US moves against Huawei’s real owner?

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Updated: May 24, 2019 12:26:11 AM

It appears the American move is directed less against Huawei and more against Chinese state. The thinking is that the US is the hand that feeds China and contributes to its surplus.

The US’s grouse is that Chinese companies will obey government diktat when ordered to share sensitive data about customers and countries, and Huawei being ‘owned indirectly’ by the state adds more fuel.

Who owns Indian conglomerate Reliance Industries Ltd? The answer is simple, clear and unequivocal. The answer, however, is not as straightforward with Chinese telecommunications giant Huawei. Lauded as ‘the (first) real multinational based in China’, Huawei was founded by an ex-soldier, Ren Zhengfei, in 1987. But in China, where the Party is the state and the state overlaps with the Party, lines of ownership can be opaque. Scholars Christopher Balding and Donald Clark have recently said that the (de facto) owner of Huawei is the Chinese state. Is this the moot point behind the recent US executive order to curb sales to Huawei?

The immediate implications of the US order mean that Huawei smartphones, which use Google’s Android, and Huawei laptops, which use Microsoft Windows OS, will not be able to use these in the future. American firms such as Intel, Qualcomm, Broadcom and Xilinx have to comply with the order until further notice. While existing Huawei smartphones, including the P30 Pro, will not be affected by the US order, future smartphones will lose Android technical support and software updates. This will hurt customers who will be unable to access Google Maps, Gmail and YouTube, which may cut into future sales of Huawei.

The American move not only goes beyond the order, but also beyond the house arrest of Ren’s daughter Meng Wanzhou, who is the chief financial officer (CFO) of Huawei; she was arrested in Canada on a US warrant in December 2018. The move may have more to do with “who owns Huawei” and, therefore, who really has control.

According to reports, Ren, the son of a ‘capitalist roader’, joined the People’s Liberation Army (PLA) as a military engineer at the tail end of the Cultural Revolution (1966-76). He also became, as was the aspiration of that generation, a party member.
Ren’s fortunes began to sync with the end of Mao’s era (Mao Zedong died in 1976) and the rise of the moderniser Deng Xiaoping, who created special economic zones (SEZs) as experimental pilot zones to nurture entrepreneurs and experiment with ‘opening up’ and ‘creating nests so that birds would come’ in Shenzhen, Zhuhai, Xiamen and Shantou (in 1978). Many ‘dared to eat crab’—or be adventurous enough—to set up their own business. Ren was one of them.

Huawei was established as a ‘self-employed business’ that traded in equipment in Shenzhen, then a fishing village. Today, Huawei is China’s Google, with a campus in Shenzhen that can give Apple’s spanking new headquarters (in Cupertino) and Google’s (in Mountain View) a run for their money. The Huawei campus is dotted with European-style buildings, canals and black swans, subsidised food, pool tables and gyms—almost as if China does it better.

And perhaps it does. Huawei, which modestly describes itself as a leading global information and communications technology (ICT) solutions provider, boasts of 188,000 employees, a presence in 170 countries (including its largest overseas $170-million R&D centre in Bangalore that can accommodate 5,000 software engineers) and revenues surpassing $100 billion. Huawei Mate 10 happens to be ‘the first smartphone with an embedded AI chipset’. In 2018, 80,000 employees were involved in R&D and it is one of the world’s largest patent holders (87,805 patents).

Huawei also ranks amongst the top-three phone makers (behind Apple and Samsung), and ahead of Xiaomi and Oppo. Huawei is emerging as one of the world’s largest providers of equipment used in 5G networks.

In the last decades, Ren has been low key (“fame is food for dogs,” he says). He takes taxis, travels without an elaborate entourage and bought a BMW in 1997, only to drive and embarrassingly ask where the brakes were.

But Ren has been a model, if unconventional Chinese ‘laoban’ (boss). He supports mattress culture (allowing employees to take a nap), has pushed to make customers the focal point, thinks out of the box with ‘greyness’ (instead of ‘black and white’ fixated ways), and has not flinched hauling the organisation with mass resignations to shake it up. Because of Ren, Huawei bandies itself as a great mix of both Chinese and Western.

Huawei describes itself as ‘a private company wholly owned by its employees’ (as does China’s search engine Baidu; interestingly, Baidu makes no such claims about others—ZTE, Lenovo, Taobao, Haier and the Gree Group, for instance, are public-private partnerships). Huawei has an employee shareholding scheme that involves 96,768 employee shareholders. Huawei says it is ‘employee owned’—Ren owns 1% (1.01) of the shares and the rest 99% (98.99) are owned by an entity called ‘trade union committee’ for the holding company.
Balding and Clark say that Huawei’s claims of being ‘employee owned’ are ‘questionable’ and that the corporate structure described by Huawei is ‘misleading’. Instead, they summarise that if 99% is owned by a ‘trade union committee’ and that ‘if the trade union and its committee function as trade unions generally function in China, then Huawei may be deemed effectively state-owned’. (Trade unions in China are state bodies.) The Communist Party controls the All-China Federation of Trade Unions. They suggest little is known about Huawei’s internal governance, nor much is known about its Articles of Governance, according to which Ren has veto powers, or what will happen when the trade union dissolves (where residual assets go up, not down, to the trade union organisation at the next administrative level).

This has sufficiently piqued Huawei, who responded with “no government agency funds the company or holds its shares. As a result, the enterprise operates independently while achieving steady long-term growth.” But this is not the first time Huawei has faced critics—there was the Cisco lawsuit (in 2003) and the US Defense Department (in 2011). While Cisco alleged patent infringement, US Defense Department cited Huawei’s close links with the PLA.

Now, what will be the impact on Huawei? In an interview to China Central Television (CCTV), Ren said that its 5G technology was ahead of competition and, tellingly, that Huawei was at odds with the US government, not US companies. The South China Morning Post and Die Welt (The World, German daily newspaper) have quoted Huawei mobile chief Richard Yu Chengdong saying that Huawei has developed its own operating system (OS) for smartphones and computers, which would be an alternative to Google’s Android OS.

On balance, it appears that the American move is directed less against Ren and more against the Chinese state. The thinking is that the US is the hand that feeds China and contributes to China’s surplus. The US’s grouse is that Chinese companies will obey government diktat when ordered to share sensitive data about customers and countries, and Huawei being ‘owned indirectly’ by the state adds more fuel. Ironically, China’s surplus is used for buffering China’s economy and military, which, paradoxically, the US has to spend money to fight on. So as with US trade tariffs, so with Huawei—it is no longer about trade only, but the total costs of China’s rise.

The author is a Singapore-based Sinologist, and adjunct fellow at the Institute of Chinese Studies, Delhi. Views are personal

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