The Side of Huawei We Don’t Know

September 11, 2023 Topic: Huawei Region: Global Blog Brand: Techland Tags: HuaweiUnited StatesChinaSanctionsSmartphoneEconomyTechnology

The Side of Huawei We Don’t Know

Though often condemned and suspected by Western policymakers and experts, the company’s origins and unique governance system are poorly understood.

China’s meteoric rise in the short space of thirty years to become the second-largest economy in the world and a global power has been by far the biggest story of the twenty-first century. It has also unfortunately been accompanied by a great deal of worry by a fearful West, which together with the global mainstream media, has painted an ugly picture of the country’s remarkable pace of development.

One of the most visible manifestations of this progress is Huawei, a Chinese company and now the world’s largest maker of telecoms gear. Yet the company’s growth has been accompanied by fear and mistrust from the West—particularly from the United States, which regards the firm as a potential threat to U.S. national security.

A great part of Huawei’s supposed infamy can be boiled down to two things. The first is that the company is actually very well-run and extremely innovative—a fact that Westerners, convinced of their own technical superiority and the relationship between technological innovation and a particular set of political/cultural values, find unnerving. The second is the view that because it is a Chinese tech firm, and its founder was in the military as well as a member of the Chinese Communist Party (CCP), it must be controlled by the Chinese government. This latter view demonstrates how little is understood of modern China, especially the relationship between China’s commercial ecosystem and the state.

This lack of knowledge relating to Huawei’s origins, methodology, and relationship with the Chinese stake makes it a recurring target. It would behoove Washington to know more about the company and how it came to be first.

Huawei’s Origins

For those unaware of the struggles within China after the creation of the People’s Republic of China in 1949, it is worth remembering that even in the 1970s and 1980s there were parts of China where famine was not unusual. One such region was Jiangsu province, where people were forced to forage in the forest for berries, nuts, and anything edible they could get hold of to survive. Bear in mind that this was also a time during which neighboring Hong Kong (and Singapore, too) saw fast food like McDonald’s and KFC become ubiquitous. This period of persistent poverty and suffering in China was a result of ongoing internal struggles and ill-considered policies that failed to support the country.

One man who grew up during this period was Ren Zhengfei. His family was so poor that he would forgo some of his meager rations so that his siblings could eat, and would instead mix his meals with rice bran to sustain himself. He used to go into the forest to pick anything edible for the family to survive.

An early life of struggle motivated him as a young man to embark on a most remarkable journey. Ren joined the Chinese military after studying architecture and engineering. He eventually left the army with bigger entrepreneurial plans, driven by a desire to contribute to society. He taught himself the workings of computers and other nascent digital technologies. After several failed forays into business, and in a last roll of the dice in 1987 at age 43, he formed Huawei, meaning “committed to China and making a difference,” with the intention of selling program-controlled switches.

The company is now, in many ways, one of the most recognized brands in the world—partly due to its innovations and market capitalization, and partly for being caught in the geopolitical struggle between the West and China.

Ren’s story of deprivation and desperation stands in stark contrast to that of many of the founders of today’s tech giants. It should also provide a clue into the resilience of the company, the sense of positivity that it is imbued with, and how it plans to withstand current external pressures. The launch of a new smartphone, demonstrating that Huawei has managed to overcome U.S. sanctions and can innovate by itself, has drawn rapt attention. Similarly, although it did not make the global headlines, the company also recently announced the introduction of its own Enterprise Resource Planning software, which ends its reliance on Oracle’s software. Many more innovations are expected, proving the old adage that necessity is the mother of invention.

What makes Huawei so innovative? Understanding this requires looking at three aspects of the company and how it is run, which provide insights for observers.

Huawei’s Governance and Ownership System

It is often wrongly assumed that Huawei operates as a commercial extension of the CCP, and is run similarly, where the founder Ren Zhengfei holds absolute authority, closely overseeing a very top-down, hierarchical system.

