How Nike Figured Out China

By Matthew Forney Daren Fonda/ Beaverton; Neil Gough/Guangzhou

Nike swung into action even before most Chinese knew they had a new hero. The moment hurdler Liu Xiang became the country's first Olympic medalist in a short-distance speed event--he claimed the gold with a new Olympic record in the 110-m hurdles on Aug. 28--Nike launched a television advertisement in China showing Liu destroying the field and superimposed a series of questions designed to set nationalistic teeth on edge. "Asians lack muscle?" asked one. "Asians lack the will to win?" Then came the kicker, as Liu raised his arms above the trademark Swoosh on his shoulder: "Stereotypes are made to be broken." It was an instant success. "Nike understands why Chinese are proud," says Li Yao, a weekend player at Swoosh-bedecked basketball courts near Beijing's Tiananmen Square.

Such clever marketing tactics have helped make Nike the icon for the new China. According to a recent Hill & Knowlton survey, Chinese consider Nike the Middle Kingdom's "coolest brand." Just as a new Flying Pigeon bicycle defined success when reforms began in the 1980s and a washing machine that could also scrub potatoes became the status symbol a decade later, so the Air Jordan--or any number of Nike products turned out in factories across Asia--has become the symbol of success for China's new middle class. Sales rose 66% last year, to an estimated $300 million, and Nike is opening an average of 1.5 new stores a day in China. Yes, a day. The goal is to migrate inland from China's richer east-coast towns in time for the outpouring of interest in sports that will accompany the 2008 Summer Olympics in Beijing. How did Nike build such a booming business? For starters, the company promoted the right sports and launched a series of inspired ad campaigns. But the story of how Nike cracked the China code has as much to do with the rise of China's new middle class, which is hungry for Western gear and individualism, and Nike's ability to tap into that hunger.

Americans have dreamed of penetrating the elusive China market since traders began peddling opium to Chinese addicts in exchange for tea and spices in the 19th century. War and communism conspired to keep the Chinese poor and Westerners out. But with the rise of a newly affluent class and the rapid growth of the country's economy, the China market has become the fastest growing for almost any American company you can think of. Although Washington runs a huge trade deficit with Beijing, exports to China have risen 76% in the past three years. According to a survey by the American Chamber of Commerce, 3 out of 4 U.S. companies say their China operations are profitable; most say their margins are higher in China than elsewhere in the world. "For companies selling consumer items, a presence here is essential," says Jim Gradoville, chairman of the American Chamber in China.

The Chinese government may have a love-hate relationship with the West--eager for Western technology yet threatened by democracy--but for Chinese consumers, Western goods mean one thing: status. Chinese-made Lenovo (formerly Legend) computers used to outsell foreign competitors 2 to 1; now more expensive Dells are closing the gap. Foreign-made refrigerators are displacing Haier as the favorite in China's kitchens. Chinese dress in their baggiest jeans to sit at Starbucks, which has opened 100 outlets and plans hundreds more. China's biggest seller of athletic shoes, Li Ning, recently surrendered its top position to Nike, even though Nike's shoes--upwards of $100 a pair--cost twice as much. The new middle class "seeks Western culture," says Zhang Wanli, a social scientist at the Chinese Academy of Social Sciences. "Nike was smart because it didn't enter China selling usefulness, but selling status."

The quest for cool hooked Zhang Han early. An art student in a loose Donald Duck T shirt and Carhartt work pants, Zhang, 20, has gone from occasional basketball player to All-Star consumer. He pries open his bedroom closet to reveal 19 pairs of Air Jordans, a full line of Dunks and signature shoes of NBA stars like Vince Carter--more than 60 pairs costing $6,000. Zhang began gathering Nikes in the 1990s after a cousin sent some from Japan; his businessman father bankrolls his acquisitions. "Most Chinese can't afford this stuff," Zhang says, "but I know people with hundreds of pairs." Then he climbs into his jeep to drive his girlfriend to McDonald's.

Zhang hadn't yet been born when Nike founder Phil Knight first traveled to China in 1980, before Beijing could even ship to U.S. ports; the country was just emerging from the turmoil of the Cultural Revolution. By the mid-'80s, Knight had moved much of his production to China from South Korea and Taiwan. But he saw China as more than a workshop. "There are 2 billion feet out there," former Nike executives recall his saying. "Go get them!"

Phase 1, getting the Swoosh recognized, proved relatively easy. Nike outfitted top Chinese athletes and sponsored all the teams in China's new pro basketball league in 1995. But the company had its share of horror stories too, struggling with production problems (gray sneakers instead of white), rampant knock-offs, then criticism that it was exploiting Chinese labor. Cracking the market in a big way seemed impossible. Why would the Chinese consumer spend so much--twice the average monthly salary back in the late 1990s--on a pair of sneakers?

Sports simply wasn't a factor in a country where, since the days of Confucius, education levels and test scores dictated success. So Nike executives set themselves a potentially quixotic challenge: to change China's culture. Recalls Terry Rhoads, then director of sports marketing for Nike in China: "We thought, 'We won't get anything if they don't play sports.'" A Chinese speaker, Rhoads saw basketball as Nike's ticket. He donated equipment to Shanghai's high schools and paid them to open their basketball courts to the public after hours. He put together three-on-three tournaments and founded the city's first high school basketball league, the Nike League, which has spread to 17 cities. At games, Rhoads blasted the recorded sound of cheering to encourage straitlaced fans to loosen up, and he arranged for the state-run television network to broadcast the finals nationally. The Chinese responded: sales through the 1990s picked up 60% a year. "Our goal was to hook kids into Nike early and hold them for life," says Rhoads, who now runs a Shanghai-based sports marketing company, Zou Marketing. Nike also hitched its wagon to the NBA (which had begun televising games in China), bringing players like Michael Jordan for visits. Slowly but surely, in-the-know Chinese came to call sneakers "Nai-ke."

