Built on Value

Front matter

Se @© Open Access Built on Value

The Huawei Philosophy of Finance Management

Weiwei Huang

Part I Expansion and Control Ld

1.2

Pursuing Sustainable and Profitable Growth

1.1.1 Seeking to Survive as a Legal Entity Beyond Life-Span Constraints of Natural Persons

1.1.2 Huawei Only Exists to Serve Its Customers

1.1.3 Inspiring Passion Across the Company Through Steady Growth

1.1.4 Being an Industry Leader and Leading Industry Development

The Meaning of Sustainable and Profitable Growth

1.2.1 Pursuing Profitable Growth, Healthy Cash Flow, and Light-Asset Operations

1.2.2 Continuously Improving Huawei’s Core Competencies

1.2.3 Building a Healthy and Friendly Business Ecosystem

1.2.44 Pursuing Huawei’s Long-Term Value

1.2.5 Sharing Gains Based on the Capital and Labor Invested

1.2.6 Passing Market Pressure Down Through Each Layer of the Company to Make Sure Our Internal Response System Remains Active xxii CONTENTS

2.2

2.4

Continuing to Invest Boldly to Seize Strategic

Opportunities

2.1.1 Seizing Strategic Opportunities Ensures Success While Missing Them Leads to Failure

2.1.2 Increasing Future-Oriented Investment When the Market Is Experiencing a Cyclical Downturn

2.1.3 Avoiding Opportunism and Having Strategic Patience in an Era of Big Opportunities

Working Together Towards the Same Goal and Deciding

What Not to Do in Order to Do Something Great

2.2.1 Concentrating High-Quality Resources on Core Business and Strategic Opportunities to Establish and Reinforce Strengths

2.2.2 Narrowing Strategic Focus to Become an Industry Leader

2.2.35 Maintaining a Narrow Focus to Make Breakthroughs

2.2.4 Never Wasting Strategic Resources on Non-strategic Opportunities

Innovating to Create Greater Value for Customers and the

Company

2.3.1 Placing More Emphasis on Value Creation Than on Cost Savings

2.3.2 Changing the R&D Spending Structure and Increasing the Proportion of Investment in Research and Innovation

2.3.3 Ensuring Sufficient Customer-Facing Budgets

Digging In and Widening Out

2.41 “Digging In”: Ensuring Investments in Improving Core Competencies and Preparing for the Future

2.4.2 Constantly Tapping into Internal Potential and

Lowering Operating Costs to Provide Higher Value

Services to Customers

2.4.3 Sharing More Value with Customers and Treating Upstream Suppliers Generously

2.4.4 Never Pursuing Low Prices, Low Costs, or Low Quality

2.5 Openness, Competition, and Collaboration

2.4.1 2.52

Nothing Can Stop Us If We Remain Open Competition in the Future Will Be Between Supply Chains

Value Sharing Is Vital to a Robust Business Ecosystem

2.6 Becoming a Truly Global Company

2.0.1 2.6.2 2.6.3

2.6.4

Building a Global Business Ecosystem to Keep Growing

Leveraging Relative Advantages in Global Competition

Locating Strategic COEs in Places Rich with Strategic Resources

Attracting Global Talent and Building a Global Management Structure

3 Remaining Flexible to Seize Opportunities Amidst Uncertainties 3.1 Maintaining Flexibility When Investing in Projects of Uncertainty

Bold

3.1.2

TE]

Never Putting All Eggs in One Basket When Making Strategic Decisions

Large Investment Along Multiple Paths in Multiple Waves

Absorbing the Energy of the Universe over a Cup of Coffee

3.2 Technological Innovation Without Boundaries Can Take Company Strategy in the Wrong Direction

CE

Product Innovation Must Focus on the Core Business and Must Always Be Driven by Business Needs

Research and Innovation on Uncertainties Must also Have Boundaries and Serve the Core Business

