Disney’s “Mulan” was intended to be a big hit globally, particularly in mainland China, but the film’s troubles, and by extension Disney’s, would begin long before the film was ever released.
One of the first incidents was when lead actor Liu Yifei voiced support on social media for the Hong Kong police during the city’s pro-democracy protests. Then came numerous release delays and eventually a straight-to-streaming release in the United States due to the COVID-19 pandemic.
The latest incident was the revelation, in the film’s credits, that parts of the film were shot in Xinjiang, a province in China that has become notorious for being the region where Uighur Muslims — a Turkic-speaking ethnic minority — live under a brutal system of oppression and human rights abuses. In the credits the makers of the film also thank governmental bodies, including a police bureau that is on a U.S. government blacklist of Chinese organizations that American companies are not supposed to do business with. This led to the #BoycottMulan hashtag on social media with activists calling for a boycott of the film. The cumulative result of all this is that “Mulan” has become a major box office disappointment in China.
At the core of the “Mulan” controversy is a larger, more generalized dilemma that Disney is now faced with, one that many other companies that also do business in China similarly face: trying to balance significant business interests in the world’s second-largest economy with corporate image and reputational risk both at home and abroad (i.e. non-Chinese countries). Reputational risk — or the potential losses a company can incur due to damage to its reputation — is nothing new.
Some of the factors that companies now face in today’s business world, however, are in fact somewhat new. For instance, cancel culture is a relatively new phenomenon that companies now have to consider as part of their risk management. The other more recent development is how increasingly complex the political, ethical, and financial realities of doing business in China have become, to the point where it’s virtually impossible to cleanly navigate these complex realities. Observing how Disney chooses to move forward with this issue will be an important case study in how one of the biggest companies in the U.S. handles what will become an increasingly common problem for American companies.
Let’s start with why China represents such an important market for Disney and Hollywood in general. While it is overly simplistic to say that streaming has hurt Hollywood as a whole, it has certainly cut into cinema attendance, and there is no question that COVID-19 has been disastrous for movie theaters. As a result, studios are relying more than ever on international box office revenue, particularly in China, which represents a massive market. China, however, isn’t about to provide open access to that market without demanding a few things in return. For one, the Communist Party expects loyalty, overt or implicit, for businesses such as Disney that have entrenched interests there.
This puts Disney in the hot seat because U.S. lawmakers are watching the company’s response to the “Mulan” controversy, and for Disney there may be real consequences if they don’t respond in a way that’s deemed satisfactory. Their copyright for Mickey and Minnie Mouse, for instance, expires in early 2024 and it’s likely that Disney is lobbying Congress to pass legislation that will allow them to extend those copyrights. They would thus not want to be in the position of upsetting Congress.
Meanwhile, China will also be keeping keen eyes and ears on them. If Beijing does not like what they see or hear, that could have disastrous financial consequences for Disney since they have sizable business interests in China, including the Shanghai Disneyland theme park, digital joint ventures, and future movie releases, making this a much larger issue than about “Mulan” alone.
For Disney to maintain business privileges in China they must maintain something called a corporate social credit rating. Corporate social credit is a reputational tracking system that China uses to gauge how well individuals and companies are complying with their demands and expectations. Anything that the Chinese government considers as being disruptive of their social equanimity can result in deductions, and falling too low in credit ranking can result in getting blacklisted from doing business in China.
The problem is that what’s considered “disruptive” is kept ambiguous and is subject to the Chinese government’s whims. For Disney, getting on China’s bad side wouldn’t just mean losing the privilege of releasing movies there; it could also mean losing what they have already invested and built. Shanghai Disneyland, for example, is a joint venture between Disney and Shendi, a government-owned company. A wrong move by Disney from the Communist Party’s point of view could result in a legally sanctioned termination of the joint venture, with Disney forgoing any of its intellectual property in China and the latter inheriting full ownership.
Being watched by both the U.S. and Chinese governments, hence, puts Disney between a rock and a hard place. They could publicly denounce China’s human rights abuses, which may persuade U.S. lawmakers and the American public that they are serious about not being complicit in China’s human rights abuses, but they would risk losing a market that they essentially depend on. Or they could respond in a way that pleases the Chinese government but put their reputation at home at risk.
Realistically, they will probably not wish to stop doing business in China altogether, in which case they will have to find a way to not explicitly condone China’s policies and practices of oppression and, at the same time, not lose their corporate social credit rating. This is a tall order, to say the least. What they will need to do is conduct contingency planning for “black swan” events – unpredictable or unforeseen episodes that typically have extreme consequences. Those plans will need to envision worst-case scenarios with respect to both China and the U.S., and companies will need to decide what they are willing to risk, and then plan and act accordingly.
They should not wait too long to do this. The world is watching.