(Chinese Version)

Recently, Huawei Technologies, the Chinese telecom equipment and now the world’s no.3 smartphone maker behind Apple and Samsung announced its 2016 annual report, which shows the company’s global revenue had climbed 32% to ￥521.574 billion, slightly slower than the 35% last year. Its net profit hit￥37.052 billion, a merely 0.38% year on year growth. It’s the company’s slowest annual growth since 2011.

It’s also worth noting that the annual report shows the employee salary and benefit cost grew by 17.4% to ￥94.179 billion in 2016, as the average salary at Huawei reaching ￥600,000. Additionally, the company’s consumer business had jumped by 43.6% and its R&D budget was increased by 28.2% to ￥76.391 billion. Huawei’s sales and management cost also surged by 38.8%.

The three telecom carriers in China have also recently announced their annual report:

In 2016, China Mobile’s revenue hit ￥708.4 billion, a year-on-year growth of 6%. The company’s net profit increased by 0.2% to ￥108.7 billion.

Chinese Telecom’s revenue in 2016 was ￥352.3 billion, a year-on-year growth of 6.4%. Its net profit slumped by 10.2% to ￥18 billion. If we exclude China Telecom’s income from selling its towers in 2015, then the net profit in 2016 did grow by 11.7%.

China Unicom on the other hand garnered a revenue of ￥274.2 billion in 2016, a 1% year-on-year drop. The company’s net profit slumped by 94.1% to ￥625 million. Compared with the second half of 2015, China Unicom was actually making its comeback.

Overall, China Telecom and China Unicom’s total net profit combined in 2016 is only 17% of China Mobile’s. Despite the companies’ efforts to strike a balance, the situation is in fact getting worse.

China Mobile is now the best telecom carrier in China. However, the telecom carrier has been facing growing challenges in recent years while its global and Internet strategy are making little progress. Huawei on the other hand is surging. Many telecom industry insiders have expressed their confusion on the prospect of this industry to me.

When I was working in the telecom industry, technicians from telecom carriers always tended to act as if they were more superior than those from telecom equipment companies. At present, Huawei’s revenue has long exceeded that of China Unicom and China Telecom. This can be attributed to the matthew effect in the telecom equipment sector. Huawei becomes the lone survivor in the arena as many telecom equipment providers started to decline. Compared with that, telecom carriers are still struggling with their globalization strategy while Huawei has grown into one of China’s most international enterprises.

Huawei is making more money than China Telecom and China Unicom. From the perspective of reputation, Huawei’s drive comes from its clear incentive. I can personally feel that Huawei’s employees are proud of their globalization business. But when look at the staff at telecom carriers, they don’t seem to know what they are fight for.

Telecom carriers’ employees lack both material and mental drive to pursue their course. This makes me wonder just how telecom carriers have come down to this road, becoming one of the little people from elites.

Why there isn’t any leader like Ren Zhengfei in telecom carriers?

Ren Zhengfei is considered as one of China’s most successful and achieved enterprise leaders. Ren had been a low-profile figure but in recent years he has started to show up on national-level tech conferences, giving many impressive speeches.

In comparison, the leaders of telecom carriers lack such influence. Wang Jianyu is a relatively high-key telecom carrier leader with foresight and sharp mind. However, he eventually retired. Wang Xiaochu is another leader that is thought highly of by the industry, but still he is unable to lead China Telecom out of its pit. In contrast to that, Huawei’s international and technological influence is unstoppable in its realm.

But that’s just one side of the story. An enterprise leader’s management style affects the corporate culture. It’s undeniable that Ren Zhengfei has tremendous influence on Huawei and that private company’s leaders tend to be more influential. How come telecom carriers never have these leaders?

First of all, telecom carriers have strategies different from telecom equipment companies. Telecom carriers are state-owned and therefore have a relatively fixed appointing mechanism and cycle. Private companies on the other hand sometimes are dictated by people. This results in the fact that many private companies don’t have standard procedures to follow through and are controlled by one side. However, private companies are maturing and can make long-term investment on strategies, which will improve the company’s management.

For instance, every telecom carrier has a strategic department, but most of the strategies are not being well implemented despite the how good the strategists are. Under the current corporate system of telecom carriers, leaders of state-owned companies are usually unable to make long-term investment since when their cycle ends new management will come in place. Aside from that, state-run companies also have target mechanisms that are more complicated and require more thinking.

Secondly, the corporate culture of telecom carriers already makes it impossible for them to nurture people like Ren Zhengfei. Telecom carriers have a corporate culture that resembles to the government and that requires the companies to put stability as their priority. Even looking at their language style you can find that they just don’t have the genes to act wild and take risks.

In addition to that, telecom carriers’ management mechanism doesn’t nurture powerful individuals as the companies themselves and the regulators don’t want to have a dictator at a state-run enterprise. What’s worse, the reform of state-run companies is still in progress and there’s no clear directions. The salary continues to drop relatively while the cost for innovations is increasing for enterprise leaders. However, during the early days of these telecom carriers, some of their branches did have influential reformers that pulled off many innovations despite the issues.

Healing the company

At present, the reform of state enterprises is pointing the direction to corporate management. mixed ownership, professional manager import, and regulation reform are commonly accepted in the managerial level. Regulators are hoping state-run companies to undergo diversification reform and turn in to active fresh blood in the main market. But in recent years telecom carriers are slowly losing the edge in the market.

Adolf Berle and Gardiner Means’s The Modern Corporation and Private Property and Ronald Coase’s The Nature of the Firm that were published in 30s were a milestone that shows people are starting to realize the importance and roles of companies. Adolf Berle pointed out in his book that ownership and management are going part ways in modern companies, revealing the principal agent problem. The principal–agent problem, in political science and economics, (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent") is able to make decisions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Under the market economic system, telecom carriers had rising profits, but the lack of an actual owner and the long agent chain make it difficult to nurture an appealing incentive system.

At last, the public is not feeling that telecom carriers have taken up social responsibility and cared for social benefit. The employees on the other hand are suffering the growing work pressure and decreasing salary.

Internationalization strategy

Do telecom carriers need to go global? To my knowledge, there hasn’t been many recent researches on telecom carrier internationalization on Baidu Academics. The newest one can date all the way back to 2011.

However, I did find an article that introduces how China Mobile Pakistan became the 3G and 4G telecom carrier in Pakistan in Caijing’s data base.

My research could be limited, but it’s undeniable that telecom carriers haven’t had any voice on overseas strategy in recent years. In contrast to that, Internet companies and equipment providers are having more and more actions, laying a foundation.

Let’s look at Huawei for example. According to a report in 2014, Huawei has set up 16 research centers globally in places that have the best resources, 28 joint innovation centers and over 40 professional centers. Through these research centers, joint innovation centers, and professional centers, as well as the cooperation with hundreds of global partners, Huawei has made its global value chain a global innovation platform. Huawei’s global clients can have access to news innovations around the world through this platform.

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[The article is published and edited with authorization from the author @Xiang Yuanzhi, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.