The reality appears rather differently. The privately-held company is 100 percent, employee-owned with  Ren holding 0.7 percent of the company’s shares. This governance structure is unique to Huawei and draws from extensive studies of best practices from across the world, customized to suit its needs.

The company operates under a collective leadership model with numerous checks and balances, where shareholder representatives and those sitting in decisionmaking bodies are democratically elected. The shareholders’ meeting, the company’s premier decisionmaking forum, decides on the company’s major matters such as capital increases, profit distribution, and election of the members of the board of directors and supervisory board. Employees are represented by the Trade Union Committee, and the Representatives’ Commission is the employee vehicle through which the Union fulfills shareholder responsibilities and exercises shareholder rights. The shareholding employees with voting rights elect the Commission on a one-vote-per-share basis, after which the Commission elects the company’s board of directors and supervisory board on a one-vote-per-person basis. These events are transparent and even live-streamed to all employees.

As the founder of Huawei, Ren’s influence and authority comes from the respect he has gained for his achievements—a particularly Chinese approach towards organizational harmony and order, rooted in a culture of respect for elders and leaders.  While Ren carries veto rights on board decisions, it is a matter of record that he has exercised this right only a few times and typically on technology and business direction, as is common in most privately held firms anywhere in the world. He is depicted internally as one who prefers to share his vision and ideas through company-wide addresses that serve as guidance on directionmaking.

The main motivation for setting up such a governance structure is to ensure the company's longevity and to enable it to achieve sustainable growth. Being a privately held company has allowed Huawei to design structures and set targets for the long-term,  able to focus on its core vision and mission—inclusive of customers and employees.

While recent sanctions have impacted Huawei’s smartphone business and short-term profits (there was a 69 percent year-on-year decline in net profit in 2022), Huawei has continued to make strategic investments and devoted even more capital to research and development (R&D). In 2022, they invested 25 percent of their revenue in R&D, equivalent to 161.5 billion yuan, more than any company in the world outside America in absolute terms, and more than the tech giants as a percentage of revenue. For comparison, Amazon, the world’s biggest spender on R&D, and Alphabet invested around 14 percent of their revenue on R&D in the same year.

Despite not being able to launch high-end 5G phones globally, the smartphone business units have not laid off any staff. This is also a cultural difference that is often misunderstood and unappreciated, where the employee is seen as being part of the family. This is such that, when hard times arrive, everyone bears with it and goes into “survival” mode. The launch of the new Mate 60, Mate 60 Pro, Mate 60 Pro+, and Mate X5 which is a new version of its foldable phones, is a testament to the wisdom of this strategy.

Huawei’s governance structure is what allows it to reinvest in the company, its facilities, R&D, and its employees, even during times of business downturn and external pressures.

A Culture of Learning from the World and Global Openness

Huawei’s emphasis on hard work, based on the Confucious tradition of collective resilience, has enabled it to attract talent who firmly believe they can overcome obstacles and create solutions that best achieve the company’s official goal of “Staying customer-centric and creating value for customers.” Employees are not driven only by the financial rewards on offer, but also by a sense of purpose and the need to be engaged in finding solutions to problems. The company’s appeal has enabled it to attract the best talent China has to offer.

In coming up with the company’s current corporate governance model, what is noteworthy is that Huawei’s leadership spent time studying the governance models of successful, long-lasting companies from around the world, including Japanese family-owned companies and corporations from France, Germany, and the United States. They actively considered the merits and weaknesses of different models, learning from lessons of success and failure, taking these ideas and customizing them for Huawei.

The design of Huawei’s supervisory board is a good example. It drew inspiration from German corporate governance structures and the governance principles developed by Fredmund Malik. However, Huawei’s structure is different from German companies in that the representatives of shareholders sit at the top. In addition, the supervisory board does not only supervise the board of directors but plays an active role in developing the leadership pipeline at different levels of the company and setting regulations for how the company operates.