China Consumer

Just don’t do it

Li Ning faces US sanctions on North Korea allegations


Li Ning: not welcome in the US?

A year ago almost to the day – amid a public backlash in China against foreign companies that had spoken out against using cotton from Xinjiang in their products – domestic sportswear giant Li Ning proudly declared that it would continue to source cotton from the region. It even went so far as to put “uses Xinjiang high quality long-staple cotton” on the labels attached to all of its apparel.

The move was a big PR success in its home market. Patriotic sentiment was running high and consumers ditched foreign sportswear brands for Li Ning. Last April the company saw sales spike a whopping 815%, followed by an equally big jump during the Labour Day holiday in May. Li Ning also saw its Hong Kong-listed shares trade up to a record high of HK$107.7 in September last year (up from HK$5 five years ago).

But some big investors have reacted unfavourably. This month Norway’s $1.3 trillion sovereign wealth fund, the largest in the world, said it had excluded Li Ning from its portfolio due to the “unacceptable risk” the company was contributing it said to human rights issues in the Xinjiang region. Other domestic sportswear makers like Anta and Xtep saw their share price fall as a result of the move.

Last week, the Chinese sportswear maker also learned that its footwear had been detained at US ports by US Customs and Border Protection (CBP) which alleged that North Korean labour was used to produce Li Ning’s sneakers. The CBP says the Beijing-based firm must provide evidence within 30 days that its sports shoes were not produced with convict labour, forced labour or indentured labour, or it “may be subject to seizure and forfeiture”. The legal basis for this is a US law which prohibits the entry of merchandise into the US involving North Korean labour, unless evidence is provided that such goods were not made with forced labour. Nevertheless, the US customs agency did not disclose where in Li Ning’s supply chain the North Korean labour was allegedly being used, or where in North Korea specifically the factory was.

Li Ning quickly pushed back against the allegations, declaring it was a victim of “incorrect and misleading allegations” by the US government. “During the operation and review process, the group has not discovered any cases of forced labour in the supplier management system,” the Hong Kong-listed company claimed in a filing with the city’s bourse last week.

When asked about Li Ning’s situation Chinese foreign ministry spokesman Zhao Lijian told a press conference that while he was not aware of the specifics he reiterated that Beijing firmly opposes “all forms of ‘long-arm jurisdiction’ and unilateral sanctions”.

Netizens concurred, referencing the fact that Li Ning’s merchandise had been ‘stolen’ in their view. “Alert! Alert! The US has resorted to robbing in broad daylight,” one wrote.

“It is clear that this is a made-up excuse to publicly steal,” another thundered.

Exclusion from the US market won’t cause Li Ning too much financial damage: it generated 98.9% of its revenue in China and only 1.1% from abroad, according to its latest earnings report. Still, Li Ning’s situation is another reminder of the operational risks Chinese brands face outside of the country.

Thankfully for investors the sportswear company was buoyed by some good news – in spite of these setbacks. Last Friday, Li Ning announced that its revenue saw a nearly 56% increase year-on-year to Rmb22.5 billion ($3.53 billion) in 2021. Meanwhile net profit jumped almost 1.4 times to Rmb4 billion during the same period.

The gains come at the expense of its foreign competitors. German sportswear brand Adidas said its Chinese fourth-quarter revenue fell 24% year-on-year due to the ‘challenging’ market environment. Similarly, Chinese quarterly revenue for Nike fell 20% year-on-year, a number so bad it had to appoint a new China chief.

“Li Ning’s growth prospects remain promising. Although the ban may taint Li Ning’s reputation abroad [the brand has partnerships with Disney and the NBA], it is unlikely to have a significant impact on sales,” predicted Jing Daily, noting that the US market remains something of a rounding error in terms of overall revenues.

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