Data, China, & Nike Run Club
An app's sudden removal and a bigger story around data, geopolitics, and China's future
Last week Nike announced its decision to discontinue the popular Run Club app in China. From the WSJ:
Nike Inc. will stop operating its Nike Run Club app in China in July, the company said Wednesday, in the latest restructuring by American businesses of digital services offered in the country.
The app, which was introduced to China in 2010, had more than 8 million registered users in the mainland, according to the company. Users could log exercise records including routes of outdoor jogs, when they ran, and how long they exercised for.
Nike didn’t give a clear reason on why it is halting the app. On the app, it suggested that users shift to a Nike mini app on WeChat, a ubiquitous Chinese tech platform run by Tencent Holdings Inc. The mini app offers video training sessions of indoor activities and records the time users spend on these sessions.
“We are creating an ecosystem from China for China, specifically catered to the region’s unique consumer needs to serve athletes better,” Nike said.
That last bit about “creating an ecosystem from China for China” while encouraging users to shift over to the WeChat-hosted mini app is noteworthy. Nike—along with virtually every other prominent sportswear brand—is well into its process of digital transformation. Its core business model relies on the collection and analysis of vast troves of data— via programs like Run Club—to enhance user experience, cultivate brand loyalty, foster a sense of community, and, ultimately, boost sales growth.
Shutting down the NRC app in one of Nike’s largest and most profitable markets seems at odds with the company’s data-intensive customer acquisition/retention strategy. My guess, based on Nike’s fairly opaque messaging around the decision, is that NRC’s shuttering spotlights the mounting political sensitivities companies operating in China face when collecting and utilizing customer data.
Nike & China
Nike is the world’s most valuable apparel company. Its iconic Swoosh logo and “Just Do It” motto are recognizable the planet over. In connecting core brand values (“inspiration,” “innovation,” “connected)” with sleek marketing campaigns around successful, world-beating athletes, founder Phil Knight turned a one-man Oregon “shoe dog” operation into a truly global sportswear behemoth.
I would argue Nike’s Swoosh, McDonald’s Arch, and the Coca-Cola can—more than anything else—came to symbolize the 1990s ‘Americanization” of the global economy.
Key to Nike’s success has been China. Envisioning the country’s massive, untapped potential, Knight established both a manufacturing and consumer presence in the People’s Republic by the early 1980s. As of 2021, Nike remains China’s leading sportswear brand with an estimated 25% market share. China-based contract manufacturers supply about 20% of Nike Brand footwear and apparel.
In spite of Nike’s considerable, multi-decade success story in China, the company faces a confluence of headwinds: competitive, reputational, and operational.
Nike’s China challenges: competition, reputation, cost
First, as Nike readily admits, “intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment constitute significant risk factors” to the company’s worldwide operations.
The intense competition Nike speaks of feels particularly acute in China; the rapid ascension of domestic brands Li Ning and Anta presents a full-frontal challenge to the traditional Nike/Adidas hegemony. I think the key issue here is demographics: China’s “Z Generation,” currently in their teens and early/mid-twenties, is more overtly nationalistic, increasingly intrigued by quality domestic products, and less enamored with iconic Western labels.
Second and relatedly, Nike took a massive and sustained credibility hit in spring 2021 when it stopped sourcing Xinjiang-grown cotton due to forced labor concerns. Reflecting the country’s hyper-nationalistic trajectory, enraged netizens called for a consumer boycott. Nike’s sales on Alibaba-owned Tmall, China’s number one business-to-consumer e-commerce platform, plummeted a staggering 59% in the immediate aftermath.
Nor was the blowback short-lived. As this excellent bit of data-driven reporting from Bloomberg in February 2022 makes clear:
Nike and Adidas, which said they would not use Xinjiang cotton, were sent on a downward trajectory in sales that has not yet bottomed out.
Months after the scandal, Chinese rivals like Anta Sports Products Ltd. and Li Ning Co.—which put out statements of support for Xinjiang cotton—continue to surpass them in sales. The local companies capitalized on the upswing in nationalism with products targeted at local consumers—from sweaters emblazoned with Chinese characters to sneakers inspired by the Forbidden City.
The Xinjian debacle showcased the myriad challenges Nike faces in maintaining brand integrity back home without alienating consumers in markets with wildly different cultures, histories, political systems, and approaches to human rights.
