Western brands ‘squeezed between an irresistible force and an immovable object’

This is an excerpt from Thursday’s (4/1) Point of Sale retail supply chain newsletter sponsored by ArcBest.

This time last year, retailers such as H&M and Nike (NYSE: NKE) released statements distancing their cotton sourcing from China’s Xinjiang region. The issue is predicated on severe human rights violations that NGOs and Western democracies believe involve the forced encampment of more than 1 million Muslim Uyghurs — allegations (obviously) denied by China. 

Skip ahead to last Wednesday, when the 12-month-old statements from H&M and other Western brands resurfaced on Chinese social media. If you spend any time on YouTube, you’ll know their algo is whack and will suggest 10-year-old videos at random. That’s not what happened here. H&M was targeted first. The Communist Party Youth League called attention to a March 2020 statement by H&M that it would stop buying cotton from Xinjiang. The league issued a statement on China’s Weibo social media platform that read, “Spreading rumours to boycott Xinjiang cotton, while also wanting to make money in China? Wishful thinking!”

The outrage against these brands was swift and, if you ask any Chinese official or media outlet, ubiquitous. Calls for boycotts of not only H&M, but Nike, Adidas, Uniqlo and a host of Western brands spread throughout Chinese social media, inflamed by slightly threatening, highly nationalistic public statements by Chinese diplomats. “The Chinese people do not allow some foreign companies to eat Chinese food and smash Chinese bowls,” said Hua Chunying, a Foreign Ministry spokeswoman in Beijing, last Thursday.

Here’s where it gets interesting. China, with its complete control over the domestic internet and media, essentially wiped H&M, the world’s second-biggest fashion chain, off the Chinese internet overnight. First, H&M was removed from e-commerce sites including Taobao, Pinduoduo and JD.com. Then, H&M’s mobile app was banned on Huawei, Xiaomi, Vivo and Tencent. Finally, users of ridesharing app Didi found themselves unable to be dropped off at a physical H&M location (of which there are more than 500 in China). That’s because the locations had been erased from Apple Maps and other map apps in China

If this were a game of chess, China called checkmate. It took all of 72 hours before H&M posted a statement on its website affirming its long-term commitment to China. “China is a very important market to us and our long-term commitment to the country remains strong,” the company stated on Wednesday. 

In the eyes of human rights organizations, this is a huge loss. If H&M, one of the world’s leading fashion brands, folds within a week, who is going to stand up against the alleged atrocities? 

The truth is, I don’t think very many will. 

The former president of the American Apparel & Footwear Association, Rick Helfenbein, who I am fast realizing is full of incredible off-the-cuff one-liners, summed up the situation succinctly via email Thursday morning: “What everyone witnessed in China this past week was the classic case of Western companies being firmly squeezed between an irresistible force and an immovable object.”

China today is analogous to California in the mid-19th century. If you couldn’t make it back East, you headed West. The same is happening today in the opposite direction with Western brands, which have seen sales growth in their home markets dwindle over the years. 

China knows it has all the hand vs. Western brands, especially in apparel and textiles where it not only supplies 20% of the cotton, but is also the fastest-growing and soon-to-be-largest consumer market.

When obtaining cotton, retailers and brands almost certainly are exposed to Xinjiang, which produces 87% of the material in China. Roughly 1 in 5 cotton garments sold globally contains cotton or yarn from Xinjiang. China’s officials state more than 40% of the cotton in Xinjiang is harvested by machinery. Is this true? I have no idea. What I do know is the cotton that comes from the region is cheap, plentiful and of good quality. 

What I also know is the pandemic reversed much of the progress the Trump administration made against U.S. reliance on Chinese exports. One could argue the government’s ill preparation for and subsequent fiscal response to the pandemic was key in creating a greater reliance on Chinese exports through government-subsidized consumer spending and personal protective equipment throughout the crisis. With the FreightWaves Inbound Ocean TEU Volume Index (for the U.S. in aggregate, as well as China-U.S.) at an all-time high and moving higher, there is support for the claim America has never been more reliant on China. 

To learn more about FreightWaves SONAR, click here.

The pandemic halted supply chains across the globe, but with China’s handling of the virus, its manufacturers recovered quickly. Henry Byers, FreightWaves global trade analyst, told me, “The companies that have had the most difficult time during this crisis are not the ones who kept their imports coming from China, but from countries outside of China that have suffered from inadequate capacity to handle the increased amount of orders as well as the elevated shipment volumes.”

Byers does believe the pre-COVID trend away from China will resume when the “everything bubble” bursts on some level, but he did point out that retailers who were quick to divert supply chains away from China are facing a different set of challenges. Ashley Furniture, for example, said it has shifted 50%-70% of its mattress production out of China and into Vietnam, but securing capacity on the ocean can be difficult for Vietnam-based operations. “The ships that load in Vietnam often transload in China, Korea and Singapore and ultimately end up competing for vessel space with volumes from China,” Byers said. 

Final Thoughts. Will Nike or Adidas or H&M see Western sales decline substantially if they rescind their statements about Xinjiang? Are Western consumers willing to vote with their wallets against the violations in China? I don’t think so. At least, not to the degree that it would be worth sacrificing the Chinese consumer market and its manufacturing prowess. 

These companies need China far more than China needs them, and the options for brands and retailers are limited. Brands can:

  1. Look to divert supply chains away from China, something that has proved difficult and expensive. And, even if the manufacturers are in Bangladesh or Malaysia, brands have very little visibility beyond their suppliers. There is no way of determining with any accuracy whether a product was created using materials 100% outside of Xinjiang. 
  2. Stand up to China. And face immediate retaliation from the government and its people? I don’t see many taking that option. Not only are you sacrificing the fastest-growing consumer market (the middle class in China is equal to the population in North America), but you’re also committing to securing materials from less reliable, often more expensive sources. 
  3. Realize China has the upper hand for the foreseeable future, walk back any negative comments on Xinjiang, state you have no commercial relationship with the region (even though most can’t prove it), and work to mend the severed relationship with the Chinese government and its people. 

H&M chose option C, and I anticipate many others will follow. It’s not that companies can’t operate without China, it’s just that for now, said companies will not grow as fast as they could with it, and will likely do so with lower margins. In a retail world constantly balancing sales and profit, avoiding China is giving up both for many Western brands.

“A lot of Western countries and China are pretty black and white on this issue. There’s not a lot of gray,” said Trey McArver, a co-founder of Trivium China, a consultancy that helps foreign businesses sell in China, referring to the opposing stances over Beijing’s policies in Xinjiang. “You can’t agree with both of them, so I don’t think it’s an easy answer.”

As long as China’s domestic media landscape is controlled as tightly as it is today and overall relations with the West remain stressed, it’s hard to imagine the situation improving.

If you want to keep up retail supply chains, try Point of Sale, my twice-weekly newsletter covering e-commerce, fulfillment, consumer trends, and much more: https://freightwaves.com/pos