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Nike risks being dragged into China NBA dispute

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Via Financial Times

Few western companies have more at stake than Nike in the fallout from an American basketball executive’s tweet about Hong Kong.

The US sportswear group, whose Swoosh logo adorns NBA player kits under an exclusive deal with the league, has been among the biggest beneficiaries from a basketball boom in China.

However, since Daryl Morey, general manager of the Houston Rockets, sparked a dispute on the mainland this week with his support for democracy protests in Hong Kong, Wall Street has been left wondering whether the NBA’s difficulties will also become those of Nike.

“The brand has been so hot over there,” said Brian Yarbrough, analyst at Edward Jones in St Louis. Such is the importance of China to the New York-listed company, which has a $115bn market capitalisation, that “one hiccup could spell problems” for the entire investment case.

Revenues from Nike’s greater China division, based in Shanghai, leapt 22 per cent in the three months to the end of August, its 21st consecutive quarter of double-digit sales growth.

The region is an even more important contributor to profits: while accounting for 16 per cent of group revenues in the quarter, it generated 36 per cent of the brand’s earnings before interest and tax. The popularity in China of basketball, and Nike as a label, is such that “they can go there and basically charge what they want”, as one retail analyst put it.

Rival sportswear groups also are turning to China as domestic growth cools for certain products. They include Under Armour, which is also using basketball to promote its brand. The Baltimore-based company put Steph Curry, the Golden State Warriors superstar, on a tour of Asia in the summer with stops in Beijing and Shanghai. However, Under Armour’s exposure to China is far more limited than that of Nike.

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Symbolising Nike’s importance to basketball in the country is the NBA’s store in Beijing, its largest outside North America, which opened this year. Nike is behind the outlet along with Chinese sports retailer Topsports.

To safeguard its future in such a lucrative market, Nike has been willing to make concessions to keep the authorities and public onside. Mark Parker, chief executive, has described the brand as being “of China [and] for China”.

The Financial Times disclosed in June that the group cancelled sales of a line of trainers after their designer, Jun Takahashi, was critical of China. In a similar vein to Mr Morey, he had posted online a picture of Hong Kong protesters with the slogan “no extradition”.

The backlash in China against the NBA highlights the danger of upsetting local sensitivities. Large Chinese ecommerce sites operated by Alibaba and JD.com appear to have removed Houston Rockets merchandise from sale since the dispute erupted.

In common with other US businesses that are China-dependent, however, Nike also risks alienating its domestic audience if it is seen to betray American values.

The group has not been shy of wading into political controversies closer to home, leaving it open to the charge of double standards. The Oregon-based company caused a stir in the US this year with an ad campaign featuring Colin Kaepernick, an American footballer who refused to stand for the national anthem.

“Athletes and coaches have spoken with impunity about civil rights and inequality when it comes to things happening in this country,” said Andrew Brandt, a sports law professor at Villanova University and a former Green Bay Packers executive. In contrast, he noted, there had for the most part been “silence” about the Hong Kong protests.

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Nike’s efforts to avoid being dragged into the dispute have been helped by the fact it was a sports team executive, rather than an employee of the company, who sent the offending tweet. Still, the storm is far from over. Marco Rubio, the Florida senator, said on Twitter that he was waiting for Nike “and their stable of ‘woke’ social justice warrior/athletes to speak out”. The company did not respond to a request from the Financial Times to comment.

Edginess has long been part of Nike’s branding. The company stuck with Tiger Woods through a scandal in the golfer’s private life. It is also standing behind Alberto Salazar, the athletics coach who this month received a four-year ban for performance-enhancing drug violations.

While Nike’s approach to the likes of the Kaepernick episode had “made certain people mad”, the company had won business from other constituencies as a result, Mr Yarbrough said. In contrast, he cautioned, China posed a different set of reputational risks and controversies that “could be more lose-lose”.

Nike shares fell as much as 3 per cent on Tuesday as investors tried to weigh up the risks, although they ticked up 0.9 per cent on Wednesday.

Sam Poser, analyst at Susquehanna, wrote in a note that concerns about the impact on Nike were “overblown”. He argued that Chinese consumers “perceive Nike as a global athletic brand, not associated with any country or part of the world. Nike has been entrenched in China for over three decades and has established deep-rooted relationships.”

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Dean Crutchfield, founder of the Crutchfield and Partners brand consultancy, said that despite demands from the likes of Mr Rubio, he would advise the company to stay quiet. “Nike didn’t create this war,” he said. “Any crisis manager would say the same: avoid, avoid, avoid.”

The episode could yet work to the company’s advantage, he added. “If they play it right, they’re going to sell a lot more merchandise.”

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