Compounding matters further are a handful of stark realities: over the past decade China’s political environment has become substantially more stifling, repressive, and jingoistic; the Sino-American relationship is at its lowest ebb in decades, and virtually every company operating across the two markets is finding it harder and harder to escape the geopolitical crossfire; against this ominous backdrop, a diverse and vocal array of non-government stakeholders are publicly pressuring prominent Western brands like Nike to speak out more forcefully against China’s human rights practices or disengage from the country entirely. Nike has been burned by the geopolitical firestorm already: a 2020 report from the Washington Post revealed the use of Uighur forced labor by Qingdao Taekwang Shoes Co., one of Nike’s largest contract manufacturers.
All of this puts Nike in a bind: while it’s rewarded for taking polarizing stances on behalf of progressive and inclusive social values in its US home market, most notably when the company backed Colin Kaepernick as the face of its 2018 “Dream Crazy” ad campaign, taking similarly principled positions in the People’s Republic risks catalyzing an “anti-patriotic” consumer backlash that may existentially threaten the Swoosh’s footprint.
It’s easy to envision a future in which a Nike-sponsored athlete—let’s say a prominent NBA superstar with a large following in the “Greater China” market—takes a public stand against the government’s position on a hot-button issue like Taiwan, Tibet, or Xinjiang. Under such a scenario, Nike would be effectively backed into a wretched corner: disavow him or her and face a torrent of criticism back home over the company’s rank hypocrisy and spinelessness or stand up for freedom of speech at the risk of yet another precipitous collapse in China market share.
Third and finally, broader developments in the Chinese economy are throwing up all manner of additional challenges. Labor costs have risen considerably over the past two decades; prompting Nike to increasingly look elsewhere for contract manufacturing options. As GQ puts it:
Ten years ago, China was responsible for most of Nike's and Adidas’s shoes, but now the country’s factories seem to have outgrown those brands. Wages have gone up in Chinese apparel factories—and while Nike and Adidas could continue to manufacture much of their apparel in China, the siren call of cheaper costs elsewhere has made countries like Vietnam more attractive.
While rising labor costs represent a long-term structural trend moving us further and further away from the era of “Cheap China,” 2022 has seen a full-speed collision between the government’s unwavering commitment to “Zero-Covid” and the rapid spread of the virulent omicron strain. Draconian lockdowns across major metro areas (most notably Shanghai), gridlocked supply chains, a massive drop-off in retail sales, and pessimistic growth forecasts have turbocharged the foreign business community’s preexisting concerns about the country’s future trajectory.
Digital to the rescue?
It’s easy for Nike, Adidas, or any Western consumer brand for that matter to look at digital transformation as a panacea.
Worried about a long-term decline in physical stores and the more recent shuttering of retail outlets due to Covid lockdowns and cratering foot traffic? Cut out the middlemen and shift to a DTC e-commerce strategy—as Nike has been doing successfully since 2012 through platforms like Tmall, WeChat Brand Zone, its company website, and the Nike and SNKRS apps.
Worried about labor costs and supply chain management? Deploy powerful digital tools to optimize inventory management, better anticipate consumer demand in local markets, and automate a greater share of the manufacturing process.
Worried about that ferocious competition from Anta and Li Ning? Differentiate from your competitors with a digital strategy predicated on social media engagement, online community building, and a fully-localized version of the Nike+ membership program (encompassing the NRC app).
Daxue Consulting outlines Nike’s approach as such:
The Nike+ ecosystem allows Chinese runners to share their experiences, track their running progress and create and meet challenges for themselves and their running networks. It is the information and data uploaded by runners that have become an important basis for Nike’s business decisions such as product design, new product promotion, and online and offline marketing. The collection of users’ running information can help Nike find potential customers and understand them better by analyzing how the fans and consumers behave, what they like about Nike’s footwear and apparel. Thus, Nike is able to conduct data-driven marketing campaigns more accurately by leveraging the troves of consumer data.
Underlying Nike’s overall strategy is the power of Big Data. Conor McGlade writes for Thomasnet:
Why is Nike focused on crafting such a personal experience for its customers? The answer lies in the data. From its apps and web traffic, Nike has found that targeting engaged — rather than casual — customers has been the most profitable. The longer they can keep customers in the store (virtually or in person) the better the sales.
According to Matt Powell, vice president and senior industry advisor for The NPD Group, engaged customers “have a greater affinity for the brand, buy more than the non-customer and the cost of acquisition of non-customer is high.”
The relationship between the customer and brand is a two-way street. Those who download the app or visit the Nike website supply meaningful and important data about their habits, lifestyles, and stylistic preferences which the company then analyzes and tailors it’s selections and stores to serve.
