During the 2007 NBA All-Star Game, the player who received the most votes was neither Lebron James nor Kobe Bryant. It was Yao Ming, the hero of Chinese basketball and the first Chinese-born athlete to play successfully in the NBA. Yao entered the NBA as the number one draft pick of the Houston Rockets in 2002, and his success overseas has brought about a paradigm shift in Chinese basketball.

What are the forces now shaping the future of basketball in China, how are businesses positioning themselves in response, and what implications does this have for the Chinese government’s role in the sport?

Basketball has enjoyed a long history of popularity in China. The sport was invented in Springfield, Mass., in 1891 by James Naismith to promote his vision of “muscular Christianity” around the world. The following year, YMCA missionaries journeyed to Tianjin, China, carrying “The Thirteen Rules of Basketball.” By the 1920s, there were more foreign missionaries in China than anywhere else in the world; in 1935, basketball was declared a Chinese national pastime.

The Chinese government estimates that 300 million people currently play basketball in China, roughly the population of the U.S. The NBA reported in 2009 that 89% of Chinese people ages 15 to 54 are more aware of the NBA than of the World Table Tennis Championships, the European Champions League, and even the FIFA World Cup. China has become the NBA’s largest international market, and the NBA’s revenue in China is growing at a rate of 30% to 40% per year. Perhaps more importantly, the Chinese government views sports as a projection of soft power, as reflected in the concerted effort put into ensuring strong Chinese performances during the 2008 Beijing Summer Olympics.

With respect to basketball, Beijing’s primary concern is to raise the standing of the national team. To this end, every five years the China State General Sports Administration (Guojia Tiyu Zongju) — with input from the National Development and Reform Commission (Fagaiwei), the Administration of Industry and Commerce (Gongshan Guanliju), and the General Administration of Sport (Tiyu Zongju) — updates the “National Policy Framework.” This doctrine outlines the government’s long-term plan for national sports development. The government views basketball not only as recreation but also as a significant industry impacting both society and its commerce.

To protect this growing and “strategically important” industry, the government limits the activities of private enterprise within the country’s basketball industry. However, over the past few years, the government has gradually allowed corporations like Nike, Li-Ning, and the NBA to play an increasingly greater role in developing the market and the basketball talent.These decisions have broad social and economic implications and serve as an indicator of China’s controlled and piecemeal privatization.

A Reward for Good Grades

With insufficient commercial incentives to develop players and lukewarm government interest in collaborating to grow basketball as a sport, sports-apparel companies operating in China have focused primarily on the low-hanging fruit: peripheral businesses such as retail and entertainment. Identifying China as a key market and the popularity of basketball as a conduit to the largest youth population in the world, Nike moved quickly to support local basketball and to build its brand in China. The company sponsored the Chinese Basketball Association (CBA), China’s first professional basketball league, upon its founding in 1995, paying $2.5 million to outfit all eight teams over the first four years of the competition.

 Beyond the apparel sponsorships and basketball camps, Nike has done little to develop Chinese basketball talent. The company is focused ultimately on growing mass-market demand for its products rather than raising the level of play. After Yao Ming elevated awareness of basketball in China, Nike no longer needed to rely on local stars to market its products and has successfully built ubiquitous recognition of its Western star-studded sponsorship portfolio among Chinese consumers. The most popular sneakers in China are not Yao’s or Yi Jianlian’s, but rather Los Angeles Laker Kobe Bryant’s “Kobe V” and Boston Celtic Kevin Garnett’s “Kevin.”

William Haitink, general manager of Nike China, credits the company’s relationships with top-flight stars as a primary pillar of its brand prominence in China today. As he noted: “We leverage our unchallenged sports marketing portfolio with athletes that only Nike has — Kobe, Lebron, Jordan.”  Nike has marketed itself as a lifestyle brand in China that represents not just basketball, but also youth, energy, and style. According to Terry Rhoads, a former marketing executive for Nike China, sneakers have become a common reward for Chinese students when they perform well on exams. Adolescents who spend more time studying are, therefore, able to afford the high-end Nike shoes. More serious basketball players, without the support of their parents, are often able to purchase only the lower-end products.

