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Huawei Benefited From Billions Of Dollars In State Support During Its Rise To Global Dominance

Courtesy of ZeroHedge View original post here.

The Wall Street Journal continued its string of reports on the Chinese government's shadowy campaign to support mission-critical companies in the private sector on Christmas Day by exposing for the first time to totality of government support for Huawei.

Billions of dollars in credit facilities backed by state-controlled "policy banks", coupled with pro-business tax breaks, allowed Huawei to cement its position as the world's leading telecoms giant, according to WSJ.

Huawei’s grants, credit facilities, tax breaks and other forms of financial assistance details for the first time how Huawei had access to as much as $75 billion in state support as it grew from a little-known vendor of phone switches to the world’s largest telecom-equipment company—helping Huawei offer generous financing terms and undercut rivals’ prices by some 30%, analysts and customers say.

Around the world, Huawei is vying to build next-generation 5G telecom networks, much to Washington's chagrin. In a well-documented campaign, the US has struggled to convince it allies to exclude Huawei equipment from their 5G infrastructure, claiming that Huawei parts would compromise security and allow the Chinese government to tap into civilian and military communications.

But thanks in part to all of this government support, Huawei is able to offer telecoms equipment at world-beating prices. Its biggest competitors, Nokia and Ericsson, can't even come close.

This government support also undermines Huawei's claims that it operates independent of Beijing, and that it would under no circumstances cooperate with state intelligence against its customers.

Nevermind that multiple investigations have uncovered evidence that Huawei builds backdoors into its equipment to allow easy access by Chinese intelligence forces.

It's important to remember that Huawei's commercial interests align with those of the Chinese government in more ways than one.

"While Huawei has commercial interests, those commercial interests are strongly supported by the state," said Michael Wessel, a member of a U.S. congressional panel that reviews U.S.-China relations, in an interview. The U.S. has raised concerns that use of Huawei’s equipment could pose a security risk, should Beijing request network data from the company. Huawei says it would never hand such data to the government.

According to WSJ's investigation, the biggest source of state support for Huawei, about $46 billion, comes from loans, credit lines and other support from state lenders. Huawei saved about $25 billion in taxes between 2008 and 2018 due to state incentives for Chinese tech firms. It also benefited from $2 billion in land discounts, and another $1.6 billion in government grants.

In a statement, Huawei said it benefited from "small and non-material" grants to support its research, but otherwise denied WSJ's claims that the Chinese state played a critical role in Huawei's development.

In its research, WSJ used public records in China including company statements and land registration documents. The paper said it "verified" its analysis with subsidy analysts, including a professor at Wichita State University, and Good Jobs First, a Washington DC-based organization that analyzes tax incentives.

Setting the money aside for a moment, it's important to remember that state support can't always be quantified. In 1999, China's central government arranged an unusual rescue from allegations of tax fraud.

The grants Huawei received from the Chinese government between 2008 and 2018 were 17x larger than similar subsidies received by Nokia, the world's second-largest telecoms equipment maker, while Ericsson received no subsidies during that period.

Back in 2010, the European Commission ruled that Chinese modem exporters, including Huawei, benefited from unfair subsidies, according to a confidential report leaked to WSJ.

But that investigation was cut short after the unnamed "complainant" dropped their claims against China.

In addition to providing cheap loans to Huawei which lower operating costs compared with foreign rivals, Beijing-backed banks also extend cheap credit to Huawei's customers.

Financial support helped the company undercut rivals. In 2010, the European Commission found that Chinese modem exporters including Huawei had benefited from subsidies, according to a confidential report reviewed by the Journal. The commission cut short its probe after the complainant prompting it reached a "cooperation agreement" with the company. Huawei denied receiving such subsidies.

Besides subsidies, Huawei since 1998 has received an estimated $16 billion in loans, export credits, and other forms of financing from Chinese banks for itself or its customers, the Journal found.

China’s state-controlled banking system underpins cheap loans that lower costs for Huawei and its customers to buy its products on credit. State lending facilities for Huawei were among the largest in history.

Two of China's biggest banks extended more than $30 billion in credit to Huawei customers over the last 20 years.

Mega-lenders China Development Bank and Export-Import Bank of China in the last two decades made available more than $30 billion in credit lines for Huawei’s customers. World Bank and official data indicate these banks were lending to the company’s clients in developing economies at some 3% in at least Huawei’s first decade abroad, around half of China’s five-year benchmark rate in since 2004.

A Huawei spokesman told WSJ that this customer credit facility was rarely more than 10% subscribed. He added that lenders, who were mostly non-Chinese banks, accounted for only 10% of Huawei's ongoing financing needs as of the end of last year. Most of Huawei's working capital comes from its own cash flows.

"If you’re going to buy a house, and if you are able to say you got backing of a half-million-dollar line of credit, that’s going to make you a much stronger bidder," said Fred Hochberg, former chairman of U.S. Export-Import Bank. "What Huawei did, cleverly, is to make sure that, when they made a bid, it came with financing terms" that surpassed those of competitors.

Of course, China's whole state capitalist model is based on the idea that government policy and corporate achievement are inseparable. This is made clear in a statement from China's foreign ministry, which told WSJ that "like many others in China," Huawei is a private company whose achievements "are inseparable from a good policy environment."

WSJ found an example of how China's export-import financing for Huawei customers has influenced foreign governments' decision to pick Huawei over other telecoms providers.

In summer 2009, Huawei pitched to Pakistan a surveillance system for its capital, Islamabad. Pakistan’s prime minister accepted, but Islamabad lacked funds and its procurement rules required competitive bidding, Pakistan court filings say.

The Chinese offered a solution. China Ex-Im would lend Pakistan $124.7 million for the project and waive most of the 3% annual interest on the 20-year loan. There was a condition, Pakistan Supreme Court filings show: Pakistan could choose only Huawei. Pakistan’s government decided to proceed without competitive bidding.

"On the recommendation of Ex-Im Bank, the prime minister of Pakistan selected Huawei," then-interior minister Ahsan Iqbal told Pakistan officials.

A Chinese embassy report showed Beijing’s then-ambassador to Islamabad officiating at the project’s inauguration in 2016 alongside Pakistan’s interior minister, standing before an array of glowing security monitors.

"The Chinese government funded it and Huawei built it," the embassy said.

And there are probably dozens of other examples like this one. Ultimately, Huawei's expansion explains only part of China's growing influence across the emerging world. Their two missions are deeply intertwined.

 


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