3.3 Identifying and Creating Certainty Out of Uncertainty

Bal

The Role of a Leader: Setting a Clear Direction Amidst Uncertainties

96 98 xxiv CONTENTS

3.3.2 In Field Offices Are Highly Competent Lean Teams Dealing With Uncertainties; In Back Offices Are Functional Departments and Shared Services Centers Dealing with Certainties

3.4 Success Is Not a Reliable Guide to Future Development

3.4.1 The Only Thing that Is Constant Is Change

3.4.2 We Are the Only Ones Who Can Defeat Ourselves

3.4.3 The Best Defense Is a Good Offense; Moving beyond Existing Advantages to Create New Ones

4 Enhancing Core Competencies through Strategic Mergers and Acquisitions and Corporate Venture Capital Investment 4.1 Bridging Gaps in Core Competencies Through Strategic

Mergers and Acquisitions

4.1.1 Capital Investment Should Serve the Strategic Purpose and Help Huawei Acquire Key Technologies and Capabilities

4.1.2 Focusing CVC Investments on Developing Cutting-Edge Technologies, Preventing Technological Risks, and Supporting Development Strategies in Our Core Business

4.1.3. The Purpose of Acquisitions Is to Make Up for Weaknesses in Our Core Business Rather Than Diversifying Our Business

4.2 Principles for External Investments and MAs

4.2.1 Never Making Principal Investments Aimed Solely at Achieving Financial Returns

4.2.2 Strengthening Post-Investment Management to Ensure Investment Goals Are Achieved

4.2.3 No Support for Employees Starting a Business: No Investing or Engaging in Such Activities

5 Strengthening Risk Control and Compliance Management 5.1 Controlling Risks During Expansion: The Purpose of Control Is to Ensure Sustainable and Profitable Growth

Sa

5.5

5.6

5.1.1 Can Huawei Keep Its Balance in an Unbalanced

World? How Can It Do So?

5.1.2 Do Not Focus Exclusively on Opportunities Without

Considering Risks

5.1.3 Pursuing Sustainable and Profitable Growth and

Curbing Blind Expansion

5.1.4 Balancing Expansion and Control A Multi-faceted System for Controlling Financial Risks at

Huawei

5.2.1 The “Four Threes” System for Risk Control

5.2.2 Two Perspectives of

‘inancial Risk Control

5.2.3. Three Financial Risk Control Centers

Financial Risk Prevention and Control

5.3.1 We Need to Have Contingency Plans to Deal with Financial Crises, But the Key Is Improving

Contract Quality

5.3.2 Taking Diversified Approaches to Financing and

Settlement

5.3.3. Do Not Stop Progressing Because of Risks or Ignore

Risks in Order to Progress Business Continuity Management

5.4.1 Huawei’s Primary Obligation: Maintaining

Stable Network O;

erations

5.4.2 Building Strategic Reserves to Prevent Supply Risks

5.4.3 Avoiding the Inclusion of Countries and Regions Affected by War, Civil Unrest, or Epidemics into Emergency-Triggered Management Cycles

Using the Certainty of Legal Compliance to Deal with the

Uncertainty of International Politics 5.5.1 Legal ¢ mpliance Is the Most Important Basis on

Which We Survive, Provide Services, and

Contribute Worldwide

5.5.2 Focusing on Protecting User Privacy in the Same

Way We Have Done in C ber Security

Compliance Management and Subsidiary Boards’

Oversight Responsibilities 5.6.1 Strengthening Compliance Mı Harvest More Crops anageme nt to

XXV xxvi CONTENTS

Subsidiary Boards: Performing Integrated Oversight in the Field on Behalf of the Company

Without Interfering in Business Operations

6 Finding the Right Amount of Openness, Compromise, and Huidu, and Properly Balancing Expansion and

Control

6.1 Opportunity-Driven Versus Resource-Driven

6.1.2

6.14

6.1.5

More Emphasis on Opportunity-Driven Resource Allocation

Channeling High-Quality Resources to Valued Customers, Valued Countries, and Mainstream Products

Managing Investment Portfolios and the Pace of Investment Based on Corporate Strategy, Investment Capacity, and Business Opportunities Keeping the Costs of Resources in Mind and Acquiring Resources to Achieve Growth Goals Guiding Resource Allocation with Differentiated Value Assessments

