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2019-10-10 19:14:12

NBA Commissioner Adam Silver with a Chinese official before a pre-season game held in Beijing in 2016.AP

After the general manager of the Houston Rockets tweeted out his support of protesters in Hong Kong, the Chinese Communist Party's retribution was swift and came from all sides, including from parts of the NBA.It is yet another example of how the tightening grip of Chinese President Xi Jinping's authoritarian regime is testing the values of corporate America.As the Chinese Communist Party becomes more assertive and aggressive about its values, so too must American businesses. Hopefully, they're up to the task. So far, things don't look encouraging.Visit Business Insider's homepage for more stories.

If, after the days-long backtracking by the NBA over Houston Rocket GM Daryl Morey's deleted tweet supporting protesters in Hong Kong, you feel like American companies are looking pathetic in China, it's because you're right. They are.

American companies have been allowing China to pull their strings for years, and as the country becomes more bellicose, this private matter is starting to spill into public view.

This is partly because China, under President Xi Jinping, will give critics no quarter. After Morey's tweet, and despite some muddled attempts by NBA Commissioner Adam Silver to smooth things over, China's state-run broadcaster CCTV halted NBA broadcasts to its 640 million NBA fans.

That is because it is not willing to compromise on what it considers a core value — the unquestionable and all-encompassing power of the Chinese Communist Party, the CCP, over all the territories it claims (and that includes Taiwan).

And make no mistake, China just attempted to censor speech here in the United States in violation of one of this country's core values. And in response, some high-profile members of the NBA have done little more than play dumb and make milquetoast statements about democracy. It finally took almost four days before Silver set the record straight.

I want this to be clear, and I think there's been some confusion around this: We are not apologizing for Daryl exercising his freedom of expression, Silver said.

The CCP has been in the game of exerting its influence over American businesses hungry to access the Chinese market for decades now, but as its relationship with the US government has become more antagonistic and its own domestic politics more authoritarian, that influence is starting to chafe.

That means American businesses (much to their distaste) will have to make a choice in public: Either stand up for American values or allow China to impose its values on America.

This shouldn't be a hard decision to make, in theory, but after years of American investment under the delusion that China's political and economic systems would start to match the US on their own, it's going to be difficult in practice.

Player, play yourself

First off, cow-towing to the Chinese Communist Party isn't limited to the NBA. A slew of companies such as Marriott, Coach, and Calvin Klein have all been browbeat by China into making public apologies over supposed faux pas.

On Wall Street you can please the party with some good old-fashioned nepotism. Back in 2016, JP Morgan paid a $264 million fine to settle allegations that it hired the friends and family members of Chinese government officials to win business in China.

When it comes to tech, CEOs are torn between playing ball with the Chinese government, making money, and forfeiting intellectual property or sitting out and losing a chunk of global market share. This is a conversation that has played out openly in board rooms and onstage at conferences for years now.

Back in 2017, at CNBC's Delivering Alpha conference in New York, Business Insider sat through one such talk with Jim Breyer, the billionaire CEO of Breyer Capital — a California venture-capital firm that was an early investor in tech giants like Facebook — and Tom Siebel, founder of software company C3 IoT.

During the talk, Siebel laid out the trade off tech companies had to make to get access to China's market. To him, there were too many.

We are not actually going into China, Siebel said. We are visited by a Chinese company every week, by State Grid, South China Grid, we were visited this week, by China Mobile and so we're kind of swarmed by the Chinese ... it is probably a third of the market opportunity globally as it relates to this space. But basically, what's going on in China, due to the mandates of the 12th and 13th five-year plan, and I know this is politically incorrect, but I don't offer political correctness, is a massive, state-sanctioned intellectual-property theft.

Breyer countered that the Chinese government's investment in achieving its goals in the technology space has led to some amazing investments for his firm. That, and the country's massive population, has made investing in China a must-do for US multinational corporations for years now.

These are not mutually exclusive statements. I am certain that is true, Seibel said.

That is to say, China has been a market too delicious to pass up, despite the the heavy hand of the CCP forcefully guiding US businesses.

However, the more China's economy closes off to Western ideas, and the more aggressive the country becomes about pushing its agenda on the world stage, the more tradeoffs there will be for American business to make.

The perfect example is Hollywood. For years, China was in violation of a 2007 World Trade Organization agreement because it refused to allow more than 20 US films into the country. After a deal cut in 2012, it allowed 34. In 2015 it promised to open up even more, but that came with strings. Back in 2015, the government laid out what those strings look like in a report called Directed by Hollywood, Edited by China.

From the report:

Hollywood relies on China's film market for revenue, but the process to get films into China is arduous due to strict and opaque regulation of film imports. China's regulations and processes for approving foreign films reflect the Chinese Communist Party's position that art, including film, is a method of social control.

As a result of these regulations, Hollywood filmmakers are required to cut out any scenes, dialogue, and themes that may be perceived as a slight to the Chinese government. With an eye toward distribution in China, American filmmakers increasingly edit films in anticipation of Chinese censors' many potential sensitivities.

In this way, the CCP doesn't need to ask to get its way on the silver screen. Hollywood will go ahead and do it for them.

Can we afford this anymore?

The question now is can American businesses continue to afford the tradeoffs they've been making to do business in China.

To understand how the relationship between China and the US works, it's better to look back before 1978 and Richard Nixon and Deng Xiaoping — even before Mao. It's better to look at the 19th century and early 20th century, when US forays into China were often at first welcomed and then met with violence.

China goes through these cycles of opening and closing again, Anne Stevenson-Yang, cofounder and research director of J Capital Research Ltd., a China-based investment advisory firm, said in an interview with Bloomberg Radio. 

It opens when the country needs cash, and that's what happened through the 1990s and the 2000s to date ... now the cost is getting higher than the benefit and so you'll see China closing again.

Consider for a moment that China may be closing before our eyes (as the numbers do in fact suggest). Welcome, then, not to a nation that is adapting to Western political norms but to Xi's China — a place where past politics are present and the struggle of the party is perpetual. In the current China, differing views are not to be tolerated domestically or as imports. The NBA could fire 100 general managers and it would never be enough to satisfy this aim.

Xi's China is one that is being attacked from all sides. In a speech to his cadres earlier this year, Xi said those attacks are political, ideological, economic, technological, social, and international threats, as well as those from within the party. And so he told the CCP to prepare for a worst-case situation.

These are not the words of a man willing to compromise or see both sides. In his worldview, any departure from his consensus — even from a random tweet — is part of a system that directly threatens his power. No amount of apologizing will change this mindset.

Groveling will not do you any better either. In fact, it will only make you a party to Xi's system of authoritarianism— another example of the West being brought to heel. There is no in-between. To avoid becoming tools of Xi's system, American companies need to show they have no fear of being thrown out of it.

This isn't the '90s anymore. Now we know the reality is that China is not here to trade values with corporate America, so corporate America shouldn't trade values with China either.


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