New Title & Review: The Chinese Corporate Ecosystem

The concluding chapter argues that this ecological realignment is more likely to succeed if key elements in the current corporate-political ecosystem are re-balanced through re-alignment of its motivating forces, using insights from contemporary systems biology, ecological science and behavioral economics, melded with vital concepts from traditional Chinese philosophy that still strongly resonate with Chinese people today. This is not a return to pre-modern ways of thinking, but a synthesis of science and a traditional Chinese organistic vision that may help to transform a self- and other-destructive Chinese corporate-political ecosystem into a sustainable, life-promoting natural-human ecosystem. At the same time, the conclusion acknowledges the immense difficulty of putting this vision into practice.

Why this Discussion is Necessary: Runaway Success, Misunderstandings, Strange Networks and Hybrid Structures

One of China’s best-known corporations on the international stage is Huawei Technologies. Despite its enormous success – as the world’s number one telecom networks equipment maker and number two smartphone seller, with reported revenues of over US$100 billion in 2018¹ – it has become a poster child for the “China threat” in the United States and many other “Western” countries². The 2018 arrest of its Chief Financial Officer, Meng Wanzhou, in Canada made international headlines and increased political tensions between the United States, Canada and China.³ Yet this incident was only the latest volley in a lengthy campaign against the company by the US government.

In 2012, after a highly intrusive investigation of Huawei and its main Chinese rival, ZTE Corporation, the Permanent Select Committee on Intelligence of the US Congress expressed “deep concerns” that Huawei and ZTE “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.”? While unable to point to any concrete evidence of Huawei’s involvement in espionage or other activities damaging to US national security, the Congressional Committee declared:?

“Huawei’s failure to provide further detailed information explaining how it is formally regulated, controlled, or otherwise managed by the Chinese government undermines the company’s repeated assertions that it is not inappropriately influenced by the Chinese government. Huawei appears simply unwilling to provide greater details that would explain its relationships with the Chinese government in a way that would alleviate security concerns.”

The Committee was also perplexed by the fact that the Chinese Communist Party (CCP) had a branch committee within Huawei, despite the company’s claim to be an employee-owned private corporation:?

“Huawei states in its defense that all economic institutions in China are required to have a state Party apparatus inside the company. This is not, however, a compelling defense for companies seeking to build critical infrastructure in the United States. Indeed, experts in Chinese political economy agree that it is through these Committees that the Party exerts influence, pressure, and monitoring of corporate activities.”

The Committee also expressed its deep suspicion that Huawei may have hidden links with the Chinese military, due to CEO and Founder Ren Zhengfei’s previous career as an engineer in the People’s Liberation Army.?

In its responses, Huawei continued to insist that it is a private corporation controlled by its employees and running its operations in a purely commercial way; that it has no ties to the Chinese military; and the Chinese government does not influence its management except in a normal regulatory fashion. ?

Was Huawei simply not telling the truth, attempting to cover up its hidden ties to the Chinese government and military, as the Congressional Committee suspected? Or did the Committee members simply imagine those ties based on a mix of paranoia and ignorance about how the Chinese government interacts with privately controlled Chinese corporations? Answering these questions clearly involves high geopolitical stakes.

This book argues that the reality lies between these two polar positions and can only be grasped by examining how Chinese corporate ecosystems have evolved within a broader sociopolitical ecosystem. Within this strange superstructure, highly creative, sometimes shady, legal structures and alliances of convenience have grown up, based on mutual self-interest, and then morphed into other forms. Often surface appearances, such as CCP control over corporations, turn out to be deceptive when we examine how corporations actually behave and whose interests are really being served.

Part I (Chapters 1-3) examines several different types of corporate ecosystems through case studies of well-known firms. It traces the evolution of their hybrid corporate structures back to their interactions with the surprisingly pragmatic Chinese sociopolitical system, beginning with the “stakeholder communities” formed by private firms like Huawei, and the offshore “variable interest entities” of Alibaba, Tencent and other private internet/e-commerce firms, which themselves have intersected with and greatly facilitated the contagious growth of small and medium enterprises. Finally, there is the continued presence of huge state-owned enterprises – lumbering mutant dinosaurs that always seem to be on their last legs but strangely refuse to become extinct.

Part II (Chapters 4-7) moves beyond case studies of corporate types to focus on the influence of key forces that act on the corporate ecosystem, either assisting or impeding its growth. These include the Chinese government and CCP, corruption and anti-corruption measures, guanxi (utilitarian networks of personal relationships), and the ever-evolving legal system. Their impact on corporations is complex because they themselves often embody inner contradictions. This means that corporations must constantly adapt their behavior and create disjunctions between their public statements and private actions to accommodate the conflicting and shifting demands of these external forces.