6.2 Growth Versus Profits

Focusing on Long-Term Strategic Development to Turn Today’s Cash into Tomorrow’s Profits Focusing on Both Opportunity-Driven Scaled Growth and Profit-Driven Sustainable Growth Company Operations: A Dissipative Structure Pursuing Rapid Growth on the Basis of a Reasonable Profit Margin

6.3 Long-Term Versus Short-Term Interests

6.3.1 6.3.2

Short-Term Interests Ensure Survival Striking a Balance Between Long-Term and Short-Term Interests

6.4 Centralization Versus Decentralization

642 643

Development: Staying Focused, Involving Little Uncertainty, and Supporting Business Success Research and Explore Across a Wide Scope Narrowing Our Strategic Focus and Setting Ourselves Apart from Competitors in Our Core Business

141 142

142 144

146 148

149 151

151 153

154 159 155 156 158

15 160

6.5 Opportunities Versus Risks

6.5.1

Managing Both Opportunities and Risks, with More Attention Paid to Risks

Inaction Has No Risk, But Will Leave Us Behind Promoting Sales Growth While Effectively Managing Risks

6.6 Creating Order Out of Chaos Versus Creating Chaos Out of Order

6.6.1

6.6.2

Purpose of Fine-Grained Management: Preventing Chaos During Business Expansion Striking and Disrupting a Balance

Part II Value Management

7 Guidelines for Value Management 7.1 Huawei’s Most Valuable Asset: An Enduring Management System

Zid

T2

Management Is Key to Ending Reliance on Talent, Technology, and Capital, and Enabling the Company to Evolve from the Realm of Necessity to the Realm of Freedom

Goal of Transformation: To Harvest More Crops and Increase Soil Fertility

7.2 Business Plays a Leading Role and Accounting Plays an Oversight Role ad

723 7.24

PAG

When We Say That “Business Plays a Leading Role and Accounting Plays an Oversight Role”, We Mean That We Do Not Focus Solely on Financial Returns on Investment

Accurately Recognizing Revenue, Accelerating Cash Inflows, Ensuring Visibility of Project Profits and Losses, and Managing Business Risks

How Can Financial Personnel Effectively Serve

and Oversee Business If They Do Not Understand It? Oversight Means Firm Commitment to Process Management

Everything We Do Must Support Field Operations, Serve Business, and Contribute to Business Success xxvii 165

165 166

167 169 169 171

Aye

178 180

184 188 189 xxviii CONTENTS fa

Using the Certainty of Rules to Deal with the Uncertainty

of Results

7.3.1 Setting Rules to Prevent Chaos

7.3.2 Using the Certainty of Rules to Deal with the Uncertainty of Results for Major Processes, Allowing Flexibility at the Endpoints

7.3.3 Using the Certainty of Rules to Deal with the Uncertainty of Execution

Effectively Conducting Oversight While Further

Delegating Authority to the Field

7.4.1 Centralized Authority Over Treasury, Accounting, and Auditing Management

7.42 Delegating Command Authority to the Field and Giving Field Commanders the Final Decision- Making Authority

7.4.3 Moving Oversight to the Field While Delegating Authority to the Field

7.4.4 Oversight Is the Means to Our End Goal: Business Success

Streamlining Our Organizations and Processes to Create

Value for Customers

ty Is Key: Standardizing and

Streamlining Routine Management

7.5.2 Any Department or Process That Doesn*t Create Value for Customers Is Redundant

8 Financial Management Throughout End-to-End Business Processes

8.1

Financial Management Throughout the OTC Process 8.1.1 KCPs Throughout the OTC Process

8.1.2 Controlling Contract Quality at the Very

Beginning

8.1.3 Integrating Payment Collection, Revenue

Recognition, and Project Budgeting and Accounting Based on Customer Contracts/POs

