Why Foreign Firms Are Walking on Eggshells in China

(Bloomberg) -- The world's largest consumer market is also increasingly a political minefield for global firms. Chinese consumers, besieged by news of geopolitical tensions, a slowing economy and the trade war with the U.S., are becoming more sensitive to any perceived slight to their country or culture. And they're quick to retaliate. The growing nationalism is also making them lean toward home-grown brands, jeopardizing the plans of multinational firms that have big bets on the Asian nation.

1. What are the triggers?

Many of them relate to China's sovereignty:

• Hong Kong: It's has been part of China since the British handed it back in 1997, but is governed as a semi-autonomous region. This year's pro-democracy protests are viewed by many in mainland China as a separatist movement. Any company or employee seen as supporting them face a scathing backlash, as the National Basketball Association found out in October.
• Taiwan: China considers the island a renegade province, even though its been governed separately since 1949, and any talk of independence as deeply hostile. Calling it a country, like some fashion brands did, can cause problems.
• Tibet: In 1959 the People's Liberation Army quashed a revolt against Chinese rule in the region and the Dalai Lama, the Tibetan spiritual leader, fled into exile. It's another sensitive area, even on a hotel website. And while the Dalai Lama is a celebrity in the West, China considers him a threat, not a subject for inspirational advertising.

The line comes from the top: President Xi Jinping was quoted in October saying any outsiders attempting to split China were delusional and would be crushed.

2. So it's about territory?

Not just. Chinese consumers have also reacted sharply to perceived cultural insults, such as when a senior UBS executive used the phrase “Chinese pig” in June to discuss the impact of the swine fever outbreak. A Dolce & Gabbana ad last year showing a Chinese model struggling to eat Italian food with chopsticks sparked outrage, leading the designers to apologize.

3. What's the response?

It's quick and severe, especially with the proliferation of social media platforms. China's online army is emerging as a powerful weapon in calling out a growing list of global brands. Chinese celebrities are also helping fan this patriotic fervor. And it can be costly: the tweet supporting the Hong Kong protests by an NBA team official led to cancellation of events in China, suspension of ties by sponsors such as sportswear maker Li Ning Co. and a broadcast halt of the matches. Dolce & Gabbana saw its goods pulled off shopping websites after its marketing blunder.

4. Why so touchy?

China has long been sensitive to slights on the global stage, especially since its astronomic economic rise hasn't brought greater say in global institutions like the World Bank. This posture is also informed by a long period before the Communist Party came to power -- known as the “century of humiliation” between 1839 and 1949 -- when the country was subject to invasion and imperialism by western countries and Japan. Chinese leaders often refer to that painful era to remind citizens why the country must stand up for itself globally.

5. What's new?

Decades of prosperity have made Chinese consumers more affluent -- and more crucial for global consumer brands seeking growth. This means that Chinese consumers now have the power to financially punish companies that they see as having disrespected the country. The trade war with the U.S. also has been polarizing, and many Chinese are personally offended by anti-China rhetoric heard in Hong Kong and frightened by the violence directed at mainlanders living there.

6. Who has faced the brunt?

Consumer goods companies -- particularly in the luxury segment -- are especially vulnerable. The Chinese market accounts for at least a third of current luxury sales and two-thirds of the industry's growth, according to figures from consultancy Bain & Co. That's why most have been quick to backtrack and apologize after being called out, including Versace, Coach, Mercedes-Benz and Christian Dior. The issue surfaces in other ways too. Under pressure from Chinese regulators, U.S., European and other major airlines revised their websites in 2018 to reflect China's claim on Taiwan. Hong Kong's flagship carrier, Cathay Pacific Airways Ltd. replaced its top brass and dismissed several employees after China censured the airline for perceived support for the Hong Kong protests. State-run Air China owns almost 30% of Cathay.

7. Does everyone back down?

No. The NBA in October said it regretted the consequences of the tweet by a team manager, but also said that the organization wouldn't limit employees' free speech despite the risk of substantial losses.

8. Who's gained?

Local brands. Apparel giants Anta Sports Products Ltd. and Li Ning have revamped their brands along nationalistic styles known as Guochao -- including using folklore references or printing “China” in large characters. Robust sales by the two firms show the strategy is working, helping them beat back short-seller ambushes. Some consumers swapped their Apple Inc. iPhones for handsets from Huawei Technologies Inc. after the Chinese smartphone giant came under pressure from the U.S. Other, non-U.S brands may benefit. A survey by AlixPartners found that Chinese consumers were planning to increase their foreign brand purchases on Singles' Day this year, but were moving away from American brands.

9. Is this expected to change soon?

Not in the foreseeable future. As long as the trade war drags on and protests in Hong Kong continue to disrupt the city and target Beijing, mainland Chinese consumers are unlikely to soften their stance.

The Reference Shelf

• Here's how far China's online army can go.
• Bloomberg Opinion's Tim Culpan takes at look at how Huawei portrays itself as a victim of U.S. bullying.
• The nationalist wave sweeping China is propelling red tourism, red culture and red consumption.
• QuickTakes on how the U.S. Congress is riling China, how blacklisting companies became a trade war weapon, and how an angry China squeezed South Korean companies.

To contact Bloomberg News staff for this story: Carolynn Look in Beijing at clook4@bloomberg.net

To contact the editors responsible for this story: Rachel Chang at wchang98@bloomberg.net, Paul Geitner, Bhuma Shrivastava

©2019 Bloomberg L.P.

With assistance from Bloomberg