How Beijing Could Unmake Howard Schultz’s Billions

If anyone deserves credit for turning China into a nation of coffee drinkers, it’s Howard Schultz, the founder of Starbucks and a prospective independent candidate for president of the United States.

Since establishing its first cafe there 20 years ago, Starbucks has opened over 3,400 locations in China—now its second-largest market—with plans to reach 6,000 by 2022. It’s a strategy driven by China’s unquenchable thirst for Western brands, as well as the fact that, with more than 14,000 U.S. locations, the domestic market is sufficiently caffeinated.

Despite this, Starbucks’s success in China isn’t guaranteed. The Chinese coffee chain Luckin Coffee is mounting a serious challenge to the Seattle-based company’s dominance. And the fickle Chinese government exercises significant control over foreign companies, which means that for Starbucks to flourish in China, it must carefully nurture its relationship with Beijing. Schultz’s chances of becoming president are tiny at best, but his ties with China point toward issues that American corporations, and future leaders, have to untangle.

As the Washington Post pointed out last week, this raises the stakes for Schultz’s candidacy. The company’s former CEO is still its biggest shareholder, holding about 3 percent of Starbucks stock, worth roughly $2 billion. Normally, Schultz would be expected to divest his investments before taking office, but President Donald Trump’s refusal to part ways with his own business interests has scrambled that convention. When asked in July 2018 whether Schultz would divest his Starbucks holdings if he ran for president, his spokesperson declined to answer, saying only that “he’s a very thoughtful individual.”

For the sake of argument, let’s say that he did. Even without a direct financial stake in Starbucks’s profitability, Schultz might remain protective of the business empire he created. He was hired by Starbucks at 29 when it had only three locations. As CEO, he catalyzed the gourmet coffee craze by blitzing the world with venti lattes. Now, the continuity of all those decades of work rests on the company’s success in China, a country whose relationship with the United States is already on the rocks.

Starbucks’s expansion into China took years of meticulous groundwork. Chinese consumers in 1999 were relatively poor and unfamiliar with Western brands. A New York Times report on Starbucks’s early challenges there described a clientele that “still dresses in drab colors and makes do with shoddy goods manufactured by state-run industries.”

What’s more, the Chinese rarely drank coffee. It was originally brought there in the 1800s by Western powers, who set up concessions replete with replicas of their beloved cafes from back home. Many of these were shut down by Mao Zedong in the mid-20th century, but in the 1980s a fledgling cafe culture began to re-emerge in China’s bigger cities.

Still, it was Starbucks that introduced the bitter beverage to a new generation en masse. The company spent years cultivating a taste for its product, spiking its frappucinos with green tea flavoring to adapt the Chinese palate. It also worked to bridge the gap between China’s teahouse culture and modern American coffee shops by designing cafes more oriented toward boisterous socializing than laptop computing. To accommodate Chinese intergenerational family dynamics, the company even provided health care for employees’ aging parents—although, since it continued to charge even sharper prices than in the West while paying Chinese salaries, profit margins remained healthier than at home

Starbucks also had to jump through the endless hoops of Beijing bureaucracy, all the while taking pains to appear ever humble before authorities skeptical of Western enterprises. This meant refraining from the types of promotional campaigns it would normally trumpet when entering a new market and lavishing government officials with borderline-obsequious signs of respect.

This ingratiating has been key to Starbucks’s success in China, and continues to be to this day. Starbucks knows that, should it fall out of favor with the Chinese government, its fortunes could quickly change. China may not kick Starbucks out of the country entirely, but it could choose to squeeze the company with health code violations, delays in building permits, and negative stories in the state-run press.

China makes up a huge share of Starbucks’s current revenue growth. The company grew by 38 percent in the China-Asia Pacific region last year, as opposed to only 8 percent in the Americas. (Numbers about Starbucks growth in the U.S. and China specifically aren’t publicly available.) In a recent interview with the Financial Times, Schultz characterized the chain’s profit margins in China as a way of ensuring there will be “less dependence on the U.S. business” in the future.

But it doesn’t take much to run afoul of the Communist Party—last year, the government shut down Marriott’s Chinese website merely because it listed Taiwan as a separate country. (Marriott quickly apologized.) The risk of such friction has only increased since the United States launched its trade war with China, which has already sparked retaliatory moves against U.S. companies selling their products there.

The Chinese government is also adept at whipping up public opposition to foreign companies that it feels have stepped out of line. In 2017, Lotte Group, a South Korean multinational conglomerate with a range of global business interests, allowed the United States to build an anti-missile system on one of its golf courses in the country’s southeast. Beijing responded with a shotgun blast of boycott measures, banning K-pop stars and South Korean movies, and discouraging Chinese consumers from buying South Korean cell phones or cars.

Though China has never taken such actions against Starbucks, the threat is ever present, and there have been instances of tension between the coffee purveyor and the Chinese establishment. In 2000, Starbucks opened a cafe in the Palace Museum, the former site of the Forbidden City and a perennial domestic tourist location. But in 2007, the ambitious young state TV anchor Rui Chenggang led an online campaign against the move, leading to the cafe’s closure. Rui himself would fall victim to the vagaries of Chinese politics, disappearing into the penal system in 2014 without trace. Starbucks, meanwhile, found itself on the receiving end of another political blast the previous year, when a move against foreign products led to repeated TV criticism of its high prices.

At moments like these, Starbucks would no doubt feel reassured with its founder calling the shots in the White House. More than any other candidate, a President Schultz could be counted on to implement pro-China policies. Ideologically, he is against tariffs simply on principle. And in his time as the leader of a global company, he spoke often of the need for healthy and open business relationships between America and China.

But more than that, in some shareholders’ eyes, having Schultz personally behind the desk in the Oval Office could amount to an insurance policy for the value of their stock. “The last thing the Chinese would do is go after the next American president’s company,” said Bill Ackman, the founder of the hedge fund Pershing Square, which bought 15 million shares of Starbucks stock last year.

The notion that a business titan could use his perch in the White House to protect his company sounds distinctly kleptocratic—and not unlike the current political reality. As president, Trump has often made political decisions that appear to benefit the hotels, golf courses, clothing lines, and real estate developments owned by him and his family.

Often, when wealthy business owners run for office, they emphasize their independence, making the argument that their money insulates them from the pressures of outside influences. But in many cases, just the opposite is true. A complex global web of financial entanglements makes it nearly impossible to maintain objectivity in politics.

Already, a top political consultancy has privately urged Democratic candidates to insulate Starbucks from their attacks on Schultz, lest the company’s revenues become collateral damage. Complications abound when corporate interests intersect with political power and will always be a feature of America’s relationship with China, no matter who is the president. Look no further than Huawei, the Chinese technology company caught up in America’s geopolitical skirmish with Iran. Whatever the outcome, it will have major implications for the U.S.-China relationship. International relations are tricky enough without corporate profits on the line—especially for the president.