Nike Navigates Controversy Once Again in All-Important China

Nike Inc. is walking a fine line in China -- its fastest-growing market -- amid a brewing controversy over its business practices there.

The ire stems from this conundrum: Embrace cotton from the contentious Xinjiang region, where there are allegations of forced labor, or reject it and risk a boycott in the world’s second-biggest economy.

The controversy has been gaining attention this week -- and sparking share losses for Nike and apparel companies. The Chinese government has rejected the claims of forced labor, with Foreign Ministry spokeswoman Hua Chunying on Thursday calling the reports “malicious lies fabricated by anti-China forces.” Nike didn’t respond to requests for comment.

In the past, Nike, which says its products aren’t sourced from the region, has said it’s concerned about the reports and noted that its code of conduct prohibits using forced labor.

What Bloomberg Intelligence Says:

“The most recent boycott related to Nike’s stance on cotton from the Xinjiang region could limit sales and raise discounts in the near term, but we see continued strength for the brand longer term.”

Poonam Goyal, retail analyst

Click here to read the research.

With U.S. and European brands in the spotlight, Chinese firms are rallying around Xinjiang, which produces more than 80% of the country’s cotton. Local companies that said they’ll continue to source the material from the region are being rewarded in the stock market, including Anta Sports Products Ltd., the Chinese sneaker giant that owns the Fila brand.

Shares of Beaverton, Oregon-based Nike fell as much as 5.8% in Thursday trading, the most intraday since June. Other companies caught up in the controversy, including Hennes & Mauritz AB and Burberry Group Plc, also fell.

“The reason that the market’s reacting is they’re worried about top-line impact,” Aneesha Sherman, an analyst at Bernstein, said by phone. “It’s more of a risk for luxury players, because they depend more on Chinese demand, but even for mainstream, it’s a fast-growing region and the discretionary spend levels are going up, so it is an important region not to lose market share in.”

Nike Navigates Controversy Once Again in All-Important China

China has grown increasingly important to global consumer companies, especially as its population of more than 1 billion gains upward mobility and spending power. At Nike, Greater China generates a growing portion of global sales, while North America -- still its biggest market -- continues to lose prominence.

“What this may do is accelerate some of the share shift that was already starting to happen as the local, fast-growing Chinese brands in fast fashion and sportswear start to threaten the market shares of the likes of Inditex and H&M in that region,” Sherman said.

Nike Navigates Controversy Once Again in All-Important China

The dilemma shows how navigating the Chinese market is an increasingly thorny for U.S. and European brands. In 2019, NBA superstar LeBron James, one of Nike’s highest profile paid endorsers, was seen as taking the side of China in its long dispute with Hong Kong over democracy -- a stance that riled fans.

Nike’s history in China goes back to the 1980s when it started producing shoes there, and it’s now become a key market for the brand. China became even more crucial over the past year as it bounced back from Covid-19 earlier than the rest of the world. In the company’s most recent quarter, revenue from China surged 51% to $2.3 billion.

But Nike’s rise there has had plenty of tension. In 2017, a consumer-protection show on state-run television in China chided Nike for false advertising. In 2004, the country’s government banned an ad featuring James battling martial arts masters, saying it was offensive.

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