8.1.4 Setting Up a Contract Support Office That Offers One-Stop-Shop Services to Support Contract Fulfillment

192 192 193 194 195

8.2 Financial Management Throughout the IPD Process 8.2.1 The Essence of IPD: From Opportunity to Commercial Success 8.2.2 Key Control Points Throughout the IPD Process 8.2.3 Industry Business Plans and Product Investment Portfolio Management 8.2.4 Integrating IPD and Other Business Processes 8.3 Financial Management Throughout the PTP Process 8.3.1 KCPs Throughout the PTP Process 8.3.2 Integrating Procurement and Financial Processes 8.3.3 Automation and Payment Security of the PTP Process

Project Financial Management 9.1 Shifting from Being Function-Centered to Being Project- Centered 9.1.1 Projects Are the Basic Units and Cells of Business Management 9.1.2 Establishing a Corporate-Level Project-Centered Management System 9.1.3 Back Offices Need to Collaborate to Provide Timely and Accurate Support for Field Operations 9.2 Key Activities for Project Financial Management 9.2.1 Closed Loop Operations: Project Estimation, Budgeting, Accounting, and Final Accounting 9.2.2 Building an Awareness of Project Operations and a Project Operations Management Mechanism 9.2.3 Integrating Pre-sales and Post-sales Activities 9.2.4 Closed-Loop Management of Project Risks and Assumptions 9.3 Matching Project Managers and Project Management Teams’ Authority with Their Responsibilities 9.3.1 Matching Project Managers’ Authority with Their Responsibilities 9.3.2 Further Developing Project Management Teams and Inspiring Passion Across Field Operating Units 9.4 Project Appraisals and Incentives

XXiX

247 248 248 250

253 254

261 263

269 270

Xxx CONTENTS

9.4.1 Adopting an Appraisal and Incentivization Mechanism Based on Final Project Results

9.4.2 Exploring Project Bonuses and Implementing the Contribute and Share System

10 Optimizing the Management Control System for Responsibility Centers

10.1

10.2

10.3

Every Operating Mechanism Is Ultimately Value-Driven

10.1.1 Making Accounting Granularity Small as Needed

10.1.2 Using the Value Distribution System to Drive Business Units to Operate on Their Own, Responsible for Profits and Losses, and Incentives and Constraints

10.1.3 Leveraging the Value Sharing Mechanism and Strategic Investment to Reinforce Our Culture of “Toasting Those Who Succeed and Offering a Helping Hand to Those Who Fail”

Methods for Managing Responsibility Centers

10.2.1 We Establish Responsibility Centers to Define Responsibilities, Streamline Management, and Motivate the Workforce

10.2.2 Incorporating Checks and Balances into Responsibility Center Management

10.2.3 Responsibility Centers Must Adopt Different Approaches to Manage Certainties and Uncertainties

Operating Mechanisms for Profit Centers

10.3.1 Focusing on Business Operations, Making Decisions Independently, and Never Rigidly Setting Job Grades Based on Scale and Levels

10.3.2 Positioning HQ as a Resource Pool and Adopting a Resource Buy & Sell Mechanism

10.3.3 Authority Delegation and Responsibility for Profit Centers

Ii

275 276

11 Developing a sa Planning, Budgeting, and ngs

Aligning hates Budgeting, and Accounting with

Strategy and Business Operations

11.1.1 The Primary Purpose of Budget Management: Pushing the Company Forward Rather Than Only Determining What Can Be Done with the Resources Available

11.1.2 Establishing a Planning, Budgeting, and Accounting System to Support Business Success

11.1.3 Linking Budgets to Contributions and Strategies

11.1.4 Shifting the Focus of Business Management from BPs to SPs

11.1.5 Establishing a Budget Allocation Mechanism Based on the “SP—Project—Budget” Logic

Preparing Plans and Budgets from the Bottom Up

11.2.1 Projects and Customers: The Focus of Planning, Budgeting, and Accounting

11.2.2 Proper Planning: Integrated Operating Plans Are the Foundation of Effective ago jii

11.2.3 Making Business Forecasts

11.2.4 Continuously Optimizing Expense Davies Reducing Operating Costs, and Improving Management to Increase Efficiency

Implementing Flexible Budgeting to Adapt to

Opportunities and Changes

11.3.1 Reasonableness Analysis of Detailed Business Department Budgets and Strict Control of Functional Department Budget Caps

