Moment of truth on China is coming for rest of corporate America

For US companies including Nike and Starbucks, China is a crucial market that is only growing in importance.
For US companies including Nike and Starbucks, China is a crucial market that is only growing in importance.PHOTO: AFP

NEW YORK (BLOOMBERG) - Long before Daryl Morey's fateful tweet - the one that set the NBA on a collision course with China - the nation had a history of employing economic might to twist corporate arms in Asia.

In 2012, Japanese automakers saw Chinese orders sink during a land dispute. Two years ago, an impasse with South Korea led to the closing of Korean-owned stores and Chinese media encouraging a boycott of Hyundai Motor Co. Two months ago, Beijing effectively barred Cathay Pacific employees who participated in Hong Kong demonstrations it deemed illegal from flying into China.

For western companies, the latest incident began Oct 4 thanks to Morey, general manager of the Houston Rockets. He tweeted a slogan supporting Hong Kong's pro-democracy movement days before National Basketball Association preseason games in China. The country retaliated by canceling broadcasts, and Chinese sponsors instantly disappeared.

It was one of China's most aggressive efforts yet to bend a western company to its will, and it pins corporate officials between the imperative of profits and loyalty to open societies that nurture their businesses.

"This skirmish between American capitalism and the China model is only going to increase in the future," said John Paul Rollert, who teaches ethics at the University of Chicago's Booth School of Business. "How American companies deal with it now will suggest how likely China is to give in on these matters or change the value system of American companies."

After years of declining public trust, US businesses have been trying to prove that their values extend beyond the bottom line. In August, the Business Roundtable, one of the country's most influential lobbying groups, abandoned a long-held view that shareholders' interests should come before all else.


China will be a big test of whether that's mere talk. For companies including Nike and Starbucks, the country is a crucial market that is only growing in importance. And the attention paid to China's behaviour probably will increase as US politicians rail against its rising power and human-rights abuses.


China's punishment of offending foreign entities "isn't new, but the speed and ferocity of the responses has grown," said Scott Kennedy, a senior adviser at the Center for Strategic & International Studies in Washington. "This is not going to go away any time soon."

Opportunities for international incidents are increasing. The US alone conducted about US$737.1 billion (S$1.02 billion) in trade with China last year, according to federal figures, and President Donald Trump has been pursuing a bitter trade war for more than a year. The internet has allowed almost anyone - government officials, corporate officers, backroom worker bees - to send out potentially offensive messages. That's a chancy environment for entities such as the NBA, Nike or movie studios, which are lashed to entertainers and athletes who like to speak out online.


The NBA has deep ties to China, striking a TV deal in the late 1980s and now claiming that 500 million people there watch its programming. The Rockets gained traction thanks to former player Yao Ming, a 7-foot-6 star who now heads the Chinese Basketball Association.

From China's perspective, it's hard to imagine worse timing for Morey's tweet. Last week, the nation celebrated 70 years of Communist rule. There was a massive military parade. President Xi Jinping promised to continue China's greatness. Meanwhile a series of marches in Hong Kong protesting an extradition bill has escalated into massive demonstrations, some 1,500 arrests and the police shooting of a protester.

Morey swiftly deleted his tweet and apologized, but the damage was done.

Chinese-owned companies quickly distanced themselves from the NBA. Sponsors including China's largest sportswear maker, the second-biggest dairy business, a smartphone brand and a local joint venture of Nissan Motor all pulled out. State television CCTV and tech giant Tencent Holdings said Oct 8 they wouldn't show the preseason games.

The Brooklyn Nets - recently bought by Alibaba co-founder Joe Tsai - and the Los Angeles Lakers were to play in Shanghai on Thursday and in Shenzhen, just across the border from Hong Kong, on Oct12. Posters advertising them were taken down.


The swift response showed China's deep sensitivity to the way it is portrayed in the west, particularly its territorial claims to Tibet, Taiwan and semiautonomous Hong Kong.

"They are upset that others don't show them the respect they think they deserve," said Mr Kennedy, who has studied China for three decades. "They are certainly proud of their achievements but at the same time don't think it's gained them any international legitimacy in the west."

The NBA's response was wobbly. It initially criticized Morey - drawing wrath from all points in the US political spectrum - but Commissioner Adam Silver later supported his right to speak freely. That ignited another round of blowback, including Chinese state media alleging Silver supported violence by Hong Kong protesters.

Spurning Beijing, the University of Chicago's Rollert said, isn't as clear cut as spurning - hypothetically - Pyongyang.

"The NBA can afford to walk away from North Korea," Mr Rollert said. "It's harder to walk away from China, and that's why this is such a significant problem."

The disparate responses to Chinese pressure of two video-gaming companies neatly illustrate the dilemma.


On Oct 8, a unit of Activision Blizzard Inc banned a high-profile e-sports player for one year and withheld prize money after he expressed support for the Hong Kong protests. It issued an abject apology on the Chinese microblogging site Weibo: "We will, as always, resolutely safeguard the country's dignity."

Meanwhile, the chief executive officer for competitor Epic Games, the manufacturer of Fortnite, said it wouldn't have punished the player for expressing his views.


Just asking a CEO about the situation can be fraught. When asked Tuesday how Levi Strauss & Co is thinking about balancing its interests in Hong Kong, Chip Bergh skirted the question.

"I don't really want to get dragged into a political comment here," Mr Bergh said, laughing nervously. "We're just going to continue to stay on top of the situation in Hong Kong and keep our employees safe, keep our customers safe and if that means we have to close stores, we will close stores."

That's a situational tactic for the protests in the streets but not a coherent strategy as China wields its economic might.