Note: This visit, the questions asked, and the answers given, took place prior to the White House executive order allowing the US government to block US firms from doing business with Huawei.
On Monday, May 13, I spent a day visiting Huawei’s offices outside of Shenzhen, China.
I’m hardly the first visitor that the company has had in recent months. As Huawei has experienced ramped-up pressure from the US government, it has embarked on a PR offensive, most notably in an open letter inviting members of the overseas media to “come and see” Huawei for themselves.
Much to my disappointment, I did not receive a personal invitation for an all-expenses-paid junket like super-hawkish Washington Post columnist Josh Rogin (who then proceeded to blast it all over Twitter). After contacting the email address in the Huawei open letter, I had a brief exchange with a Huawei PR representative in the US, who told me on March 6 he would get back to me as soon as he could—and then, well, never got back to me.
I ended up getting an invitation from Joe Kelly, Huawei’s Global VP of Public Affairs, after sitting on a panel with him.
As I understand, my visit was fairly standard for foreign media visitors to Huawei. I visited their AI lab, known as “Noah’s Ark” because its central function is to predict and manage the “floods” of data that course through its networks. I also spent time visiting and speaking with Huawei staff in the firm’s cybersecurity center, its smartphone factory floor, and of course its R&D campus, which is famously modeled after historic European towns and castles.
For the record, I paid my own way. A very nice lunch (featuring multiple courses, including lobster), beverages, transportation between different stops on the tour, a few books on Huawei’s culture and history, a pen, and a notepad were just about the extent of what Huawei offered. I did not request that any expense be covered by the company.
Neither did I request that TechNode cover any expenses for the Huawei visit, although I will likely be paid for this article. I went mostly for my own curiosity.
Crowdsourcing the questions
As statements from Huawei, interviews with executives, and company talking points have been so abundant in the media in recent months, many of the most pressing questions have already been asked and answered. For other questions, it was evident that I would receive an insufficient answer, considering that the only people with the knowledge and authority to answer such questions (i.e., Huawei founder Ren Zhengfei or Chinese president Xi Jinping) would not be available to speak with me.
I had taken the opportunity to outsource the question-asking to members of the TechNode Squared subscription program, as well as my followers on Twitter and listeners of my podcast (The China Tech Investor Podcast). The questions ranged from the company’s products and business strategy, to its people-management practices, to its ownership structure, to how it is responding to US pressure and allegations of IP theft and questionable ethics.
Many questions were answered by the company representatives I spoke with at the various locations visited on the tour. However, the bulk of them, and often the most thorough, were given by public affairs VP Joe Kelly, who, along with another Huawei representative, accompanied me throughout the day.
Side note: A former postal worker from Ireland who dropped out of school at 15 years old and now finds himself at the center of a global technological and political conflict, Kelly himself is perhaps as interesting as the company he represents. The Beijing Bookworm’s Peter Goff wrote a profile on him in The Irish Times that is very worth reading.
What does Huawei consider to be their core business? Do they view themselves as an infrastructure business, a consumer electronics business, or something else?
—Vincent Bergsma, TechNode Squared member
In Huawei’s early days, we were a hardware company, and the software was created to manage and control the hardware. Today, in 2019, the hardware is becoming commoditized, and the intelligence is embedded in the software. Huawei’s activities range from the chip sets, through to the device (e.g., smartphone, laptop, wearable, or connectivity device installed in a car), through to the base station, to the core transmission network. Huawei’s range of activity is broader than any of our competitors. Ericsson and Nokia, for example, are in the network space, not so much in the device space. Apple is in the device space, not so much in the network space.
—Joe Kelly
The fact that Huawei is engaged in all four areas on this value chain explains much of their path to success. The nature of the telecoms industry is one that heavily favors scale, and dominance in one area allows firms like Huawei to invest or subsidize other areas of business, which can create a snowball effect.
What is often a point of dispute between Huawei and its critics is the degree to which the Chinese state, through subsidies and other forms of assistance, helped Huawei in getting up to scale in its earlier days, effectively giving the “snowball” its initial push down the hill.
From a US perspective, Huawei’s potential to dominate all four areas of the telecoms value chain is understandably a source of concern, as it would give them the leverage to establish many of the rules and standards of that value chain, and the ecosystems built on top of it.
How have Huawei’s priorities changed since receiving increased pressure from the US government? Are they taking more assertive actions to speed up development of their own chips? What about an alternative to Android? What is the strategy to succeed without the US?
—Several individuals asked similar questions along these lines
Although this visit took place before the May 15 executive order that threatens to cut off Huawei from US semiconductors and the Android operating system, the company’s official response on such matters is consistent—yet consistently vague.
