The Enemy of My Enemy is My Friend - Huawei and 3Com

Leading Chinese communications firm Huawei was eager for a major Western JV partner. US-based 3Com was anxious to reverse its slide in fortune and gain more global market access and other synergetic benefits. But Cisco Systems was threatening Huawei with multiple copyright infringement lawsuits. Professor of Asian Business Steven White and Eugene Yang of Peking University, describe the potentially devastating effect the Cisco actions threatened for both 3Com and Huawei. Should both potential partners postpone the deal, or was the time "now or never"?

by Steven White, Eugene Yang,Sarah Harper
Last Updated: 23 Jul 2013

By 2003, Huawei Technologies of China had grown into a $2.7 billion-a-year global player. Its wide product range, serving fixed, mobile and optical networks and mobile data communications systems, was in use in over 40 countries in Europe, the Americas, Asia and the Middle East. Reclusive CEO Ren Zhengfei had gone from being a minor entrepreneur to one of China's richest men in less than 15 years.

The firm had experienced little trouble in attracting major international partners, particularly for joint ventures. California-based 3Com, until recently a world leader in networking technology, was looking to take advantage of Huawei's strong presence in international markets, as well as its good worldwide reputation and China's far lower production costs. Plans were made in mid-2002 for an initial JV for producing network routers in China, to be sold under license in the US. This hopefully would help reverse 3Com's rapidly declining sales and status as a global presence in the industry, while also boosting Huawei's international profile.

But things took a turn for the worse in January 2004. In addition to suffering from a severe and prolonged industry-wide slump, Huawei was being sued by Cisco Systems, the global market leader and the Chinese company's role model. The American giant was claiming a host of intellectual property violations in a complaint filed in Texas. It pushed for an injunction to have all Huawei products removed from the US market, and, even more worryingly for Ren, threatened to take similar action in other countries where Huawei had far more extensive operations. This clearly threatened both to taint Huawei's global reputation severely, and to derail the proposed JV with 3Com, once Cisco's main worldwide competitor.

Professor of Asian Business Steven White, in collaboration with Eugene Yang of the Management Case Center of Peking University, describe the potentially devastating effect the Cisco actions threatened for both 3Com and Huawei. 3Com CEO Bruce Clafin needed to consider how the intended JV might look in light of Cisco's well-publicised accusations. Would the deal be seen as a struggling US multinational teaming up with an unscrupulous counterfeiter - one from a country with a very sullied reputation for respect for IP copyright law, no less?

Huawei stands as an excellent example of the new challenges facing many multinationals based in developing countries, especially in Asia. Huawei was desperate to be affiliated with a global brand, and coveted 3Com's technological expertise.

But was 3Com really such an appealing prospect? Some of its restructuring decisions had alienated many major clients, particularly in its home market. For 3Com's part, it looked to a partnership with Huawei both for greater access to Asian markets, and as an enterprise solution provider that the American firm could not achieve alone.

The (A) case focuses on the rationales behind the contemplated JV between Huawei and 3Com prior to Cisco's court action. Case (B) centres on the considerations being made by Bruce Clafin, weighing the potential affects of the lawsuit at a critical time for his company against the clear longer term synergic benefits of this and other arrangements with Huawei.

But the Chinese firm was overwhelmingly being judged as guilty in the Western media, even though the case had yet to go to trial. Clafin had very little time to make a decision that could potentially make or break 3Com. Should he agree to the JV as arranged, try to renegotiate the deal, or shelve the entire thing until the Cisco suit was settled one way or another?

Taken together, the cases together can be used as a role-play exercise. What would be the correct course of action for a CEO in these circumstances? How could they best convince other decision-makers of the wisdom of their position?


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