Risk Management in a Technology Company: Huawei

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Table of Contents

Introduction
Occurrence of Risk in Relation to Economic and Legal Implications
Risk Management Plan
Summary
Reference Lists

Introduction

The article explores the potential risks facing Huawei in its operations. It also presents detailed recommendations on preventive and corrective measures against the risks. Huawei is a Chinese technology company that researches and develops telecommunication equipment, consumer electronics and provides cloud services worldwide(Jiacheng et al., 2020, p. 36). In recent years, the company has found itself caught up in the US-China trade war and blame games, affecting its global growth and business ventures. The article explores the potential risks facing Huawei in its operations. It also presents detailed recommendations on preventive and corrective measures against the risks. Lastly, a guideline is presented on recording keeping and reviewing frequencies for the risks.

Occurrence of Risk in Relation to Economic and Legal Implications

Definition of Risk

Risk is the likelihood of an organization or business not meeting its projected outcome due to the probable impacts of the incidents(Amankwah-Amoah and Wang, 2019). The potential impacts of risk depend on its probability of occurring. The corporate sector is heavily intertwined, which means companies depend on one another to achieve their business goals (Oxford Analytica, 2020). Risks are associated with internal and external factors, which might be unpredictable on most occasions (Kavussanos et al., 2021, p. 30).

Difference Between Risk and Uncertainty

Risk is a subset of uncertainty, but risk and uncertainty are not the same (Diaz-Barriga-Fernandez et al., 2018, p. 433). Risk is quantifiable since probabilities can be associated with possible outcomes and the impact of the outcomes that can be measured (Bonciani and Ricc, 2018). This is not the case for uncertainty, as companies do not know the probabilities associated with the outcomes and do not know the impact of these outcomes (van Staveren, 2021, p. 65). The risks involve situations such as loss of revenue, legal implications, or total closure of the business (Bonciani and Ricc, 2018).

Uncertainty is built on potentially unpredictable risks, which make it for the business or organizations to estimate their performance in a specified period (van Staveren, 2021, p. 70). It is common with both startups and well-established businesses such as Huawei. An unpredictable change of events, usually associated with risks, complicates the company planning and investment patterns (do Vale and de Carvalho, 2017, p. 93). Uncertainties build up around the economic landscape and have the potential to kill and create opportunities in different sectors of the economy (Meder et al., 2019, p. 95; Brown, 2020).

Origins and the Nature of Risk

The French first conceptualized the term risk and came up with the word “risque” which meant “shock.” The English perceive the word differently and associate it with danger, damage, and loss (Polinkevych et al., 2021, p. 99). The nature of risk has been well illustrated by Pascal after he had introduced the famous Pascal’s Wager. Based on Pascal’s argument, there is a need to believe in God because it offers a positive expected value that laid the foundation for modern risk management since the nature of risk is well illustrated. In modern times, Hopkin (2017) identified four main types of risk:

Compliance risk.
Hazard risk.
Control risk
Opportunity risk.

Business and Societal Setting

Huawei is a technology company based in Shenzhen on the Chinese central coast. It was established as a telecommunication equipment manufacturer but grew to venture into smartphones and computers. As of 2020, the company had 190,000 employees worldwide, with over 60,000 working at the company headquarters (Gavurova et al., 2019). The company targets telecommunication companies, government agencies, individual customers, and cloud services (Feng and Li, 2020, p. 39).

China is the most populous nation in the world, with over 1.4 billion people as of 2020 (Hall and Ren, 2020, p. 309). The company dominates in providing telecommunication equipment, both in China and around the world, reducing chances of competition in the domain. The company spends a large fraction of its revenue in research and development, a move that has seen the company thrive in the fifth-generation network technology.

Identification of Risks in the Context of Economic and Legal Implications

Compliance Risks

Huawei may face compliance risks because of its monopoly on the market. Chinese law prohibits industry monopolies, and Huawei faces huge fines if it does not comply with the law. Huawei will face a fine of RMB26.7 billion (Hall and Ren, 2020, p. 309; Inkster, 2019,p. 196). The impact of this risk is significant, but the probability of it occurring is very small for a large listed company like Huawei, at around 0.1%.

