Oregon’s largest company bets big on the Beijing Olympics and the new China.
By Ben Jacklet
The story of Nike’s multi-billion-dollar bet on China and the 2008 Beijing Olympic Games begins, appropriately enough, with Phil Knight.
The wily sports guru who has single-handedly kept Oregon’s state budget in the black by selling off $1.3 billion in Nike stock over the past year was a hungry entrepreneur when he first visited China in 1980. His business had grown to $150 million in sales and was revving up for an initial public offering. He recognized China as a business frontier worth exploring, Communist in name but bustling by nature, where wages were low and factories were in need of upgrading. Within a year Knight and Nike had entered into formal negotiations with the Chinese Communist Party, the first advance in a relationship that would intensify and deepen over 28 years of staggering growth for both Nike and China.
This was long before China had emerged from the backwaters of the global economy to establish itself as factory to the world and its fastest-growing market, a land where skyscrapers now sprout like grass and hundreds of millions of people have left behind poverty to join the middle class. Then the Chinese government was in the early stages of an earth-moving shift from isolation to economic liberalization. Mao Zedong was dead, and his successor, Deng Xiaoping, had set a lofty goal of doubling China’s gross domestic product in the 1980s and then again by 2000. Deng’s proclamation reminded skeptics of Mao’s Great Leap Forward, a colossal failure. But rather than over-stating his nation’s potential, Deng underestimated it. China achieved Deng’s goal five years ahead of schedule. Today it is the fourth-wealthiest nation in the world, with a 2007 gross domestic product of $3.3 trillion.
Nike also has grown exponentially since that point, increasing sales a hundredfold to more than $18.6 billion in fiscal 2008. Expanding from its first investment in a behind-the-times state-owned factory, Nike has built a network of 180 private contract manufacturers employing 210,000 Chinese workers. Those factories laid the groundwork for a whole new marketplace. Nike established its brand early, sponsoring the Chinese national basketball team in 1981 and a string of top athletes since then, from the gentle giant Yao Ming to the charismatic gold-medal-winning hurdler Liu Xiang. Nike China opened a small marketing office in 1991 with six employees, launching a high-energy campaign to hype sports in China, backing everything from neighborhood parks to professional leagues. In 1994 Nike China was an $8 million enterprise; by 2002 sales had reached $100 million.
Today the annual revenues of Nike China surpass $1 billion, and no company is better positioned to harvest gold from the big business bonanza that will be the Beijing 2008 Olympic Games. Nike has never been an “official sponsor” of the games, but it has perfected the art of branding Olympic heroes. Nike’s influence helped China land the Games, and as all eyes turn toward Beijing, it will be impossible to ignore the swoosh. Athletes from more than 100 countries are supported by Nike, but none will be more closely watched in the host country than the 22 of 28 Chinese Olympic teams that will be donning Nike. These local heroes have been lionized in over-the-top advertisements plastering billboards, televisions, computer screens and even Beijing skyscrapers, symbols of the energy and pride of the New China and the transcendent power of victory.
“Our goal is to help [Nike-sponsored athletes] finish at the top of the podium,” says Willem Haitink, vice president and general manager for Nike in China and Hong Kong. “They are the center of our product innovation and we will celebrate their greatest Beijing moments, inspiring consumers and fans all over the world.”
In a recent company report about Nike’s investment in China, CEO Mark Parker promised, “Nike and China will succeed together,” and to a certain extent he is already right. But as Parker has been quick to point out, Beijing is just the beginning. Most analysts consider China the single biggest driver of future global consumption. A recent report from Credit Suisse applauded Nike for its strong position in China and forecasted that Nike’s sales in China will grow from $1 billion to $6.5 billion over the next seven years.
Before that can happen, Nike and China must clear a daunting hurdle together. The Games must go well. They must not descend into chaos, crackdown and condemnation. There can be no international incidents or devastating doping scandals. Hosting the Olympics always carries risk, and the risks associated with Beijing Games are as enormous and complicated as the host nation and the Oregon business that helped bring the Olympics to China.
Terry Rhoads was a sophomore at the University of Oregon when he heard a Nike executive speak at the Hilton in Eugene about the future of global business. The message was clear: Learn Mandarin and go to China. Amazing things will happen there. Pioneers will be rewarded.
Kicking back recently at a Portland Pioneer Place Starbucks in between endorsement calls regarding the 10-year-old Chinese tennis prodigy he is representing, Rhoads looks back at how dead-on that advice was. Learning Mandarin and traveling to China earned him the opportunities of a lifetime for a sports nut fascinated by Chinese culture. As head of sports marketing for Nike China from 1994 to 2002, Rhoads helped launch professional sports leagues, built an American-style “streetball” basketball culture from scratch, and forged relationships with everyone from top government officials to basketball player Yao Ming. He owns several business interests in China today, including his Shanghai-based sports company, Zou Marketing.
“Our goal was to weave Nike into the fabric of Chinese sports,” says Rhoads.
