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Huawei the “misterious”

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Core information:

While tracking the trends related to experiencing the cloud one inevitably had to deal here with a recent giant in the mobile Internet technologies, Huawei of the mainland China:
ICT Top-100 in Mainland China and the #1 Huawei [June 4, 2011]
Huawei’s IDEOS U8150 smartphone for US$86 in Kenya: 350,000 units sold in 8 months [Aug 17, 2011] (note that this activity stemmed from the first non-infrastructure business of the company, and now it is part of the Huawei Consumer business group)
and
Huawei Enterprise after its 1st year and the 2012 strategy [March 26, 2012] (note that Huawei Enterprise is a new business group of the company)

While the company’s internal business structure is quite well know by this time–see this:image
from the recent Corporate Governance [Huawei webpage, Apr 23, 2012], the ownership structure is unclear, even when checking the bigger scheme representing “employee shareholding” on the same governance page of the company.

Fortunately for us the recent thorough US investigation of Huawei from the point of view of “security threat to U.S.” is providing ample material to describe here both the ownership structure, and –more importantly— the real strategic decision making structure of the company, which –you will find below– is a structure into which the Communist Party of China and the Chinese government are highly weaved into through a still uncovered web of the party organisations down to the company’s own party organisation, as well as different government organisations, including even the defense and intelligence related parts of the Chinese capitalist state. It becomes obvious from findings of the US investigation that the very much state controlled financial sector of China is also part of this complex strategic decision making structure which is behind the Huawei company.

Certainly this post has nothing to do with the security question which is just mentined in the first to video reports given below.

I. Background: the “security threat” investigation in the U.S.

All the rest is devoted to three aspects:

II. Overall findings

III. Findings regarding the relationships with the Chinese government and the Chinese Communist Party

IV. Findings regarding the founding and financing of Huawei

My goal with that was to complement my two earlier posts on:
SOEs and state coexistence in China [June 19, 2011 – Feb 24, 2012]
and
Entrepreneurial global brand building by the founder of the Chinese aigo [爱国者] company: a desparate attempt to avoid the death march of ruthless competition at home [Oct 11, 2012]
since Huawei is definitely not a SOE (State Owned Enterprise), but essentially driven by the state and party even more efficiently than the most of SOEs. At the same time aigo is a totally grass-roots, entrepreneurial company through the story of which one can understand the insanely wild world of true private companies now forming an equally important backbone of the Chinese economy, overall dominated by the Chinese capitalist state and the party behind. So I have now a complete picture without which one cannot understand even the Chinese high-tech sector developments which more and more are determining the future of the global ICT as clearly demonstrated by a number of trend tracking posts on this blog, such as:
Be aware of ZTE et al. and white-box (Shanzhai) vendors: Wake up call now for Nokia, soon for Microsoft, Intel, RIM and even Apple! [Feb 21, 2011 – Aug 10, 2012]
ASUS, China Mobile and Marvell join hands in the OPhone ecosystem effort for “Blue Ocean” dominance [March 8, 2011
China Mobile repositioning for TD-LTE with full content and application aggregation services, 3G [HSPA level] is to create momentum for that [June 18, 2011]
New high-tech and direct investment relationships between the US and China? [Aug 19, 2011]
China becoming the lead market for mobile Internet in 2012/13 [Dec 1, 2011 – Jan 16, 2012]
OPhone 2.5 and beyond from Borqs for China Mobile [Dec 5, 2011]
World’s lowest cost, US$40-50 Android smartphones — sub-$100 retail — are enabled by Spreadtrum [Dec 11, 2011 – Feb 27, 2012]
The ZTE way of capitalizing on the LTE opportunity [Dec 20, 2011 – Feb 10, 2012]
The new, high-volume market in China is ready to define the 2012 smartphone war [Jan 6 – July 13, 2012]
China TD-SCDMA and W-CDMA 3G subscribers by the end of 2011: China Mobile lost its original growth momentum [Jan 21, 2012]
China-based second-tier and white-boxed handset makers targeting the emerging markets[Feb 13 – Apr 17, 2012]
MWC 2012: Fuzhou Rockchip Electronics [March 13, 2012]
Core post: Boosting the MediaTek MT6575 success story with the MT6577 announcement  – UPDATED with MT6588/83 coming early 2013 in Q42012 and 8-core MT6599 in 2013 [June 27, July 27, Sept 11-13, Sept 26, Oct 2, 2012]
Core post: Lowest H2’12 device cost SoCs from Spreadtrum will redefine the entry level smartphone and feature phone markets [July 26, 2012]
Core post: MediaTek’s ‘smart-feature phone’ effort with likely Nokia tie-up [Aug 15, 2012]
Core post: The low priced, Android based smartphones of China will change the global market [Sept 10-26, 2012]
– Take note: MT6577-based JiaYu G3 with IPS Gorilla glass 2 sreen of 4.5” etc. for $154 (factory direct) in China and $183 [Sept 13, 2012]

