October 23, 2020

Huawei's Phantom Plan Provides Real Ownership for 90,000 Employees

NCEO founder and senior staff member

Huawei Technologies is the largest telecommunications equipment manufacturer in the world and the second-largest manufacturer of smartphones. It has close to 200,000 employees worldwide, mostly in China. It also claims to be employee-owned, which, if true, would make it the second-largest majority employee-owned company in the world, just after Publix in the US.

Its ownership structure has been something of a mystery, however, at least to outsiders. In the U.S., many political leaders have accused it of being essentially state-owned or at least state-controlled. Others have said it is owned by the Communist Party. A new paper by Colin Hawes, “Why is Huawei’s ownership so strange? A case study of the Chinese corporate and socio-political ecosystem,” provides the most detailed and reliable analysis of its ownership to date and concludes that Huawei’s employee ownership is genuine (the article is behind a paywall). Hawes is an associate professor in the law faculty at the University of Technology Sydney and a research associate at the UTS Australia-China Relations Institute. Hawes shows that almost all the value of Huawei equity is owned broadly by about 90,000 employees who buy what we would call phantom stock rights. 

Unlike most phantom plans in the U.S., however, the shares carry a right to interim profit distributions. Employees have to redeem the shares when they leave, and initially, they redeemed them at or close to their par value.  Even though employees did not benefit from a rising stock price, their shares were yielding annual returns averaging around 70% per year on the money they invested. Eventually, the rules were changed so that employees could also get equity appreciation as well. Huawaei stands in sharp contrast to most other privatized firms in China, which concentrated ownership in a few hands.

The NCEO was actively involved in China's employee ownership reforms in the 1990s. We partnered with the officials in China considering reforms to hold two major conferences, and when these officials made multiple visits to the U.S., we arranged for them to visit ESOP companies. Ultimately, the government directed provinces to set up their own rules for privatizing state enterprises. While we know that many did become broadly employee-owned, it has been very difficult to find reliable information on how many of these plans there are or how they operate.

A second paper, "Employee Ownership and Industrial Innovation: Huawei in the U.S.-China Technology Rivalry" by Kaidong Feng and Yin Li (China Review, Nov. 2020), comes to the same conclusions about the ownership structure at Huawei and argues that employee ownership has been an essental element of Huawei's success.