Huawei's affiliations

China’s doctrine of cyberspace operations is reflected in PRC’s legislation and the country’s governance model. The most questionable document is the China’s National Intelligence Law (CNIL), which has been introduced in 20171. This act includes several articles, that controversial from the European perspective, especially when it comes to engaging Chinese citizens in their country’s efforts to conduct intelligence operations. Article 7 of the act contains “obligation of Chinese citizens to support national intelligence work.”2. As Jane’s (British publishing company specialising in military, aerospace and transportation topics) writes in its analysis of the act, the CNIL is an attempt to create coordinative mechanism for a national spying effort3. The new legal framework has strong implications on the functioning of Chinese companies as it imposes obligations on ICT operators to share their data at the request of relevant security services. The most frequently cited excerpts include articles from Chapter II of this Act, entitled “National intelligence bodies and competences”:

Article 11

Foreign bodies, organizations or individuals engaging in acts harming the national security and interests of the People’s Republic of China within Chinese borders must be punished by law. National intelligence work organs shall provide intelligence reference and evidence for preventing, curbing and punishing the above-mentioned acts.

Article 12

National intelligence work organs may establish a collaborative relationship with relevant individuals and organizations, and entrust them with carrying out relevant work.

Article 13

Relevant departments in all levels’ People’s Governments, enterprise and undertaking work units, other organizations and citizens shall provide the necessary assistance to national intelligence work organs lawfully carrying out their work, and maintain secrecy4.

These provisions quite clearly define the prerogatives of secret services regarding access to collected data and the use of infrastructure and civil law partnerships to build security in the PRC. At the same time, the wording contained in the provisions is blurry enough to allow for interpretation as favorable to the secret services as possible.

Any legislation in China is enforced in the context of “rule by law”5, with the absence of separation of powers6 and the supremacy of the Chinese Communist Party (CCP) as the ultimate interpreter and arbiter of the law7. This mode of governance, coupled with the National Intelligence Law, enforces legal obligation, that allows no escape for Chinese companies who are embedded in a totalitarian regime.

The activities of the Chinese administration—both in the military and the legislative sphere, clearly indicate that cyber espionage has become a permanent element of the PRC’s development doctrine. In this context, Huawei is a special entity that cannot be disassociated with the CCP, the Chinese government and army8.

Huawei as a special entity

Huawei is a telecommunications company that offers solutions in the field of telecommunications and wireless technologies. The production of computers and smartphones is an additional area of its operations. The company was founded in 1987 by Ren Zhengfei, a former officer of the People’s Liberation Army of China (PLA). The company’s initial area of activity was the sale of telecommunications equipment in poor agricultural regions of China. At the beginning of the 1990s, however, the company gained a contract for the supply of telecommunications equipment to the PLA. In 1996 the company was awarded the status of “national champion”9.

Even if the company wants to appear as an independent entity, its connections to the government are deeply rooted in its culture and the practice of authoritarian governments. Report prepared by the Journal of Political Risk (JPR) indicates that influence of Communist Party over Huawei is twofold: “firstly, the Chinese government has the motive to both support and steer Huawei, and secondly, in an authoritarian state such as the PRC, the Party certainly has the means to do so.”10. Huawei is not only a bolster to Chinese R&D statistics and budget, but also a provider of ICT equipment that represents certain prestige.

Starting from 2010, the company began a rapid expansion with the aim of eventually dominating many markets. This expansion was largely possible thanks to the domestic support Huawei received on the Chinese market and through financial support that the company received from Chinese state-owned banks. Although the company officially claims that it remains independent from party structures, the ownership structure and huge preferential loans indicate that Huawei is heavily dependent on the Chinese Communist Party as shown below.

Huawei—ownership structure

A popular belief promoted by Huawei is that the company is owned by its employees. Allegedly and the subsequent control of the company is ensured by broad employee ownership of the company’s “shares” (also by western interpretation). Those shares are in fact a legal contract that allows the owners participation in the company’s profit sharing, but not in the decision-making process of any sort as employees cannot exert control over the company11. Also the shares that are in the hands of employees are not tradable. This makes it impossible to trace the shares, which raises many doubts about the actual ownership structure of the company. A landmark in this regard was the study conducted by Christopher Balding (Fulbright University of Vietnam) and Donald C. Clarke (George Washington University), who investigated the ownership structure of this Chinese giant.

The article published by Clarke and Balding was based on the study of open sources, such as press reports, corporate documents or materials from court cases, and clearly states that Huawei is not owned by employees.

99% of Huawei shares are owned by an unidentified organization called the Huawei Trade Union Committee (Huawei Investment & Holding Company Trade Union Committee), and one percent falls to Ren Zhengfei, the company’s founder as well as former PLA military personel. The rules governing the “trade union commission” are not specified. Moreover, it is not known who belongs to the authorities of this union or how its members are elected. Members of the union, however, do not have rights to the capital held by the union. The authors also state that, given the functioning characteristics of Chinese trade unions, it can be assumed that Huawei is a company of the Chinese treasury and employees have no control over the company’s activities12.

The main problem with determining the ownership structure also results from the significant complexity of the Huawei group. The company that is responsible for operations and productions is Huawei Technologies Inc. The company that appears to be the dominant entity of the group is Huawei Investment & Holding Co. Ltd. It holds 100% of shares of Huawei Technologies, and splits the shares between the founder and the “trade union commission”13.

