Western companies doing business in China face risks – Toronto Star

After China’s state-controlled media savaged Canada Goose, skittish investors rushed for the exits, sending the company’s stock plummeting this fall and wiping out more than $1 billion in shareholder value, David Olive writes.

Canada Goose has been subjected to Chinese social media condemnation, tacitly endorsed by Beijing, and skittish investors have rushed for the exits.

By David OliveStar Business Columnist

Thu., Dec. 23, 20214 min. read

Investors in Canada Goose Holdings Inc., the Toronto-based luxury parka maker, can be excused for thinking that China is out to get the company.

Canada Goose has been subjected this fall to waves of Chinese social media condemnation, tacitly endorsed by Beijing, as a purveyor of over-priced, low-quality and deceptively advertised goods.

As it happens, Canada Goose’s business in China is booming despite the savage social media commentary, also conveyed by China’s state-controlled broadcasters and newspapers.

And the firm is unusual among apparel retailers in having sufficient inventory despite the chaos in global supply chains.

And yet skittish investors have rushed for the exits.

The value of Canada Goose stock has plummeted by almost 30 per cent since its mid-November peak of $66, wiping out more than $1 billion in shareholder value.

The Canada Goose episode is a warning to investors in all Western brands sold in China that bursts of criticism are to be expected from China’s state-controlled media.

Among the most vulnerable targets are firms like Canada Goose. Its lofty price-earnings multiple of 85 is pinned to the extraordinary Chinese growth that CEO Dani Reiss has promised investors.

There are other contributing factors, of course.

China’s crackdown this year on Chinese tech giants, along with U.S. sanctions on China and Chinese companies, has wiped out some $1.1 trillion (U.S.) in the value of Chinese firms listed on America’s Nasdaq exchange alone.

That kind of thing is bound to put investors off stocks whose value is overly reliant on China, by population the world’s biggest pariah state.

Investors keeping the faith in the world’s biggest consumer market must hope that status will change. That North American, European, Asia-Pacific and Australasian governments will someday have reason to trust China and stop regarding everything it does as a risk to their security.

To start, China would have to cease committing human-rights abuses on its Uyghur Muslim minority, threatening the sovereignty of Taiwan, suppressing civil rights in Hong Kong, and inflicting arbitrary imprisonment on Canadian and other foreign nationals.

There is a straightforward motive for the sporadic state-media bullying of Western brands.

The social-media attacks are grounded in two things: nationalism and a fear of Western culture subverting that of China.

Most Chinese media attacks on Western brands try to redirect Chinese consumer purchasing to locally made goods.

And they accuse Western imports of perceived association with greed, Western profiteering, and other traits that conflict with Chinese President Xi Jinping’s “common prosperity agenda.”

That agenda, which demonizes China’s emergent “super rich,” is an expedient for narrowing a widened gap between rich and poor.

What’s actually needed, of course, are things like a decent social safety net, an end to bloated state-owned enterprises, and curbing widespread corruption.

Meanwhile, at the nadir of Canada-China relations last year, when Beijing was banning imports of Canadian beef, pork and canola, Canada managed to increase its exports to China by eight per cent, to roughly $25 billion.

The treatment of Canada Goose isn’t an isolated case.

In recent decades, Chinese consumers, abetted by Beijing, have boycotted goods from Japan, South Korea and the U.S.

And this year, which marks a high point in anti-foreign sentiment, has seen populist vilification of Nike Inc., Unilever PLC (Dove soap, Sunlight detergent), Hennes & Mauritz AB (H&M), Tesla Inc., Adidas AG, Tommy Hilfiger Licensing LLC, Burberry Group PLC, Christian Dior SE, Swiss watchmaker Audemars Piguet Holding SA and other Western brands.

The attacks have the tacit approval of Beijing, a worrisome aspect of doing business in China.

But they tend to be episodic, just as real and threatened consumer boycotts in the West have been.

They peak with denunciations of one or more foreign companies, then fade as Chinese anti-Western activists shift their focus to new targets.

Those targets include Chinese celebrity tycoons like Jack Ma, the Alibaba Group Holding Ltd. founder, whose renown threatened to eclipse that of President Xi; and Chinese tech giant Tencent Holdings Ltd., whose online gaming products have been denounced in state media as “spiritual poison.”

The crucial point is that Western companies in China are caught in a dilemma.

Canadian trade experts tell Canadian firms that they will do fine in China if they simply “align” with President Xi’s policies and practices.

But those same Western companies must also align with best practices in environmental protection, social benefits, and sound governance (ESG) that are becoming a widespread prerequisite for Western retail and institutional investors.

That is a circle that cannot be squared.

Until China becomes a genuine member of the world community, Western companies doing business there face what is still an unforeseen risk.

Which is that they will someday endure ESG-inspired protests and boycotts in their home markets in North America and Europe. ESG runs counter to reaping profits in a police state that inflicts cruelty on its own people and threatens world stability.