Brand Crisis Management in China

2024-02-01

Difficult geopolitical landscapes: Risks for international brands in China

What are the risks that international companies face regarding their brand in the Chinese market? And how are global brands perceived in connection with China on international markets? We’re exploring these questions in our current article on brand crises in China.

Brand Crises in China: Comprehensive Summary

In the Chinese international marketplace, brands are at special risk of entering a Corporate Social Responsibility-associated brand crisis
In worst cases, the brand crisis can lead to a loss of market access
Monitoring and planning are necessary to minimize damages
The no-win situation of opposing demands from consumers in different countries/markets requires careful communication and diligent planning

The Risks of Brand Crises for International Companies in China

A strong brand is one of the most valuable assets of a consumer-centered company, especially in an ever-evolving global market, where customers seek quality and reliability from the brands and products they come to know and trust. But just as a beloved brand can add value to products, a damaged brand can lead to a direct negative effect on sales, consumer satisfaction and the companies’ overall value proposition.

Such a case of brand value loss can be described as a brand crisis, which refers to a perception gap from the consumers’ perspective regarding the brand’s promises and an inability of the brand’s organization to fulfil them. Consequently, organizations must proactively avoid brand crises with good preparation and minimize potential losses with a swift and effective response.

Unique Challenges of the China Market

In the context of multinational companies operating in China an additional challenge presents itself. No other market in the world bears as much potential, but at the same time doing business in this market requires extensive adaptation to local conditions, while facing stakeholders and consumers in China and internationally. Tense conflicts can arise from this context that can not only damage an organization’s brand but also endanger their access to the Chinese market.

International and China Markets: Corporate Ability in Association with Brand Crises

There are two distinct modes of a brand crisis that manifest both in the Chinese and international markets. Brand crises in association with Corporate Ability (CA) are related to the companies’ ability to produce quality products, as per their brand promise. When the gap between the advertised quality and the actual product becomes critical, a CA-related brand crisis might occur. When Tesla had to recall 1.1 million of its cars in China this year to address braking problems, it was faced with a CA-related brand crisis. Their ability to produce safe cars was publicly questioned.

Although CA-related brand crises also can have devasting effects on the company’s brand image and value proposition, they are relatively easy to approach, by communicating accordingly and addressing product concerns to rebuild consumer trust.

China: Corporate Social Responsibility Associations in Brand Crises

The second mode of brand crises, however, is much more difficult to address, especially in the Chinese international context. These may be called brand crises related to Corporate Social Responsibility (CSR), as these address not a gap in the organization’s direct output capabilities, but rather a perceived lack of ethical, legal or social compliance.

In an international context, these gaps might even contradict each other. While one reaction to a crisis might satisfy consumers’ expectations in one market, it might directly enrage them in another market. For an in-depth look at the regulatory framework of Corporate Social Responsibility in China, see our previous article.

Effects of CA- and CSR-Associated Brand Crises in China

To prepare for the negative effects of a brand crisis, it’s important to first understand the brand’s promises in the Chinese and international markets, both CA- and CSR-related, from the consumer’s perspective. For example, even though Apple has extensive Environmental Social Governance (ESG) guidelines and principles, consumers may care primarily about the company’s ability to create great products. With an average revenue growth of 8.3% per year, consumers did not turn their back on Apple products, despite issues around working conditions in Foxconn factories. A CA-associated brand crisis could, however, have a much more direct negative impact on Apple’s brand than a CSR-associated one.

A brand such as Patagonia, on the other hand is building strongly on their CSR associations to distinguish themselves from competitors, which also leads to a greater vulnerability towards CSR-related brand crises. Nevertheless, the specific points of exposure to potential brand crises can differ strongly between companies. Understanding the consumer’s associations with the brand is the first step to preparing for potential brand crises in China and internationally. However, regardless of the main associations a brand may have, research suggests there may be a stronger negative effect of CSR-related brand crises on the brand and image. CSR-related brand crises should therefore be a focus in risk management of negative effects on the brand.