When I visited Huawei’s AI lab to discuss the company’s capabilities which would enable it to develop an OS and accompanying app suite, Xu Chunjing, the director of Huawei’s computer vision lab, told me that while the company could potentially launch its own OS, it was content with its relationship with Android.
With regard to whether Huawei has accelerated the development of its own core components in preparation for a US ban, Joe Kelly emphasized that the company had been working on its own core tech long before things soured with the US, having founded chipmaking subsidiary HiSilicon in 2004. According to Kelly, this came from a desire to have greater control over the functionality of the chips, and therefore the design of their products.
“All of the strategic direction of the company was established long before there was a China-US trade war … None of this is changing,” said Kelly.
Throughout the day, Kelly seemed intent on portraying the firm as a sort of immovable fixture, an institution that is, has been, and will continue to last into perpetuity.
This is a central theme not only of the firm’s messaging, but also its physical environment. Huawei’s “Ox Horn” R&D campus, known for its massive replicas of European castles, projects a similar solidity. I expected something like Disneyland, or the large villas in the suburbs outside of Beijing, which look impressive from a distance, but up close reveal cheapness behind a facade. Yet Huawei’s Ox Horn campus boasted a quality of material, construction, and maintenance that was frankly jaw-dropping, leaving an impression befitting the RMB 10 billion (about $1.4 billion) that it reportedly cost to build. To walk around that campus is to receive the impression that it was intended to last a very long time.
I’ve been to other places in China that inspire such a feeling. However, they rarely have anything to do with technology or business. More often than not, the headquarters of China’s other top technology firms occupy standard, even unattractive, office buildings, with far more attention paid to the work they are doing than the physical space in which they are doing it.
However, Ox Horn reminded me of China’s great national institutions, such as the National Museum, the Great Hall of the People, or Peking or Tsinghua Universities. Indeed, there was a sense of the permanent, the pseudo-sacred, a sense normally reserved for a consecrated site intended to remain above and apart from the profane business world.
Even though being cut off from US components and services would appear to be like a death sentence for Huawei, it is hard for me to imagine such a collapse playing out. While experts differ on how much US technology Huawei can replace with its own or by finding alternative sources, it’s clear that many of the most necessary components have no non-US substitute. Ren Zhengfei has been quoted as saying that his firm will “always need US chips.”
And yet, the firm’s demise just doesn’t feel likely, or even possible. Huawei feels less like a business than like an institution. And institutions like that don’t just go away.
Is it true that Huawei staff are required to travel for work during their non-working time?
—Frankie Huang, writer and researcher
Kelly told me that roughly 20,000 Huawei employees travel via air on average each day. The company has a strict economy-class policy, which even fairly high-ranking executives like Kelly are apparently required to adhere to. When booking air travel, Huawei employees must purchase the lowest-price ticket available that day, which at times can be during off-work hours.
Stories of Huawei’s famously intense “wolf culture” are numerous. Some are true, others are not, and still others are a bit more complicated. What is evident when looking at Huawei’s internal culture is that, like many companies (perhaps especially in China’s hyper-competitive tech space), there are the rules that are written down, and then there are cultural norms which employees follow. For Huawei, the expectations set by the culture can often far exceed requirements on paper.
Huawei is known for being faster and more responsive than their competitors, with a willingness to do whatever it takes to meet their goals. Therefore, when Huawei is criticized for pushing the limits of what can be expected from an employee, it is often the case that regardless of what the official policies say, the company’s culture of “striving” rewards those who dedicate more of their life, time, and energy to their work, and is less likely to be a place where those looking for “work-life balance” move ahead.
Would Huawei ever consider changing its ownership structure to be more transparent and similar to global norms?
–Anonymous
As Huawei’s representatives tell it, in the company’s early days at the beginning of China’s reform and opening up, the very notion of private enterprise was still a novel concept to many, and the role which private companies would play in the Chinese economy was still uncertain. As Chinese law allowed for no more than 200 private shareholders for a single company, Huawei’s approach of using the labor union as a holding structure was their way of effectively establishing employee ownership in accordance with Chinese law.
According to Kelly and other Huawei representatives, the company is ultimately controlled by Huawei’s Representatives’ Commission, which is formed to exercise shareholder rights on behalf of employee shareholders on a vote-per-share basis.
According to Joe Kelly, while non-Chinese employees are enrolled in a Time-based Unit Plan (TUP)—a profit-sharing and bonus scheme that does not involve ownership—Chinese employees are enrolled in an Employee Stock Ownership Plan (ESOP). Although it is on paper managed through the structure of the labor union, which pays dues to the local government’s labor union, it is in practice owned by its employees.