And those sneakers brought with them a lot more than just basketball. Nike gambled that the new middle class, now some 40 million people who make an average of $8,500 a year for a family of three, was developing a whole new set of values, centered on individualism. Nike unabashedly made American culture its selling point, with ads that challenge China's traditional, group-oriented ethos. This year the company released Internet teaser clips showing a faceless but Asian-looking high school basketball player shaking-and-baking his way through a defense. It was timed to coincide with Nike tournaments around the country and concluded with the question, "Is this you?" The viral advertisement drew 5 million e-mails. Nike then aired TV spots contrasting Chinese-style team-oriented play with a more individualistic American style, complete with a theme song blending traditional Chinese music and hip-hop.

Starting in 2001, Nike coined a new phrase for its China marketing, borrowing from American black street culture: "Hip Hoop." The idea is to "connect Nike with a creative lifestyle," says Frank Pan, Nike's current director of sports marketing for China. The company's Chinese website even encourages rap-style trash talk. "Shanghai rubbish, you lose again!" reads a typical posting for a Nike League high school game. The hip-hop message "connects the disparate elements of black cool culture and associates it with Nike," says Edward Bell, director of planning for Ogilvy & Mather in Hong Kong. "But black culture can be aggressive, and Nike softens it to make it more acceptable" to Chinese. At a recent store opening in Shanghai, Nike flew in a streetball team from Beijing. The visitors humiliated their opponents while speakers blasted rapper 50 Cent as he informed the Chinese audience that he is a P-I-M-P with impure designs on their mothers.

Thanks in part to Nike's promotions, urban hip-hop culture is all the rage among young Chinese. One of Beijing's leading DJs, Gu Yu, credits Nike with "making me the person I am." Handsome and tall under a mop of shoulder-length hair, Gu got hooked on hip-hop after hearing rapper Black Rob rhyme praises to Nike in a television ad. Gu learned more on Nike's Internet page and persuaded overseas friends to send him music. Now they send something else too: limited-edition Nikes unavailable in China. Gu and his partner sell them in their shop, Upward, to Beijing's several hundred "sneaker friends" and wear them while spinning tunes in Beijing's top clubs. To them, scoring rare soles and playing banned music are part of the same rebellious experience. "Because of the government, Chinese aren't allowed access to a lot of these things," says Gu's partner, Ji Ming, "but with our shop and Nike-style music, they can get what they want."

The Nike phenomenon is challenging Confucian-style deference to elders too. At the Nike shop in a ritzy Shanghai shopping mall, Zhen Zhiye, 22, a dental hygienist in a miniskirt, persuades her elderly aunt, who has worn only cheap sneakers that she says "make my feet stink," to drop $60 on a new pair. Zhen explains the "fragrant possibilities" of higher-quality shoes and chides her aunt for her dowdy ways. Her aunt settles on a cross trainer. For most of China's history, this exchange would have been unthinkable. "In our tradition, elders pass culture to youth," says researcher Zhang. "Now it's a great reversal, with parents and grandparents eating and clothing themselves like children."

Success aside, Nike has had its stumbles. When it began outfitting Chinese professional soccer teams in the mid-1990s, its ill-fitting cleats caused heel sores so painful that Nike had to let its athletes wear Adidas (with black tape over the trademark). In 1997, Nike ramped up production just before the Asian banking crisis killed demand, then flooded the market with cheap shoes, undercutting its own retailers and driving many into the arms of Adidas. Two years later, the company created a $15 Swoosh-bearing canvas sneaker designed for poor Chinese. The "World Shoe" flopped so badly that Nike killed it.

Yet all that amounts to a frayed shoelace compared with losing China's most famous living human. Yao Ming had worn Nike since Rhoads discovered him as a skinny kid with a sweet jumper--and brought him some size 18s made for NBA All-Star Alonzo Mourning. In 1999 he signed Yao to a four-year contract worth $200,000. But Nike let his contract expire last year. Yao defected to Reebok for an estimated $100 million. The failure leaves Nike executives visibly dejected. "The only thing I know is, we lost Yao Ming," says a Shanghai executive who negotiated with the star.

Nike is determined not to repeat the mistake. It has already signed China's next NBA prospect, the 7-ft. Yi Jianlian, 18, who plays for the Guangdong Tigers. And the company has resolved problems that dogged it a few years ago. Nike has cleaned up its shop floors. It cut its footwear suppliers in China from 40 to 16, and 15 of those sell only to Nike, allowing the company to monitor conditions more easily. At Shoetown in the southern city of Guangzhou, 10,000 mostly female laborers work legal hours stitching shoes for $95 a month--more than minimum wage. "They've made huge progress," says Li Qiang, director of New York City--based China Labor Watch.

In China, Nike is hardly viewed as the ugly imperialist. In fact, the company's celebration of American culture is totally in synch with the Chinese as they hurtle into a chaotic, freer time. In July, at a Nike three-on-three competition in the capital, a Chinese DJ named Jo Eli played songs like I'll Be Damned off his Dell computer. "Nike says play hip-hop because that's what blacks listen to," he says. "The government doesn't exactly promote these things. But we can all expose ourselves to something new." That sounds pretty close to a Chinese translation of "Just Do It." --With reporting by Daren Fonda/ Beaverton and Neil Gough/Guangzhou