I. Background: the “security threat” investigation in the U.S.

Opposing Views on Congress’ Claims Huawei Technologies [PBSNewsHour YouTube channel, Oct 9, 2012]

Jeffrey Brown discusses the House Intelligence Committee’s report with Rep. Dutch Ruppersberger, D-Md., which suggests Chinese telecoms pose a national security threat. Then Brown talks to Huawei Technologies spokesman William Plummer who refutes any claims of an inappropriate relationship between Huawei and China’s government.

And here is a 3d party assesment – Opinion: Is Huawei Really a Security Threat? [WSJDigitalNetwork YouTube channel, Oct 11, 2012]

Columnist Bret Stephens on a U.S. intelligence committee report that Huawei’s equipment could be used for spying. Photo credit: Associated Press.

II. Overall findings

from Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE [A report by Chairman Mike Rogers and Ranking Member C.A. Dutch Ruppersberger of the Permanent Select Committee on
Intelligence
, U.S. House of Representatives, 112th Congress, October 8, 2012]

pp. 13-14

Huawei markets itself as a “leading global ICT [“Information Communications Technology”] solution provider,” that is “committed to providing reliable and secure networks.”38 Throughout the investigation, Huawei consistently denied having any links to the Chinese government and maintains that it is a private, employee-owned company.39 Many industry analysts, however, have suggested otherwise; many believe, for example, that the founder of Huawei, Ren Zhengfei, was a director of the People’s Liberation Army (PLA) Information Engineering Academy, an organization that they believe is associated with 3PLA, China’s signals intelligence division, and that his connections to the military continue.40  Further, many analysts suggest that the Chinese government and military proclaim that Huawei is a “national champion” and provide Huawei marketdistorting financial support.41

For years, analysts have struggled to understand how Huawei’s purported employee-ownership model works in practice, and how that ownership translates into corporate leadership and decision-making.43  Huawei repeatedly asserts that it is a private, employee-owned and controlled company that is not influenced by the Chinese government or Chinese Communist Party.44 Executives also asserted that the unique shareholder and compensation arrangement is the foundation of the company’s rise and success.

Available information does not align with Huawei’s description of this structure, and many analysts believe that Huawei is not actually controlled by its common shareholders, but actually controlled by an elite subset of its management.45 The Committee thus requested further information on the structure of the company’s ownership.  For example, the Committee requested that Huawei list the ten largest shareholders of the company.  Huawei refused to answer.46 At the hearing on September 13, 2012, Huawei admits that its shareholder agreement gives veto power to Ren Zhengfei, the founder and president of the company.47 Other public statements by the company undermine the suggestion that the 60,000 supposed shareholders of Huawei control the company’s decisions.  For example, in the company’s 2011 report, Mr. Ren highlighted that Huawei’s Board of Directors:

