Your New China Problem

Since Portuguese explorers first arrived on China’s shores in 1517, the country has always held special allure for businesspeople. Those intrepid Portuguese were astonished by the country’s riches, noting the use of gigantic silken banners and flags in a parade. “Such is the wealth of the country,” wrote one observer at the time, “such is its vast supply of silk, that they squander gold leaf and silk on these flags where we use cheap colors and coarse linen cloth.” 

In recent times, China’s huge, increasingly-affluent population has been a siren call — “the next great market.” The biggest risk for most CEOs in recent years, in fact, was not doing business in China: with little scrutiny, public companies could sell investors on hockey-stick projections by citing the impressive growth potential of selling to more than a billion Chinese consumers, while goods could be made and procured there at rock-bottom prices. 

But the times, as they say, they are a-changing. In an era of ESG, #cancelculture and fast-shifting political mores, many CEOs are about to discover—if they haven’t already—that the risks of doing business in an increasingly authoritarian China are starting to outweigh the benefits of being there.  

The shift will surprise some, but it shouldn’t. In return for access, Western companies for years kowtowed to seemingly “modest” Chinese demands. Even though Taiwan has never been part of the People’s Republic of China, for instance, in August 2019, luxury brands Versace, Swarovski, Coach and Givenchy issued apologies for labelling Taiwan, as well as Hong Kong and Macau, as independent from China on tee shirt designs and other fashion products (at the time, China hadn’t yet breached the multinational agreements that ensured Hong Kong’s independence). Also that month, China’s Xinhua New Agency reported that 29 Fortune 500 companies had “rectified” “problem maps” that didn’t adhere to the Chinese government’s wishes. 

In July 2018, three major U.S. airlines (Delta, United and American) bowed to Chinese pressure and relabeled their route listings and maps, removing references to Taiwan as a country. Marriott Hotels’ website was shut down by Chinese authorities for similarly labelling Taiwan and Tibet as separate countries (after Marriott apologized and re–labelled things according to Chinese authorities’ dictates, the company was ordered to close down its website and mobile app for a week in punishment, just to drive home the point.) 

Also in 2018, Spanish clothier Zara and American medical device maker Medtronic were ordered to publish apologies, carry out “self-inspections” of their websites and mobile apps, and craft “rectification reports” for their geographic faux pas. The Chinese state-run newspaper, People’s Daily, labelled Mercedes Benz “an enemy of the people” after the auto company posted to its Instagram account a benign quote from the Dalai Lama (“Look at the situation from all angles, and you will become more open.”) Mercedes Benz apologized and removed the post. 

The ease with which Western businesses acceded to China’s demands undoubtedly emboldened the regime to go further. In retrospect, China signaled a change in status for Hong Kong to these companies; the signals were greeted by pure acquiescence and no meaningful involvement by U.S. diplomats or policy makers. In China, given that so-called “private” companies are, in reality, just extensions of the government, the regime’s signals to our companies were clear trial balloons.  

Our collective inaction almost certainly contributed to Chinese supreme leader Xi Jinping’s calculus in wholly cracking down on Hong Kong in 2019 by overturning its largely-autonomous legal status, eliminating the free press, implementing strict security laws that justify mass arrests and prohibit peaceful protests, jailing democratic activists and eliminating opposition candidates from elected office. 

The era of bipartisan mercantilism with China—with the goal of maintaining trade and nudging liberalization—is over. The Trump Administration was the first to meaningfully challenge and shine a spotlight on China’s deeply-illiberal strategy of stealing and forcing the handover of Western intellectual property, limiting foreign access to its prime markets, restricting competition by favoring state-controlled entities through preferences and subsidies, and exploiting academic freedom to drain Western universities of their cutting-edge technologies. 

It appears by all measures that the Biden Administration will continue to press against China, focusing its ire not on free market issues but instead on its gross human rights abuses—including the mass incarceration and use of forced labor of its Uighur ethnic minority. 

China is responding by becoming more belligerent and uncompromising, making it more difficult for Western companies to operate by its increasingly draconian rules. This month, Swedish fashion retailer H&M voiced concern about China’s use of forced labor to farm cotton in the Uighur region of Xinjiang. Chinese authorities punished the company by “disappearing” H&M and its 400 China-based stores from internet searches, maps and apps. 

For CEOs operating in China, it is now clear that the Chinese government will require some level of moral complicity as the price for doing business there. This is a classic “when good people say nothing” moment. At the same time, Western consumers and employees are demanding that the companies they deal with and work for align with their values. As some of the dust settles on the 2020 election, don’t be surprised to see business’s interactions with China become the next ESG hot button—a tasty point of attack for the press, for activists and for populist politicians on both sides of the aisle. 

It’s the right time for a rethink. See it as an opportunity: For CEOs who say they put people before profits—even when it hurts—China now offers an unrivaled chance to “live your values.” And maybe help the world at the same time.