To the never-ending list of things companies should be worried about, from improving sales and launching new products to boosting margins and managing supply chains, they can now add another one rapidly rising up the agenda – geopolitical risk.
The recent travails of Swedish retailer H&M in China have been widely reported, and stem not only from a conflict of values around human rights, but also a clash of political systems that bears nothing but bad news for brands used to operating in a relatively benign global environment since the end of the Cold War.
H&M has around 500 stories in China, representing around 5 per cent of the company’s global sales, and probably thought it was doing a good thing when it highlighted potential supply chain issues in China’s controversial Xinjiang region: “H&M Group is deeply concerned by reports from civil society organisations and media that include accusations of forced labour and discrimination of ethnoreligious minorities in Xinjiang Uyghur Autonomous Region. We strictly prohibit any type of forced labour in our supply chain, regardless of country or region.”
A few months then passed before H&M experienced a level of blowback its management and communications teams could never have expected.
What was particularly interesting was the form of the response from China. Western companies who find themselves in hot water at home occasionally have to deal with an angry regulator and a hostile media, for example, and sometimes even widespread public fury. But few will have experienced a highly coordinated attack on their operations and reputation organised by a nation state itself.
Chinese authorities appear to have directed an onslaught against H&M that included blocking access to its online store, removing its stores from ride-hailing apps, and deleting the company’s smartphone app from online app stores. Social media users called for H&M boycotts, celebrities withdrew from endorsement deals, and state media accused H&M of criticising China while profiting from its operations in the country, with one prominent newspaper saying Western companies should be “highly cautious”.
Concerted action against a company on several fronts driven by a nation state is rare in the West. A Pandora’s Box has been opened, and the potential implications for brands are of great concern.
Now, this could all die down and in future be seen as an isolated incident, but the general sentiment among foreign policy specialists suggests that as wider geopolitical tensions rise, events like this will occur more frequently.
As Western companies increasingly act on social issues, doing business in countries with human rights problems that are also important geopolitical actors will become increasingly difficult. It is not inconceivable to imagine a worst-case scenario developing over the next few years where Western companies in China will essentially have to choose sides, and either acquiesce to China’s requests to stop the human rights criticism, thereby undermining their values, or tactfully reduce operations in the country. For consistency’s sake, as a brand you can’t proclaim to the world you are taking a strong stand on human rights, then insert an asterisk that says ‘except in China’ – it’s all or nothing.
Let’s not forget that this dynamic is not one-sided either. The US Government is reassessing the economic and geopolitical risks associated with the country’s supply chains, which will most likely result in less reliance on China for products and components.
Geopolitical expert George Friedman put it succinctly last year in an article about US-China relations when he said: “The U.S. is dependent on China for vast amounts of products, a supply chain that gave the U.S. the benefit of low-cost manufacturing, and the Chinese an industrial base. The Chinese move is to expel and block the U.S. supply chain, but Beijing can’t do it while also maintaining social stability. And the U.S. has options to replace the Chinese supply chain.”
An interesting parallel to all this might be the situation in Europe in the 1930s and 40s. As tensions increased it became increasingly difficult for companies to maintain neutrality, and some US subsidiaries operating in Germany, for example, were either coerced or willingly kowtowed to the Nazis, looking to preserve their investments and make the most of market opportunities, despite the circumstances.
Years later, this landed companies like Ford and GM in hot water. The Washington Post, for example, reported in 1998 that: “Both General Motors and Ford insist that they bear little or no responsibility for the operations of their German subsidiaries, which controlled 70 percent of the German car market at the outbreak of war in 1939 and rapidly retooled themselves to become suppliers of war materiel to the German army. But documents discovered in German and American archives show a much more complicated picture. In certain instances, American managers of both GM and Ford went along with the conversion of their German plants to military production at a time when U.S. government documents show they were still resisting calls by the Roosevelt administration to step up military production in their plants at home.”
Even more worryingly: “In July 1938, four months after the German annexation of Austria, he [Henry Ford] accepted the highest medal that Nazi Germany could bestow on a foreigner, the Grand Cross of the German Eagle. The following month, a senior executive for General Motors, James Mooney, received a similar medal for his distinguished service to the Reich.”
And imagine being the poor GM staffer who wrote these words in the company’s magazine in 1934: “Hitler is a strong man, well fitted to lead the German people out of their former economic distress … He is leading them, not by force or fear, but by intelligent planning and execution of fundamentally sound principles of government.”
Corporate profits and the desire to maintain operations during a time of worsening global tensions clearly played a role in decisions made at the time that can be considered completely indefensible.
But the question today is, would the US let a similar dynamic play out with its own companies operating in China if tensions escalate? And what of European and other Western nations whose commitment to human rights and new social norms appears to be strengthening?
H&M spoke out on an issue it cares about and paid a price in China, and that may well be a harbinger of things to come, as the saying goes. Executives and corporate communications teams will now have to pay closer attention to geopolitical developments, and no doubt will craft strategies aimed at staying out of trouble and keeping all sides happy while getting on with making money.
Whether this approach can ultimately be successful over the medium to long term in a rapidly changing world is now an open question.