will not make maximizing the interests of stakeholders (including employees, governments, and suppliers) its goal.  Rather, it holds on to the core corporate values that are centered on customer interests and encourage employee dedication.48

pp. 15-16

Huawei officials explained that Chinese law forbids foreigners from holding shares in Chinese companies absent a special waiver.49  Current and former Huawei employees confirm that only Chinese nationals working at Huawei in the United States participate in the shareholding plan. The inability of non-Chinese employees of Huawei to hold shares of the company further erodes its claim that it is truly an employee-run organization as an entire group of employees are not only disadvantaged, but automatically excluded from any chance to participate in the process.

Huawei also provided staff access to shareholder ballots for shareholder
representatives and the Board of Directors.  These too did not appear to be facially fraudulent, but they were impossible to authenticate, especially as investigators were not allowed to remove the documents from Huawei’s facilities for third-party validation.  The documents appeared to highlight that shareholders have a write-in option for union representatives, but there is no such option for the Board of Directors.  Rather, Huawei officials stated that the nominees for the Board are chosen prior to the vote by the previous Board.  It was unclear how the original Board was established, and Huawei has consistently failed to provide any answers about who was previously on its Board of Directors.

Huawei further explained that in 1994, the first Company Law of China was
officially published, regulating the establishment and operations of limited liability companies.51 Under this law, the maximum number of shareholders was 50 individuals. Thus, in 1997, Huawei claims to have changed its legal structure to a limited liability company, and started the employee stock ownership program through the union. Similarly, Huawei asserted that in 1997, the City of Shenzhen issued policies regarding employee shareholdings.  According to Huawei, it designed its shareholder program to conform to the the Company Law of China, and the laws and policies of the City of Shenzhen.52

According to Huawei, the union, known as Union of Huawei Investment and Holding Co., Ltd., facilitates ESOP implementation.  The Union is a lawfully registered association of China.  Huawei officials stated that “Huawei’s success can be directly linked to the company’s unique compensation structure.”53 Currently, Huawei claims that the Union holds 98.7% of the ESOP shares, and Mr. Ren holds 1.3%.  At the Huawei explained that as of December 31, 2011, ESOP has 65,596 participants, which it alleges are all Huawei employees (current and retired), it claims that there are no third parties, including government institutions, holding any ownership-stake in the company.

p. 17

  • Each year, the company determines the numbers of shares an employee can purchase based on job performance.  Eligible employees must sign the Confirmation Letter and the Letter of Undertakings and make payments for the shares.
  • An employee’s stocks can be held only by the employee him/herself, and cannot be transferred or disposed by the employee.  When an employee leaves the company (except for those who meet the retirement requirements with minimal eight years of tenure and 45 years old), stocks will be purchased back by the company.
  • The current stock price is the net asset value of the stock from the previous year.  When an employee purchases more shares or the Union takes shares back, it is based on the current stock price.  The dividend amount of each year is based on the performance of the company.

p. 20

(3) Acquisition of Restricted Phantom Shares [see the Wikipedia desciption of phantom stock for clarity]

  • The restricted phantom shares of the Union shall be issued to those key employees of the Company who have displayed excellent work performance.
  • The Restricted Phantom Share Management Committee shall decide annually whether to issue shares, and the number of shares to be issued, based on the comprehensive evaluation of the work performance of such employee and in accordance with the evaluation rules of the restricted phantom shares. Retired or restructuring beneficiaries are not allowed to purchase new shares