The Increasing Risk of CSR-Related Brand Crises in China

In the Chinese context, organizations may become unwillingly involved in geopolitical conflicts surrounding China. The negative associations of the conflict are then directly connected to the organization’s brand. As these geopolitical conflicts are complex and feature strong opinions on either side, whether it’s questions surrounding Taiwan’s status with the mainland, democracy in Hong Kong, potential human rights violations in Xinjiang, Chinese border conflicts or political dissidents, the international organization is now faced with a dilemma that has no right answer: either please Chinese consumers, who demand companies in China follow domestic public opinion, or at least not oppose them; or the organization can appeal to Western consumers by taking the stance of following their home country’s official communication and potentially defy China’s official positions, which can risk massive damage to their brand and business in China. These two opposites have to constantly be weighed against each other in the case of an active CSR-related brand crisis in China.

A Closer Look at Past Brand Crises in the China Context: The 2019-20 Hong Kong protests

During the 2019-2020 pro-democracy protests in Hong Kong, many international companies found themselves under close observation regarding their past and current stances and behaviors in the context of Hong Kong’s jurisdictional status. Both mainland Chinese consumers and governmental bodies, as well as Western consumers and political stakeholders, were paying close attention to the organizational behavior in this tense situation. During these protests, brands such as Apple, Cathay Pacific, Vans, Tiffany & Co. and the NBA were directly caught up in the conflict field of Chinese international politics. With political and public actors from both sides voicing criticism, it’s hard to take the right steps to minimize brand damage in such a heated conflict.

For example, during the protests the CCP-associated news platform Global Times (环球时报) released illustrations on their Weibo accounts demanding certain Western brands apologize for their alleged anti-China behavior and to take a pro-China stance in the debate. In the US on the other hand, congressional members from both parties signed joint letters urging US-companies to not give in to the Chinese demands. As the debate is held in public, the organization’s brand is under constant stress in such a Chinese-international brand crisis. Giving in to either side increases the damage to the brand in the eyes of the other, while no reaction is also perceived negatively. In such a no-win situation there is no right answer. However, depending on the context and the organization’s position, thoughtful reaction might dampen the damage.

The National Basketball Association: Morality in the US vs. Profit in China

One organization that received special attention during the protests was the National Basketball Association (NBA), North America’s major professional basketball league and a multi-billion-dollar business that is active not just in the US but also globally. China in particular was (and is) of interest to the league, due to the country’s high interest in basketball as a professional sport and the promise of steady growth.

During the Hong Kong protests, however, the NBA faced a major brand crisis that did not just threaten their business in China but also put them under huge pressure in the West, particularly their home market, the US. One of the franchisee managers, Daryl Morey, GM of the Houston Rockets, released a message on Twitter stating his support for the pro-democracy protests in Hong Kong. Although franchisee managers are not under the direct supervision of the NBA as an organization, the tweet received great attention, both in China and the West.

Chinese netizens promptly demanded an official statement from the NBA’s central organization on their stance on the protests and demanded they not allow pro-independent Hong Kong statements in the league out of respect for the current status quo of mainland China’s influence on the territory. In turn, the US public demanded the organization stand with democratic values and not give in to the demands of the Chinese public. In this dilemma, Chinese partners cut ties, pro-Hong-Kong-protesters showed up to the games and NBA players gave statements in favor of or against either side.

During all of this, the NBA expected losses in the hundreds of millions of dollars. The NBA is an extreme example of a brand that is torn between the geopolitical tensions of China and the West. The NBA, as a distinctly American brand, is expected to reflect US values, which include a generally favorable stance on freedom of speech and the pro-democracy protestors in Hong Kong. Nevertheless, China is an important growth market for the organization and crucial for their mid- to long-term business plans. The NBA’s communication reflected this interest in the Chinese market: in a first response to Daryl Morey’s original tweet, the NBA apologized to Chinese fans. Later statements were much more considerate, saying the NBA would not censor affiliated individuals’ freedom of speech, with the general stance on the topic still being only vaguely answered without taking a clear position.

