Why Western Companies Should Leave China
Consumers will punish brands that rely on forced Uighur labor. While abandoning the Chinese market might hit profits, it will bolster reputations.
In a recent survey, 96 percent of German businesses active in China said they planned to stay there. That’s because there’s money to be made. There is, alas, also the matter of image. In a 2020 report, the Australian Strategic Policy Institute (ASPI), a think tank, reported that 27 factories in nine Chinese provinces were using Uighur workers from Xinjiang, including forcibly interned ones. “Those factories claim to be part of the supply chain of 82 well-known global brands,” ASPI found, and “some factories appear to be using Uyghur workers sent directly from ‘re-education camps.’”
Although Beijing does not allow outside observers access to the camps, ex-inmates who have managed to leave China have provided harrowing accounts of systematic rape of female detainees and other crimes. The brands identified by ASPI include Abercrombie & Fitch, Acer, Adidas, Amazon, Apple, Asus, BMW, Bosch, Calvin Klein, Cerruti 1881, Cisco, Dell, Electrolux, Gap, General Motors, Google, H&M, Hitachi, HP, HTC, Jaguar, L.L.Bean, Lacoste, Land Rover, Mercedes-Benz, MG, Microsoft, Mitsubishi, Mitsumi, Nike, Nintendo, Nokia, Panasonic, Polo Ralph Lauren, Puma, Samsung, Sharp, Siemens, Skechers, Sony, TDK, Tommy Hilfiger, Toshiba, Uniqlo, Victoria’s Secret, Vivo, Volkswagen, and Zara.
In short, corporate giants’ understandable desire for access to China also involves the risk of coercion and brand damage.
Here’s a modest proposal for the many Western consumer-product companies doing business in China: get out. Initially, it may cause you production headaches and loss of revenue. But global consumers will reward you. And you won’t have to worry about ending up in the increasingly busy line of geopolitical fire.
The survey of German businesses conducted by the German Chamber of Commerce in China also found that 72 of German companies active in the country plan further investments. This may be connected to the fact that 77 percent of German companies active in China expect the market there to develop significantly better than in other economies this year. That’s a logical assumption, considering that the International Monetary Fund predicts China’s GDP to grow by 7.9 percent this year.
A few months after the ASPI report’s release, a BBC correspondent asked Volkswagen’s China CEO, Stephan Wöllenstein, about the matter. Wöllenstein replied that he couldn’t be sure that none of the Uighurs in Volkswagen’s plant in Urumqi, Xinjiang’s capital, had been transferred there from one of the camps. Soon social media was exploding with comments by angry consumers vowing to boycott the carmaker.
Other western firms including Nike, Apple, and Coca-Cola—which operates a bottling plant in Xinjiang—have in recent months acquitted themselves rather poorly in the court of public opinion. The three mighty brands have lobbied the U.S. Congress to weaken the Uighur Forced Labor Prevention Act, though without much success: Last September, the House passed the bill by an overwhelming majority, and it’s reported to have majority support in the Senate as well.
The icons of Western market economies should brace themselves for more China-related woes. Beijing has, as I’ve highlighted in Foreign Policy, been pressuring Ericsson’s CEO, Börje Ekholm, to lobby the Swedish government for a reversal of the country’s Huawei ban. Starbucks is in a similar situation. One can only guess how many similar cases haven’t come to the public’s attention.
Is the Chinese market worth such risks? It sounds like a crazy question: A market with 1.4 billion people and outstanding manufacturing infrastructure that has made China known as “the world’s factory” can’t be beaten. Which other country would be able to offer attractive incentives to a range of carmakers, appliance-makers, and others whose plants require enormous investment in technology?
That is the wrong question. A more appropriate one for Western business leaders is this: How can executives and boards of Western companies map business strategies when they face the risk of being coerced by Beijing as it seeks to extract concessions from their home governments? If they’ve received investment incentives for their plants, businesses are even more vulnerable to pressure. And it’s hard to develop strategies when Beijing disrupts even the best laid plans through wanton measures in retaliation against their home governments, as has happened to a plethora of Australian food exporters.