The area which perhaps remains most murky regarding Huawei is its ownership structure, or more importantly, the question of who controls what at Huawei. In April, US academics Donald Clarke and Christopher Balding argued that what the company claims to be an ESOP is actually a profit-sharing scheme operating through a labor union, which is in fact the legal owner of the 99% of the “employee-owned” company. As labor unions are by law ultimately accountable to the Chinese Communist Party’s All-China Federation of Trade Unions, the academics concluded that Huawei was ultimately owned and controlled by the Chinese Communist Party.
What Huawei seems to take issue with in Balding and Clarke’s paper is less the facts that are presented, and more with the conclusions which the academics draw. The confusion and mystery seem to lie in the blurry lines between what is the case on paper versus how things play out in practice, and in the nuances regarding the nature of ownership of a company versus actual control over it. Joe Kelly takes issue with Balding and Clarke’s conclusion that Huawei’s ownership structure makes the company effectively government-owned. According to Kelly, this is jumping to a conclusion without sufficient evidence, and inconsistent with how the company operates in practice.
Yet, from my own perspective, the claims that the company makes about where power and authority rest at the firm don’t quite pass the sniff test. Officially, the company’s employee shareholders elect a commission of 115 representatives on a vote-per-share basis. With just over 1 percent of shares, Ren Zhengfei is the company’s largest individual shareholder, and the company’s articles of governance also give him limited veto authority. Ren therefore has more power over the company than any other one employee shareholder, but his power is supposedly dwarfed by that of the commission of 115 shareholder representatives.
But what we know about the way Huawei makes decisions just doesn’t match the employee-ownership story. While most large corporations tend to operate in one form or another as dictatorships, or as governed by a small elite that make up a board of directors, organizations with highly dispersed ESOP programs tend to function more like democracies, with greater internal transparency and employee buy-in and engagement, but also with slower, messier decision-making processes and conflicts over power and company direction.
Look at Huawei through this prism. Its structure certainly operates as an incentivizing mechanism that can increase employee engagement, but that seems to be where the typical ESOP characteristics end. Huawei, by all accounts, is heavily centralized and top-down in its decision-making. Its strengths are consistency in its strategic direction and its ability to act quickly and decisively, even at times at the expense of employee well-being. A common complaint among former Huawei staff is the firm’s siloed internal structure, with a lack of transparency for employees. There also seems to be no doubt among Huawei staff as to who is in charge: Ren, and the handful of people who he trusts most.
Looking at how power and decision-making play out in and around the organization, Huawei’s explanation seems to be incomplete at best. The company doesn’t function like an employee-governed representative democracy. It functions like a dictatorship.
Huawei has never had an IPO, yet has expanded so rapidly. Why not go public, and access the capital of public markets like most other similarly-sized companies?
—Chris Edwards, web editor and publicist, Shenzhen University of Science and Technology
The answer consistently given both by Joe Kelly and other Huawei executives when speaking with the media is that Huawei has chosen not to go public because it would weaken the firm in the areas which it considers to be its greatest strengths. The lack of pressure from public shareholders, the thinking goes, allows Huawei to think with a long-term perspective and invest more in areas like research and development. If Huawei were a public firm, shareholder demands for quarterly profits would place pressure on the firm to make compromises that it does not want to make.
While this certainly seems to be at least partially the case, I personally doubt that it is the entire story. Dual-class shareholding structures—such as that in Facebook’s case—now allow founders to raise capital through public listings without giving up control. Hypothetically, a Huawei IPO using a dual-class structure could give Ren and others in power at Huawei even greater control than they currently have.
Regardless of what one might conclude about Huawei’s ownership, or relationship with the Chinese government, the company’s ownership is at the very least messy and complicated. I suspect that an IPO would likely reveal some of those complications, and would be quite difficult to manage.
Another reason why Huawei has not undergone a public listing is that they simply do not need to: They can access all the capital that they need through the cash flow generated from their business, or through bond issuances. Kelly and others at Huawei frequently point to the snowball effect caused by the firm’s massive scale, but they also received approximately RMB 11 billion (about $1.6 billion) in grants from the Chinese government over the past ten years. While the role of government assistance in Huawei’s growth story can be debated, it’s indisputable that the strength of such a firm is an invaluable and necessary component to China’s long-term geopolitical and economic goals. China is also known to give a helping hand to firms whose development is in the national interest, and the strength and variety of how they help such firms is often, though not always, greater than in countries with more free-market economic systems.
Would Huawei ever consider having a more internationally representative board or C-suite management?