Although the heated debate cooled down eventually, it is unlikely this will be the last episode of contention in the Chinese geopolitical context for the NBA’s corporate brand. The long-term damage to the brand may only become visible during the next episode of a brand crisis in this context, as netizens, media outlets and officials are likely to vividly remember the organization’s behavior during the Hong Kong Protests, both in China and the West.

Volkswagen in Xinjiang: Supply Chain Issues

Although the intensity of the NBA’s brand crisis in China during the Hong Kong protests is unmatched when it comes to the public debate, German automaker Volkswagen recently faced a similar situation regarding the perception of their brand in the Chinese context. In recent years, allegations regarding systemic human rights violations, including the use of forced labor, in the Chinese province Xinjiang put VW (and other companies) on the hot seat.

For one, VW is still operating a controversial plant in the Xinjiang city of Urumqi, which sparked a particularly strong reaction. Several German companies made assurances there were no indications of forced labor in their Chinese production facilities, and VW just recently passed an audit of their Xinjiang plant. Evidence suggests, however, that the labor-related human rights violations in the automotive industry are an issue in the upstream supply chain. Regardless of how international companies may be involved in potential human rights violations, the corporate brand of VW was connected to these issues and suffered a CSR-related brand crisis.

The situation now is similar to the NBA case: if VW speaks out too boldly on ensuring no forced labor is happening in their Chinese factories, or even acknowledges the Xinjiang issue of potential forced labor, Chinese stakeholders, such as consumers and political actors, will see this as an attack on Chinese dignity. Similarly, a non-response would lead to higher pressure from the public in the West and especially in Germany, including potential legal consequences under the relatively new German Supply Chain Due Diligence Act.

The audit of VW’s Xinjiang plant is a convenient middle way of giving in to demands from the West but staying in good standing with Chinese stakeholders, as the audit did not find evidence of forced labor in the facility Nevertheless, just as with the NBA, in case newer allegations see the light of day VW might be one of the first German companies to get special public attention.

Nike in the Spotlight: Accusations of Supporting Forced Labor

US-based sports apparel corporation Nike has also found its corporate brand subject to brand crises in the context of both Xinjiang and the 2019-20 Hong Kong protests. After the US and the EMEA region, China is the company’s third biggest market, accounting for 15% of its total global revenue in 2023; however, most recently, growth is slowing down in the country. But apart from being a major sales market for Nike, China is also its major production market, with 117 factories producing finished goods for the company.

With such a stake in China and as a consumer-facing brand, brand crises surrounding China pose a serious danger to the overall wellbeing of the company. Even more critically, despite not being directly involved, the company became a target of public debate during the NBA brand crisis during the 2019-20 Hong Kong protests. As the organization’s exclusive apparel producer, NBA-related products can be found in many Nike stores around the world. The pro-protest tweet by Daryl Morey put the NBA in the uncomfortable spotlight of the Chinese and Western public, and Houston Rockets merch vanished from some Nike stores. Although it’s unknown if this was the local store managers’ decision or a country- wide instruction, it was part of the media coverage at the time and sparked criticism.

An even more uncomfortable association and CSR-related brand crisis occurred, however, amid the controversy of forced labor accusations in the context of Xinjiang and the Uyghur minority. Nike positioned itself in opposition to labor camps on the Chinese social media platform Weibo, which sparked criticism from Chinese users and media. Nevertheless, revenue rose in the region between 2021 to 2023 by more than 20%, from 5.3 billion dollars in 2021 to 6.4 billion in 2023. Regardless, the contentious topic of forced labor in China might not be over yet. In the newest episode of labor-related brand crises, Canada is probing Nike’s supply chains in regards to forced labor. The company stated however that ties to the suppliers in question were already cut and they were no longer producing for Nike.

Conclusion: A Fine Line Between Ethics, Morality and Profits for International Companies in China

The Chinese market comes with promising opportunities and a large potential for economic growth. Many Chinese consumers have a great interest in international products and appreciate the value of a strong global brand. Nevertheless, the geopolitical conflicts surrounding China do not happen in a vacuum. While those conflicts rarely directly impact international companies, they can easily find themselves in a Corporate Social Responsibility-related brand crisis that demands sensitive communication to meet contradictory expectations. While there is not one right reaction to these most extreme brand crises, damages can be limited substantially with good preparation and planning.

