Huali Networks: Going its Own Way to Innovation

By Tommy Zhang, China IP,[Comprehensive Reports]

  Innovation has been a rather modern jargon nowadays, and is a concern to everyone and every enterprise. What is innovation? How does one innovate? For the medium and small-sized enterprises in China, how can they maintain sustainable development through innovation? These are the questions frequently asked by enterprisers. Actually, there are no set rules for innovation and the answer varies by enterprise. The key lies in whether it is in tally with the characteristics of a company’s specific enterprise and will promote its long-term development. Jiangsu Huali Networks Engineering Co., Ltd. (Huali Networks for short) shares with us its own innovation story.
  Huali Networks’s 13 years of development involves 13 years of innovation. Ding Xiangen, Founder and General Manager of the company, told this journalist about its innovation philosophy: “To innovate is to optimize every detail. We make innovations in R&D, management and corporate culture, and play the ‘combination blow’ to respond to the tough market competition.” More specifically, Huali Networks’s innovation actions are detailed in the following aspects:
A path of changes led by creative minds
  In 1993 when Mr.Ding was working in a state-owned shipyard, he was enlightened by Deng Xiaoping’s southern tour speech and decided to plunge into the commercial sea. He did not blindly follow trade or real estate development and such prevailing “commercial voyages” at that time, but took advantage of his knowledge and working experience and chose computer skill training to play to his strengths. In the following years, Mr. Ding monitored the ongoing trends of network development and devoted himself to network technique study and research. In 1997, he set up Jiangsu Huali Networks Engineering Co., Ltd.
  Mr. Ding briefed the history of Huali Networks,“I was working on network engineering at the beginning, and started doing network equipment in 2002; thinking about to combine the router, firewall and exchange into one component. I submitted this idea to R&D that year, and we worked out the first prototype in 2006, which received authoritative acclaim. From there our business blossomed and formed an industrial bridge from network engineering to network equipment. In 2008, we entered the networking chip area. Now, we have become a network engineering group diversified in network engineering, system integration, network equipments and networking chips.”
  From the foundational network engineering to the middle-end synthesis network equipment, then to the cutting-edge 10Gb networking chip, Huali Networks maintains its steady development  by exactly following Mr. Ding’s strategic goal of, “flooding the entire network with Huali’s technology.”
       “Next, we will have our company listed on the GEM to attract more capital and talents, and to achieve our far higher goal – to beat Silicon Valley enterprises in chip technologies in ten years,” said Mr. Ding.
The “convergent mode” accomplished by using integral network equipment
The history of Huali Networks is a history of innovation. Innovation has penetrated into every aspect of the company’s business operation and R&D product.  
“To connect all the computers of a company to the Internet, you have to do a lot of work: connecting network cables, installing firewalls, and buying routers and exchanges (especially the multilayered exchanges)… This is a time and money consuming process. For a set of network equipment capable of 1Gb, a firewall costs more than 70,000 Yuan, a router more than 50,000 Yuan, and a multilayered exchange more than 30,000 Yuan. That is at least 150,000 Yuan you must pay. Then we asked ourselves: Can we replace the three pieces of equipment with one that serves the same functions at a lower price?”
The answer is yes. Mr. Ding and his R&D team developed “EWONT” convergent network equipment, which converges the functions of a 1Gb firewall, 1Gb router and 1Gb multilayered exchange into one piece of equipment, and considerably lowers the price. This technology opened up a new epoch for convergent network hardware devices. Based on this technology, Huali Networks developed many new network devices and earned a good fortune, which in return made the company financially and technologically prepared for the coming innovations and development.
The new high of innovation realized by 10Gb networking chips
Chip technology has been a tender spot for Chinese enterprises for a long time, allowing the market to be dominated by foreign enterprises in either VCD chip or PC chip or networking chip fabrication. To this end, Huali Networks is devoted to developing China’s own networking chips and breaking the American monopoly. Mr. Ding is clearly aware of the importance of chip technology: “Chips are the core of electronic and IT equipment. A nation without leading chip technologies is a backward nation and in bondage to those with advanced chip technologies. If we master this core technology, we will acquire pricing power and the market leadership. Therefore, we have spent a lot of time and money on chip innovation. With no example to follow, we totally rely on ourselves. Chip development consumes a lot of time, money and energy. If the design fails, all the investment will disappear.”   
“We have spent more than 10 million Yuan recruiting high-tech intellectual talents. Now we have three Chinese Americans whose annual pay reaches 1 million Yuan, and will soon have one more in this rank. Next month, we will go to the Britain to look for talents, and plan to increase the number of 1 million Yuan annual pay owners to 6-10 by the end of this year.”  
“Now our chips are under fabrication testing. We believe that networking chips with our independent designs will soon come to the market!” Every time they are talking about the coming success of their “10Gb chip,” Mr. Ding and his team are filled with pride and confidence.
The innovated management system based on “humanism”
