Why Are U.S. Companies So Fixated With China? 🇨🇳

Why Are U.S. Companies So Fixated With China? 🇨🇳

For the last 20 years, there has been little that has gotten investors as excited as one word…

China.

Just the mention of China has sent stock prices soaring. 

Why?

Because China is big.

Very big in fact.

In the US there are 10 cities with over 1 million residents. In China, there are over 160. When the Three Gorge Dam was constructed, the Chinese government had to relocate 1.24 million people, as 13 cities, 140 towns, and 1350 villages were either flooded or partially flooded. That means there are 13 cities in China that are underwater.

Major companies have spent billions of dollars to try and gain a foothold in what is the largest consumer market in the world, bolstered by a rapidly growing middle class. Howard Schultz, as CEO of Starbucks, claimed to have traveled to China more than any other public CEO over the last ten years. Mark Zuckerberg learned Chinese to try and charm government officials into letting Facebook operate there (they didn't).

New IPOs from the Middle Kingdom are regularly called "the X of China". Baidu is "the Google of China". Alibaba is "the Amazon of China". iQiyi is "the Netflix of China". These terms are incredibly reductive but investors love them.

Some Western companies have thrived in China. Starbucks, Apple, Tiffany & Co. are just a few, and many believe that China will someday be their biggest market. However, the last few weeks have shown how fragile that can be. 

It started like so many international incidents seem to these days — with a tweet. It was a tweet by Daryl Morey, the manager of the NBA team, the Houston Rockets. The tweet was that of an image showing support for the protests that have been ongoing in Hong Kong for several months now.

To Westerners that may not seem like a very big deal, but in China it absolutely was.

To understand why, it's important to realize that in China, the NBA is beloved. It's one of the great success stories of a Western company entering the Chinese market. Basketball is a big deal in China, with an estimated 300 million people playing the sport. And the Houston Rockets are very popular too, largely due to the fact that in 2002, they drafted Yao Ming, one of China's top players. (I would call him the Michael Jordan of China but I really don't know enough about the sport to justify that.)

So Chinese media took this tweet very seriously. Matches that were taking place in China as part of a preseason-tour were not shown on television (even though the Rockets weren't playing). E-commerce sites like JD.com pulled all Rockets merchandise from their shelves. Nike even followed suit to avoid appearing to support the tweet.

And things got worse. The NBA Commissioner, Adam Silver made a statement calling the tweet "regrettable". This caused an uproar in the United States were it came across as the Chinese government encroaching on an American's free speech and drew ire from Senator Ted Cruz and Presidential hopeful Beto O'Rourke - two men who have likely never agreed on anything. Silver was forced to walk back his comments, saying, "values of equality, respect, and freedom of expression have long defined the NBA — and will continue to do so." For a while, things were at a stalemate. No one really seemed to know what was going to happen. There were billions of dollars on the line in terms of television rights, merchandising, and player sponsorship…all over a tweet. It's worth pointing out at this point that Twitter is banned in China.

From then on, things appeared to slowly cool down, which is probably best for both parties. After all, the NBA is one of the most differentiated products on the planet. It is the most popular basketball league by far, attracting all the top players. What could China do? Ban the NBA? How would the hundreds of millions of fans react to that? The fact is, we actually still don't know what's going to happen.

This isn't the first time that a Western company has upset Chinese officials. In 2018, Marriott International listed Hong Kong, Macau, Tibet, and Taiwan as independent countries in a survey it sent to customers. Various airlines made the same mistake on their booking sites. Gap had to apologize after selling a T-shirt featuring a map of China that omitted Taiwan.

It's not my place to make a judgment on whether or not the reaction to these is justified. However, it does bring up a big question that investors need to start thinking about. What happens when the companies that succeed in China, succeed too much? What happens when China represents a massive percentage of their overall revenue? How can you be sure that some employee won't send out the wrong tweet potentially upending your entire business?

I'm not saying these things might happen. They are bound to happen.

China is no doubt a country of massive opportunity for Western brands. But as the last few weeks have shown, there's an awful lot of risks involved too. 

—Rory

Head Analyst 

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