It also poses a moral dilemma to the involved companies. The topics that are sparking brand crises are highly sensitive and trigger strong emotions in the public debates. Different views on how a moral and ethically compliant foreign company should behave on the Chinese market make it extremely difficult to find a balance between appeasing ethical and moral expectations, without upsetting the opposing group. Additionally, many foreign companies have a vested interest in the Chinese market, since it is a major revenue source. Finding the balance between managing public expectations in either China or the West while keeping business channels open is a challenge that requires diligent preparation and careful reaction.

Unfortunately, when it comes to risks for foreign companies in China, an international, geopolitical brand crisis might not be the most tangible of risks to prepare for. Neglecting the influence of international political debates on one’s brand can, however, lead to direct financial losses, an inability to do business in China and lasting damage to the corporate brand and image. It is crucial to acknowledge the CCP as a non-negotiable stakeholder that has direct influence on any operation in China. The most important factor is to acknowledge risks, prepare for those risks and follow the prepared plans.

Best Practices for Companies in China: Expect the Brand Crisis

Understand consumers’ perceptions of your brand and define potential exposure
Monitor the perception of your brand and identify trends
Prepare communication and a brand crisis strategy for potential CSR-related topics in the Chinese context
React accordingly to the crisis by following your plan and adapting to the situation
Do not act impulsively and only allow designated speakers to communicate with the outside

Sources

Balmer, John M. T., and Weifeng Chen. “Advances in Chinese Brand Management”. Journal of Brand Management, 2017. https://doi.org/10.1057/978-1-352-00011-5.

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Jeon, Jung Ok, and Sunmee Baeck. “What Drives Consumer’s Responses to Brand Crisis? The Moderating Roles of Brand Associations and Brand-Customer Relationship Strength”. Journal of Product & Brand Management 25, no. 6 (2016): 550-67. https://doi.org/10.1108/JPBM-10-2014-0725.

Lo, Sonny Hing-Shiu, Steven Chung-fun Hung, and Jeff Hai-Chi Loo. “The Dynamics of Peaceful and Violent Protests in Hong Kong: The Anti-Extradition Movement”. Edited by Steven Chung-fun Hung and Jeff Hai-Chi Loo. Singapore: Palgrave Macmillan, 2021. https://doi.org/10.1007/978-981-15-6712-4.

“OHCHR Assessment of Human Rights Concerns in the Xinjiang Uyghur Autonomous Region, People’s Republic of China.” United Nations Human Rights – Office of the High Commissioner (ohchr.org, 31.08.2022). https://www.ohchr.org/en/documents/country-reports/ohchr-assessment-human-rights-concerns-xinjiang-uyghur-autonomous-region.

Ramzy, Austin, and Chris Buckley. “‘Absolutely No Mercy’: Leaked Files Expose How China Organized Mass Detentions of Muslims.” The New York Times (nytimes.com, 16.11.2019). https://www.nytimes.com/interactive/2019/11/16/world/asia/china-xinjiang-documents.html.

Sudworth, John. “Xinjiang Police Files: Inside a Chinese Internment Camp.” BBC News (bbc.co.uk, 24.05.2022). https://www.bbc.co.uk/news/resources/idt-8df450b3-5d6d-4ed8-bdcc-bd99137eadc3.

Pictured: The NBA-Shop on Wangfujing Avenue (王府井大街) in Beijing – Fotokon – stock.adobe.com

Sources

Balmer, John M. T., and Weifeng Chen. “Advances in Chinese Brand Management”. Journal of Brand Management, 2017. https://doi.org/10.1057/978-1-352-00011-5.

Sudworth, John. “Xinjiang Police Files: Inside a Chinese Internment Camp.” BBC News (bbc.co.uk, 24.05.2022). https://www.bbc.co.uk/news/resources/idt-8df450b3-5d6d-4ed8-bdcc-bd99137eadc3.

Pictured: The NBA-Shop on Wangfujing Avenue (王府井大街) in Beijing – Fotokon – stock.adobe.com