The authors of the report also indicate that in the years 2001-2011 Shenzen banks granted significant loans to Huawei employees so that they could buy virtual shares of their company. 99% percent of the income from sold shares went to the “Huawei trade union commission” and then through it to Huawei Holding or Huawei Tech. Estimates from Chinese sources indicate that Huawei gained between 10 and 26 billion yuan in this way. Employees buying virtual shares, however, did not receive any validation of acquired any property. The only copy of the contract they signed was in the Huawei offices14.

Chinese practice indicates that even if the “trade union commission” could exercise real power over Huawei, it is still controlled by the All-China Federation of Trade Unions—a central body that is controlled by the Chinese Communist Party, therefore Huawei should be treated as state owned company.

Another example of this dependency on the CCP is the position of Zhou Daiqi, Huawei’s party committee secretary and the representative of Chinese Communist Party, who joined Huawei in 199415. According to Taipei News the founder of Huawei Ren Zhengfei has to answer before the secretary Zhou Daiqi. What is even more, he has to follow his instructions, which in turn are given by CCP itself16.

Huawei—government funding is another source of government dependency

Another aspect connecting Huawei to the Chinese government and indicating that it is state controlled are the financing issues. In April 2019, the american CIA intelligence agency allegedly indicated to its British counterpart that Huawei was receiving funding from the Beijing security apparatus—the People’s Liberation Army of China, the Chinese National Security Commission and the Third Department of Chinese Intelligence17.

Huawei also received significant funding through the Chinese Development Bank, which is a financial institution under the strict control of the Chinese government18. Government aid significantly supported company’s international development by providing access to low-cost capital.

In 2005, Huawei received a USD 10 billion credit line from the Chinese Development Bank. Documents disclosed by WikiLeaks regarding this loan contained a “support letter,” which stated that the line was opened to “assist Huawei in foreign development, including exports of ICT products and equipment, foreign investment, foreign contracts and the like”19.

In 2009, the Chinese Development Bank granted Huawei another credit line, this time amounting to USD 30 billion, to “introduce (Chinese) globalization strategy”20. Chinese Development Bank issued another USD 30 billion in the form of a low-interest rate loan for Huawei in the 201121.

The RWR Advisory Group report, notes that since 2010, Huawei has carried out at least 45 agreements in which exports were financed with the support of Chinese state-owned banks. Support in these projects amounted to USD 10.54 billion22.

Huawei benefits also from grants, subsidies, preferable land prices or event apartments. Over the past 10 years, Huawei has received 11 billion yuan ($1.6 billion) in grants, according to its annual reports. More than half was given by Chinese government as “unconditional government grants” because of the firm’s “contributions to the development of new high-technology” in China, according to Huawei’s 2009 annual report23.

The RWR report also cites preferential financing conditions and access to cheap capital which allows Huawei to maintain a strong position in the telecommunications technology market by giving the company the ability to compete on profit margins. Thus Huawei’s biggest advantage over the competition on the telecommunications market, does not come from innovative business practices, but from the support of the Chinese government. There is no doubt that Huawei’s expansion is included in the Chinese development plans described on the above pages. It should be assumed that Huawei, due to its special role and strategic importance in the ICT industry, is a special entity in Chinese plans.

Chinese development goals

Lastly, the Chinese government’s support for Huawei on the domestic market, which is aimed against foreign competition, is also an indicator of Huawei’s links to the Chinese government and its dependency on the government.

In the “Made in China 2025—Global Ambitions built on local protection” analysis prepared by the US Chamber of Commerce the following goals of the Chinese government are stated:

  1. Jane’s Intelligence Review, Chinese legislation points to new intelligence co-ordinating system
  2. The Diplomat, The Real Danger of China’s National Intelligence Law, retrieved 20.09.2019
  3. Janes, Chinese legislation points to new intelligence co-ordinating system, retrieved 20.09.2019
  4. China Copyright and Media, National Intelligence Law of the People’s Republic of China (Draft), retrived 19.09.2019
  5. George G. Chen, Le Droit, C’est Moi: Xi Jinping’s New Rule-By-Law Approach, 26 July 2017
  6. The New York Times, 18 January 2017
  7. Sinopsis, Lawfare by proxy: Huawei touts “independent” legal advice by a CCP member, retrieved 19.09.2019
  8. JPR, Huawei and China: Not Just Business as Usual, retrieved 20.09.2019
  9. BBC, Huawei, retrieved 20.09.2019
  10. JPR, Huawei and China: Not Just Business as Usual, retrieved 20.09.2019
  11. Christophera Balding, Donalda C. Clarke, Who owns Huawei?, SSRN, retrieved 17.09.2019
  12. Ibidem.
  13. Ibidem.
  14. Ibidem.
  15. Taipei Times, Huawei—private or state-owned?, retrieved 25.09.2019
  16. Ibidem.
  17. Forbes, CIA Claims It Has Proof Huawei Has Been Funded By China’s Military And Intelligence, retrieved 20.09.2019
  18. China Development Bank, About CDB
  19. WikiLeaks, Letter of Support, retrieved 20.09.2019
  20. Telecomasia, Huawei gets $30b credit line from CDB, retrieved 20.09.2019
  21. Bloomberg, Huawei’s $30 Billion China Credit Opens Doors in Brazil, Mexico, retrieved 20.09.2019
  22. RWR Advisory Group, Assesing Huawei Risk, Maj 2019 s. 27
  23., Huawei a key beneficiary of China subsidies that US wants ended, retrieved 20.09.2019
  24. US Chamber of Commerce, Made in China 2025—Global Ambitions built on local protection, retreived 25.09.2019
  25. Ibidem.
  26. Ibidem.