Innovation strategies in mobile technologies

Jul 08, 2018

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Company strategies address a number of aspects such as market, technology, and partnerships. While all strategic decisions are important by definition, a bad decision in just one of these aspects could seal the fate of the company. A quick review of two companies in the mobile communications space -- ZTE and Huawei -- partly illustrates this. While similar in several aspects, partnerships and collaborations appear as a distinctive factor that determines, in part, the path of development of these companies.

We have heard a lot about the Chinese company ZTE lately. ZTE is a large telecommunications and smartphone company (74,000 employees) founded in 1985 and headquartered in Shenzhen, Guangdong. It covers every vertical sector of wireless networks, core networks, access & bearer networks, services and terminals markets. It recently caught the attention of many after an export ban was imposed on technologies the company works with. More specifically, in 2017, ZTE was fined for illegally exporting U.S. technology to Iran and North Korea. More recently, the U.S. government determined that the company was not complying with a settlement initially reached, and further sanctions were imposed.

Originally, ZTE's main business was supplying telecom equipment and network services to global telecomm carriers. Then it entered the growing consumer mobile market. While the company lost to its competitors in China because of a failed marketing model, its partnership with carriers in the U.S. and a "no logo" cell phone product helped ZTE position itself as an attractive alternative for the American consumer [1]. By 2015, it was the only Chinese smartphone maker with a sizable share of the U.S. market. It currently is the number 4 seller of smartphones in this market (coming after Apple, Samsung, and LG Electronics in terms of market share).

Access to U.S. technology also played a role in ZTE's expansion and more recent troubles. As the company continued developing its business in other regions of the world, it exported such technology to other countries. That is how ZTE shipped U.S. technology to Iran's largest telecom carrier, for example, as reported by Reuters back in 2012. This triggered an investigation by the U.S. Department of Commerce that resulted in the aforementioned sanctions. According to Arstechnica the export ban "amounted to a corporate death sentence" because ZTE's smartphone business is heavily dependent on QUALCOMM chips, Google's Android operating system, and other American-made technology. Reuters' estimate is that 25-30 percent of the components used in ZTE's equipment are American technology. Moreover, ZTE's consumer business represents about 30 percent of its revenues.

ZTE has also invested significantly in developing its own technology, becoming one of the most active patentees in this space, globally. But, the most active R&D player in this space is still Huawei, a company that is worth comparing with because of its technological similarity with ZTE.

Founded in 1987 and with 180,000 employees as of 2017, Huawei is one of the largest telecommunications equipment manufacturers in the world. ZTE is China's number 2 telecom equipment maker (that is, including all equipment and not only smartphones) after Huawei. Huawei's core products are wireless, exchange, access, optical transmission, and data telecommunications gear; mobile phones; and telecommunications software. In 2017, Huawei was the number 3 smartphone manufacturer in the world after Apple and Samsung.

ZTE and Huawei share more than their city and country of origin and product market. In particular, the technology footprint and intellectual property portfolio of these two companies is strikingly similar (although Huawei's portfolio of U.S. patents doubles in size ZTE's). They practically fully overlap when considering the top technology categories they work on. Almost half of their patenting activity is on wireless communications technology, followed by mobile communications, and electrical digital data processing (these top 3 categories make up about 75 percent of their portfolios). But like the portfolio of many other big technology companies, ZTE's is very diverse -- about 120 different technology categories on InnovationPulse. Huawei's portfolio is even more diverse with 164 technology categories.

Similarly to other tech corporations, these companies are active patentees as well. But, lately, their R&D efforts seem to be decreasing (if measured by patent outputs). ZTE's patenting activity went from an average of about 100 U.S. patent applications per month in 2012 to less than 20 in 2017. It accumulates almost 2,500 U.S. patent applications since 2012 and a slightly higher number of patent grants. Huawei's, on the other hand, also slowed down significantly by 50 percent when comparing 2012 and 2017 averages. It accumulates more than 4,000 U.S. patent applications since 2012 and more than 6,000 patent grants in the same timespan. It is worth remembering that, particularly in this space, patent counts are not necessarily a measure of good performance. A few basic, standard-setting patents could be more valuable than an intellectual property portfolio that only includes "common" patents.

