Why Huawei Should IPO in America

Huawei should IPO in America. Not London, Hong Kong, Tokyo, Frankfurt, or Toronto, but New York -- the heart of America’s capital market.

In fact, Huawei should file its S1 paperwork as soon as the Holding Foreign Companies Accountable Act (HFCAA) passes Congress and becomes law. The bill already passed the Senate, appears to be swiftly making its way through the House of Representatives, and will likely land on President Trump’s desk by the end of this summer.

Isn’t now the worst time for a Chinese tech company to go public in America?

Not if you are Huawei -- already the most despised Chinese tech company in America and the pinata of the US-China trade and technology cold war. Becoming a public company and being subjected to the SEC’s Public Company Accounting Oversight Board (PCAOB) is perhaps the company’s best way forward.

What’s the HFCAA?

The major purpose of the HFCAA, as it currently stands, is to strengthen the enforcement of the PCAOB’s oversight power. The PCAOB is designed to be the neutral third party that verifies the work of the accounting firms that audit public companies’ financials -- the auditor of the auditors. It was born out of America’s own accounting scandals in the early 2000s, namely Enron and Worldcom. Among other things, this bill would require all companies publicly listed in the U.S. to be certified that they are not under the control of a foreign government. This status must be verified by the PCAOB via its own independent audit of the company’s ownership structure and financial information for the last three straight years.

All publicly-listed American companies and foreign, non-Chinese companies already abide by the PCAOB’s oversight. Chinese companies have been the exception to this standard for the last decade. Because of China’s economic hypergrowth, Chinese companies’ public listing has been a big source of business for Wall Street -- keeping the hordes of underwriters, bankers, hedge funds, lawyers, and accountants handsomely paid. Thus, the financial service industry lobbied the SEC to compromise on its requirements with regard to Chinese companies. This compromise, combined with a series of actions by the Chinese government to stonewall the PCAOB access to the necessary financial documents to do its auditing, led to where we are today.

Why Should Huawei Bother?

The list of controversies and allegations surrounding Huawei is long: corporate espionage, intellectual property theft, national security threats, backdoors for the Chinese government, to name just a few. Becoming a public company won’t clear up all these controversies, but it will help bring transparency to what I believe is the root cause of many of Huawei’s problems: ownership.

Nobody knows exactly who or what owns Huawei. Without that knowledge, it’s impossible to discern and trust Huawei’s actions and motivations. It’s a private Chinese LLC. It’s famously employee-owned, with 98.99% of company shares controlled by its employees via a “trade union committee”. Allegedly, this committee pays dues to more senior trade unions in an opaque bureaucracy that ultimately leads to the All-China Federation of Trade Unions, which is controlled by the Chinese Communist Party (thus all the controversy). Yet, all this committee is apparently responsible for is organizing after-work activities, i.e. lots of badminton tournaments and hiking excursions. What runs the company’s day-to-day business operations is something called the “Representatives’ Commission”. Meanwhile, the remaining 1.01% of shares are owned by Huawei’s founder and CEO, Ren Zhengfei. He also has veto power. His daughter Meng Wanzhou, who is still house-arrested in Canada awaiting extradition, is the CFO, making the whole shop look more like a family business than an employee-owned tech company.

Sounds confusing? I agree.

Every time an allegation pops up against Huawei, including ownership-related issues, its playbook is vehement denial through a PR campaign. It also spends millions of dollars on Washington lobbyists, the latest being a $1.6 million gig for two months in mid-2019 for Michael Esposito, a prominent Trump reelection fundraiser, to soften the stance of the Bureau of Industry and Security. Two weeks ago, the same Bureau of Industry and Security, in charge of export control and the “entity list”, issued new restrictions on Huawei’s ability to use U.S. technology and software to design and manufacture semiconductors.

Obviously, all this PR and lobbying spending didn’t buy Huawei much. I wonder if Huawei’s “trade union committee” or “Representatives’ Commission” would find this a good use of money. I would rather spend that money prepping for an S1.

With the HFCAA upping the ante, there’s no better time for Huawei to clear its name, if all of its denials are indeed true. If there’s nothing to hide, there's nothing to lose, but much integrity to gain. Going public is also a clear signal that Chinese tech companies are willing to abide by American laws when doing business in America -- the same way that the Chinese government would expect American tech companies to behave when doing business in China.

When we peel away the emotions, conspiracies, and political opportunism surrounding all the US-China tension, the core problem is lack of reciprocity, which erodes trust over time. By going public on the NYSE or NASDAQ with PCAOB oversight, Huawei can begin this long, hard, but necessary journey of building mutual trust, avoiding further tension, and replenishing some much-needed reciprocity between the US and China.

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