Key Takeaways:
- Sportswear maker Li Ning’s shares took a beating after the company came under fire for new designs that resembled hats worn by Japanese soldiers during World War 2
- Although such scandals are typically short-lived, they can have a big impact if handled improperly, experts say
By Jose Qian
When Li Ning Co. Ltd. (2331.HK) held a fashion show in September, the leading sportswear brand founded by one of China’s earliest gold-medal gymnasts probably didn’t expect the event would affect its stock price a month later.
But it got an unexpected surprise last week when some netizens uncovered photos from the event and started doing backflips over one particular element they didn’t like.
At the center of the controversy were some green army winter hats with earflaps, launched as part of the company’s new winter collection at the Li Ning Fashion Show at an airport in central Hubei province. Some social media users suggested the hats looked like those worn by Japanese soldiers during World War 2. As the critical rhetoric spread, Li Ning’ shares fell for three consecutive days in Hong Kong, plummeting as much as 13% at one point.
As companies in China often do in such cases, Li Ning quickly issued an apology on its official social media account on the Twitter-like Weibo, saying that it would humbly listen to public voices and make products that consumers would identify with more. The statement further explained that the new “Dream Walk” collection was based on a “flying” theme, drawing inspiration from clothing used by pilots to show the human dream to explore the sky.
A Li Ning representative told a local news outlet that the hats in question were pulled from the line and will not be sold in future. But that failed to quell the public outrage, with one netizen declaring: “I treat you as the pride of national brands, but you treat me as a fool.”
The stock continued its slide this week, and was down about 17% as of Friday, its lowest level in more than 18 months. The type of scandal that tripped up Li Ning is increasingly common in China these last few years, created by nationalistic internet users known locally as “little pinks.” Such critics can wield considerable influence, partly because their comments are allowed to stay posted and spark heated public discussion on China’s highly-curated social media.
“My first thought is that the domestic audience is too sensitive and too nationalistic,” said James Gau, co-founder of FMNII, a shoe business consultancy for brands like Adidas and Crocs. “In such a market environment, brands may (want to) set up better design guidelines to prevent” such problems from occurring.
Increasingly common
Such scandals were often aimed at western brands like Dolce & Gabbana and H&M for products and actions that some Chinese found insulting. But more recently domestic brands have fallen into the crosshairs of online nationalists as well.
This summer, the Chinese lifestyle retailer Miniso’s (NYSE:MNSO) Spanish Instagram account was accused of mislabeling the clothing worn by one of its dolls as that of a Japanese geisha, when in fact it was a traditional Chinese cheongsam. After an online outrage ensued, the company, whose more than 5,000 shops worldwide use a Japanese-style design, apologized for promoting itself as a “Japanese designer brand.” It added it would start replacing Japanese elements of its shops with Chinese logos, emphasizing it is a Chinese enterprise through-and-through and aspired to be a “dignified Chinese brand.”
The younger generation in China is increasingly patriotic, Gau said, adding that the global trend of China’s decoupling from the rest of the world “may push this direction further.”
Cases like Li Ning’s often spark “fact finding” campaigns, with outraged netizens digging around both online and offline to find more incriminating information about the offending entity. In this case, netizens managed to discover that Li Ning’s CEO was a Chinese with a Japanese passport, and believed that the brand was deliberately aiming to deceive Chinese consumers.
Making matters worse, senior executives at Li Ning criticized Chinese consumers for being ignorant of Chinese culture, saying the hats were actually inspired by a common type of military helmet style from ancient China and providing photos. That only fanned the flames of discontent, and netizens criticized the company for being “arrogant” and failing to offer “a design that people like to see.”
Financially, the scandal has cost Li Ning about HK$20 billion ($2.5 billion) in market value so far. It has also taken some of the shine off the stock by bringing its price-to-earnings (P/E) ratio down to 25, the same as smaller rival Anta Sports (2020.HK), though still well ahead of the lesser-known Xtep’s (1368.HK) multiple of 18 times.
Chinese brands need to manage public relation crisis better, said Ashley Dudarenok, a China marketing expert, “To avoid another PR crisis, it is important to respond rather than just trying to cover up the incident,” she said. “Li Ning’s failure to respond to the market will continue to raise questions as to whether the brand’s design crisis is deliberate.”
Source of national pride
The crisis is just the latest in a series of ups and downs over the years for a brand closely associated with nationalism due to Li Ning’s status as an Olympic gold medalist. More recently the brand was also a source of national pride in 2018 when its apparel featuring traditional Chinese elements was unveiled at Paris Fashion Week, attracting many young Chinese consumers who described the clothing as “the rise of the national fashion” on social media.
Since then, the company’s sales have risen rapidly, with Li Ning’s annual revenue growth averaging 21% in the last five years. As of the end of last year, the company had 4,770 franchised dealer stores and 1,165 directly-operated stores.
A series of scandals last year involving cotton grown in the controversial Xinjiang region led to boycotts of a number of major western brands, including Nike and Adidas. That played to their domestic rivals like Li Ning, with China’s four top sporting brands all achieving strong growth in 2021. Li Ning led that group with 56% growth, followed by Anta with 39% and Xtep with 23%.
While the latest scandal is damaging, its impact on Li Ning’s overall business growth might not last too long, said Gau. He pointed out that Chinese consumer market tends to get such short-term responses, and that the brand is still considered a leading designer. But he added that Chinese brands must build better product guidelines in the future, similar to big fashion retailers like H&M and Zara, which have a three-part process for vetting their products before launch.
