The Chinese government has called for boycotts of several Western companies — including Nike, Adidas, and H&M — that have made past statements criticizing China for alleged human rights abuses against Uyghurs in the northern province of Xinjiang, where the Chinese government has built a network of internment camps for the Muslim minority group, forcing them to work in textile and other hard-labor manufacturing jobs, according to human rights groups.
Though China denies the allegations, the U.S., Canada, Britain, and the European Union have imposed sanctions against China for the alleged abuses. On Friday, the U.S. government also criticized China’s social media campaign to boycott U.S. companies.
But Western brands are likely to remain under a microscope in China, according to a recent note from Cowen Equity Research. Analysts noted that China accounts for over 40% of Nike’s future sales growth, and despite reiterating its Outperform ratings on Nike, anticipate stock volatility around increasing rhetoric between the U.S./ Europe and China.
“On 3/24 H&M was removed from Tmall and other key points of distribution in China and was subject to news/social media outrage. Notably, this was related to last year’s pledge to no longer use cotton from the Xinjiang Uyghur Autonomous Region (XUAR). Our supply chain contacts suggest there is little to no manufacturing being done within our coverage in XUAR. The risk appears centered on language past and present directed at China. The statement Nike (NKE) made denouncing forced labor in XUAR was over a year ago.”
In November 2020, Nike, which has been criticized in the past for alleged unfair labor practices in China, stated that it does not source material from the region.
Legislation in Congress such as the Uyghur Forced Labor Prevention Act would restrict imports from China’s Xinjiang province and impact U.S. companies that manufacture and/or import textiles, food products and electronics from suppliers there. New bills have been introduced in both the House and the Senate in recent weeks.
Former Nike CEO Mark Parker often said that “Nike is a brand of China, for China,” and the country is a huge part of Nike’s growth strategies. In Q3, despite an overall revenue miss, business in Greater China came out strong as ever as the Swoosh brand netted $2.28 billion in revenue in the region, jumping 42% on a currency-neutral basis.
Some industry experts believe that this is not a great time for Nike to have any headwinds in a region it relies so heavily on for future growth.
Rick Helfenbein, former chairman, president & CEO of the Apparel & Footwear Association (AAFA), tells Yahoo Finance that the latest situation in China might prove costly.
"Nike's China business has been growing double digits for like six years. And with the flick of a switch, China could shut it off," he said. “The U.S. has 327 million people. China’s got 400 million in their middle class and 1.4 billion overall. So Nike clearly wants to sell in China. They’re not having the same growth rate in the United States as in China,” he said.
“I give them credit because they always seem to bounce back and they keep growing,” said Helfenbein. He tells Yahoo Finance that he does not know what Nike had to gain by commenting on Xinjiang’s forced labor situation when the brand does not source any materials from the region.
“First of all, they don’t run cotton. So why did they even make the statement? It’s all about forced labor in picking cotton … They can’t be guilty of using cotton; they use synthetic,” he said. “They [Nike] tries really hard to make sure there’s no forced labor in their supply chain, but at the same token, It absolutely can leak into the supply chain.”
The former AAFA CEO tells Yahoo Finance that China knows exactly how to hit companies where it hurts.
“China picked on H&M and literally scared the daylights out of a bunch of people. Why? Nike is at 19% of their business in China … the moral of the story is China doesn’t care. And they wanted to scare the daylights out of everybody. The way you do that is through their pocketbook in their stock price. All China has to do is go after Nike full bore, Holy cow, they’ll get a lot of attention. They’re [China] is trying to say, we have the buying power, you stop criticizing us. And our cotton from Xinjiang is the best cotton …... And that’s the stance they’re going to say. The price to sell in China is basically don’t say anything bad about us.”
Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.
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