Expected value = -26.7 x 0.1% = RMB – 0.267 billion

Huawei may face compliance risks due to tax evasion. Huawei faces huge fines if it does not comply with China’s tax laws. The fine Huawei will face could amount to RMB 2 billion (Oxford Analytica, 2019). The impact of this risk is significant, but the probability of it occurring is very small, at around 0.5%.

Expected value = – 20 x 0.5% = RMB -0.1 billion

Hazard Risks

Huawei is potentially at risk of hazards from earthquakes and fires. Huawei is headquartered in Shenzhen, China, where there are three seismic fault zones underneath the city (Earthquake, 2016), with a medium to strong seism tectonic background. The probability of an earthquake occurring in Shenzhen is about 0.3%, and in the event of an earthquake, Huawei’s losses could reach more than RMB 10 million (Bürer et al., 2019).

Expected value = -10 x 0.3% = RMB – 0.003 million

Despite the fact that the offices are now equipped with intelligent fire-fighting facilities, Huawei is still exposed to the risk of fire, with a probability of about 0.02%. In the event of a fire, there could be casualties and property damage, and the estimated cost would be RMB 3 million. The impact of the risk of harm is high, but its probability is very low.

Expected value= -3 x 0.02% = RMB – 0.06 million

Control Risks

Huawei’s mobile phone manufacturing business would be exposed to control risk due to the supply of chips. China’s chip manufacturing industry currently lags behind the US by ten years. Due to patent restrictions on the lithography machine and design software required for chip manufacturing, the supply of Huawei’s chips has always been restricted (Lin, 2019, p. 111). The probability of controlling the risk is about 3%, and the impact is very high because it directly leads to whether the product can be produced, and the possible loss is about RMB1 billion (Lin, 2019, p. 111).

Expected value= -1 x 3% = RMB – 0.3 billion

Opportunity Risks

Huawei’s self-developed Hongmeng OS system has a certain chance to form a three-legged mobile device ecological chain with Apple’s IOS system and Google’s Android system (Marques et al., 2021). If it fails, the development cost of RMB1 billion may be lost. The probability of this risk occurring maybe 50%. If it can be successful, it will scrape the current ecosystem of Apple and Google, and the possible profit will reach RMB 300 billion (Wintour, 2020, p. 11).

Expected value =300×50%+(-1)x50%=RMB 149.5 billion

Huawei is already in the field of autopilot in 2021. If the development of the autonomous driving program fails, it may lose about 1.5 billion yuan in related development costs (Wintour, 2020, p. 11). The probability of this risk occurring is 50%. But if the development is successful, the possible profit will reach RMB 400 billion (Wintour, 2020, p. 11).

Expected value =400×50%+(-1.5) x 50%=RMB 199.25 billion

Risk Management Plan

Control Measures

Preventive Measures Against Control Risks

To counter control risks, the company should put policies in place regarding its management practices. The policies should outline how different departments should be run and how they should interact with each other. There should also be a clear guideline on what projects should be prioritized to reduce the risks. There should be guidelines detailing how employees should conduct themselves on different occasions. The company should conduct employee training sessions to equip them with knowledge on what to do at the right time. The company should provide clear guidelines on the roles and responsibilities of different staff, outlining the separation of powers among the senior management personnel to remove any ambiguity or redundancy in responsibilities. It will prevent leadership and management wrangles, especially in financial decision-making and accounting processes.

Preventive Measures Against Compliance Risks

Companies must comply with antitrust laws in order to operate smoothly (Alslihat et al., 2018, p. 188). The company’s sales department shall ensure that the company’s sales activities comply with the relevant requirements of the anti-monopoly law. The company must comply with the value-added tax law, and the company’s financial department should ensure that the company does not face compliance risks of tax evasion (Lim and Taeihagh, 2018, p. 10).

Preventive Measures Against Hazard Risks

The earthquake resistance level of the building should be increased when the structural design of the office is carried out, when the company responds to the hazard risk caused by the earthquake, although this may increase construction investment. The property management department shall inspect and strengthen the main load-bearing structure of the building. The safety and security department should arrange for special personnel to inspect the hazard sources in the office every week and organize a fire emergency drill once a year so that all personnel can memorize the fire escape route when the company responds to the risk of fire hazards.