The big risk: darkening data politics
By all indications Nike’s digital strategy in China has been a massive success, but therein lies the rub: the Swoosh’s metamorphosis into a tech powerhouse coincides with data politics becoming a primary focus for Chinese regulators and a major battleground between foreign multinationals and state officials. Staying innovative and outpacing the competition risks running afoul of domestic political prerogatives.
I think there are a couple of key points to bear in mind here:
The uppermost echelons of China’s political elite (this very much includes President Xi who is a notorious micromanager) see Big Data as essential to every facet of the country’s future—economic development, technological innovation, social stability, and national security. In April 2020 the State Council designated data as the “fifth factor of production” alongside the traditional inputs of land, labor, capital, and technology.
From Beijing’s vantage point, while the data revolution presents a massive opportunity it also generates serious potential challenges to the Communist Party’s grip on power. Very much in keeping with China’s centralizing trajectory under Xi, a panoply of regulatory bodies have become intensely fixated on ensuring stringent data controls backed up by onerous restrictions on the flow of information deemed “politically sensitive.”
I see the government’s extreme sensitivity towards safeguarding data as a direct outgrowth of its considerable suspicion of foreign multinationals transferring user data outside national borders. At its core, this fear is driven by an irresolvable paranoia that such data can (and will) be weaponized by hostile foreign forces intent on undermining state authority. The Data Security Law, which went into effect last September, “subjects almost all data-related activities to government oversight, including their collection, storage, use and transmission” and has had a markedly chilling effect on the willingness of Chinese businesses to share critical information with their foreign counterparts.
In the current legal and national security landscape, data compliance can no longer be safely ignored. We’re seeing the deleterious effects of this overarching focus on security and control already: the rollout of both the Personal Information Protection Law (PIPL) and Data Security Law last year, coupled with often unclear and ambiguous enforcement, has rapidly spiked demand (and salaries) for Data Protection Officers (DPO) and raised alarm bells within the Western business community. As the FT wrote back in September, “the hardening of China’s legal regime around data usage is causing severe disruptions for multinationals operating in China, large Chinese corporations and the financial markets.”
With that context in mind, the NRC shuttering feels in keeping with a number of other chilling developments:
Chinese ride-hailing giant Didi Chuxing’s decision to delist from the NYSE following a data security probe initiated by the powerful Cyberspace Administration of China (CAC) last year;
LinkedIn’s October 2021 decision to sunset its localized China service on account of “a significantly more challenging operating environment and greater compliance requirements”;
Yahoo’s choice to abandon ship one month later due to similar operational challenges.
In fact, the NRC outcome seems to reflect the exact concerns outlined by the US-China Business Council, which wrote (regarding China’s data security regime) back in April:
If the policies are implemented rigidly, a possible outcome is the creation of data islands that force companies to localize technology, people, and processes, disconnecting them from global operations. This could force companies to make separate product offerings or conduct separate research and development in Chinese and global markets. This range of impacts might hurt the competitiveness of China’s business environment to the detriment of Chinese consumers, corporate competitiveness in China, and the country’s integration with the global economy.
I’ll make one final point here: China’s “securitization” of the tech space is not a one-way street. Mutual distrust and a sense of zero-sum strategic competition are now hallmarks of Sino-American relations. With security hawks in Washington setting the tone, the manner in which Chinese companies collect, store, and utilize data within the United States is now of keen interest to American regulators, politicians, and national security officials alike—as the examples of Huawei, Grindr, and TikTok aptly illustrate.
It would be outrageously premature to suggest Nike faces a Yahoo or LinkedIn-style China exit. The Swoosh is simply too big, too embedded, and too popular. It remains the leading sportswear player in the world’s largest consumer market. By virtue of its massive contract manufacturing network—underwriting an untold number of factory jobs across the country—it enjoys systemic importance in local labor markets that confers substantial political clout.
More broadly, as Jack Zhang and Samantha Vortherms, authors of a widely-discussed paper on the topic of Sino-American decoupling, have pointed out: “despite intensifying political hostility between Beijing and Washington and the mounting economic cost of tariffs, Chinese and American businesses remain deeply integrated in terms of financial, knowledge, and production networks. The vast majority of U.S. companies are not embracing the idea of decoupling from China.”
And yet it’s hard to look at the NRC closure and not see the latest example of a darker new reality; one where foreign multinationals operating on the knife’s edge between overzealous data regulators, hostile government officials, nationalistic consumers, and outraged stakeholders back in their home markets decide to scale back their operations…or opt-out of China altogether.