No, Huawei isn't built on Chinese state funding

By: Karl Song

Recently, Huawei has fielded persistent claims from the U.S. government, amplified by numerous media reports, that it receives special funding from the Chinese government that enables the company to gain an unfair market advantage. These attacks, spread using all the tools at Washington’s disposal, are motivated, we believe, by a desire to protect U.S. technological hegemony.

The claim that Huawei is state-sponsored is one of the main arguments Washington uses to convince its allies –largely without success so far – that they should not use Huawei gear in their 5G networks. Huawei has steadfastly denied U.S. allegations that it receives special funding from Beijing.

Our annual reports, audited by KPMG, clearly show that Huawei is a private company wholly-owned by its employees. The Chinese government does not hold a single share in the company. And the government subsidies, bank loans, and tax incentives that Huawei receives are no different to those received by its major competitors.

To conclusively prove this, our external law firm recently engaged a financial expert to take another look at our books. Dr. Wei Jiang is a tenured professor of finance at Columbia University Graduate School of Business. She is also a Senior Fellow at the Program on Corporate Governance at Harvard Law School. The author of many papers on top academic journals, she has won the prizes for best annual submission in all three of the top finance journals in the U.S.

Ren Zhengfei

In her recently completed report submitted to the Federal Communications Commission, Prof. Jiang concluded that the financial benefits Huawei gets from the Chinese government are proportionally in line, once adjusted for size, with what global competitors like Nokia, Ericsson, Cisco, or Alcatel-Lucent get. These benefits include tax breaks, bank loans or credit facilities, and direct government grants [1].

According to audited data in the report, in the 10 years from 2009 and 2018, the total amount of direct grants Huawei received from the Chinese government – mostly in R&D incentives – was just 0.3% of Huawei's total sales of $514 billion over the period. If Huawei hadn't benefited from these grants – that are incidentally also made available to foreign firms operating in China- Huawei's profits would have been almost unaffected. Meanwhile, in other countries, Huawei's direct competitors also benefitted from comparable R&D grants from their governments.

Washington regularly accuses Huawei of benefitting from huge tax breaks because it pays less in taxes than the regulatory rate. But the preferential treatment it gets is standard for high tech corporations around the world. Huawei spends roughly 15% of its sales revenues on R&D every year, entitling it to tax incentives from the government, just as other companies in the industry are. Chinese tax law states that the standard corporate income tax rate is 25%, but that qualified high-tech companies can enjoy a rate of 15%. Over the past decade, the average effective tax rate paid by Huawei has been about 15% – similar to the rate paid by U.S. companies, Prof. Jiang pointed out. According to numbers from the Bureau of Economic Analysis of the U.S. Department of Commerce, from 2008 to 2018, average U.S. companies were subjected to an effective tax rate of less than 16% after deductions, even though the headline rate is 35% [2].

Turning to bank financing, the U.S. claim that Huawei is buoyed by state-backed loans granted on easy terms utterly fails to hold up. The report shows that, in 2018, 75% of loans Huawei received were from foreign banks lending on standard commercial terms (including interest rates, repayment periods, and repayment methods), a ratio that has changed little in recent years. But importantly, according to Prof. Jiang, Huawei primarily relies on the cash flow generated from its own business operations, meaning that the company would be fine without any external financing. In 2018, for instance, Huawei held $38.8 billion in cash and cash-equivalents while its loans only amounted to $10.2 billion [3].

Washington charges that Huawei benefits from tens of billions of dollars in export financing that the China Development Bank or China EXIM Bank makes available to company customers. This is another assertion that fades under scrutiny. First, other countries offer the same financing.  Sweden, the home of Ericsson, has the Swedish Export Credit Corporation.  And Nokia’s home base of Finland offers trade finance through Finnvera. Second, the export credits are in the form of loans that must be repaid with interest on customary market terms. And third, if such financing were providing Huawei an advantage, it would be reflected in Huawei achieving shorter turnarounds of its accounts receivable than its competitors. But the average age of Huawei's receivables over the 2009-2018 decade was 91.7 days, which is neither high nor low for a telecom equipment vendor, Prof. Jiang suggested. "There is no indication that these credit lines accessible to Huawei's customers provide Huawei an unfair competitive advantage relative to its peers," Jiang found.

To a large extent, once adjusted for the size of companies, Huawei's accounts do not stand out from those of its competitors. But Prof. Jiang discovered some major differences when she looked at key financial ratios. For instance, Huawei consistently achieves the highest asset turnover among telecom equipment manufacturers. Overall, Huawei's astute financial management allows the company deployment of its finances position the company "to make higher returns on invested capital relative to its competitors," Prof. Jiang observed.

Washington has embarked on an unprecedented campaign of disinformation against a private company headquartered in a country the U.S. views as a geopolitical and high-tech competitor. But this campaign relies in large part on a demonstrably false claim that Huawei is unfairly financed by the Chinese government. As the numbers show, Huawei has received no special treatment from the government or from state-run banks.

The boom of the global telecoms market in China and the rest of the world over the past three decades has presented Huawei with extraordinary growth opportunities, but the driver behind Huawei's position as an industry leader is not the so-called special government grants. Rather, this position has been achieved through Huawei's dedication and customer-centricity, a sharp focus on its core business, sticking to a heavy investment in R&D, and a stock ownership plan that helps fully unleash the creativity and potential of its employees.

The author is vice-president of the Corporate Communications Department at Huawei Technologies. He was previously CEO of Huawei U.S.A and CEO of Huawei France.

[1] Link to Prof. Wei Jiang's report:

[2] Based on a study of 379 major U.S. corporations by the Institute on Taxation and Economic Policy.

[3] U.S dollar amounts are converted at the exchange rate prevailing at the end of 2018, i.e. US$1=CNY6.8561.