It’s one of the greatest technology “startup” success stories of the personal computer and smartphone eras. Yet, despite selling 59 million smartphones and netting $27 billion in revenue last quarter in its first-ever public earnings report this morning, a strange and tantalizing question shrouds the world’s number two handset manufacturer behind Samsung.
Who owns Huawei?
To hear the company tell it, it’s 100% employee-owned. In a statement circulated last week, it said that “Huawei is a private company wholly owned by its employees. No government agency or outside organization holds shares in Huawei or has any control over Huawei.”
That’s a simple statement, but oh is it so much more complicated.
As with all things related to Huawei, which outside of its 5G archrival Qualcomm is probably the tech company most entrenched in geopolitics today, the story is never as simple as it appears at first glance.
Last week, Christopher Balding (a finance professor who recently departed China due to safety concerns) and Chinese law professor Donald Clarke published a draft of a paper analyzing the ownership structure of Huawei. In it, they describe the complications of trying to scrutinize who has economic control of the company.
“Huawei,” the two write, “should be understood as an umbrella term covering more than one entity.” There is Huawei Tech, which is the operational side of the business (i.e. what you read about on TechCrunch), Huawei Holding which owns Huawei Tech, and then the shareholders of Huawei Holding itself, which are co-founder Ren Zhengfei and “an entity called Huawei Investment & Holding Company Trade Union Committee.” There is a chart in their paper which makes this paragraph ever so slightly clearer.
The “employee-owned” aspect comes from this trade union ownership. But as Balding and Clarke discuss, trade unions in China are treated very differently from their counterparts in the West. “In China, trade union officials are appointed by management or by the administratively superior trade union organization, not chosen by the members. Thus, under Chinese labor law, employees qua employees have no voice in how the union leadership decides to use its share ownership in Huawei Holding.”
Furthermore, “The corporate governance picture is further complicated by the fact that as a matter of law (and usually fact), trade union officers — those who decide what the trade union shall do with its assets, for example — owe their loyalty and are accountable to superior trade union organizations, all the way up to the All-China Federation of Trade Unions at the central level. The Communist Party controls the ACFTU, with the head of the ACFTU sitting on the Politburo.”
Like other aspects of the Chinese economy, policy often comes from above, with individual union officials responding to directives from central and regional authorities. Balding and Clarke conclude that “Thus, if Huawei Holding is 99%-owned by a genuine Chinese-style trade union operating the way trade unions in China are supposed to operate, it is in a non-trivial sense state-owned.”
Huawei directly opposed that conclusion in its statement, to which Clarke responded later that:
Like some of the other critical responses, the Huawei statement fails to identify any facts we got wrong. It does not identify any of the sources it believes are unreliable or wrong, or from which we drew the wrong conclusions. It complains that we did not verify the information with Huawei, but it doesn’t identify any specific thing we got wrong as a result. If Huawei is unwilling to tell me, it is not for me to guess which sources Huawei finds unreliable and then to defend their reliability…”
I think there are a couple of aspects worth considering here.
First, for such a vital company that underpins both telecommunications infrastructure and end-user handset devices, why is this question even being asked in the first place? Even if the company has received money over the years from the Chinese security services, as the Times of London reported last week from a source describing contacts between Britain and the CIA, why not just clear up the corporate governance today and be done with it?
Indeed, it seems clear from what little we understand about the corporate history of Huawei that it was (likely) heavily funded and supported by Chinese government agencies (civilian, military, both?). As Huawei became successful overseas and reached clear and healthy profitability, it could have entirely weaned itself off from these subsidies and mandates in order to present a clear and transparent entity going forward. The fact that it has chosen not to do that is worthy of deep reflection.
The larger story here though is just how difficult it can be tease out the dividing line between where a company ends and where the government begins — in China as much as in the West. The U.S. government offers prodigious funding for research through defense agencies like DARPA that often are picked up by private corporations, and of course, the national security branches offer some of the most plum procurement contracts in the world.
Plus, there has long been a revolving door between Washington and corporate boards, further blurring the distinction between the two here in America. For instance, Oracle’s board of directors includes Leon Panetta, who formerly ran the CIA and the Defense Department. The company also recently applied (but failed) to win the massive $10 billion Pentagon JEDI cloud contract. It clearly desires closer ties to the government, and particularly from the national security wing.
This isn’t to equivocate on transparency here — clearly Western institutions have better and more reasonable disclosures and clearer lines of economic control and ownership than their Chinese counterparts.
But when it comes to governance, culture, rules, and norms often have an outsized influence on corporate behavior beyond strictly what the law or a charter might indicate. That makes translating our understanding of Chinese, or American, or German, or Korean governance extraordinarily difficult. Our mental models need to shift drastically in order to make this work.
The answer of who owns Huawei then is that maybe it is the wrong question to ask entirely. Ownership in this context may be far more fluid than our existing mental model is willing to accept. Huawei may be employee-owned right up until it is not, and that spectrum is not easy to grok from a rational-legal perspective. If we want to understand these institutions, we first have to situate them in the right context.
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