then there is

pp. 17-18
The Commission is composed of 51 Representatives and nine alternates, elected by the Active Beneficiaries as organized by the Union with a term of five years.
– Active beneficiary is defined as an active employee who works at Shenzhen Huawei Investment and Holding Co, Ltd or any of its equity affiliates and participates in the Plan of the Union.
– In the event there is a vacancy, the Alternate shall take up the vacancy in sequence.  The Alternates can attend, but not vote at, all meetings.
The Commission
  • reviews and approves restricted phantom share issuance proposals;
  • reviews and approves dividend distribution proposals;
  • reviews and approves reports of the board of shareholding employees;
  • elects and replaces any member of the board;
  • elects and replaces any member of Supervisory Board; reviews and approves procedures forelecting representatives;
  • approves amendments of these articles;
  • reviews and approves the use of the reserve fund;
  • reviews and approves other material matters with respect to restricted phantom share;
  • perform functions as the shareholders of the company, exercises the rights of the shareholder, and develops resolutions regarding material matters such as capital increase, profit distribution, and selection of Directors and Supervisors.
The Board is responsible for regular management authority and shall be responsible to the Commission.
The main functions of the Board are to:
  • prepare restricted phantom share issuance proposal;
  • preparation of the dividends distribution proposal;
  • formulation, approval, and amendment of the detailed rules, processes, and implementation methods with respect to the restricted phantom shares;
  • preparation of the amendments to articles;
  • determination on the detailed proposal as to the use of the Reserve Fund;
  • execution of the resolutions of the Commission;
  • exercise of the specific rights and powers of a shareholder of the Investee Company except for the matters on which a resolution from Commission is required;
  • determination of other matters that shall be determined by the Board.

     

The Board consists of 13 directors selected by the Commission; each serves for five years
p. 19
The Supervisory Board is the organization responsible for supervising the implementation of the shareholder plan with its main functions and powers as follows:
  • supervising the implementation of the resolutions by the Board;
  • making recommendations or inquiries in event of any violation of any law, regulation or these Articles by the Board;
  • making work reports to the Commission; and
  • other regular functions and powers.
Supervisors may attend Board meetings as non-voting delegate. The Supervisory Board shall consist of five Supervisors who shall be elected by the Commission to five year terms; no Director can serve concurrently as a Supervisor.
p. 20
      • Before 31 December 2018, Mr. Ren shall have a right to veto the decisions regarding restricted phantom shares and Huawei’s material matters (resolutions of the Board, Commission, and Shareholder’s Meeting of the Company).
      • Starting from 1 January 2013, the confirmed Active Beneficiaries who represent a minimum of 15% of the restricted phantom shares (excluding the restricted phantom shares held by the Restructuring Beneficiaries and the Retained Restricted Phantom Shares) shall have a right to veto the decisions regarding restricted phantom shares and Huawei’s material matters (including resolutions of the Board, the Commission, and the Shareholders’ Meeting of the Company).
      • The relevant resolutions shall take effect in the event that the owner(s) of the right of veto does (do) not exercise the right of veto against the aforementioned resolutions.

III. Findings regarding the relationships with the Chinese government and the Chinese Communist Party

from Investigative Report

p. 21

The nature of the modern Chinese economy is relevant for understanding
Huawei’s connection to the Chinese state.  The Chinese government often provides financial backing to industries and companies of strategic importance.  Indeed, analysts of the Chinese political economy state that:

Huawei operates in what Beijing explicitly refers to as one of seven “strategic sectors.”  Strategic sectors are those considered as core to the national and security interests of the state.  In these sectors, the CCP [Chinese Communist Party] ensures that “national champions” dominate through a combination of market protectionism, cheap loans, tax and subsidy programs, and diplomatic support in the case of offshore markets.  Indeed, it is not possible to thrive in one of China’s strategic sectors without regime largesse and approval.56

Similarly, the U.S.-China Commission has explained, with Chinese companies, “the government’s role is not always straightforward or disclosed.” Despite some reforms, “much of the Chinese economy remains under the ownership or control of various parts of the Chinese government.”57  The U.S. China-Commission lists Huawei as a form of enterprise in China that exists in a relatively new market and receives generous government policies to support its development and impose difficulties for foreign competition.58

p. 22

In its written submission in response to the Committee’s questions, Huawei
simply asserted that it “maintains normal commercial communication and interaction with relevant government supervisory agencies, including the Ministry of Industry and Information Technology and the Ministry of Commerce.”62  Huawei’s failure to provide further detailed information explaining how it is formally regulated, controlled, or otherwise managed by the Chinese government undermines the company’s repeated assertions that it is not inappropriately influenced by the Chinese government.  Huawei appears simply unwilling to provide greater details that would explain its relationships with the Chinese government in a way that would alleviate security concerns.

