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Can Western brands recover from consumer reaction in China?

For many years, foreign companies operating in China have faced adverse consumer reactions fueled by social media, sometimes because of cultural insensitivity and sometimes because of political controversies.

“Anyone who offends the Chinese people should be prepared to pay the price,” was the direct message from China’s Foreign Ministry spokesman, Hua Chunying, when asked recently about a number of Western companies facing a boycott later. to express concern about alleged human rights abuses in Xinjiang province. .

H&M was the main target, but the reaction also hit Nike, Adidas and Puma – all members of the Better Cotton Initiative (BCI), a nonprofit group that promotes sustainable cotton production.

The Swedish fashion retailer is blocked on China’s main e-commerce platforms and its physical stores have disappeared from some digital maps. Twenty H&M stores remain closed.

These companies are not the first to face a negative reaction in China and will almost certainly not be the last.

But the price of these transgressions seems to vary dramatically. The problem passes quickly for some companies, but it causes permanent damage to others.

The president of the EU Chamber of Commerce in China, Jeorg Wuttke, said it is not uncommon for foreign companies to conflict with Chinese sensitivities. It is an old challenge that has grown with China’s economic importance and Europe’s changing attitudes.

“What has changed is that public perception and public opinion about China have worsened dramatically. And that, of course, increases the pressure on companies on the domestic front,” said Wuttke.

For some retailers like H&M, it is an enigma. Should they stick to the principles and risk of doing business in China or give in and offend their customers elsewhere?

At the moment, H&M sells 94.8% of its clothing elsewhere, but China’s growing wealth is likely to account for a large part of the company’s growth in the years to come.

Pragmatic anger

Wuttke believes that the aim appears to be to inflict short-term pain to defend his political position, rather than getting companies out of the market.

Boycotts are selective and tend to target companies with a high visibility retail presence, an approach that maximizes the visibility of the reaction, but also minimizes the impact on the Chinese economy.

Cotton harvester in Xinjiang
Source: BBC

It is quite easy for a retailer to increase its operations again, but the same may not be true for companies in other sectors, such as heavy industry.

“If they were going to punish a chemical company, or a company that makes machines, these guys have assets on the ground. If they get away, they won’t come back, ”he said.

Cultural errors or political statements?

There are several ways in which foreign companies can have problems with Chinese consumers. Many were mistaken with them for being culturally insensitive.

Often, these controversies pass and consumers come back. Balenciaga and Burberry, for example, offended consumers with awkward advertising campaigns related to Chinese holidays.

“There are now enough cases to suggest that cultural errors can be cured by careful execution on the spot and with the passage of time,” said Michael Norris, of consumer research agency AgencyChina.

Even so, the two companies also had problems with other issues. And sometimes cultural mistakes can also be more serious.

Italian luxury brand Dolce & Gabbana felt the ire of Chinese social media when it released three videos in 2018 showing a Chinese model struggling to eat Italian food, including cannoli and pizza with chopsticks.

The ad was widely viewed as racist and led to a violent reaction with several Chinese retailers withdrawing the brand’s products.

The company’s results have since suggested that it may have had an effect, with the Asia-Pacific market dropping from 25% to 22% of the group’s total revenue for the year ended March 2019 (although the company’s overall revenue has grown 4, 9% to $ 1.54 billion)

The following year, the company’s wholesale and retail sales in Asia, including China and Hong Kong, fell 35%. However, the results did not mention the boycott and the period in question includes the first three months of 2020, when China’s economy was hit by the Covid-19 pandemic.

Foul or free throw?

Politics, on the other hand, presents an entirely different challenge.

In 2019, the United States National Basketball Association suffered what its chief executive described as “substantial” losses after an online comment from a team executive sparked a negative reaction in China.

“Political postures or comments can compromise the future of a brand in China,” said Norris.

After Houston Rockets manager Daryl Morey tweeted support for pro-democracy protesters in Hong Kong, state broadcaster CCTV and Tencent Holdings, which broadcasts NBA games in China, said they would stop broadcasting Rockets games.

Hundreds of basketball fans gather in Wan Chai Southorn Playground to show support of the Houston Rockets general manager, Daryl Morey and league’s commissioner, Adam Silver
Source: BBC

The Chinese Basketball Association has suspended cooperation with the Houston Rockets, as have Chinese sportswear brand Li-Ning and the club’s sponsor in China, Shanghai Pudong Development Bank.

The Rockets remain on the bench.

“It took most of an NBA season to reinstate Houston Rockets ‘scores and standings for Tencent Sports. However, even today, Houston Rockets’ clothes remain inscrutable in Alibaba’s e-commerce markets,” he said. Norris.

A lot of money

Korean companies faced perhaps the fiercest opposition in 2017, when South Korea agreed to install a U.S. missile system that Beijing said could be used to spy on China, although it was intended to defend itself against North Korea.

The Korean Tourism Organization estimated that the fight cost the country’s tour operators $ 6.5 billion (£ 4.66 billion) in lost revenue. Korea’s cosmetics and entertainment industries have also suffered. The central bank estimated that it reduced 0.4% of the country’s economic growth in the year.

Perhaps the biggest loser was the Korean conglomerate Lotte, which provided land it owned in South Korea for the missile defense system.

Shuttered Lotte store in China
Source: BBC

The company sold its chain of convenience stores to a Chinese company as a result of the controversy.

The losses suffered about $ 1.7 billion in China in the 18 months after the start of the controversy, mainly with the sale of its convenience stores in China at a loss, according to the Financial Times.

The company’s confectionery, beverage, food production and department store divisions have been hit.

However, even Lotte came back. In 2019, the company resumed work on a $ 2.6 billion real estate project in Shenyang.

Wuttke says it rarely seems to be the case that foreign companies are permanently excluded from China. The main question seems to be how long the boycotts last.

“China wants the world to know its anger. They do it. It is very painful for companies, but it is going away,” he said.

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