• Milton Friedman Society

Who owns Huawei?

By Filippo Carola.


“Who are Huawei’s main stakeholders? What are their interests?” are incredibly challenging concerns that are yet to be answered despite the numerous efforts from both scholars and business experts. What we should care about are not formal labels, but rather understanding who controls Huawei: namely, who decides over its strategic positioning and direction.

Huawei's ownership is a dark matter because the company has never sold shares to the public. According to the company’s annual report, “Huawei is a private company wholly owned by its employees", as only 1.14% of the share is owned by the founder Zhengfei whereas the 100,000 or so employees own the rest. This shared ownership structure is the result of the numerous ESOPs that the company has implemented over the years. The rationale behind ESOPs is to pay part of employees' remuneration in the form of the company's stocks so that they not only benefit from the economic performance of the organization but also exert control through their representatives.


However, the story seems to be way more complicated than this, and according to the two scholars Clarke and Balding, the so-called "employee shares" in Huawei are not actual stocks but virtual ones, a profit-sharing mechanism that grants no effective rights on the control of the company. Who owns the company then? According to Chinese corporate records, Huawei Technologies is wholly owned by the holding Huawei Investment & Holding. The latter has two shareholders. Mr. Ren, Huawei’s chief executive, owns a little more than 1 percent of shares and admittedly benefits of veto power on any decision of the directors. The rest is owned by an entity called the Union of Huawei Investment & Holding. According to Mr. Ren, this is Huawei’s labor union, and it owns most of the company purely out of legal convenience.

Nonetheless, the leadership of the trade union is not nominated by or accountable to the employees. In China, trade unions officials are appointed by management or by the administratively superior trade union organization all the way up to the All-China Federation of Trade Unions at the central level. The Communist Party controls ACFTU, and its head sits on the Politburo. Tailor&Li 2007 wrote that the ACFTU is not a trade union at all but “a part of the Party-State that represents the will of the leadership”. As stated in the conclusions of Balding&Clarke 2019 paper, “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”. This uncertainty concerning the control over Huawei is a source of international worry, and it is already leading to repercussions on the firm’s business.


Many countries fear that letting a Chinese company suspected of being state-controlled operate their 5G networks would ultimately jeopardize their national security and decided to ban the company. According to Japan Times, this reflects three concerns: fear that its equipment can be used to observe data that it transmits (espionage); worry that Huawei benefits from Chinese government support that provides an unfair advantage in market competition; fear that the company could manipulate data or shut down connections in case of an international crisis (sabotage).For example, M. Burgess, director-general of the Australian Signals Directorate, which oversees cyber warfare and security, said that the need to ensure the safety of critical infrastructure was the key concern for security agencies when they recommended banning the Chinese telecoms group. What follows is that a growing number of countries have considered, or undertaken in the case of Japan, Australia, and the USA, among others, a ban or a de facto exclusion of Huawei based on varying rationales and mechanisms, hence hindering Huawei growth in the sector and depriving it of massive markets.


In the case of the USA, the reasons for concern are much broader and inextricable from today's geopolitical tensions. Allowing Chinese companies to play a key role in critical American infrastructure presents unacceptable threats for the United States, not only in the form of espionage but also as an utter subversion of this critical infrastructure. As 5G is prospected to be the backbone of economic growth in the next decade, McKinsey Global Institute estimates a $2trn annual connectivity boost to global GDP by 2030; the U.S. can not afford to let a Chinese company, arguably state-controlled, to take the biggest slice, as this would dangerously shrink the gap between the two super-powers and even threaten U.S. technological and economical leadership in the long term.


Most of these international concerns can be traced back to the very ownership structure we have analyzed in the beginning, and to the opaque role that the Chinese government plays in swaying private companies' decisions. If foreign countries see Huawei as nothing more than an arms-length body of the Chinese government, it is comprehensible why they are not willing to let it operate in such a strategic industry as the telecommunication one, where the risks of espionage and sabotage are concrete, especially given Chinese government propensity to the use of such tools. If Huawei is to lead the 5G revolution and to set worldwide accepted standards in the industry, it needs to be more transparent about its internal practices and shed light on who is its real stakeholders so to gain international trust and contracts abroad.



Bibliography



• Balding, C. and Clarke, D. C. (17/04/19), Who owns Huawei?, SRN, https://ssrn.com/abstract=3372669 or http://dx.doi.org/10.2139/ssrn.3372669 (accessed 10/04/20)


• Glosserman, B. (03/02/20), Huawei and the realities of the 5G world, Japan Times, https://www.japantimes.co.jp/opinion/2020/02/03/commentary/world-commentary/huawei-realities-5g-world/#.Xo9VwsgzZPa (accessed 10/04/20)


• Kania, E. (07/11/2019), Securing Our 5G Futur.The Competitive Challenge and Considerations for U.S. Policy, CNAS, https://www.cnas.org/publications/reports/securing-our-5g-future (accessed 10/04/20)


• McKinsey Blog (24/02/20), How our latest work helps leaders get ready for the 5G revolution, https://www.mckinsey.com/about-us/new-at-mckinsey-blog/new-research-and-center-prepare-leaders-for-the-world-of-5g-and-advanced-connectivity (accessed 10/04/20)


• Shi, W. (16/04/19), New research claims employees do not own Huawei, Telecoms.com https://telecoms.com/496951/new-research-claims-employees-do-not-own-huawei/ (accessed 10/04/20)


• Taylor, B. and Li, Q. (2007), Is the ACFTU a Union and Does it Matter?, Journal of Industrial Relations, Vol. 49, No. 5, https://doi.org/10.1177/0022185607082217 (accessed 10/04/20)


• The Economist (08/04/2020), America does not want China to dominate 5G mobile networks, https://www.economist.com/business/2020/04/08/america-does-not-want-china-to-dominate-5g-mobile-networks (accessed 10/04/20)


• Zhong, R. (25/04/19), Who Owns Huawei? The Company Tried to Explain. It Got Complicated., The New York Times, https://www.nytimes.com/2019/04/25/technology/who-owns-huawei.html (accessed 10/04/20)


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