Western Retailers Caught Between Revenue, Ethics Over Xinjiang Rights Abuses

March 28, 2021 Updated: March 31, 2021

News Analysis

Many international brands have attempted to distance themselves from sourcing materials and labor from China’s Xinjiang region due to Beijing’s acts of genocide against the Uyghurs and other ethnic and religious minorities.

The United States, European Union, United Kingdom, and Canada recently sanctioned certain Chinese officials over their involvement in the persecution of majority-Muslim minorities in Xinjiang. The Chinese Communist Party (CCP) has detained more than a million Uyghurs in concentration camps in the region. Detainees are subjected to forced labor, torture, rape, and political indoctrination.

H&M, Gap, Nike, and Japan’s Fast Retailing—the parent company of UNIQLO—have all released statements over the past two years condemning forced labor or distancing themselves from the allegations.

But now Western firms are facing immense backlash from the communist regime and are increasingly being forced to pick sides. Companies may have to walk a delicate tightrope between pleasing Beijing to keep their Chinese customer base and complying with the expectations of Western shareholders, executives, and other stakeholders.

CCP mouthpiece People’s Daily on March 25 called out Nike, Adidas, New Balance, and Burberry—all members of the Better Cotton Initiative (BCI)—and recommended a China-wide boycott of the big-name companies. Dozens of Chinese celebrities have or plan to cancel contracts with Western brands over their stance on Xinjiang.

BCI has been a frequent target on Chinese social media. BCI promotes sustainable cotton production and last year announced it was suspending support of its member companies sourcing cotton from Xinjiang due to human rights concerns. Xinjiang supplies an estimated 20 percent of the world’s cotton.

H&M and Fast Retailing are also BCI members.

Swedish fast-fashion retailer H&M was one of the initial targets when the Communist Party Youth League dug up an early 2020 statement by the company saying it would stop sourcing its cotton from Xinjiang. Nike and Adidas were also attacked on Chinese social media and by Chinese state media for their stances. Both firms had put out statements that they don’t source materials from the Xinjiang region.

Chinese internet giant Tencent Holdings removed Burberry-themed “skins,” or virtual costumes worn by characters on Tencent’s Honor of Kings mobile video game, due to Burberry’s statements distancing itself from Xinjiang-sourced materials. The decision was announced in a post on Chinese social media platform Weibo, owned by Tencent.

“Enormous investment in public relations has been destroyed instantly,” Hu Xijin, chief editor of foreign-facing Chinese state media Global Times, wrote in an editorial.

“They need to return to the Western society to complain, because they know that for whatever reason, whether they are active or passive, they have indeed done something that is intolerable to Chinese consumers.”

Fearing widespread boycotting by Chinese consumers, who have limited access to information independent of the CCP’s propaganda department, shares of H&M, Burberry, Nike, and Adidas all fell the week ending March 26. Adidas suffered the biggest decline, with its shares dropping 6.7 percent during the week in Frankfurt.

Companies are being careful to balance their business interests in China with consumer sentiment at home. Some companies are already backpedaling, and some are beginning to ingratiate to the CCP to prevent a boycott and win back business.

Spain’s Inditex, which runs Zara stores, removed a previously published statement regarding Xinjiang from its website on March 24. Japanese retailer Muji recently began to voluntarily advertise that it uses “Xinjiang derived cotton.” American footwear company Skechers said its investigations found no evidence of forced labor within its Chinese supply chains.

How this plays out will be interesting given how important ESG (environmental, social, and governance) factors have become to corporate boards and shareholders.

There isn’t a uniform definition of ESG standards, but generally speaking, it judges a company’s environmental impacts, social policies such as labor standards, employee relations, impact on local communities, as well as governance factors such as ownership transparency, business ethics, and the independence of its board.

Fund and investment managers have begun to place great importance on ESG and, in some cases, investor demand for a company’s stock could have a positive correlation to its ESG rating.

For example, Adidas is assigned an ESG score of 82 by credit ratings firm S&P Global. Burberry Group has a rating of 87, Inditex has a rating of 75, while H&M has a rating of 70.

While S&P is just one ESG ratings firm—there are many ESG trackers—these scores would all be considered good.

But if these Western companies begin to acquiesce to Beijing’s demands to rescue sales, the picture becomes murkier. Actively kowtowing to the CCP and turning a blind eye to the Uyghurs’ plight in Xinjiang should be detrimental to the companies’ ESG scores, assuming the ESG ratings firms are doing independent monitoring.

And that could trigger forced sales by funds that must meet certain ESG thresholds, and potentially decrease the companies’ stock price.

Once again, companies doing substantial business in China are caught between revenue and ethics.

Fan Yu is an expert in finance and economics and has contributed analyses on China’s economy since 2015.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.