That is precisely what the company has achieved. It helped that Nike had already established its brand by flooding Chinese markets with sneakers that weren’t good enough for export but were still better than the canvas sneakers most Chinese athletes wore. The other keys to Nike’s success, in Rhoads’ view, were key investments in retail and distribution, a solid employee mix of Chinese nationals and expatriates fluent in Mandarin, and the disciplined leadership of executives such as Dan Loeb, who was all of 25 years old when he became general manager of Nike China.
Loeb, Rhoads and the other pioneers of Nike China struggled with corrupt insiders and counterfeited competition, but revenues kept growing. Rhoads recalls a company retreat in 2000 where eight senior managers formed a strategy leading up to the 2008 Olympics and beyond. “I was sitting there looking at the numbers they were putting up, $600 million in sales by 2008, and I remember thinking, ‘Whoa, that’s 10 times where we are now. How is that going to happen?’”
The first thing that needed to happen was for the International Olympic Committee (IOC) to award the 2008 games to Beijing. China’s first major effort to host the Olympics failed when the IOC awarded the 2000 games to Sydney, Australia. The Chinese government was determined to succeed this time, and Nike offered to help.
While the IOC was deliberating in 2000, Nike created the FUON Sports Marketing Center, a partnership between Fudan University, the University of Oregon and Nike, modeled after the James H. Warsaw Sports Marketing Center in Eugene. The center was funded by Nike and supported by the Chinese Olympic Committee. One of the first participants was He Hui Xiang, the vice president of the Chinese Olympic Committee and the government’s top spokesperson for athletics. While He and her colleagues were wooing the IOC with backing from Nike, the FUON Center organized a series of conferences timed to build maximum hype in the summer of 2001. The featured speaker for these conferences was Carl Lewis, the Nike-backed track star with 10 gold medals to his name. Lewis was a legend in Olympics-crazy China, and fans flocked to his appearances.
Lynn Kahle, a professor of marketing at the Warsaw Sports Marketing Center who traveled from Eugene to China to speak at the conferences, recalls, “The purpose of the conferences was educational but the timing made it clear that Nike China was trying to help the Beijing Olympic Bid Committee succeed. The people on the bid committee reached out to Nike China because they knew that Nike understands how the world works and Nike can influence things.”
Millions of people celebrated in the streets of Beijing on July 13, 2001, when the IOC granted the 2008 games to Beijing. It was a day of triumph for China — and for Nike.
“People have criticized Nike for missing opportunities in other areas,” says Kahle. “But I don’t think Nike has ever been confused about China and its potential.”
Nike’s early efforts in the Olympics did not produce stellar results. The company was a nonentity at Munich in 1972 and at the boycotted 1980 games in Moscow, and it was humiliated at Montreal in 1976 when marathoner Frank Shorter dumped his Nikes for poor performance prior to winning the gold.
That changed in Los Angeles in 1984, the same year Nike signed Michael Jordan. Nike-backed superstar Carl Lewis soared to victory in four events, and Nike pumped up the volume with its first big-time foray into television advertising.
Today Nike-sponsored athletes are renowned for raking in the gold every four years while Nike itself has studiously avoided humdrum official sponsorships in favor of ambush marketing blitzes that set new standards for advertising. JPMorgan analyst Robert Samuels notes that Nike’s stock has outperformed the Standard & Poor’s 500 index in each of the past four Olympic years, shooting up 34% in 2004, 14% in 2000, 74% in 1996 and 16% in 1992.
None of those previous games has been bigger than Beijing in 2008, where Nike is using every ounce of its creativity and influence to build demand and compensate for past missteps involving Yao Ming and LeBron James. In 2003, Nike lost Yao, a larger-than-life icon in the company’s fastest-growing market, to Reebok. This was a major blunder, the first time Nike had ever lost a head-to-head battle to sponsor a celebrity athlete.
Then Nike invested $90 million to sign LeBron James, who starred in an ad that infuriated Chinese viewers and was eventually banned by the Chinese government for insulting national dignity. In the ad, produced by Portland-based Wieden+Kennedy, James out-duels kung fu masters and Chinese dragons to power his way to victory, leaving defeated Chinese symbols in his wake.
Since the LeBron James ad was banned, Nike has walked a fine line to win over Chinese youths without offending Chinese elders. The company released its “Look of China” outfits for Chinese athletes at an event at Beijing’s Ancestral Temple that featured martial artists and traditional drummers. The show took place 88 days before the 2008 Games, paying clear respect to the widely held Chinese superstition that the number 8 represents good fortune (the games will begin promptly at 8:08 p.m. on 8/08/08).
In its advertising pitches, Nike China has replaced the irreverent tone that has worked so well in the West with a more direct message stressing heroism and pride. “It’s more inspirational,” says Rhoads. “It’s like: ‘What’s your dream? What’s stopping you? Go get it.’”
The centerpiece of the campaign has been Liu Xiang, the first Asian to win a gold medal in a sprinting event. The minute Liu took gold in Athens in 2004 Nike pounced with a campaign about overcoming stereotypes in the race to victory. The message was not subtle, but it was extremely effective. The once-obscure hurdler became an icon in China. He was the first runner to carry the Olympic torch this year, before the torch relay descended into chaos.