For the sake of illustration, I handpicked a couple of technology examples. These companies have been working on fifth generation (5G) wireless networks, which present the technical challenge of managing increasing network loads and number of connections (including support for the Internet of Things or IoT). A recent ZTE's patent, for example, involves a method for competitive transmission, where data streams are processed according to a priority attribute, as an approach to solve WLAN networks increasing loads (Patent application US20180176951A1). Huawei has been working on related technologies, but many of its recent patents also relate to protocols, device identification, and methods for encoding and decoding data in 5G wireless networks (if you are interested in the technical details, see for example "A system and method is provided for configuring a plurality of protocol data units -- PDU -- sessions") (Patent application US20180192472A1).

Partnerships and collaborations, in terms of both number and type, are an interesting difference between these companies. In the past 5 years, about 20 organizations collaborated in research and development (R&D) with ZTE. Those are generally Chinese organizations, except for a few American exceptions (Cisco, for example). Much of the co-assignment seen in technology patents results from intra-group relationships, that is, co-patenting between ZTE subsidiaries in the U.S., China and Europe. All but one of ZTE's top-5 co-assignees are subsidiaries. ZTE's number of collaborations increased slightly in the past 12 months (about 8 percent).

Huawei partnership and collaboration networks, on the other hand, also include subsidiaries, but appear more diverse and expand at a much higher rate (about 70 percent more organizations appear as co-patentees of Huawei in the past 12 months, comparing year-over-year). We believe this is the result of the company's open innovation approach. Huawei has partnered with more than twice as many other organizations, including universities (from China and around the world). No American partners are among its top-15 collaborators of the past 7 years. Its top-5 co-assignees in patents include three universities (two Chinese), the German institute Fraunhofer, and China Aviation Optical-Electrical Technology.

As companies in this space generally do, both ZTE and Huawei enter into extensive cross-licensing arrangements to license standard essential patents on fair terms. ZTE, in particular, and despite huge R&D efforts, still pays large amounts in terms of licensing fees and royalties to American companies such as Microsoft, Google and Qualcomm to access their technology (between 2011 and 2014, ZTE paid more than $17 billion in this concept) [1]. Huawei, on the other hand, and according to the data we have access to, might be actually having a surplus in terms of licensing fees with American companies (at least with Apple).

It would be interesting to dig deeper into the history and activities of these two companies, but this brief summary already makes a point. ZTE and Huawei are very similar in their origin, technology and product markets served. They both became large corporations and R&D performers (although Huawei has grown faster). The paths they followed are different though, and a key factor seems to be, in addition to the difference in geographic focus, how they collaborate and partner.

ZTE's extensive cross-licensing arrangements and carrier agreements gave the company an advantage to enter the lucrative and sizable U.S. mobile market yet, at the same time, made it particularly vulnerable to U.S. contextual factors, such as policy issues. Its R&D effort does not seem to have paid results from the point of view of how much this company depends from technology licenses. ZTE was planning to be the first to offer a smartphone connected to next-generation 5G wireless networks, a move that could have positioned the company as a leader in the American market. But this opportunity was lost and now the leader in 5G technology for the U.S. market could be Apple. Huawei, in the meantime, pursued a path centered on the Chinese market, investing significantly in R&D. It does not depend that much on the U.S. market and technology. Both have developed a network of partnerships and collaborators, but Huawei's looks more extended and more diverse, which is possibly the result of an open innovation strategy.

The mobile communications space is a peculiar case. Licensing agreements and partnerships with carriers are key to enter certain geographic markets. But, more generally, and particularly in the case of open innovation strategies, partners and collaborators can become a decisive factor in the life of a company (something like "Tell me who you hang out with and I'll tell you who you are your future").

This short report is not meant to be an exhaustive analysis of these two companies. Its purpose is to illustrate how hard data can help better understand the strategies of companies. Data-driven insights, such as those produced by our solution, InnovationPulse, can be very useful for strategic planning and learning lessons from other companies. Using this kind of tool, research analysts can help managers tease out what factors make companies more or less successful so that decisions do not just rely on intuition and commentary.

References

[1] Ma, W. (2016). China's mobile economy: opportunities in the largest and fastest information consumption boom. John Wiley & Sons.


How to cite

InnovationPulse (Jul 08, 2018). Innovation strategies in mobile technologies. Retrieved from https://www.innovationpulse.com/blog/5/innovation_strategies_in_mobile_technologies/

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