Similarly, Huawei officials did not provide detailed answers about the
backgrounds of previous Board Members.  Rather, the Committee simply received the same biographies as previously disclosed of current members of the Board of Directors and Supervisory Board.63  Previous Board Members may have significant ties to the Party, military, or government.  And since the previous Board is responsible for nominating the current Board members, this information is important to understanding the historical progression of the company.  Because the biographies of the previous members would highlight possible connections to military or intelligence elements of the Chinese government, Huawei’s consistent failure to provide this information is alerting.

p. 23

In response to the numerous opportunities to answer questions about its
connection to the Party, Huawei stated that the company has no relevant connections. For example, in response to the Committee’s written questions about the role of the Party in the company’s affairs, Huawei merely stated that it “has no relationship with the Chinese Communist Party in its business activities.”65

Huawei admits, however, that an internal Party Committee exists within Huawei.  Huawei simply states that party committees are required by Chinese law to exist in all companies in China.66 The existence of these Committees is, however, of particular relevance.  Huawei states in its defense that all economic institutions in China are required to have a state Party apparatus inside the company.  This is not, however, a compelling defense for companies seeking to build critical infrastructure in the United States.  Indeed, experts in Chinese political economy agree that it is through these Committees that the Party exerts influence, pressure, and monitoring of corporate activities.  In essence, these Committees provide a shadow source of power and influence directing, even in subtle ways, the direction and movement of economic resources in China.67  It is therefore suspicious that Huawei refuses to discuss or describe that Party Committee’s membership.  Huawei similarly refuses to explain what decisions of the company are reviewed by the Party Committee, and how individuals are chosen to serve on the Party Committee.

IV. Findings regarding the founding and financing of Huawei

from Investigative Report

 

In the corresponding parts of the ivestigative report you can find a five times reference
to Mr. Ding = Charles Ding.
Regarding his previous public appearances I found on the web only one page having a photo of him embedded. As it is the only public appearance giving not only a direct visibility outside his regular job as president of Huawei in US/NA, but also some clue about what kind of strategic role he could play in various influential circles of the western world, I am copying here the whole page content as it appears now:
Georgetown Leadership Seminar 2011 [The Jewish Diplomatic Corps, March 15, 2011]

Set in one of the world’s leading academic and research institutions, Georgetown University, JDCorps’ Yariv Nornberg of Better Place [founded by Shai Agassi], attended the Georgetown Leadership Seminar in March 2011.
(From L to R) JDCorps Member Yariv Nornberg, former Sec. of State Madeline Albright, Charles Ding Huawei NA President

This seminar is a annual, prestigious event dealing with many topics of interest for World Jewry. Yariv’s attendance was the first of its kind in a decade, whereby an Swedish-Israeli Jew attended the seminar. Organized by the School of Foreign Service at Georgetown University and led by former US senior officials, each year the seminar invites some 35 emerging leaders to Washington D.C. to discuss major foreign policy issues.