The reason China failed to host the Olympics sooner can be summed up with one powerful image: Tank Man. This anonymous man who stood up to the Chinese army and its tanks at Tiananmen Square in 1989 has been erased from history as far as the Chinese government is concerned. It is as if he never existed, and neither did the freedom movement he symbolized.
In the 19 years since Tank Man vanished, an arrangement has developed between the Chinese people and their one-party state; they are allowed to prosper and build empires with the full blessing of the Communist Party as long as they do not challenge its authority. The same rules apply to companies doing business in China, making for touchy relationships as pressure builds to use the power of the Olympics to force political reforms.
Not long ago, a public relations disaster seemed imminent. Actress Mia Farrow branded Beijing 2008 the “Genocide Olympics” and convinced director Stephen Spielberg to resign as artistic director of opening ceremonies. Václav Havel, the former president of the Czech Republic, led intellectuals and world leaders in questioning whether the IOC should allow the games to take place in China. The Olympic Torch Relay devolved into a string of demonstrations in Paris and San Francisco. The Chinese government responded with characteristic defiance, banning foreign reporters and detaining dissidents. Chinese nationalists staged counter-protests and threatened to boycott Western companies. A poll by Zogby International found that 70% of likely American voters believe the IOC was wrong to award the Games to China because of its poor human-rights record. It took a tragic earthquake in Western China to push the controversy off the front page.
“The situation was definitely getting ugly,” says R. Scott Greathead, CEO of World Monitors, a New York-based risk prevention consultant to multinational corporations. “There was a real risk that the whole thing would descend into utter chaos, and utter chaos is a result that nobody wants.”
Nike is no neophyte when it comes to global politics. The company was founded on free trade and was international from day one. But it hasn’t been an easy ride. Images of low-wage workers sweating in foreign factories while Air Jordans sold for $100 a pair did not go over well with idealists, who painted Nike as a corporate villain profiting from child labor and exploitation. The tension peaked in 1998 when Knight famously ranted to the National Press Club: “The Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse.”
After an unsuccessful period of denial, Nike shifted to a new policy of increased scrutiny and transparency that has won over many former critics. In 2005 Nike became the first in its industry to disclose its supply chain. Nike has intervened on behalf of workers detained by Chinese authorities and initiated a code of conduct and a monitoring system for its contract factories.
“In the past, when workers raised concerns Nike tended to ignore them,” says Li Qiang, executive director of China Labor Watch, a New York nonprofit that receives worker complaints through underground offices in Chinese industrial zones. “That is no longer the case. Instead of denying problems exist, Nike is trying to fix them.”
Nike’s position on the pre-Olympic political tensions has been consistent. “Nike’s focus is on sport and serving athletes,” says Haitink. “Boycotts only hurt athletes who train for their entire lives for that special Olympic moment.”
There is no guarantee that the Games will proceed orderly and to the liking of the Chinese government. For that matter, there is no guarantee that China’s amazing rise will continue. China has invested an estimated $40 billion renovating Beijing for the Olympics, but its economy is not immune to global uncertainties. The Chinese stock market dropped 50% between October 2007 and June 2008, and inflation is on the rise. China’s position as factory to the world was built on cheap oil for transport and low wages for factory work. Cheap oil is a thing of the past, and wages are rising in China.
But any global company that hopes to succeed had better have a strong strategy for China, and Nike certainly does. “Nike has been a part of China for almost 30 years and we are the leading sport brand in China, and around the world,” says Haitink.
“Nike is the first in our industry to hit $1 billion in revenue in China, and China is our No. 2 market in the world — and growing fast. We have done this by connecting with China’s youth and investing in sport at every level.”
Rhoads points out that Nike’s position in China could grow even stronger if the Chinese government were to bow out of the sports industry. While other industries such as technology and finance have blossomed in China following their release from government control, the Chinese government has clung tightly to the two sectors it has deemed vital to propaganda efforts: the media and sports. Were the state to let go of sports, the market in China could explode.
Nike’s strategy for building that market has focused on the consumers of the future: young, tech-savvy, open-minded and eager to establish their place in the New China. The company has targeted that demographic with snappy marketing campaigns and hundreds of new retail outlets such as the Beijing flagship store, one of Nike’s most successful stores in the world, opened during the great buildup to the Olympics.
Two recent campaigns created by Wieden+Kennedy for Nike foreshadow the Nike China of the future. One is a reality television series aired in China in May and June, starring Kobe Bryant and his “mentu” or disciples.
Over the course of the show’s run, a squad of young Chinese basketball standouts was culled from 400 to 24, American Idol-style, earning the opportunity to get schooled by Bryant on TV.
Another notable campaign was Nike’s Beijing City Young Basketball Masters, a hoops tournament in May 2007 that was hyped with ads in glossy magazines, on billboards and in retail shops that sell Nikes, as well as through a website created for the event and in the online basketball game Freestyle Street Basketball. A rap anthem by Chinese hip hop star MC Webber set the tempo for a promotional video featuring hoop warriors dressed in Chinese-themed outfits. The multimedia blitz drew 1.25 million online viewers.
Even Phil Knight would have been hard-pressed 28 years ago to visualize such a future — for Nike or for China.
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