Why Huawei and its CFO Meng Wanzhou are caught up in the US-China trade war

Huawei has a key role to play in China’s ambition to lead the way in next-generation mobile telecoms infrastructure – known as 5G

Huawei

Meng Jing

Published: 5:02pm, 12 Dec 2018

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Sabrina Meng Wanzhou, the 46-year-old CFO of Chinese telecoms giant Huawei and daughter of its founder Ren Zhengfei, has been granted bail by a Canadian court, setting up a protracted legal fight over extradition to the United States.

Meng was arrested in Vancouver earlier this month at the request of US authorities, who have accused her of fraudulently representing Huawei to get around US sanctions on Iran.

Her case has now become embroiled in the wider trade war between China and the US after US President Donald Trump suggested he may intervene if it would help secure a broad deal with Beijing. The arrest came the same day Trump and Chinese President Xi Jinping declared a 90-day truce in their trade war during summit talks in Buenos Aires.

Although Meng’s arrest prompted outrage in China, Beijing is walking a fine line between defending one of the crown jewels of the country’s tech industry and preventing a nationalist backlash that could derail a potential trade deal with Washington.

But what is Huawei and why is it so important to the future of relations between China and the US? Here is what you need to know.

What is Huawei?

Established in 1987, Huawei is a Chinese tech champion that sells smartphones and telecoms equipment across the world. Headquartered in China’s southern coastal city of Shenzhen, Huawei is China’s top smartphone maker, and overtook Apple as the second-largest smartphone vendor globally in the second quarter this year – a feat it also maintained in the third quarter, according to IDC data.

Perhaps more importantly, Huawei is now the world’s largest telecom equipment supplier and has a key role to play in China’s ambition to lead the way in next-generation mobile telecoms infrastructure – known as 5G. Competing with the likes of Ericsson and Nokia Oyi, Huawei was the only major equipment-maker to achieve an increase in market share in 2017.

Who created Huawei?

Huawei’s founder Ren Zhengfei is a noted figure in China’s business world and moves in the highest government circles. The 74-year-old self-made billionaire is the son of schoolteachers and grew up in a mountainous town in China’s poorest province, Guizhou. A survivor of China's great famine between 1958 and 1961, Ren graduated from the Chongqing Institute of Civil Engineering and Architecture.

He worked in the civil engineering industry until 1974 when he joined the People’s Liberation Army as an engineer – a connection that still provokes questions in the West about Huawei’s ties to the Chinese army and government. Ren was an elected member of the 12th National Congress of the Communist Party of China.

Today Huawei does business in more than 170 countries and regions globally, has around 180,000 employees and a sales volume of over US$39 billion. The low profile Ren is ranked 83rd in Forbes’ China Rich list with a net worth of US$3.2 billion.

Who owns Huawei?

Unlike its Chinese rival ZTE Corp, which is a state-backed enterprise, Huawei is a private company collectively owned by its employees. Not being familiar with Western stock option systems, Huawei’s founder Ren Zhengfei says he designed an employee stock ownership plan at the inception of the company.

Huawei founder Ren Zhengfei picture with China’s president Xi Jinping on a tour of the company’s offices in London in 2015. Photo: EPA

At a time when China was still struggling with the aftermath of the Cultural Revolution, being a private owner and hence open to being perceived as a capitalist – Ren felt that not owning the company was the least dangerous thing for a founder to do, according to a Harvard Business Review story which studied Huawei’s profit sharing model. Ren himself holds a 1.4 per cent stake in Huawei, according to the company’s 2017 annual report.

How did Huawei become successful?

The vast domestic market, the timing of overseas expansion and heavy investment in research and development have all been important positive factors for Huawei. But many analysts attribute the secret of its success to a unique company culture, sometimes dubbed “wolf-culture” for being fearless and aggressive. Workers have also been known to pass out on office mattresses from exhaustion. It has strong discipline and nobody – not even Ren – has their own driver or flies first class on the company dime.

Why and how was Meng arrested?

Meng was detained in Vancouver on December 1 at the request of US authorities. Meng was accused by the US of helping Huawei cover up violations of US sanctions on Iran, according to Canadian prosecutors. She is said to have told financial institutions that affiliate Skycom was a separate company in order to conduct business in the country, when in fact it was a Huawei subsidiary.

“Meng and other Huawei employees repeatedly lied about the nature of the relationship between Huawei and Skycom and the fact that Skycom operated as Huawei's Iran-based affiliate in order to continue to obtain banking services,” the US authorities said in the arrest request delivered to Canadian authorities.

Meng has denied any wrongdoing and said in her personal affidavit for bail that she will contest the allegations if surrendered to the US.

Why is Huawei banned in the US and in some other markets?

The US government has for years seen Huawei as a national security threat due to fears about its association with China's government, the Chinese Communist Party and its military. This has been of particular concern when it comes to networking gear and the possibility for breaches of data privacy.

In February, US intelligence officials warned Americans not to buy Huawei devices because they could be used to spy on users. The Chinese smartphone maker was supposed to enter the US via mobile network AT&T, but the deal fell through at the last minute.

The US in August enacted the National Defence Authorisation Act to ban the government’s use of Huawei and ZTE technology products and services on concerns over their connections with Chinese intelligence. US security experts have warned of a range of potential security risks, including but not limited to the capacity to control telecommunications infrastructure and even conduct undetected espionage.

Japan, a US ally, this week excluded Huawei and ZTE from public procurement, adding to the list of countries that have pushed back against the Chinese technology company on security issues. Australia and New Zealand have also effectively blocked Huawei from their roll-out of 5G network infrastructure, with the UK and Canada also weighing up the possible security risks posed by Huawei.

Meng Wanzhou, CFO and Executive Director of Huawei, was detained in Vancouver on December 1 at the request of US authorities. Photo: Handout

What has Huawei said in its defence?

Huawei has consistently denied any connections with the military, saying that it is a private company that is part-owned by its employees.

When Australia took the decision to block Huawei from its 5G infrastructure in August on national security grounds, Huawei said the decision was not aligned with the long-term interests of the Australian people, and denied Australian businesses and consumers the right to choose from the best communications technology available.

It has said all countries need to recognise the importance of setting better common standards, adopting industry best practice and implementing risk-mitigation procedures to ensure that there is an objective basis for choosing technology vendors.

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