Can You Invest in China's Huawei?

Ren Zhengfei, a former officer of the People's Liberation Army, founded Huawei (pronounced Wah-Way) in 1987. Since then, the Shenzhen, China-based company has become one of the world's largest smartphone makers next to Apple (AAPL) and Samsung. The company also makes other consumer electronics and builds communication equipment and infrastructure. It has become a multinational giant with more than $126 billion in revenues in 2019.

Despite impressive growth, Huawei remains a private entity fully owned by company employees. That means the company is not traded on any public market and that people other than current employees cannot invest in it. Despite the inability to invest in Huawei, investors may still want to keep an eye on one of the world's largest smartphone producers.

Where Does Huawei Do Business?

Beyond making smartphones, Huawei builds telecommunications networks and services and provides solutions to enterprise customers. As of 2019, Huawei had more than 190,000 employees in more than 170 countries. It conducts the majority of its business in China and EMEA (Europe, the Middle East, Africa, and the Asia-Pacific region).

While it's helpful to know where Huawei does business, it's far more telling to know where it doesn't. Global skepticism about Huawei has grown in recent years, following a 2012 congressional report that highlighted the security risks of using the company's equipment.

In addition, while the company claims that it is 100% owned by employees, U.S. officials are skeptical that the Chinese government and the Communist Party might be calling the shots at Huawei. A Chinese law requiring Chinese companies to assist in national intelligence networks passed in 2017 added to those concerns.

Many companies have already ceased using Huawei products. In Jan. 2018, large U.S. mobile companies like AT&T and Verizon stopped using Huawei's products in their networks; in August, Australia decided not to use the company's technology as it builds out its country-wide 5G mobile networks; and in November, New Zealand prevented Spark, one of the country's biggest telecom companies, from using Huawei products in its 5G network. Despite these governmental roadblocks, Huawei can still conduct business with private companies in each of these countries.

In December 2018, Canadian officials arrested Meng Wanzhou, the chief financial officer of Huawei and the daughter of the company's founder, on the request of the U.S. government. On Jan. 28, 2019, the U.S. government officially filed a formal request for her extradition, alleging that she violated U.S. sanctions against Iran. The U.S. also banned Huawei from doing business with U.S. companies due to the sanctions violations.

In June 2019, Trump lifted the restrictions on Huawei as part of ongoing U.S.-China trade war negotiations. Nevertheless, Huawei announced plans to cut 600 jobs in Santa Clara, Calif. and, by Dec. 2019, had made the decision to move the center to Canada.

How Does Huawei Make Money?

Huawei operates in the carrier, enterprise, and consumer segments of the market. Because the company is not public, it is not traded on any stock market and is not required to submit filings to the Securities Exchange Commission (SEC). The company still reports its numbers on a regular basis, however.

In its 2018 annual report, the company said that total revenue was $107 billion, up 19.5% from a year earlier. Profits jumped 25%. The company said it sold more than 200 million smartphones in 2018, which represents an impressive increase from the 3 million sold in 2010.

Huawei reported that business in China—by far its largest market—rose 19% in 2018. Business in the Asia Pacific region grew 15%, it rose 24.2% in EMEA, while its business in the Americas—the smallest market—fell 7% and showed a decline for a second consecutive year. 

Why Can't You Invest in Huawei?

Huawei is privately held by the company's China-based employees only, but anyone working for the company outside of China cannot buy into the company. The company's shareholders admit, however, that they don’t understand the company's structure, are not provided updated information on their holdings, and have no voting power. Thirty-three union members elect nine candidates to attend the annual shareholder meeting. Shareholders receive dividend payments, and they have the potential to earn bonuses based on performance. Their salaries also are reviewed on an annual basis.

In 2014, upper management at Huawei was asked if it would consider a stock market listing, but the idea was rejected. Huawei's debut on the public market can't be completely ruled out in the future, though, especially if the company is in need of additional capital in the future. It’s not likely that Huawei could list in the United States, partly because of its poor relationship with the country and the company's growing reputation for using technology to spy on users.

As far as investing in Huawei goes, right now there's only one potential solution—but it’s far-fetched. In order to received dividends, you would have to become an employee of the company in Shenzhen, China, and you would have to make management believe you aren't a spy. Good luck.