Li-Ning, founded in 1990, is China’s largest domestic sportswear apparel company. It utilizes a brand development strategy similar to Nike’s and, in the last two years, has signed two-time NBA All-Star Baron Davis and 2010 second overall NBA draft pick Evan Turner. While it does not have top-flight stars like those in Nike’s portfolio, Li-Ning’s lucrative marketing contracts have created a buzz among NBA agents looking for endorsements. This heightened interest is likely to help the company secure future sponsorships with even more recognizable athletes. Like Nike, Li-Ning leverages its endorsements primarily to grow its retail brand rather than to develop the sport of basketball. It appears that Chinese sports-apparel companies do not need “another Yao” to sell shoes.

The NBA in China

The internationalization of basketball over the past two decades and the allure of 300 million basketball players ultimately led the NBA to China. According to David Yan, vice-president of business development and marketing partnerships for NBA China, “Today, NBA programming airs on 51 stations. It reached more than 1 billion viewers last season and we are on pace to break that record again this season.” However, China was not as welcoming when NBA Commissioner, David Stern first arrived in China in the late 1980s, offering free basketball programming to the state-run television monopoly. No one at CCTV headquarters even knew who he was. Relations have improved dramatically over the past 20 years, and the NBA’s strategy since then has been to grow the sport of basketball through a series of exhibition games, promotional tours, and coaching clinics. The NBA has taken a slow and considered approach in navigating the Chinese market and government, which not only controls broadcasting but also directly controls China’s professional league.

Both the NBA and the government want basketball to succeed in China, but for different reasons. The government views basketball as a projection of national ambition and, given the significant captive audience, as a means of maintaining social harmony. The NBA wants to capitalize on the sizable business opportunities in China, capturing the full array of basketball-related revenue streams it has in the United States, which includes television broadcasts, digital media, merchandising, events, and games.

The NBA has long-held ambitions of creating an NBA-affiliated league in China. According to Deputy Commissioner Adam Silver, the NBA is continuing its discussions with the CBA but has offered no specific timetable. However, such a league would represent competition to the CBA and challenge the government’s control of the development of basketball in China. As Tim Chen, CEO of NBA China, put it, “It is critical because we (the NBA and CBA) both have to do well to succeed.” Consequently, the NBA-CBA relationship to date has involved mainly coaching and player-development programs as both sides seek to strengthen their business relationships. For now, because the development of an NBA league in China is impossible, the NBA is focused on expanding every other aspect of its business model there, while ensuring that all its initiatives are aligned with the government’s goals.

In January 2008, the NBA established the entity NBA China, an affiliate with local operations and management. Since then, NBA China has built its business aggressively through a broad media play, along with sponsorships, promotions, events  and an arena-management venture. NBA China now represents half of the NBA’s international sales, and annual revenue is estimated at around $150 million to $170 million. Since 2008, sales have grown at double-digit rates annually, and the business has expanded to over 150 people with offices in Beijing, Shanghai, Hong Kong, and Taipei.

While the NBA continues to broaden its appeal, several social and policy issues are limiting the full potential of basketball in China. The current identification and selection process of prospective athletes limits talent development among Chinese basketball players to those few children who the government predicts will be exceptionally tall. In addition, the Chinese education administration is structured in a way that precludes massive adoption of extracurricular activities such as athletics. Finally, infrastructure to support professional basketball development is largely undeveloped in China and is one of the main reasons for NBA China’s venture into the arena-management business.

The current process for selecting athletes in China is very different from that found in Western countries. The Chinese government has adopted the Soviet “womb-to-tomb” model, identifying potential athletes at an early age and sending these children to specific training schools where their athletic development is as important as their academic performance. This model is intended to harness China’s competitive advantages in sports — a large population and the increased control that comes with treating sports as a profession from an early age. The schools employ a strict, drill-based approach. Many Chinese families, particularly low-income households attracted by the potential for stable government jobs for themselves and guaranteed health care and education for their children, enthusiastically pursue professional athletic careers for their offspring.

Yet the Chinese training and selection process is still lacking, according to a former professional Chinese basketball player who now coaches at the elementary level in a government-run athletic academy in Guangzhou. According to a coach, who wished to remain anonymous, the attempted identification of talent at such an early age is an insufficient predictor of future basketball performance. In roughly half the annual enrollments, the selection process is still influenced by relationships — guan xi —rather than talent. As a result, children of parents with government connections are overrepresented within the system.