And now information from the investigative report:

p. 23

In his official biography, Mr. Ren admits that he was asked to be a
member of the 12th National Congress of the Communist Party of China in 1982.  The National Congress is the once-in-a-decade forum through which the next leaders of the Chinese state are chosen.  The Party members asked to play a role in China’s leadership transition are considered key players in the state apparatus.68 Mr. Ren proudly admits that he was invited to that Congress, but he will not describe his duties.  Shortly after being given such a prestigious role, Mr. Ren successfully founded Huawei, though he asserts he did so without any government or Party assistance.69 Huawei likewise refuses to answer whether Mr. Ren has been invited to subsequent National Congresses or has played any role in Party functions since that time.70

pp. 24-25

According to Huawei officials, Mr. Ren was a member of the Chinese military’s engineering corps as a soldier tasked to establish the Liao Yang Chemical Fiber Factory and was promoted as a Deputy Director, which was a professional role equivalent to a Deputy Regimental Chief, but without military rank.71 Mr. Ren then retired from the army in 1983 after the engineering corps disbanded, and next worked for a State Owned Enterprise (SOE) following his retirement. According to this account, Mr. Ren was “dissatisfied” with his low salary and career path at the SOE, so in 1987, he established Huawei.  Huawei officials did not explain how he was able to leave his employment with a SOE or whether he got agreement of the state to do so.  Huawei officials denied that Mr. Ren was a senior member of the military.72 The Committee’s requests for more information about Mr. Ren’s military and professional background were unanswered.  Huawei refused to describe Mr. Ren’s full military background.  Huawei refused to state to whom he reported when he was in the military.  Huawei refused to answer questions about how he was invited to join the 12th National Congress, what duties he performed for the Party, and whether he has been asked to similar state-party matters.

Huawei similarly denied allegations that Ms. Sun Yafang, Chairwoman of
Huawei, was previously affiliated with the Ministry of State Security.  Mr. Ding responded to Committee questions after the hearing that, to his knowledge, reports about Ms. Yafang in Chinese publications, such as those in Xinjing Bao, are erroneous.73 Mr. Ding did not respond to questions asking about how such publications received such information, or whether Ms. Yafang’s previous biography on the Huawei website was erroneous as well.  Rather, Mr. Ding simply provided again Ms. Yafang’s corporate biography from the Huawei Annual Report 2011.74

With respect to Huawei’s founders, Huawei cited a Chinese legal equirement that new companies in the economic development zone must have a minimum of five shareholders and 20,000 RMB registered capital. During meetings with the Committee, Huawei officials claimed that in 1987, Mr. Ren raised 21,000 RMB with personal savings and five other private investors. To the best of the officials’ knowledge, none of the five investors had worked with Mr. Ren prior to start-up and one individual has previous affiliation with the government.75 According to Huawei officials, the five investors never actually worked for Huawei and withdrew their investments several years later.76

The Committee struggled to get answers from Huawei on the details of this
founding, including how Mr. Ren came to know the initial individual investors, whether his connections to the military were important to the eventual development of the firm, and whether his role in the Party remains a factor in his and his company’s success.

pp. 27-28

During the Committee’s hearing, Mr. Ding suggested he did not understand and had no knowledge of the term “national champion,” which is often used to describe favored Chinese companies throughout the economic literature on China.91 The Committee finds that Mr. Ding’s suggestion that he does not understand the term is not credible.  Huawei itself provided Capitol Hill offices a slide presentation in November 2011, which used the term “national champion” several times.92 In response to the Committee’s questions about use of the term in that document, Huawei did not deny that it used the document and provided the document containing the term.93 Rather, Huawei stated that the particular slide in the larger document was created by a third party and thus not Huawei’s responsibility.94 The Committee finds that Huawei’s knowing use of the document in its discussions with United States elected representatives is sufficient evidence to prove that Huawei does in fact have an understanding of the term.  Mr. Ding’s consistent refusal to answer questions about which firms are considered national champions in the Chinese telecommunications sector was obstructionist.  In fact, his response to the Committee’s question that “Huawei has not paid attention to the meaning of ‘national champion’ before,” is obviously untrue given the company’s use of the term in its presentations previously.95 Moreover, his answers suggest that he did not want to explain how it was that Huawei, the number one telecommunications provider in China, is not a company of strategic importance in China, as recognized by others around the world.

