued in May that chips made using such techniques would cost four times as much as those produced with EUV lithography, Huawei’s actions appear to bust this claim. On November 26, Huawei launched its Mate 70 Pro, with the 1TB version priced at 7,999 CNY—the same price as the Mate 60 Pro with similar specifications released the previous year.

On December 9, Huawei’s executive director, Yu Chengdong, publicly announced that the chips in the Mate 70 series are 100% made in China. Technode reported that the Huawei Mate 70 Pro’s CPU, the Kirin 9020, outperforms Qualcomm’s Snapdragon 8+ Gen 1, which was released in 2022 and manufactured using TSMC’s N4 process. According to insiders, while the Kirin 9020 chip may still uses a 7nm transistor process, its advanced packaging technology has greatly enhanced computing efficiency.

The successful launch of the Huawei Mate 70 Pro demonstrates that Chinese chipmakers can now produce chips competitive with TSMC’s 5nm technology in large quantities and at competitive prices. This achievement also positions them to extend their expertise to GPUs, provided they adapt their designs to meet the specific requirements of each processor type. This advancement suggests that Chinese chipmakers are nearing the capability to produce GPUs with hardware performance comparable to Nvidia’s H100.

Moreover, The Financial Times reports that China’s biggest chipmaker SMIC has put together new semiconductor production lines in Shanghai, aiming to produce 5nm chips. Although 5nm chips remain a generation behind the current cutting-edge 3nm ones, the move would show China’s semiconductor industry is still making gradual progress, despite US export controls.

Secondly, Chinese AI companies are increasingly positioned to reduce their dependence on CUDA.

American companies like Google and Meta remain heavily reliant on CUDA because it offers the best acceleration performance for Nvidia’s H100 chip, which dominates the AI hardware market. However, the CHIPS and Science Act, signed by President Biden, prohibited Nvidia from exporting H100 chips to Chinese companies after 2022. This restriction has forced Chinese technology giants such as Baidu and Tencent to explore alternatives, including AMD GPUs and domestically developed GPU chips, effectively reducing their reliance on Nvidia’s CUDA ecosystem.

In addition, Moore Threads, a Chinese GPU design company, launched its Moore Threads Unified System Architecture, MUSA, on November 5. The MUSA architecture, a serious challenger to CUDA, provides a high-performance, flexible, and highly compatible computing platform that supports various parallel computing tasks, including AI computation, graphics rendering, multimedia applications, and physical simulation. The company also provides a wealth of development tools and libraries, such as MUSA SDK, AI acceleration libraries, communication libraries, etc., to help developers better develop and optimize applications. Moreover, MUSA is compatible with CUDA’s software stack interface, significantly easing the process of porting applications and lowering the cost for enterprises to move away from Nvidia products.

Moore Threads’ MTT S4000 AI GPU is already available in December 2023

Thirdly, InfiniBand technology is becoming outdated compared to Chinese Ethernet advancements.

While InfiniBand currently dominates AI networking with approximately 90% of deployments, IEEE reports that Ethernet is emerging as a strong contender for AI clusters. For instance, InfiniBand often lags behind Ethernet in terms of maximum speeds. Nvidia’s latest Quantum InfiniBand switch reaches 51.2 Tb/s with 400 Gb/s ports, whereas Ethernet achieved 51.2 Tb/s nearly two years ago and now supports port speeds of up to 800 Gb/s.

One challenge for Ethernet adoption has been its inability to handle the massive workloads of AI training and other high-performance computing (HPC) applications. The high traffic levels in data centers can lead to bottlenecks, causing latency issues that make it unsuitable for these tasks.

However, on September 27, during the 2024 China Computational Power Conference, state-owned China Mobile and 50 other partners introduced Global Scheduling Ethernet (GSE)—a new networking protocol designed to handle large data volumes and provide high-speed transfers tailored to AI and other HPC workloads.

Since Nvidia’s acquisition of Mellanox in 2019, there are no longer independent suppliers of InfiniBand products. In contrast, Ethernet has a diverse range of suppliers worldwide. If China Mobile successfully promotes Ethernet technology as a replacement for InfiniBand in AI applications, it could provide AI companies globally with access to local suppliers, potentially reducing costs and fostering competition.

China is not the only country challenging Nvidia’s monopoly. However, it is the most determined and resourceful one. Due to U.S. sanctions, China’s own technological advancements and a vast domestic market, China has emerged as one of the few countries with significant independence and competitiveness in hardware, software, and communication technology. More importantly, these technology companies are not just owned by the state—they are driven by the ingenuity and efforts of the Chinese people.

As of October 2024, China boasts 1.1 billion internet users, accounting for 20% of the world’s total online population. When President Biden banned Chinese companies from purchasing the most advanced American chips and algorithms, it was the demand from these 1.1 billion users—who engage in activities such as watching short videos, gaming, and shopping online—that empowered Chinese tech companies to pursue self-reliance. According to official Chinese statistics, in 2023, the market size of China’s digital economy reached 53.9 trillion yuan.

Europe and the Global South undoubtedly have minds as brilliant as China’s. However, with Google and Meta leaving little room for competitors to emerge in these regions, they can never rely on the support of European and Global South users to get rid of Nvidia’s dominance. The free market is great, but if you only support it when it suits your needs, it might not work as it should.

