The China Syndrome
The People’s Republic is complicated, but most U.S. brands can’t afford to walk away
By Angela Doland Published on October 28, 2019
Illustration by Tim Bradford
Illustration by Tim Bradford
Nike’s outgoing CEO Mark Parker made a comment in a September earnings call that might have startled people who think of the company as a great American success story. Nike, he said, “is a brand of China, for China.” Parker’s provocative remark meant to draw attention to how important China is for the sportswear giant. Nike has had 21 consecutive quarters of double-digit revenue growth in the China region, and sales there were up 22 percent in the quarter ended in August. Nike looks to China’s 1.4 billion consumers and its swelling middle class to power future growth.
Like many Western brands, it also carefully tailors its China messaging to the market. Soon before Nike took a stand on U.S. social justice in its “Dream Crazy” ad featuring Colin Kaepernick, Wieden & Kennedy Shanghai dreamed up a very different Nike commercial for the Chinese market. In time for the 2018 World Cup, the spot imagined a future in which China is a global soccer powerhouse. That vision just happens to align with President Xi Jinping’s ambitions; he’s a soccer superfan who made the sport a national priority. It's not always easy Doing business in the world’s second-biggest economy is a balancing act for Western brands that want to stay true to their values, craft an image that appeals to Chinese consumers and at the same time stay in Beijing’s good graces. That was obvious in the National Basketball Association’s recent debacle, when the general manager of the Houston Rockets, Daryl Morey, sparked a crisis with a seven-word tweet supporting Hong Kong’s anti-government protesters, angering many in China. The NBA supported Morey’s right to free speech but also released a statement on Chinese social media that sounded more contrite than the English version. Nike, mindful of local sensitivities, quietly removed Houston Rockets gear from some Chinese stores, Reuters reported. When Nike endorser LeBron James criticized Morey for speaking out, he might have had the NBA’s business interests in mind, but also Nike’s and, by extension, his own. Separately, Apple pulled an app that identified the location of Hong Kong police, and video game company Activision Blizzard sanctioned e-sports players who showed support for the protesters. Sensitivity over Hong Kong comes on top of uncertainty about the U.S.-China trade war and efforts to negotiate a truce. But this isn’t a strictly U.S.- China phenomenon—politics often cause flare-ups for multinationals navigating China. Ahead of the 2008 Beijing Olympics, when France greeted the Olympic torch relay with protests over human rights abuses in China, Chinese consumers retaliated by burning a French flag outside Carrefour, the French supermarket. After Japan was embroiled in a territorial dispute with China in 2012, Chinese sales of Honda and Toyota vehicles plummeted. In 2016, China cracked down on K-pop and other South Korean imports as punishment for Seoul’s decision to let the U.S. build a missile defense system on its soil. People were caught off-guard by the NBA incident “because the NBA understands China very well and made friends with the Chinese government and people on many levels,” says Tom Doctoroff, a longtime China advertising executive who is now global senior advisor at consultancy Prophet. “It shows how fundamental the idea of [Chinese] sovereignty over Hong Kong is.” While Chinese broadcasts of preseason NBA games were canceled, Doctoroff says, “if the NBA were just banned, the Chinese people would view it as a step too far.” Sticking it out (or not) So yes, it’s complicated—even for brands with deep China expertise like the NBA, Nike and Apple. But most are not walking away. China’s economy has slowed, but it’s nonetheless set to grow 6.1 percent this year, the International Monetary Fund says. The middle class is still growing and buying more washing machines, smartphones and diapers; McKinsey & Co. says more than three-fourths of China’s urban population will be middle class by 2022. That’s up from 4 percent in 2000 and 68 percent in 2012. When Western brands generate sales in China, it’s win-win, says Humphrey Ho, U.S. managing director at Hylink, a major independent Chinese digital agency. “An American brand that does well in China increases domestic consumerism, which serves the brand’s interests in the U.S. on Wall Street,” he says. “But it also serves one of the core pillars of China’s current five-year plan, which is increasing domestic consumption.”
China has transformed over the past few decades from an agrarian society into an urban nation of savvy consumers. But it isn’t as easy for foreign brands to grow in China as it once was. There’s more competition from local players—which have improved product quality and gotten more savvy at marketing—and there are signs consumers are saving more and spending less. China is the world’s second-largest ad market, but overall spending is cooling from its previous double-digit years of growth; Publicis Groupe’s Zenith predicts China ad-spending growth of 4.5 percent this year. Many U.S. brands have invested heavily in China and are still betting big. Starbucks, amid competition from local rival Luckin Coffee, still expects to open nearly 600 stores in China this fiscal year. Marriott International says China is its strongest driver of growth in Asia, and the company has 300 hotels in the pipeline there. Apple has strong Chinese competitors, including Huawei, but it is deeply invested there, logging 17 percent of its global sales in greater China in the most recent quarter. Brands can’t afford to ignore the market or walk away, although there are exceptions. Amazon struggled for relevance in China, where Alibaba Group and JD.com dominate online shopping, and this year Amazon shut its domestic Chinese e-commerce business. In 2017, McDonald’s sold most of its China business to Chinese state-backed conglomerate Citic and private equity firm Carlyle Group; observers said the move would allow McDonald’s to benefit from royalty fees while letting its local partner handle the hassles of growing in a tough market. After being hit by a scandal over the quality of a supplier’s meat in China, KFC parent Yum Brands spun off its massive China business into a separate company in 2016 to allow it more agility there. Other companies have simply been forced out. Most Western tech platforms, including Facebook, Google search and Twitter, are censored for China’s masses, and accessing them from within mainland China requires special software.
So what's a brand to do Like all foreign companies operating in China, U.S. brands strenuously try to avoid offending Chinese political sensitivities or insulting consumers, as Dolce & Gabbana did in 2018 with ads that showed a Chinese model awkwardly eating pizza and spaghetti with chopsticks. The ad was deemed racist, and sales have suffered. “Now it’s a powder keg whenever anything happens that seems to be disrespectful or against Chinese nationalism,” says Jerry Clode, who founded The Solution, a consultancy focused on understanding Chinese consumers. “These types of incidents are going to happen more regularly and become a core behavior of China’s social media culture.” Aside from avoiding crises, brands also try to show they value Chinese consumers and understand their traditions and aspirations. Brands from Starbucks to Tiffany & Co. sell traditional mooncakes for the Mid-Autumn Festival, and many brands spend big on campaigns for the Lunar New Year. Occasionally they even tap into Chinese patriotic feelings—surprising people accustomed to brands’ U.S. messaging. Last year, a KFC ad marked 40 years of economic reform in China, looking back at how far the country has come and ending with a cheer of “Go China!” Yet Chinese consumers (just like Americans) aren’t always looking at brands through a patriotic lens. Hylink’s Ho attended the recent preseason Los Angeles Lakers-Brooklyn Nets exhibition game in Shanghai at the height of NBA tensions in China, monitoring whether fans canceled tickets or backed out. They didn’t. “For the love of the sport, people didn’t want to take sides,” he says. “They just wanted to see some basketball.”
Web production by Corey Holmes. Illustration by Tim Bradford