Finally, Part III (Chapters 8-10) traces how the various contending forces within the Chinese corporate-political ecosystem have negatively impacted the natural-human ecosystem in recent history, critically analyzes the current efforts of the Chinese government to address the environmental crisis caused largely by polluting corporations, and suggests how incentives might be adjusted to encourage Chinese corporations (and government officials) to promote natural-human ecosystem flourishing.

…

The book’s conclusion argues that the CCP and Chinese government need to combine a traditional Chinese pragmatic approach – freed from empty ideological verbiage – with more effective incentives for corporations and government officials drawn from contemporary behavioral economics. Corporate managers also need to learn that the long-term growth and productivity of their firms is correlated with the health and well-being of their employees and their surrounding natural and human communities.

While these new incentives are based on empirical behavioral research, their uptake by Chinese leaders and corporate managers may be encouraged by relating them to some core assumptions of traditional Chinese philosophy – both Neo-Confucian and Daoist – especially the importance of balancing and channeling “vital energy” (qi). These assumptions resonate powerfully with contemporary scientific accounts of human/natural ecological balance, psycho-social integration, creative spontaneity, and the neuroscientific critique of self vs. world dualism.? They still influence much of contemporary Chinese life, including medical practices, diet and food consumption, the significant revival of interest in Buddhist, Taoist and popular spiritual practices like meditation, qigong, temple worship, fengshui and divination, a yearning for harmony with nature, as well as self-cultivation/education and family duties.¹?

… Of course, facilitating such changes may also require some adaptation of the Chinese political system to provide the optimum conditions for life-affirming Chinese corporations, and their human constituent organisms, to flourish.

Excerpt from Chapter 1: Why is Huawei So Strange?

[Note: this excerpt is just a brief part of the detailed profile of Huawei presented in Chapter 1 of the book. Please read the book for more supporting evidence and comprehensive discussion of Huawei’s ownership and rapid expansion]

One of the most frequently parroted claims about Huawei is that it has “close links” with the Chinese military, and even that the military is Huawei’s “political patron.”¹¹ This claim has very little factual basis, and mainly results from a careless game of “Chinese whispers” among the media, influential thinktanks, and politicians.

It is true that Huawei’s founder and CEO Ren Zhengfei was once in the People’s Liberation Army (“PLA”). Ren has publicly stated that he served in the PLA’s engineering corps from 1974-83. He spent all those years working as part of the construction team on a major chemical fiber plant. This plant was purchased whole from a French company by the Chinese government in 1974, then imported to China and rebuilt in the North-Eastern city of Liaoyang.¹² Ren rose to become a civilian officer in the engineering corps, but he was demobilized in 1983 as part of a major downsizing of the Chinese military.¹³ Huawei has also stated that Ren’s work in the army had no connection with communications technology. ¹?

Ren did not start Huawei until 1987, four years after leaving the PLA, and the company clearly had no military links in its early years. Numerous accounts by Huawei’s early employees confirm that it started off struggling to sell simple telephone exchange switches imported from Hong Kong to hotels and businesses in Shenzhen.¹? The vast majority of Huawei’s equipment sales since the early 1990s have been to civilian state-owned telecom firms in China, and to overseas private and state telecom firms. However, Huawei has consistently (and publicly) stated that it does also sell some standardized communications equipment to the Chinese military, but this market has always been less than 1 percent of its total sales, and by 2012 it was 0.1 percent, according to Huawei’s testimony to the U.S. Congressional Committee. ¹?

A very different narrative about Huawei’s military ties has emerged among Western commentators and policymakers, but it is based on remarkably shaky foundations. It appears to have first been sparked by Bruce Gilley, then a reporter from the news magazine Far Eastern Economic Review, who visited Huawei’s Shenzhen manufacturing facility back in 2000. He claimed to have come across three large telephone exchange switches in Huawei’s “holding area for completed telecoms gear” addressed to the “Telecommunications Bureau: People’s Liberation Army.”¹? The only other hard evidence in Gilley’s article was a comment by Huawei’s Senior Vice President Fei Min that the company did sell equipment to the Chinese military as one of its customers, but it made up “less than one percent” of the company’s overall sales. Also, Gilley cited a Xinhua news article reporting that Liu Huaqing, “vice-chairman of China’s Central Military Commission,” had paid a short visit to Huawei back in 1996. … And of course, Gilley trotted out Ren Zhengfei’s prior military service, though he did note that Huawei was not set up until four years after Ren left the military. ¹?

From this scattered and vaguely substantiated information, Gilley concluded that Huawei was a “military-backed company,” and that the military touted Huawei as a “national champion.”  ¹?

There are several problems with Gilley’s article which make it unreliable as a source of intelligence on Huawei’s military ties. The first is that Gilley did not provide any evidence that Huawei was actually “backed” or “supported” financially by the Chinese military. Selling telecom switches on a commercial basis to the telecoms network of the PLA is not the same as being backed by the military. This is because, from 1988 until the early 2000s, the PLA’s telecoms network was a for-profit commercial venture servicing regular civilian customers. It was one of numerous commercial businesses run by the military during that period, an example of the “febrile business atmosphere” of the 1990s that was also evident among SOE telecom firms. ²?

