Family jewels

The local telecoms sector is watching with great interest the complex power plays unfolding in a major Chinese technology supplier. The outcome of the power play in progress will affect major decision about the technologies we will use and the products we will procure.

The company under close observation is Huawei Technologies Co. Ltd. It is a major global telecommunications supplier.

Recall that during the height of the national broadband controversy a few years ago, this company was mentioned as one of the partners of Amsterdam Holdings Inc. (AHI). The holding company was set up by Joey de Venecia, competing with the ZTE-led consortium that figured in the broadband controversy.

AHI was excluded from the ill-fated project because it could not prove sufficient financial capacity and show a sufficient track record. Authorities in the Netherlands even issued a statement denying there was any Dutch investment in this company.

Huawei itself has run into a number of controversies through the years. Just last July, Motorola filed a suit against Huawei, alleging theft of trade secrets. Back in 2003, Cisco Systems also sued the Chinese firm for copying the source codes of its mobile phone operating system.

The firm has a local subsidiary, Huawei Technologies Philippines Inc. Although the firm maintains an office at the PBCom Tower in Makati, we know little about the businesses it might be engaged in.

Huawei made business news recently when its chairwoman, Sun Yafang, was supposed to have been offered somewhere between Rmb 900,000 to Rmb 1.4B for her stake in the company. The price per share she is now being offered is rattling stock markets in the region.

That is a staggering offer, especially considering that it was made for the sole purpose of getting Sun Yafang out of the company. This is surely more than the proverbial Golden Parachute.

Sun Yafang is, to be sure, a woman of substance. It is likely she might decline the generous offer.

As chair, Sun led Huawei Technologies out of difficult financial straits into the dominant position it now enjoys in an extremely competitive industry. As recognition for her achievements, Sun is listed in the Forbes Power Women for 2010 — the only Chinese woman in that impressive list.

Sun took over as chair of Huawei Technologies in 1998. Since then, there has been a constant battle between her and the company’s founder Ren Zhenfei.

By effectively directing policy in this mammoth corporation, Sun had effectively sidelined Ren. For his part, Ren tried with little success to curtail Sun’s authority as much as possible.

Over the past few years, the elder Ren has been trying to promote his own son’s position within the corporation. He tried to put his son, Ren Pin, onto the powerful executive management team. That effort was frustrated by a majority of the members of this decision-making team.

Industry insiders see the elder Ren’s move to oust Sun Yafang from the corporation as ultimately aimed at installing the younger Ren in her place. Should Sun yield to the temptation of cashing in her shares for Ren’s very generous offer, the father-and-son tandem will regain complete control of the corporation.

Such an outcome might be good for the Ren family’s interest in consolidating their control over an extremely profitable corporation. But it will also likely undermine market confidence in the corporation’s quality of leadership. Remember that once before, Ren Zhenfei nearly ran the company to the ground.

 The family’s gain will be the corporation’s loss. Should the battle for control of Huawei continue inconclusively or should an inferior management team control it, the global telecoms industry could begin looking at other technology suppliers for their future needs. Huawei’s product line is under strong challenge from new Android operating systems for mobile phones.

The outcome of the telenovela unfolding in the headquarters of Huawei could influence the technology trends of our local telecoms industry and the products our consumers use.

This sort of corporate power struggle is by no means unique. In fact, it is commonplace among large corporations that used to be entirely family-owned.

Very often, the success of traditional family ownership to reassert control over what has become a modern enterprise comes at the cost of diminishing the quality of corporate governance. Over the long run, as the corporation suffers from the diminished management quality, the family’s victory ends up hollow. Very often, they succeed in reestablishing family control only at the price of subverting the viability of the enterprise. The trophy transforms from asset to liability.

The obvious peril of striking down professional management to favor family control never dissuades the patrimonial impulse, especially among Asian companies. Wealthy families take great pride in retaining control over the management of companies they established. It matters little to them that cutting out professional managers could irreparably damage a company’s viability.

We could replace the names of the main players in the Huawei drama and replace the name of the corporation in question with Filipino ones. The story will likely remain the same. The graveyard of failed corporations abounds with enterprises that were managed badly because family control was accorded greater importance over professional management.

When family names prevail over the standards of professional merit, the consequences are often dire. This is true not just of private corporations. It is true of the management of nations just as well.