‘No Wei’: After Helping Iraq Target American Pilots, Huawei Targets American Consumers Via Wholly-Owned U.S. Subsidiary

(Washington, D.C.): Earlier this month, Huawei Technologies Company — one of China’s two largest telecommunications equipment suppliers — announced plans to launch a wholly-owned U.S. subsidiary, FutureWei, to be headquartered in Plano, Texas. While the establishment of foreign subsidiaries in the U.S. is not unusual, Huawei’s past international operations are anything but benign and demand scrutiny by the State of Texas and others with regard to the identity of the parent company and its history within China and overseas. This is especially the case as Huawei may be angling for a listing on the New York Stock Exchange.

A Troubling Past

According to press reports dating back to February and March 2001, Huawei Technologies acted in violation of UN sanctions in constructing a fiber optic air defense network for Iraq around Baghdad. For example, according to a Washington Post article of 1 March 2001, the company was the subject of an official U.S. inquiry to China regarding the extent to which Huawei helped Iraq “improve links between antiaircraft missiles and the radar systems that guide them.” This militarily-relevant construction project with a regime that has repeatedly sought to shoot down U.S. pilots patrolling the No-Fly-Zone ultimately led to U.S. and British bombing sorties on February 16, 2001 intended to disrupt or destroy the network built by Huawei.

The company’s controversial international operations, however, have not been limited to Iraq. Huawei also earned headlines for its activities in Afghanistan where it helped the Taliban regime create a telephone switching system in Kabul that the Indian government identified as communications surveillance equipment.

Despite Huawei’s explosive growth (with a reported employee base of some 16,000), the company has remained in private hands and, at least to outward appearances, independent from government control. The company has chosen not to disclose its ownership structure, however, and has thus far steered clear of listing on public exchanges enabling it to maintain that posture. What little is known about the company’s structure is less than reassuring to those concerned about its potential associations and corporate missions: It was founded and is still supervised by Ren Zhengfei, a former army officer in the Peoples’ Liberation Army (PLA).

The Sins of the Father

As a wholly-owned, private subsidiary of Huawei, FutureWei evidently hopes to enjoy a similar degree of non-transparency. So far, it appears to have gotten away with setting up shop in Texas without attracting the scrutiny of state or federal regulators either to itself or its parent company.

One thing is clear: FutureWei, which plans on providing telecommunications and enterprise networking equipment to U.S. consumers, will be an extension of Huawei Technologies, affording it access to the American market previously untapped by that company.

Another PetroChina?

It would not be unprecedented among Chinese firms for FutureWei (or some other, sanitized off- shoot of Huawei Technologies) to pursue a public listing on the U.S. capital markets in the period ahead. Huawei may calculate that, as with PetroChina — the spin-off created in 2000 by the China National Petroleum Company (CNPC) in which the parent retained majority control while raising some $2.9 billion from U.S. and other investors — Huawei could benefit from listing a subsidiary company in a gambit to access the U.S. markets without having itself to meet awkward disclosure requirements. Alternatively, the subsidiary could serve as a stalking house for the parent company (or a derivative), allowing the degree of activist opposition (of the kind that cost CNPC dearly) to be assessed before risking the embarrassment of a contested or failed initial public offering.

The Bottom Line

The U.S. government, Texas authorities and American consumers should remain vigilant with respect to corporate creations that have the effect of obscuring the true identity, management and global activities of a foreign firm — particularly one as problematic as Huawei Technologies. Given Huawei’s intimate association with the Iraqi military for the purposes of enhancing Saddam’s ability to endanger American and allied lives, any subsidiary — particularly a wholly owned one like FutureWei — must receive the closest of scrutiny. In the absence of government intervention or full disclosure as part of a public listing, however, it may fall to American consumers and the business community to take the lead in guaranteeing appropriate transparency and accountability.