Government subsidies have recently been a key talking point in the ICT industry, particularly in the context of a wider trade war between the US and China. We recently spoke to Karl Song, Global VP of Corporate Communications at Huawei, to explore what subsidies actually mean for the ICT sector and within Huawei, dispelling some common myths in the process. Governments around the world have long bolstered strategic industries in their home markets. In a market as large as China, what are the implications for those in the ICT sector?
Government subsidies do indeed come in many forms and nearly all sectors. The topic itself has a lot of history depending on which geography you look at and which industry.
Let’s take China as just one example though, looking specifically at the technology sector. The fact is that all qualified tech companies operating in China, including foreign-funded companies, are eligible for a 15% corporate income tax rate—compared to the standard corporate income tax rate of 25% in China—as well as preferential tax deductions for R&D. In China, electronic equipment exporters are also entitled to apply for export buyer’s credit from China Development Bank. These policies are non-discriminatory and apply equally to every company operating in China.
Just to give that some context, many Western companies like Tesla and Apple have received subsidies from the Chinese government. The New York Times has previously noted that Apple’s iPhone production lines in Zhengzhou received billions of dollars in incentives from the local government. I bring these examples up simply to highlight the point that government subsidization really is a complex topic, and is something that companies around the globe can—and do—benefit from.
How do those subsidies compare to others found in Western markets?
Every country has its own strategy on subsidies, but there are certainly benefits being made available to tech players around the world. In Sweden for example, home to Ericsson, the Swedish Export Credit Corporation provides export buyer’s credit. In Finland, another large telecoms and technology market, trade finance is again offered through Finnvera—a Finnish state-owned financing company.
Do Chinese companies also benefit from export financing at home?
China Development Bank do offer export financing to entitled companies, like some of our overseas clients. But it’s worth noting that in China, the export credits are in the form of loans that must be repaid with interest on customary market terms. There is also no indication that the credit lines accessible to Huawei’s customers, for example, provide Huawei an unfair competitive advantage relative to its peers.
So in the case of Huawei, what role do subsidies play in your business?
We firmly believe that success comes from a dedication to and intensive investment in R&D over the long term. While we are afforded the same subsidy considerations as many other technology companies operating in China—including foreign entities—we do not receive any unique or special subsidies from the Chinese government. Nearly all of Huawei’s working capital primarily comes from its own business operations and external financing. Huawei’s external financing follows all market rules, and its cost of debt aligns with market standards.
There have been some reports alleging that Huawei does receive special consideration in China. Is there any truth to that?
In the last year or so, the US government in particular has been playing up this topic to support its claim that Huawei’s market success is based on unfair financial backing and low prices. That is simply not true.
One of the reports I think you’re referring to is a story run by the Wall Street Journal in which there was a staggering number they came up with about subsidies received by Huawei. By all our accounts, the logic in that article is based on poor reasoning. It does not actually provide evidence that Huawei receives “special” government support.
Have there been other independent reports since that time?
Absolutely. There are those who have openly refuted such claims. One example is Dr. Wei Jiang, a tenured professor of finance at Columbia University Graduate School of Business, who has actually done detailed financial analysis that refutes the allegations made in the Wall Street Journal article.
In her recently completed report submitted to the US Federal Communications Commission, Prof. Jiang concluded that in the ten years from 2009 to 2018, the total amount of direct grants Huawei received from the Chinese government was just 0.3% of Huawei’s total sales over the period. If Huawei hadn’t benefited from these grants – that are incidentally also made available to foreign firms operating in China – Huawei’s profits would have been almost unaffected. Meanwhile, in other countries, Huawei’s direct competitors also benefitted from comparable R&D grants from their governments.
Based on recent experiences, what role do you foresee subsidies playing in the ICT sector over the next decade, regionally and internationally?
While subsidies will remain part of the global economy, it would be incredibly shortsighted to depend on subsidies for success. It’s far more advantageous to look at one’s own competitive differentiation, which in the technology world, is centered on R&D and patents.
In Huawei’s case, this focus has helped Huawei lead the development of 5G technologies globally and the Middle East region specifically. We have invested over $100 billion in research over the past 30 years. Even more recently, we were ranked as a top-five R&D investor worldwide on the recently released 2019 EU Industrial R&D Investment Scoreboard.
Within the Middle East specifically, it is exciting to see how joint innovation programs are now deepening on the back of numerous efforts to reduce barriers to foreign investment and talent. These are not “subsidies” per se, but rather sound economic policy. They have certainly helped us at Huawei to accelerate our efforts with public and private sectors to build local talent alliances, set talent standards, and communicate the value of ICT skills in the region. As nations across the Middle East develop their digital infrastructure in the next decade, the most important advancements will be a result of encouraging collaborative breakthroughs in liberalized markets—certainly not through subsidy policies.