Further limiting the development of young Chinese basketball players is the lack of talent-development opportunities outside the government-run sports education system. Many Chinese coaches feel that the player-development network in the U.S., from the NJB youth leagues to the NCAA, produces a far superior talent pool. While some express an interest in emulating the Western school-based system, they still believe the government will remain the primary force driving Chinese basketball for the foreseeable future.

Finally, most children in China have one chance to improve their future socioeconomic standing: by doing well on the gao kao, China’s college placement exam. The education system and the test-based college-admissions process exacerbate the obsessive focus on academic preparation. Primary-school students are known to have full schedules teeming with extracurricular tutoring in English, advanced mathematics, and Chinese literature. Sports, including basketball, while viewed positively in a physical-fitness context, are considered secondary to academics.

Further adding to the pressure on Chinese students is the “one-child policy” the Chinese government enacted in 1978. Culturally, with limited social safety nets, Chinese children are expected to provide for their parents. The “one-child policy” pressures children to pursue lower-risk careers in government and business rather than pursuits of passion such as basketball. Rhoads believes these two effects have resulted in a bottleneck in developing talented athletes in China. Without athletics in the education system, children do not have as much time to experience competition and develop “game IQ,” something that cannot be taught through precision drilling.

Founding of the CBA

Modeled after the NBA, the CBA is “basketball with Chinese characteristics.” Brian Goorjian, head coach of the Dongguan Leopards (a basketball team in the CBA’s south division) and a previous advisor to the Chinese National Team, describes this different culture as “full-on, full-time professionalism,” where the coach has complete control over the team. The style of play is also very different, with a heavy emphasis on practice-makes-perfect perimeter shooting. Former Newsweek writer and Yao biographer Brook Larmer describes the players of the early CBA as “Soviet-era automatons performing out of a somber sense of duty.”

Despite the efforts of the Chinese government, basketball in China has many hurdles to overcome before it can be competitive on both the professional and international levels. Traditionally, the Chinese National Team has done well against its Asian counterparts, but has only recently become competitive vis-à-vis Western teams. Furthermore, since the late 1970s, the Chinese team has never ranked better than eighth in either the Olympics or the FIFA World Championships. Recent results have not been encouraging. China lost (70-52) to Iran, a country not known for its basketball prowess, in the finals of the Asian Men’s Basketball Championship in 2009, a serious loss of face for the host country and the first time China had ever lost a gold-medal game in FIBA Asia Championship’s history.

The CBA is struggling to stay relevant in its own market as it faces overwhelming competition from the NBA. Many Chinese fans prefer to watch the NBA, as they find the style of play faster, more athletic, and, most importantly, more entertaining. To elevate the level of play, in 2007 the CBA raised the limit on the number of foreign players per team from one to two. Because these changes caused operating costs to skyrocket during the 2008-2009 season, the league took a loss of 115 million RMB (approximately US$17 million). In addition, the rules have made evident the lag in talent development: The two foreign players per team have dominated, such that former Dallas Maverick Zhang Yiyi was the only Chinese player during the 2009-10 season to place among the top 20 scorers in the league.

In addition to cultivating competitive domestic talent, another hurdle in developing basketball in China is the lack of infrastructure. While the government has committed to building 800,000 courts across the country, these primitive playgrounds fall far short of the modern arenas required to attract fan attendance and publicity. Commissioner Stern has cited the lack of sufficient facilities as one barrier to the NBA being more active in China. A survey conducted by China’s General Administration of Sport in 2004 found that only 8% of sporting venues were located in villages and towns, highlighting the concentration of resources in urban areas. The Chinese government has taken note and is investing in more facilities, partly by cooperating with foreign entities, such as a partnership with the NBA and AEG.

The Government Opens Up

Faced with a chronic shortage of sports funding and the consistently weak performances of Team China, Beijing over the last 10 years has slowly opened basketball to outside influences, in much the same way it has opened other strategic industries to foreign investment. The challenges facing the development of competitive Chinese national basketball teams came to a head in 1997. Team China failed to qualify for FIBA and, along with the youth squads, was soundly defeated in a series of world basketball competitions. In response, Beijing called a National Basketball Conference in 1999, which resolved to “learn from other countries and transfer their experience of developing professional basketball to our own situation.”

In 2003, Li Yuanwei, the new director of the China Basketball Management Center (CBMC), China’s governing body for basketball, traveled to the U.S. to learn about the NBA and NCAA systems. He used that knowledge to implement the “CBA 10-year Reform Project 2005-2014,” in hopes of turning the CBA into the second-largest professional basketball league in the world and breaking into the top three rankings for the women’s team and the top six rankings for the men’s team at the 2008 Olympic Games. Neither team achieved these targets.