—James Hull, Hullx Capital
Despite doing business in 170 countries around the world, Huawei’s executive team appears to be remarkably uniform in their backgrounds. All are Chinese, and have been with the company for at least 20 years, but none have a degree from a foreign university listed in their bio. Many of Huawei’s top leaders struggle to communicate in English, or at least choose not to in a public setting. Huawei possesses a level of insularity that is remarkable, even in comparison with other Chinese tech giants, many of whom are listed overseas or in Hong Kong, have prominent foreign investors, and have senior leadership teams with the international backgrounds, educations, and professional networks that are more similar to the corporate elite in “the West.”
The downsides of having a management team with such a similar set of backgrounds and perspectives are numerous. There is an abundance of research showing connections between boardroom diversity and business performance across a range of metrics. Even beyond that, as Huawei struggles to gain the trust of local governments in their overseas markets, a more diverse set of top leaders could add credibility to the firm’s claims that they are independent of the Chinese state and military.
From Huawei’s perspective, they tend to emphasize different priorities. They highlight the fact that the firm consistently employs the services of foreign consulting firms and has established an International Advisory Council to inform and advise Huawei’s leadership on international issues. The people chosen to lead the company were selected because they were judged to be the people most capable and suitable for their roles, according to Huawei’s priorities of growing their business and satisfying their customers. As is reflected in the growth of the company’s business over the past decade, they have certainly succeeded at that.
Joe Kelly chooses to look at the relative lack of international experience of Huawei’s top brass as a sign of just how impressive their accomplishments are. “The Board of Directors of Huawei today joined the company as fresh graduates. It was their first employer. Over time, they’ve learned how to run a $100 billion/year-plus business by building it,” said Kelly over lunch during my visit. “That is pretty unique in the world of business and technology, and they should be given credit for that remarkable achievement.”
It’s that sentiment which is echoed among many of Huawei’s Chinese employees, and which can be seen in the way that the company is discussed in Chinese media and among many Chinese people. Huawei may have adopted certain foreign management methods and may utilize some foreign technology or expertise—but at their cultural core they are Chinese, and they have gotten to where they are by doing things in a Chinese way. For a country and people well aware of how their technological advancements have lagged behind those of more developed nations in recent centuries, to have a world-leading technology firm that is also thoroughly Chinese is a source of deep national and civilizational pride.
Huawei founder and figurehead Ren Zhengfei was born five years before the founding of the People’s Republic of China in Guizhou, one of the poorest provinces in the country. He lived through the Great Leap Forward and the Cultural Revolution. He served in Mao Zedong’s military. He moved to Shenzhen in the 1980s, when it was still little more than a small fishing village. He belonged to the first wave of entrepreneurs in post-Mao China, founding a company and leading it as it became one of the world’s largest technology firms.
He is also twice-divorced, and has expressed on a number of occasions in recent months that his commitment to his work caused him to be an all-too-absent father. While I do not know the details of his lifestyle choices over the course of his nearly 75 years on this earth, his worn, wrinkled face and raspy voice are reminiscent of other Chinese men I’ve met of a similar age group, who have spent their lives working, smoking, and drinking a bit harder than a responsible doctor would recommend.
In Ren, I see echoes of a lot of people in China who I’ve met before. In him, many Chinese people no doubt see their fathers, their uncles, their grandfathers. They see the imperfect people who made sacrifices during the country’s most difficult years to help build what it has become today. It is understandable why so many people in China view Huawei’s success as their success, and attacks on Huawei as attacks on their nation.
Conclusion
Towards the beginning of my visit, Joe Kelly said to me bluntly: “Look, we know you’re not one of our biggest fans. That’s OK.”
That is, for the most part, true. I would probably never want to work for Huawei, and do not strongly identify with their brand. The characteristics of the firm that inspire so many in China to feel such a strong connection are the ones that cause me, as an American and someone not of Chinese heritage, to struggle to trust or identify with the company.
My visit did not change this. Nor did it sway my opinion in any direction as to whether Huawei is an arm of the Chinese military, is a threat to US national security, systematically steals intellectual property, or mistreats its employees. Most of the questions I asked during my visit could have just as easily been answered through a few phone calls, text messages, or even Google searches.
However, I’m still very glad I went.
I’m glad because in such situations as our countries are currently in, and as this “tech cold war” intensifies, it is all too easy to forget the humanity of the people involved. In visiting Huawei, I was better able to see the people, the stories, the personalities, and the effort behind such a massive and controversial entity. And while my opinions on the company were not particularly altered, I do feel as though I can better empathize with those in and around this firm. And that, I believe, was worth the visit.