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Consumer

Chinese sportswear brands count profits from Xinjiang controversy

As sales boom for Li Ning and Anta fades, Olympics revives Adidas and Nike

Anta Sports promoted its products during the Tokyo Olympics with a themed pop-up store in Beijing.   © Reuters

SHANGHAI -- College student Lin Hong long looked to Nike for his sneaker needs, buying five pairs of its basketball shoes over the past two years.

Now he is eyeing the U.S. brand's biggest Chinese rivals.

"It's time to ditch Nike for Li Ning or Anta," he said, complaining that his latest Nike sneakers did not hold up well while the Chinese brands offer "vibrant designs and tougher soles."

Thanks to consumers like Lin, Li Ning, founded by the Olympic gymnast of the same name, has signaled that it will report soaring profit growth when it announces half-year results on Thursday.

Xtep International Holdings and Anta Sports Products, the fastest growing sportswear company in China's market over the past five years, are due to follow suit two weeks later.

While all three companies have highlighted a recovery in consumer demand since the eruption of the COVID pandemic last year, that had little benefit for Western competitors in China like Adidas and Nike.

Their sales suffered in the spring after state media and social media users blasted their previous expressions of concern about forced labor in the minority region of Xinjiang and company statements about avoiding cotton from the area.

This followed joint moves by the U.S., the EU, the U.K. and Canada in March to censure China and sanction officials over alleged human rights abuses against Uyghurs and other Xinjiang Muslims.

The resulting furor, stoked by Communist Party-run media, hit Swedish clothing retailer H&M hardest. Chinese celebrities broke off endorsement contracts with the brand, online mapping and ride-hailing services erased H&M stores from their systems, top internet shopping platforms dropped its products and some landlords canceled store leases amid a boycott campaign.

For the quarter to May 31, H&M's net sales in mainland China tumbled 28.1% to 1.62 billion Swedish krona ($186.86 million) from a year before while its national store network contracted by a net 13 outlets to 489. Previously the chain's third-biggest market, China ended the quarter in sixth place.

Adidas and H&M both saw their China sales fall in the spring amid public attacks over their stance on the use of Xinjiang cotton.   © AP

Adidas, meanwhile, recorded a 16.3% fall in greater China sales to 1 billion euros ($1.18 billion) in the April-June quarter, according to figures published last week. Nike earlier reported that its greater China revenues for the March-May period rose 17% to $1.93 billion, but this came as its global revenues nearly doubled from a year earlier.

By contrast, Chinese brands publicly trumpeted their use of Xinjiang cotton, with Anta and others quitting the Better Cotton Initiative, a Geneva-based group seen as a key culprit in raising questions over the use of forced labor, and captured a wave of nationalist sentiment.

Li Ning has said that it expects to report revenue growth of more than 60% and at least 1.8 billion yuan ($277.65 million) in net profit for the first half of the year, potentially tripling the 683.27 million yuan it earned in the same period last year.

The swing in consumer attitudes enabled Beijing-based Li Ning to cut back on discounting, with Daiwa analysts Adrian Chan and Sybil Hu projecting the company will report "a record-high net margin of over 18%" for the half year as some stores sold out of popular products.

Li Ning has signaled that it may report a tripling in profits compared with a year ago in its half-year results.   © AP

Li Ning shares have risen 86% since the party campaign against H&M started while Anta is up 44% and Xtep's stock has almost tripled in value.

Xtep has told investors it will report profit growth of at least 65% for the half year while Anta has talked of a surge of more than 110% from revenue expansion of over 50% as it cut back on discounts. Anta recorded 1.66 billion yuan in profit a year ago.

Buoyed by its new sales momentum, the Xiamen-based company laid out plans to analysts last month for expanding sales volumes and shifting its branding up market, with an eye toward pricing basketball shoes at as much as 1,500 yuan a pair to level up with Nike and Adidas.

Momentum, though, now appears to be shifting, with the Western brands regaining their footing in China while their domestic rivals' momentum from the Xinjiang controversy fades.

Adidas Chief Executive Kasper Rorsted told analysts last week that the company's Chinese online sales returned to growth in June while overall sales were flat. Analysts believe sales picked up last month with high-profile appearances of the Western brands at the Tokyo Olympics, with Chinese sprinter Su Bingtian, who set an Asian record for the 100-meter dash, notably sporting Nike.

Sprinter Su Bingtian, who set an Asian record for the 100-meter dash at the Tokyo Olympics, sported Nike gear.   © AP

"In our observation, discussions about 'Xinjiang cotton' have in most social media diminished in July-Aug.," Citigroup analyst Xiaopo Wei wrote in a client note on Tuesday. "In recent weeks, Chinese state-owned media have been reporting Chinese athletes wearing Nike/Adidas uniform in Tokyo Olympics, leading to Chinese consumers' much more positive sentiments towards Nike/Adidas."

The Chinese brands, meanwhile, are facing new threats in the U.S.

While each of them generates almost all their revenues within China, they have looked to endorsements from National Basketball Association players to lift their brand profile.

Senator Jeff Merkley and Congressman James McGovern, who head up the Congressional-Executive Commission on China, took aim at this link in June, writing to the NBA Players Association to urge members to break off contracts with Anta and Li Ning unless they halt use of Xinjiang cotton.

"We urge the NBPA to work with its members to raise awareness about the ongoing genocide taking place in Xinjiang and the role of forced labor in the production of products made by brands that NBPA members have endorsed," they said. "We believe that commercial relationships with companies that source cotton in Xinjiang create reputational risks for NBA players and the NBA itself."

Luis Scola, who was previously on five NBA teams and now plays for an Italian team, is one of Anta’s celebrity spokesmen.   © AP

"NBA players have a track record of using their large public platform to speak out against injustice, and we hope this will include Xinjiang," the legislators wrote.

Representative Scott Perry and three other congressmen wrote to the U.S. Department of Treasury, meanwhile, calling on the agency to add Li Ning and Anta to a blacklist that would bar American companies and individuals from any business dealings with them.

"We believe that any kind of financial association with either brand by a United States person is fundamentally unacceptable," they said. Those who do "are undermining U.S. national security by downplaying the severity of the genocide designation" announced by the U.S. State Department in January.

Politics, though, is not the only reason Chinese sports brands have been gaining domestic customers. Jacob Cooke, chief executive of e-commerce consultancy WPIC in Beijing, said the Chinese manufacturers are making smart use of marketing data.

"Local consumer brands are succeeding because of data-driven product offerings and strong marketing," he said.

Additional reporting by Zach Coleman

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