The only way to halt this snowballing process of corporate coercion is for one of the West’s leading consumer brands to leave. Yes, it’s a risk, but the company would liberate itself from the constant risk of geopolitically motivated coercion and punishment. And if it’s one of the foreign brands identified by ASPI, it could cleanse the brand in the process too. It is, in other words, a strategy for long-term health.
Australia is already making the shift. “Whether China continues to reduce its purchases of Australian food and agriproducts in coming years—as we think likely—or not, the risks of supplying this market have definitely increased. 2021 will likely mark a watershed year, in which Australia starts to reduce its reliance on China, voluntarily or otherwise,” Tim Hunt, the head of food and agribusiness research at the Netherlands-based global bank Rabobank, said last month.
Citizens all over the West, meanwhile, have taken a radically dimmer view of China than was the case even a few years ago. In a poll conducted in the summer of 2020 by the Pew Research Center, 81 percent of Australians had unfavorable views of China, up from 32 percent in 2017. So did 85 percent of Swedes, up from 49 percent; 74 percent of Britons, up from 37 percent; 73 percent of Americans, up from 47 percent; 73 percent of Canadians, up from 40 percent; and 71 percent of Germans, up from 53 percent. The Chinese government’s ban on the BBC this month won’t win any hearts or minds—quite the opposite.
Such views matter. Western consumers are not only taking a stronger interest in current affairs but want the businesses they buy from to do the same. In its 2021 Global Marketing Trends report, Deloitte advises that “organizations should view themselves as human entities that mirror—and support—the values of those they are built to serve.” And it reports that consumers are paying close attention to businesses’ activities: 79 percent of consumers polled recalled instances of brands positively responding to COVID-19 to help their customers, workforces, and communities. That translated to 23 percent saying their perception of the brand changed and 19 percent saying it strongly influenced their brand purchase behavior. But the opposite is true as well: 66 percent of consumers recalled instances of brands behaving negatively, 31 percent reported that it affected their perception of the brand, and 26 percent said it strongly influenced their purchase behavior.
What could be more negative than being associated with 21st-century concentration camps? Sure, not too many Western consumers keep a tally of which brands have factories that might be using Uighur labor, but there’s likely be more damaging news coverage like the Wöllenstein interview and Uighur rape victims’ accounts. Indeed, Disney’s much-touted Mulan movie last year gained headlines for entirely the wrong reasons. Not only had the film been shot in Xinjiang; in the credits, the studio also thanked Turpan Municipal Bureau of Public Security, which operates the so-called reeducation camps and was sanctioned by the U.S. Commerce Department in 2019.
If a brand has even the faintest whiff of concentration camp, one-quarter of Western customers are—based on Deloitte’s figures—likely to defect. Such negativity can damage the brand, and what’s more, it will make institutional investors nervous. In the 1980s, apartheid South Africa had become so toxic that powerful institutional investors including Harvard University divested from firms with links to the regime. All this poses a risk to firms’ share price. And when the share price dips, the board notices.
Admittedly, packing up and leaving involves some effort, even for apparel firms that don’t have highly complex equipment. And there’s a big difference between giving up manufacturing in China and not selling to the Chinese market. For a food and drink chain such as Starbucks, leaving China would clearly mean forgoing Chinese consumers altogether.
Yet many businesses are already moving parts of their production elsewhere, primarily to other Asian countries, not for political reasons but because China is losing its allure as the world’s factory. Vietnam is becoming a clothes-making hub and has since 2018 been Adidas and Nike’s main manufacturing base. Thailand is attracting carmakers, and India is solidifying its position as a hub for tech and pharmaceuticals. Last month, India’s Serum Institute, the world’s largest vaccine manufacturer, received permission to make AstraZeneca’s COVID-19 vaccine.
And, yes, initially a consumer brand leaving the world’s largest consumer market would lose shareholders interested only in instant gains. But it would possibly gain better ones, with interest in long-term performance. And let’s not forget that major investors are beginning to focus more on ethics, even if only to please public opinion. In 2019, Norway’s powerful sovereign wealth fund sold its fossil fuel holdings.
Which company is going to be the first consumer brand to make the leap? The reward would not only be long-term stability but immediate positive headlines as well. That’s more than can be expected for those brands that stay and greet every day in the knowledge it could bring evidence of Chinese coercion or more damaging revelations of concentration camp labor. Not even 7.9 percent growth rates can offset such headaches.