For high-tech enterprises, talents are always considered the cornerstone of survival and development. Speaking of talent management, Mr. Ding states his philosophy and practices as follows: “According to Maslow’s theory, humans have five hierarchies of needs: physiological, safety, love/belonging, esteem and self-actualization. Practically speaking, people have needs, and needs invite pressures, which jump exponentially with the rise of hierarchies. For us employers, we expect our employees to attain the highest hierarchy of needs, i.e. the self-actualization, or self-esteem.”
Based on this “humanism,” Huali Networks established the corporate culture themed by “Confucianism, Diligence, Quality and Humanism.” Confucianism is reflected by integrity, generosity and law-abidingness. Diligence requires all the staff to be job-devoted and diligent. Quality is realized by constant innovation. Humanism is the respect for individual. In Ding’s view, as long as you are hard-working, generous and understanding, you will get people’s understanding and trust. “The IT sector is synonymous with sophisticated knowledge and advanced technology. Many customers, due to their limited knowledge of this area, don’t trust us or the products they intend to buy. If we treat them with sincerity, considerate service and intimate understanding, we will alleviate their worries. This is applicable for both doing business and making friends,” Mr. Ding explained.   
In Mr. Ding’s view, employees are the source of power for a company’s innovation and development. To attain long-term development, the company must fully mobilize its staff’s enthusiasm, initiative and innovation behaviors. The best way to associate an enterprise with its staff is to implement the, “Employee Stock Ownership Plan” (ESOP). In Huali Networks, however, many core technical specialists are foreigners, who are excluded from direct stock ownership according to the current rule of law. Therefore, Huali Networks initiated another plan: the “ESOP” employee option incentive mechanism. The major shareholders of Huali Networks invested and set up Mstar Internet of Things Research Institute Limited (Mstar Internet of Things), acting as the general partners/acting partners (usually referred to as “GPs”) of the company and assuming unlimited liabilities. The Mstar Internet of Things recruits employees (including foreign employees) of Huali Networks who have outstanding contributions as its limited partners (LPs) with limited liabilities. Mstar Internet of Things is structured through this GP/LP arrangement. Through stock transfer, Mstar Internet of Things obtains the stock/option of Huali Networks, and then the GPs transfer their stocks to LPs based on the contributions. Changes in the LPs’ stock ownership in Mstar Internet of Things indirectly lead to changes in their stock holdings in Huali Networks. This is how Huali Networks’s employee option incentive mechanism works. Additionally, Mstar Internet of Things is a Sino-foreign invested limited partnership. GPs and LPs of the partnership need not pay business income tax or other taxes. They only need to pay personal tax. Therefore, this mechanism is the best solution for Huali Networks’s incentive mechanism. 
The long-term development propelled by intellectual properties
Mr. Ding’s understanding of intellectual property is far beyond this journalist’s expectation. He said, “We attach great importance to R&D and innovation, and have put in enormous time and effort. Intellectual property is also a great concern for us. We try our best to protect it. Up to now, we have filed 34 patent applications, including 12 invention patents, 12 software copyrights and two registered marks.” As to the impetus role of patent and other intellectual properties upon technological development, Ding has his unique perspective: “If I made an invention and I wanted to know if there were similar inventions, I would check patent documents. Then if I found several similar inventions, say 50% in similarities, and saw ‘bugs’ in them, I would use them as a reference to modify and improve my own invention. This is a progress of technology.”  
“Intellectual properties, such as patents, are more like a glorious title for an enterprise than a tool for lawsuits. They are also a weapon for restricting and intimidating competitors.” Ding’s perception of intellectual property greatly surprised this journalist. But on reflection, he saw the reason. This is about the commercial application of intellectual property in business operation, and such a commercial role is usually ignored by other enterprises in China. Possibly, this is the cornerstone for Huali Networks’s sustainable innovation and development.
Huali Networks has a recurring new product development conference it calls, “brain storm.” Out of respect for innovation, Huali Networks encourages its staff to learn new technologies, encourages technicians to attend new product release conferences, and gives financial support to buy learning materials and experimental apparatus. Any good idea of the technicians will get the support of the company. About the IP encouragement system of Huali Networks, Mr. Ding said: “We have our unique practices to encourage and manage intellectual properties. For applied patents, we return all the rewards from the government to the invention team. For granted patents, we will give the team extra rewards. If the patented product yields a good profit, there will be additional project rewards.”   
Generally speaking, innovation-prone people, the consciousness of innovation and the innovation mechanism are the essential elements for a company’s development. Meanwhile, IP commercialization and the management of innovation achievements are also important to maintain and maximize a company’s rights and interests. More importantly, innovation should not be directionless, but must have specific targets and follow particular steps in combination with the company’s strengths and development. Huali Networks follows these rules and succeeds.      
The innovation road of Huali Networks is on-going. No matter whether it will finally beat American chips, it sets a good example for other medium and small enterprises in understanding and practicing innovation.
Innovation remains an eternal topic at any time. But in what ways can innovation actualize the sustainable development of an enterprise? Maybe you, or your company, will give us the answer by telling your innovation stories.

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