Starbucks enters Xinjiang in calculated geopolitical risk

Hi, this is Anniek, writing to you from Singapore. Welcome to the latest edition of The China Connection — a snapshot of what I’m seeing and hearing from local businesses.

Starbucks struck one of Asia’s most closely watched deals last year, selling a majority stake in its China business to a local private-equity firm. Now it is getting headaches at home over choices made by a partner that increasingly leans toward Beijing’s priorities.

Starbucks Corp has taken its green apron to Xinjiang, a region where Western governments accuse Beijing of widespread human-rights abuses and where the U.S. restricts imports over forced-labor concerns.

The opening of two stores in Urumqi shows how the Chinese private-equity firm that now controls Starbucks’ business in its second-largest market is willing to weather Washington’s anger.

Starbucks completed the sale of a 60% controlling stake in its China operations to Boyu Capital in April. The venture aims to grow from roughly 8,000 stores to as many as 20,000, and Xinjiang appears to be a bold, if controversial, first stop.

The U.S. House Select Committee on China called the decision “shocking and morally bankrupt” for “a company that prides itself on social responsibility” and demanded the stores close. Its chairman, Rep. John Moolenaar (R-Mich.), was blunt in that statement headlined “Starbucks Serves Up Venti-Sized Genocide.”

China’s Foreign Ministry rejected the criticism, calling U.S. claims of genocide “a blatant lie” and saying Xinjiang has emerged as a region of “social stability, economic prosperity, ethnic unity and religious harmony.” Beijing has long defended its security crackdown as necessary to counter terrorism and religious extremism, and denies allegations of “crimes against humanity” and ongoing repression.

Boyu — run by people who know China’s politics well — wouldn’t have missed the risk, said Ivy Yang, founder of Wavelet Strategy. “Boyu understands the sensitivity of Xinjiang as well as anyone,” she said. In her view, the decision shows the firm weighed Washington’s reaction and concluded that the domestic commercial opportunity mattered more.

The Hong Kong-based private-equity firm, co-founded by Alvin Jiang, a grandson of the late President Jiang Zemin, has long been seen as having close ties to China’s political elite.

Starbucks has been losing ground on price and speed to local rivals, Yang said, and a new owner who’s under pressure to deliver growth is likely to go where the stores aren’t yet.

Molly Liu, chief executive of Starbucks China, in a recent statement, pledged to keep investing in the region.