Huawei officials also deny that they have received any special financial incentives or support from the Chinese government.96 Huawei claimed that the company simply takes advantage of general Chinese banking opportunities, but does not seek to influence or coordinate with banks such as the Chinese Development Bank and the Export-Import Bank, which are both state owned.  In previous presentations, Huawei had suggested that it served as an “intermediary and bridge” between the state-backed financial institutions and Huawei customers.97 Huawei refused, however, to provide more detail about precisely how those lines of credit developed.  Huawei also refused to answer specifics about its formal relationships with the Chinese banks, opting to simply answer that it maintains “normal business relations” with the Export-Import Bank of China.98

p. 29

In sum, Huawei admits that its customers receive billions of dollars in support from Chinese state-owned banks and that it has received favorable loans from Chinese banks for years.  Huawei refuses to provide answers to direct questions about how this support was secured, nor does it provide internal documentation or auditable financial records to evaluate its claims that the terms of these agreements comply with standard practice and international trade agreements.  The Committee is equally concerned with statements by company leaders that undermine the Committee’s  confidence in the financial information the company has provided.  For example, in a June 2007 speech to Huawei employees in the United Kingdom, Mr. Ren stated that he appreciated the subsidiary’s attempt to create financial statements, “whether the data is accurate or not.”105 Based on available information, the Committee finds that Huawei receives substantial support from the Chinese government and Chinese state-owned banks, which is at least partially responsible for its position in the global marketplace.

p. 34

The Committee also received internal Huawei documentation from former
Huawei employees showing that Huawei provides special network services to an entity the employee believes to be an elite cyber-warfare unit within the PLA.131 The documents appear authentic and official Huawei material, and the former employee stated that he received the material as a Huawei employee.132 These documents suggest once again that Huawei officials may not have been forthcoming when describing the company’s R&D or other activities on behalf of the PLA.

Supplementary materials

Why Do Private Companies in China Have Party Committees? [ChinaForbiddenNews YouTube channel, Sept 30, 2012]
Note that the New Tang Dynasty Television (NTDTV or lately NTD) which is behind ChinaForbiddenNews (see the logo in the upper right corner of the screen) said to be founded in affiliation with Falung Gong, and one of the hallmarks of this television is strong criticism  of the CPC.

If you don’t like to follow the captions of the video then here the captions in an entire text form:

In mid September, two major suppliers of communication equipment , Huawei and ZTE Corporation, attended a hearing of the U.S. House of Representatives and answered questions regarding the threat to U.S. national security. This is the first time Chinese enterprises participated in such hearings in the U.S. Congress.

In addition to being suspected of Internet spying, U.S. lawmakers asked in the hearing why Huawei and ZTE should have party organizations.

Since February 2011, the U.S. Congress began to investigate Huawei and ZTE. On September 13, the two sides finally met. At the hearing, members of the U.S. Congress pinned harsh questions on both companies in regards to their “espionage” activity.

Committee Chairman Mike Rogers pointed out that the two companies sell espionage equipment. There are vulnerabilities hidden in the back door of
their products. It is a deliberate design which provides help for Chinese
intelligence agencies to attach network in the United States and become a serious threat to network security.

The hearing lasted three hours. Huawei and ZTE executives also defended the allegations.

In addition to the network security issue, party organizations in Huawei and ZTE had also become the focus of the questioning. U.S. Lawmakers questioned why a private enterprise would have a party organization.
how many members are in the party and whether they participate in company decision-making.

Ding Shaohua, senior Vice President of Huawei and President of North American companies, argued that a party committee is established under the PRC company law, and even Wal-Mart, a foreign-funded enterprise, has party organizations. But he declared that party organization members do not participate in enterprise management and decision-making.

