The controversy surrounding China’s most prominent and embattled technology firm seems to be growing ever-more intense. Discerning the reality of the situation is growing progressively more difficult.
China’s telecoms and technology giant Huawei was accused by two American academics of misrepresenting the company’s ownership structure. Days later, the CIA released a report alleging that the firm has been funded by Chinese security agencies.
Both allegations, as well as Huawei’s responses, seem to pose more questions than answers.
Who owns Huawei?
The first was published on April 17 in a paper by professors Christopher Balding and Donald Clarke, of Fulbright University Vietnam and George Washington University respectively. The independently published paper examines Huawei’s claim to be an “employee-owned” company, asserting that it may misrepresent who controls the firm.
Drawing on publicly available sources such as media reports, corporate databases and court cases, the article notes that Huawei’s operating company is 100% owned by a holding company, which is in turn approximately 1% owned by Huawei founder Ren Zhengfei and 99% owned by an entity called a “trade union committee” for the holding company. As trade union members in China have no rights to assets held by trade unions, Balding and Clarke deduce that what are referred to as “employee shares” are “in fact at most contractual interests in a profit-sharing scheme.” Since trade unions in China answer to the state, the professors suggest that Huawei may be effectively owned by the Chinese state.
The indirect nature of Huawei’s employee shares has been a topic of frequent discussion in Chinese media, in some cases referenced as a model for cryptocurrency and tokenomics. But who maintains ultimate power and decision-making authority over the trade union remains murky.
Huawei responded to the paper with the following statement:
This report, released by Professor Christopher Balding and Professor Donald Clarke, was based on unreliable sources and speculations, without an understanding of all the facts. They have not verified the information in the report with Huawei, and their conclusions are completely unsubstantiated. 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.
Through the Union of Huawei Investment & Holding Co., Ltd, Huawei implements an Employee Shareholding Scheme that complies with applicable laws and regulations. The Representatives’ Commission is the organization through which the Union fulfills shareholder responsibilities and exercises shareholder rights. As Huawei’s highest decision-making body, the Representatives’ Commission elects members of the Board of Directors and the Supervisory Board.
In addition, the Commission makes decisions on important company matters, like capital increases, issuance of new shares, and profit distribution. Members of the Representatives’ Commission are elected by shareholding employees that have the right to vote. Daily operations of the Representatives’ Commission, Board of Directors, and Supervisory Board, including the selection of their members, comply with Huawei’s Articles of Governance.
They do not report to any government agency or political party, nor are they required to do so. We welcome experts and researchers who have an interest in this topic to visit Huawei’s exhibition hall of shares and exchange their thoughts and ideas.
In a text-message exchange on the evening of April 21, a representative from Huawei stated that he anticipates that the company will bring further clarity to the firm’s ownership later this week, and expressed disappointment that the authors did not attempt to contact the company, or arrange a visit to their headquarters.
In a written rebuttal, Clarke challenged the assertions made by Huawei representatives, pointing out that the company’s statement did not specify which parts of the paper they took issue with, saying:
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, but I wonder whether they include State Administration of Industry and Commerce records, compiled with information supplied by Huawei, within that anathema.
While Huawei representatives have in recent months invited journalists to view what they claim to be their shareholder registry at their headquarters in Shenzhen, Clarke posits that the existence of such a registry is not sufficient to refute his paper’s claims, saying:
We don’t deny that there are paper books with records of something. Nor do we claim that the records are simply made up from nothing. But the question is, records of what? A name with some numbers beside it is not proof that the named person is an actual shareholder, especially given the fact that corporate records show who the actual shareholders are. Very possibly the paper books record the holdings of virtual shares under Huawei’s profit-sharing scheme.
When asked about their decision not to contact the firm itself for comment in their research, Balding responded, “the on-record facts speak for themselves, and we felt that a comment from Huawei would not enhance our research.”
CIA questions Huawei’s funding
Days after the publication of Balding and Clarke’s paper, The Times of London reported that the US Central Intelligence Agency informed its “Five Eyes” intelligence partners (Australia, Canada, New Zealand and the UK) that Huawei has received funding from the Central National Security Commission of the Communist Party of China, the People’s Liberation Army and a “third branch of the Chinese state intelligence network.”
The report, which, according to an anonymous source, was shared with “only the most senior UK officials,” is said to have provided a “strong but not cast-iron classification of certainty.”
Huawei dismissed the allegations as “unfounded,” saying that the company “does not comment on unsubstantiated allegations backed up by zero evidence from anonymous sources.”
Nastier by the day
As a business, Huawei has continued to perform impressively, despite its confrontation with the US government. It reported that its Q1 revenue jumped 39% vs the previous year, a staggering number considering that the firm already did over $100 billion in 2018 sales. This is the first time Huawei has reported quarterly earnings, perhaps to show their strength to the US, and to project transparency to the public.
Yet it is the issue of transparency that has made the Huawei story so painfully frustrating to follow. US intelligence agencies, Huawei and the Chinese Communist Party are all very large, very powerful and very secretive. Trying to understand the issue can feel like wandering in the dark, in an unfamiliar house, with a blindfold on.
The US government has provided evidence for its concerns about Huawei, if at all, in classified documents like that reported by The Times, telling the public: “trust us, Huawei is bad.” For intelligence services that have been notably wrong on numerous occasions, including when justifying an invasion of a sovereign state, “trust us” is insufficient.
Yet Huawei hardly inspires trust either. The charm offensive that they have embarked on this year seems to be far more offensive than charming—more the attitude of a street fighter than an innocent firm with nothing to hide. They’ve chosen military and warlike narratives, including comparing to 5G to a “nuclear bomb.” China’s Ministry of Foreign Affairs and state media organizations have lined up in complete support of the company, undermining Huawei’s claim to independence from the Chinese state.
For westerners concerned that democratic values are under threat from China’s political and technological rise, the response from both Huawei and Chinese media has only exacerbated fears. As their response to the Balding and Clarke paper indicates, Huawei seems to be more intent on hitting back at their critics than actually informing and engaging with the public. This is an understandable response when one feels attacked, but it’s counterproductive.
We don’t know the truth about last week’s allegation, but we do know that in the Chinese system, the party-state plays a different role than in most other countries in the world. Huawei’s claims of “independence” from its government, while probably at least partly true, are a vast oversimplification in China’s state-led system. The firm’s unique corporate structure, whatever the specifics may be, calls for a skeptical eye, as does its track record of opacity and inconsistent overseas legal compliance.
What is perhaps most discouraging in this entire saga is that a complex issue has in many cases been reduced to mudslinging. I have never written about an issue that brings out so much vitriol, and displays the ugliest sides of so many otherwise decent folks (at times, myself included).
If, as many say, the US and Huawei are at war, one of the first casualties is the honest and respectful pursuit of the truth.
Clarification: An earlier version of this article stated that Huawei’s 2019 Q1 earnings report was its first time reporting earnings. In fact, it was the first time the company has reported quarterly earnings. The article has been revised to reflect this.