11.3.2 Preparing Flexible Budgets to Allow Field Teams to Obtain More Resources After Their Business Grows

11.3.3 Strictly Implementing a Process for Granting and Increasing Budgets

Accounting: An Important Indicator of Management

Improvement

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322 324 xxxii CONTENTS

11.4.1 Overseeing the Exercise of the Delegated Authority Through Accounting to Ensure Field Teams Have Command Authority

11.42 Improving Management Through Scientific Accounting

12.1

12.3

Keeping Accounting Independent from the Top Down

and Letting It Serve as a “Dam”

12.1.1 Roles of Accounting: Service and Oversight, with the Latter Being More Important

12.1.2 Oversight by Accounting: Comprehensive Oversight Throughout All Processes

12.1.3 “Accounting Plays an Oversight Role”: Incorporating Service and Oversight into End-to-End Processes; Exercising Oversight While Providing Services

Accounting Must Get Deeply Involved in Business

Operations and Implement Integrated Financial

Management While Serving Business

12.2.1 Accounting Must Be Proactive While Serving Business

12.2.2 Accounting Must Get Close to Business and Establish a Multi-level Shared Service Model Based on Business Scenarios

Payment Management

12.3.1 Basing Performance Appraisals of Payment Personnel on the Quality of Their Work and Maintaining Appropriate Redundancy in the Headcount

12.3.2 Establishing a Mechanism to Ensure Daily Reconciliation at Three Organizational Levels

12.3.3 Having a Correct Understanding of Error Rates

Complying with Accounting Ethics and Rules

12.4.1 Being Bold and Able to Stick to Principles

12.42 Complementing Institutional Oversight with Ethical Constraints

329 330 330

335 335

337 339

340 342 342 342

CONTENTS xxxiii

13 Treasury Management 347 13.1 Exploring a Capital Structure for the Company’s Long-Term Development 348 13.1.1 Growing from Within Is the Core and Major Driving Force Behind Huawei’s Future Development 348 13.1.2 Improving Working Capital Efficiency and Quality to Ensure the Continuity and Robustness of Operating Cash Flow 350 13.2 Building a Global Treasury Management System to Better Manage Fund Risks 355 13.2.1 Scaling Up Financing, Enriching the Financing Structure, and Dispersing Financing Risks 355 13.2.2 Establishing Diversified Financing Systems and Cash Settlement Centers 356 13.2.3 Guaranteeing Financing Capabilities with Stable Financial Policies 357 13.3 Centrally Managing Funds to Ensure Fund Security 357 13.3.1 Centrally Managing Funds and Enhancing the Process Ownership System 357 13.3.2 Standardizing Account Management and Establishing a Unified Treasury Management System 359 13.3.3 The Ability to Deal with Strict Foreign Exchange Controls Helps to Guarantee the Company’s Fund Security. It Is Also a Core Competency That Helps Affected Regions Maintain Their Competitive Advantages and Robust Business Performance 361

14 Tax Management 363 14.1 Paying Taxes Is a Corporate Social Responsibility 364 14.1.1 A Company’s Biggest Contribution to Society Is to Pay Taxes and Do Its Work the Best It Can 364 14.1.2 Abiding by Applicable Tax Laws in All Business Activities 364 14.1.3 Performing Intercompany Transactions in a Standard and Effective Way Based on External Laws and Industry Practices 366

XXXiV

14.2

14.1.4 Establishing a Long-Term Transformation and Operation Management Mechanism to Ensure Taxes Are Paid According to Law