Prof. Xie Tian, from the University of South Carolina’s Aiken Business School, once published an article entitled “Foreign Companies Set Up Party Branches in the New Era” which provided in-depth analysis of why the Chinese authorities force foreign companies to set up party organizations.
Xie Tian pointed out that the establishment of party organizations is in order to implement political control needs. A party branch in a private enterprise precisely displays the fact that guidance and management comes from senior party committee on the location.

Prof. Zhang Tianliang of George Mason University believes that under the Chinese Communist Party(CCP), the party’s power is always higher than administrative power. Those enterprises in Mainland China cannot survive without official support.

Prof. Zhang Tianliang: “The entire CCP system penetrates into each cell of society, including enterprises. You may not know the functions of a party committee and what it can do. It is linked with the superior party committee, the city’s party committee, and the district party committee, for it is an entire system.”

Xie Tian’s article quoted the Secretary of the Party Committee of Beijing Hyundai Motor, who said let foreign companies realize that in order to business in China, you need to connect with the political resources – party organizations. This reveals the CCP’s secret and coincides with Professor Zhang’s analysis.

Professor Zhang said that he had previously worked in a Sino-German joint venture in Mainland. Its party committee role was to supervise employees and to report to their superiors.

Prof. Zhang: “Usually this party committee engages in some activities.
After the persecution of Falun Gong began, the Party committee would act according to the CCP’s requirement to discern which employees were practicing Falun Gong. They would have a talk with him/her and fulfill the function of thought-control. It is not a problem if you don’t see eye to eye
with the committee. They will report it to their superiors and you will
be dealt with later.”

In actuality, Huawei and ZTE is experiencing long term pain in the U.S. market when they plan the international territorial.

Why have these companies not broken into the U.S. market?

A Wall Street Journal article from June 13 may provide the outside world with an answer. It wrote, “Huawei, one of the world’s largest telecommunications equipment manufacturer, seems to have found what hampers its ambitions in the US, precisely because of its official relations with the CCP.

Huawei-ZTE Congressional Hearing September 13, 2012 [Roza Kazan on behalf of CCTV, Oct 9, 2012]
Note that “CCTV NEWS is the English language news channel of China Central Television (CCTV), the nation’s largest national broadcasting network.” according to its own description.

CCTV America’s Roza Kazan (Roza Ibragimova) reports on a U.S. Congressional investigation into Huawei and ZTE, two of China’s largest telecom companies. On September 13, representatives of the two companies were invited to Capitol Hill to testify at a hearing of the U.S. Congressional Intelligence Committee. The Committee is investigating the two companies present a threat of cyber espionage and cyber attacks.

Huawei, ZTE Criticized by US Congress Committee [BizAsiaAmerica YouTube channel, Oct 9, 2012]
Note that “Biz Asia America is a daily global business news hour which aims to combine reporting of economic and financial issues in North and South America with those from China and the Asian region. For full shows go to the Beijing website http://www.cctv-america.com” according to its own description.

Correspondent [of CCTV America] Jessica Stone reports a powerful US Congressional Committee has warned US companies NOT to do business with China’s two largest telecommunication companies: Huawei and ZTE.

Impact of US criticism of Huawei, ZTE [BizAsiaAmerica YouTube channel, Oct 9, 2012]

Correspondent Jessica Stone explains how the US’s recent criticism of China’s two premier telecommunications companies-Huawei and ZTE-has on Sino-US trade relations

Some articles for further reading:
Analysis: Who really owns Huawei? [iTnews, May 28, 2010]
Staff Churn Stirs Huawei’s Management Circle [Caixin, Nov 12, 2010]
Corporate Governance [Huawei webpage, Apr 23, 2012]
Huawei: Inside the lair of the not-so-hidden dragon [The Register, Sept 30, 2012]

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1 Comment

  1. […] trendkövető blogom a később itt szereplő MTI anyagoknál sokkal messzebb jutott: – Huawei the “misterious” [Oct 12, 2012] – ICT Top-100 in Mainland China and the #1 Huawei [June 4, 2011] – SOEs and state […]

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