Original published by South China Morning Post titled The NBA and Apple Cases Show Foreign Businesses Need to Better Understand China, and Its Boundaries on October 21, 2019. All rights reserved.
Gao Feng Advisory's CEO Dr. Edward Tse's latest op-ed was published on SCMP. In this article, Dr. Tse pointed out all countries have their own “boundary of sensitivities”, and foreign companies doing business should be mindful of the host country’s boundary. This applies to the recent cases of the NBA and Apple in China and will also apply to Chinese companies as they expand overseas.
The months-long protests in Hong Kong have not only attracted international attention, but have also begun to involve major foreign powerhouses like the NBA and Apple. The fallout caused by Houston Rockets general manager Daryl Morey's tweet led Tencent and China’s predominant broadcaster CCTV to suspend the airing of NBA games, and Chinese companies such as Ctrip.com (China's major travel booking platform) to terminate NBA sponsorship.
Meanwhile, Apple's approval of an app which allows users to track protest activities received an immense backlash from the Chinese government and consumers. Apple has since removed it and released a statement that the app "violate[d] our guidelines and local laws".
Some critics were quick to jump to the conclusion that China is victimising foreign companies and preventing freedom of expression. However, as in every country, China has certain boundaries of sensitivity.
Issues such as racial discrimination are highly sensitive in the US. In 2014, Donald Sterling (the former LA Clippers owner) was fined US$2.5 million and banned from the NBA for life because of his racist remarks. The NBA reacted to the unacceptability of these comments in US society, even with freedom of expression considered.
It is common sense that companies doing business in a foreign country need to observe and understand the host country's boundaries of sensitivity and understand what is, and is not, acceptable. Not doing so is generally the result of ignorance, incompetence, arrogance or a combination of these things.
In 2012, many pundits were quick to say that Japanese companies had no chance of succeeding in China during a period of anti-Japanese sentiment (regarding a territorial dispute over the Diaoyu/Senkaku Islands). During this time, some Toyota and Honda dealerships in China were burnt down and their sales in China plunged.
Today, Japanese carmakers are actually doing well. Japanese brands' market share in China has steadily increased, and today is the second-largest in terms of foreign passenger car brands (measured by country where the companies' headquarters are based).
I agree with the assertion in The Economist's June 28, 2018 Schumpeter column that "[t]he sense of victimhood is over the top; American firms have done reasonably well in China". The NBA has been very popular and was on the rise in China for over a decade before Morey's tweet.
Were the Chinese people's reactions appropriate? It depends on your point of view, of course. The negative impact for the NBA in China is likely to be temporary. After all, a company's success is a function of its competitive advantages, especially its products and brand, so the NBA can recover.
Despite the recent controversy, passionate Chinese fans turned out for a preseason NBA basketball game between the Brooklyn Nets and Los Angeles Lakers at the Mercedes Benz Arena in Shanghai on October 10. Photo: AP
There are already signs of this, as Tencent lifted its temporary ban on live-streamed NBA games, and recently streamed two NBA games in China. Of course, the NBA and its stakeholders should continue to work on damage control.
Apple remains a strong brand in China, even while facing competition from local players like Huawei and others. The uproar regarding the Hong Kong app was simply China's view on how a sensitive boundary had been crossed (by design or not, the app helped Hong Kong protesters organise around the city).
Apple's response was swift and, from the Chinese perspective, appropriate. On its own, this episode will have a limited impact on Apple's position in China.
These two episodes do not represent the institutional barriers causing difficulties for foreign companies in China. Beijing continues to open up its market, sector by sector, for foreign companies, especially since the US-China trade war started.
However, foreign companies' success in China increasingly requires a recognition that the world is diverging into "two systems" – one led by the US; another by China. Multinationals are finding that they need to develop different strategies for each system. Striking a balance will be critical for global operations and success.
In the auto industry, for instance, global companies such as Toyota and BMW need to create strategies to meet the dynamics of these very different markets. Toyota has developed completely different and separate ecosystems, recognising the need to meet China's unique communications, IT and software requirements.
This includes building different "mobility as a service", technological (such as autonomous vehicle technology) and business model solutions. For example, Toyota partners with Monet (a mobility-as-a-service joint venture between Japanese carmakers and the tech investment firm Softbank) and Uber in Western markets, and with Guangzhou Automobile Group and Didi Chuxing in China.
Foreign companies in China need to step up their game if they want to capture the full potential it offers. Increasingly it's not just about the China market but also the nation's impact on the rest of the world, especially developing markets, which are increasingly evolving in a fashion similar to China.
They need to understand China much better. While this may sound like a broken record, significant gaps remain, partly due to the context of China, which continues to evolve and is in many aspects proceeding into unknown territory.
Foreign companies need to adjust their products, services and business models to the Chinese context. To this end, they should seek to better appreciate and incorporate China's quickly developing innovations, and integrate them into the core of what they do in China.
At the same time, they need to be extremely perceptive of where China's boundaries lie and respect them, while deploying measures to anticipate and manage risks.