The post China is the Last Hope to Stop NVIDIA’s Monopoly first appeared on China Academy.

China found the evidence from a document of U.S. National Security Agency (NSA) , titled STORMBREW showing that the U.S. has established seven monitoring stations across the country to intercept data transmitted through undersea cables in the Atlantic and Pacific. These data were analyzed and extracted in close collaboration with FBI and the UK’s National Cyber Security Centre (NCSC), enabling the U.S. government to conduct indiscriminate surveillance on global internet users.

Document released by China shows that the U.S. has established seven monitoring stations

The Chinese government also released a set of photos, showing that the U.S. installed surveillance equipment on the undersea cables, intercepting information through a special device and transmits the data back to the country. One of the key centers for this data transmission is the U.S. military base in Guam.

A set of photos released by China

Du Zhenhua, a senior engineer of CVERC, said that by tapping digital signals from these undersea cables, it is possible to obtain voice data, text messages, video information, and even the passwords of social media accounts.

To convert the data into readable and searchable intelligence, the NSA has implemented two programs known as Upstream and Prism, both authorized under Section 702, a provision of law that allows the U.S. government to indiscriminately collect global intelligence. The Upstream program extracts data intercepted by the monitoring stations from undersea cables, creating a vast database. Prism, in turn, analyzes and categorized these data. This intelligence is ultimately provided to the U.S. government and its intelligence-sharing partners, particularly the countries within the Five Eyes.

“Upstream” and “Prism” programs

According to TeleGeography, an U.S. telecommunications research firm, until 2022, there are more than 400 cables running along the seafloor across the world, carrying over 95% of all international internet traffic.

Interestingly, on September 26, the U.S. and its allies, including Australia, Canada, Japan, and the U.K., issued a joint statement calling for the protection of the “security, resilience, and integrity” of undersea cables, emphasizing the importance of choosing “secure” providers.

However, some Chinese people noted that the so-called “secure” provider don’t exactly seem to have been chosen through any sort of fair process.

HMN Tech, whose predecessor company was majority-owned by Huawei, was selected in early 2020 to build an undersea cable covered from Asia to Europe. According to Reuters, HMN Tech’s bid of $500 million was roughly a third cheaper that the proposal by the American subsea cable company SubCom.

The HMN Technology logo

Reuters reported that the clients of the cable verbally agreed that HMT Tech would be the supplier of this deal. And SubCom would be the reserve in case the Chinese company pulled out of failed to deliver on the terms of its proposal.

However, to secure the order for SubCom, the US government spent a large amount of money to subsidize the effort. The U.S. Trade and Development Agency (USTDA) told Reuters it provided training grants totaling $3.8 million to five telecom companies along the cable’s route in exchange for choosing SubCom as the supplier. Meanwhile, the U.S. Commerce Department accused HMN Tech of attempting to acquire American technology to aid in modernizing China’s People’s Liberation Army. Ultimately, HMN Tech, which had entered the bidding process purely for profit, opted to withdraw.

According to Reuters, U.S. ambassadors in at least six of those countries, including Singapore, Bangladesh and Sri Lanka, wrote letters to local telecom carriers participating in the deal. One of these letters, said picking SubCom is “an important opportunity to enhance commercial and security cooperation with the United States.”

On June 26, 2022, the White House published a fact sheet citing various upcoming infrastructure projects, including the SubCom undersea cable deal. The document stated the U.S. government had “collectively helped secure” the award of that contract for SubCom.

Chinese people have pointed out that what was originally just a routine business deal quickly turned into something more, as the U.S. rushed to exclude China from the undersea cable project.

According to Reuters on September 18, The U.S. was urging Vietnam to avoid HMN Tech and other Chinese companies in its plans to build 10 new undersea cables by 2030. Since January, U.S. officials and companies have held at least a half-dozen meetings with Vietnam’s foreign officials and business executives to discuss the Southeast Asian nation’s cable strategy. One of the people who attended the meetings, said that “they clearly singled HMN out.” U.S officials have also claimed that choosing cable contractors with less experience and less access to critical components would prevent U.S. companies from investing in Vietnam.

Justin Sherman, a fellow at the Cyber Statecraft Initiative of the Atlantic Council, an U.S. think tank, said undersea cables were “a surveillance gold mine” for the world’s intelligence agencies.

This is the first time someone has so openly described other people’s privacy as their own property, especially when it comes to intelligence agencies. Michael Casey, director of the National Counterintelligence and Security Center, said in June of this year that the U.S needs to prepare for more cyberattacks. And he called the U.S. citizens to share information with the public sector, adding that “If you don’t know your local FBI representative, you’re doing something wrong.”

Michael Casey speaks during the 2024 CNBC CEO Council Summit in Washington, D.C. on June 4, 2024.

At this point, it seems many Americans are already on the FBI’s radar, even before they realize it.

The post China Exposes Another U.S. “Prism” Program first appeared on China Academy.

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.

The post Ren Zheng Fei’s Corporate Management: Why the U.S Fears of Huawei? first appeared on China Academy.