… Gilley also provides no evidence that Huawei received any research money or other funding from the PLA, or that it was engaged in any co-research projects or producing military equipment, or that the military had any shares or financial interest in Huawei’s business. Later investigations of Huawei cited Gilley as their main source while making just these kinds of unsubstantiated claims.²¹

Third, Gilley pads out Ren Zhengfei’s resume in the military to make it seem that he was engaged in intelligence-type work. He states, based on unnamed “company sources,” that Ren was “a former director of the Information Engineering academy of the PLA’s General Staff Department,” … “the academy is responsible for telecoms research for the Chinese military.”²² This information contradicts the company’s own testimony to the U.S. Congressional Committee, and Ren Zhengfei’s public statements about his military career, which have remained consistent since at least 2001. ²³

… A final problem with Gilley’s article relates to the importance of Huawei’s early contract to supply the PLA’s telecommunications network. Gilley relies heavily on a Russian sales manager, Alexei Shalaginov,²? but more recently, in 2019, the Los Angeles Times re-interviewed Shalaginov in relation to this story, and he gave a crucial clarification: “The contract was an important marketing tool that helped Huawei sell to other companies but … it didn’t imply close relationships with the military.” ²?

… A weekly news magazine article would not normally require such detailed analysis, but Gilley’s piece has fortuitously exerted an enormous impact on American and other Western governments’ perceptions of Huawei’s “military links.” This is because it gained a whole new lease of life in 2005 as the key evidential source about Huawei in a report by the RAND Corporation, a U.S. defense thinktank. The report’s imposing title was “A New Direction for China’s Defense Industry,”²? and its authors claimed that Huawei was part of an emerging “digital triangle” between the Chinese state, the military, and the commercial IT industry with “deep military ties.”

Incredibly, Gilley’s article is the only written source about Huawei that the authors cite.²? They then embroider the story further with their own imaginative speculation to fit it within their broader conspiratorial narrative. For example, where Gilley’s article gave the figure of “less than 1 percent” of Huawei’s sales to the military, the RAND Report “suggests” that it is more likely “between 5 and 6 percent,” based purely on guesswork by their “industry experts in Beijing.”²? Where Gilley mentioned one “small” contract to supply the PLA telecoms network, the RAND Report now talks of “deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner.”²? Their only source for these claims is Gilley’s article, which even if taken at face value does not support such wide-ranging conclusions about “deep ties,” military patronage or R&D partnerships. They also repeat verbatim Gilley’s claims that the military and Chinese government tout Huawei as a “national champion” and that Ren Zhengfei was formerly a “director” of the PLA’s “information engineering academy” engaged in “telecom research for the Chinese military,” yet without providing any other documentation to back up these dubious statements.³?

By 2005, when the RAND Report was written, there was plenty of published Chinese material available about Huawei, including several books based on extensive interviews with current and former Huawei managers.³¹ It is disturbing that the authors of the RAND Report did not consult any of these sources, and instead preferred to spin an imaginary yarn loosely based on one short magazine piece.

… Despite these serious evidential flaws, in a kind of snowballing effect, the RAND Report’s claims about Huawei’s “deep” military ties and “research partnerships” led to numerous attacks on Huawei by U.S. and other countries’ politicians, and were instrumental in the decision of the Committee on Foreign Investment in the United States (CFIUS) to block Huawei’s proposed acquisition of two U.S. firms.³² The RAND Report was also the key source used by the U.S. Permanent Select Committee on Intelligence (“PSC”) in 2012 to conclude that Huawei has close links with the Chinese military.³³ More recently, the Trump administration followed through with an export ban on U.S. firms selling software or hardware components to Huawei, which if strictly enforced, could cripple its business outside China. ³?

In fact, it is very clear from reading the whole PSC Report that the Congressional Committee had already formed its opinion about Huawei being a “tool” of the Chinese government and military long before the investigation started. Where did this negative opinion come from? Based on their footnotes, it was entirely from unreliable sources like the RAND Report and other commissioned U.S. reports that also rely on the RAND Report. Having already placed Huawei within this negative mental frame of “security threat,” they then disbelieved or downplayed any testimony provided by Huawei that challenged it, and instead uncritically embraced weak evidence that confirmed their opinions. This is creating a house of cards on a highly unstable foundation.

If a well-funded U.S. government committee assisted by the vast U.S. intelligence organization could not dig out any more reliable evidence about Huawei’s military ties than the dubious claims provided in a single weekly news magazine published twelve years earlier, the only logical conclusion is that those ties are much weaker than alleged.³? There is certainly no convincing proof that Huawei’s own evidence is false, and we are faced with the distinct possibility that the prevailing Western public narrative about the company is wrong.

Get Colin S. C. Hawes’s The Chinese Corporate Ecosystem from Cambridge University Press [20% discount by October]!