Opportunity risks

It is up to the purchasing department to determine several chip suppliers when the company is dealing with the control risks brought by the mobile phone chip suppliers. Huawei can also acquire important patented technologies in the chip manufacturing process for chip design and chip foundry for manufacturing and packaging. The company’s risk control department prepares a feasibility study report on the development of the Hongmeng operating system and the autopilot program, Cash flow calculation of development costs, calculate the payback period of the project, And use the amount of investment as the upper limit of the company’s willingness to bear losses, and ultimately the company’s board of directors will make the decision and be responsible for implementing these control measures when the company deals with opportunity risk.

Corrective Actions

Corrective actions are an important part of the disaster management process as they seek remedies to the damages caused by the associated risks (Yeo et al., 2020,p. 82). TEKİR (2020, p. 113) notes that corrective measures are implemented after a risk has occurred and its damage has been felt. The measure taken includes reducing or eliminating the impact of the risk incident as well as putting measures in place to prevent future occurrence of the risk. Usually, corrective actions seek to establish and fix the primary cause of a known risk (Liu and Woo, 2018, p. 319)

Corrective actions for compliance risks

In case of the occurrence of compliance risk, the company should be prepared to identify the root of the problem and act accordingly. First, the company should work as per the industry standard. For instance, if the company is fined for failure to protect user data, the company should pay the dues and dismiss the responsible employees. Should the company lack the policies to guide its employees on such a scenario, it should formulate them in line with the set rules, regulations, and industry standards.

Corrective actions for hazard risks

The first step should be saving lives and critical resources through the provision of first aid to injured personnel or rescue of stranded individuals in case of hazards. The next step should be digging to know the cause of the risk and putting measures in place to ensure it does not occur again. If the company does not have a hazard risk mitigation plan, one should be developed to help the company resume normal operations as soon as possible.

Corrective actions for control risks

Since control risks are mainly caused by human error, the company should identify the responsible individuals and disciplinary them accordingly. The company should also train its employees on how to better carry out their duties in a professional and responsible manner. To promote better performance, the company should separate powers between different executive personnel to reduce the chances of ambiguity or redundancy of responsibilities. Lastly, it should instill preventive measures to ensure the risk does not occur again in the future.

Corrective actions for opportunity risks

The sales department should review existing antitrust laws once a year. The finance department should review the existing value-added tax law every six months. If the property management department finds cracks in the load-bearing structure of the building, it shall repair and reinforce it in time. The security department should organize fire safety month activities every year to familiarize employees with common fire hazards and install fire-fighting smoke exhaust systems in the office. The company should increase chip design and research and development costs and use related technologies in chip manufacturing foundries and deeply bind the foundries with the company to meet the company’s chip supply. The company should establish a complete risk assessment process and conduct a comprehensive assessment before the development of the new system. It can cooperate with large-scale automobile manufacturers in the automobile manufacturing industry to reduce the development cost of automobile autonomous driving programs.

Record-Keeping and Review Frequencies

The number and impact of the company’s violations of the monopoly law should be recorded in the sales department’s risk register, and they should be reviewed once a year. The number of violations of the value-added tax law and their impact should be recorded in the risk register of the financial department, and they should be reviewed every six months. The number and impact of earthquakes in the area where the company is located should be registered in the risk register of the property management department, and they should be reviewed once a year. The location and cost of repairing cracks in the load-bearing structure of the office premises should be registered in the risk register of the property management department, and they should be reviewed every six months. The number and impact of the company’s chip supply failures should be recorded in the risk register of the purchasing department, and they should be reviewed once a month. The gains from the company’s new product development and the losses from development failures should be registered in the risk control department’s risk register, and they should be reviewed quarterly.

Summary

The paper discusses the risks Huawei may face in its operations, both within and outside China. First, the paper highlights the differences between risk and uncertainty and presents the link between the two. The company should insure its property with the China Life Insurance (Group) Company. The products should be insured against natural disasters, technological failure, theft, employee sickness, and overall company collapse. The insured products and services should be reviewed quarterly. Lastly, a recommendation is presented on record keeping and review frequencies for all risks discussed therein.

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