14.1.5 Creating a Positive Business Environment to Support Huawei’s Global Operations

Proactively, Effectively, and Appropriately Managing

Tax Risks and Costs

14.2.1 Clarifying Goals and Responsibilities of Tax Risk Management

14.2.2 Effectively Developing Global Tax Plans and Keeping the Company’s Taxes at a Reasonable Level

15.3

15.2

15.2

The Company’s Oversight System: The Governance

Structure and Three Lines of Defense

15.1.1 The Oversight System: Governance Structure

15.1.2 Internal Controls: Three Lines of Defense

Process Controls

15.2.1 Oversight Aims to Prevent Corruption, Improve Operations, and Establish Deterrence

15.2.2 “Wearing American Shoes” and Starting from Scratch to Build Huawei’s Internal Control System

15.2.3 Internal Control Management: Objectives and the Framework

15.2.4 Implementing the Process Ownership System

15.2.5 Internal Control Ownership System

Internal Controls Over Financial Reporting (ICFR)

15.3.1 Building Sustainable and Profitable Growth with High-Quality Process Controls and ICFR

15.3.2 ICER Is a Means, and Consistency of Business and Accounts Is an End

15.3.3 ICFR: Starting by Managing the Quality of Business Data to Ensure the Quality of Financial Reports

15.3.4 ICER Management Should Shift Its Focus from Moving Targets to Fixed Targets

374 374 375 378

381 383 385 387 391 391

15.3.5 Finance: Building an Effective Internal Control

System; Business Departments: Rigorously

Fulfilling Their Internal Control Responsibilities 15.3.6 ICFR Is Designed to Continuously Improve the Quality of Financial Reports, Not Merely to

Hold People Accountable Internal Audits and Investigations

15.4.1 Establishing Deterrence Through Internal Audits 15.42 Strengthening Legal Deterrence and Tightening

Accountability Criteria Every Year

15.4.3 Separating Investigations from Disciplinary

Actions

15.4.4 Oversight Is the Best Way to Care for and Protect

Our Managers

15.4.5 Audit: Assuming Innocence Until Proven Guilty and Taking Appropriate Disciplinary Actions

Against Mistakes at Work

16.1

16.2

16.3

Data Is a Strategic Resource

16.1.1 Managing Data in the Same Way as Managing

Capital

16.1.2 Fully Leveraging Data Resources to Create New

Competitive Advantages Data Cleaning Is the Most Effective Approach for Internal Controls 16.2.1 Ensuring Data Quality from the Source

16.2.2 Whoever Creates Data Must Be Responsible for

Data Quality

Making Routine Financial Management Automated and Intelligent, and Leveraging Big Data Analytics to

Improve Financial Management

16.3.1 The Basis of Scientific Management: Rational

Analyses Based on Data and Facts

16.3.2 Establishing a Future-Proof Data Governance

System

16.3.3 Leveraging Automation, AI, and Big Data

Analytics to Reduce the Complexity and Uncertainty of Financial Management

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399 400 400 403 404

417 418

418 419

421 421

424 424

XXxvi CONTENTS

17 Making Financial Management Process-Based and

Professional

17.1 Financial Personnel Should Understand Business and Business Personnel Should Understand Finance

47.3

Epilogue

TER,

Irda

Financial Personnel Can Help Business Grow Only by Understanding Business

Managers Are Also About Managing Finance Financial Personnel Can Become Well-Rounded

Managers Only by Knowing How to Manage

Projects Developing a Mixed Financial Team

Building a Process-Based, Professional Financial Management System

Irad

17.2.2

Reducing Costs Through Process-Based and Professional Financial Management Building a Professional Financial Team That Has Solid Integrity, Dares to Shoulder Responsibilities, and Sticks to Principles

Progress in Finance Is the Basis for All Management Advances izad

17.3.2

Financial Transformation Is Not Limited to the Finance System, But a Company-Wide Effort There Will Not Always Be Flowers Along the Road Ahead

PART I

Expansion and Control

To achieve sustainable and profitable growth, we need to consider financial indicators in the short term; in the medium term, we need to look at capability improvement; in the long term, we need to focus on the industry landscape, the health of the business ecosystem, and the sustainability of the industry. Business success will always be an issue of concern throughout our company’s lifecycle. Management is about weighing the present against the future, balancing the short term and the long term. — Ren Zhengfei