After placing 8th at the Olympics and 15th in the last FIBA World Championship (2006) and failing to place in the top three in the East Asian Games (2009), Beijing recognized the need for more international experience in its coaching ranks. The national team, led by American coach Del Harris in the 2004 Olympics and by Guo Shiqiang in 2008, returned in 2009 to an American head coach, Bob Donewald, Jr. Donewald was hired after leading the Shanghai Sharks to the final four of the domestic league in his first season in 2009, the first time Shanghai had qualified for the semifinals in eight years.

Can foreign enterprise begin to move into the more strategic and sensitive areas of basketball? In addition to its media business, one of NBA China’s notable recent business initiatives has been its joint venture with AEG to develop and manage arenas throughout the country. It is a move that Commissioner Stern sees as a way to further enhance the NBA’s business in China and provide the necessary facilities to offer NBA-quality events. The Chinese, by and large, welcome the involvement of foreign basketball corporations. A Guangzhou government basketball coach noted that the Chinese basketball community is impressed with the NBA’s commitment to the development of the Chinese market, citing the NBA’s decision to import the same floorboards used in U.S. arenas for newly constructed Chinese stadiums to ensure international-level quality.

NBA China was established with five strategic investors purchasing a combined stake of 11% of the company for $253 million, valuing the business at $2.3 billion. Among the investors are a number of influential Chinese organizations, including Bank of China, Legend Holdings, Li Ka Shing Corporation, and China Merchant Investments. The NBA recognizes that its success in China depends on the alignment of its goals with those of the government.

Three years may be a short window from which to draw any definitive conclusions, but the proliferation of media and sponsorship deals, the steady increase in fan interest, and the increasing sales of Kobe Bryant jerseys signal the NBA’s growing influence. While few question the NBA’s strategy, many experts in China believe the prospect of an NBA-affiliated league is important for accelerating long-term growth. As Rhoads observed, “Media-wise, NBA China is doing a wonderful job, but to really capture a large fan base and more sponsors, the NBA [must] have more live programming….  Having a few exhibition games is not the answer because all it does is whet the appetite. How the NBA gets involved is the big question.”

According to Tim Chen, CEO of NBA China, “[a partnership] is something that we have discussed with the CBA and talks are ongoing. It’s not clear whether it could be a co-branded league or whether [a partnership] manifests itself with a tournament or a series of tournaments. It is in the future, but not in the immediate plans.” Investors such as Yao already own and manage individual CBA teams, although the league itself remains state-run. In 2010, American Kenny Huang invested in the alternative China National Basketball League (CNBL), observing, “This is the first time private enterprise has been given the chance to reform a Chinese league.” Huang is excited by the prospect of introducing management practices from successful overseas leagues. His company will co-manage the league with the CBA. The league hopes to become more market-responsive than the CBA and more focused on local talent development.

The Chinese basketball authorities, previously fearing that players who go abroad will never return, now encourage players to get overseas experience. In 1999, Beijing forbade Wang Zhizhi leave to play in the NBA. But five Chinese players had played in the NBA by 2009, all of whom had trained at the United States Basketball Academy before being drafted. In addition, increasing numbers of Chinese players have been recruited into the NCAA as China looks to raise its level of international competitiveness. In 2006, China signed a contract with ISM, the exclusive global marketing partner for China’s national basketball teams, to increase competition opportunities to 30 friendly international matches per year against American and European opponents.

Transitioning basketball in China from a planned Soviet-style system to a commercialized mass sport will take time, but even the stickiest social factors are changing. The rags-to-riches tales that attract many young basketball players also make basketball more palatable to their academically focused parents. Yao has signed two contracts with the Houston Rockets worth a total of $94 million since 2002. His sponsorship deals are now worth $150 million. When his life is compared with the hard, monotonous lives of professional athletes in earlier eras, a chance at professional basketball suddenly seems worth seeking. Sponsorships from private enterprises such as Nike enable schools to establish recreational leagues, widening the “talent bottleneck” Rhoads described.

Will these changes lead to the development of another Yao? Goorjian, the leading candidate to coach the Chinese national team during the 2010-2011 season, believes the level of play is improving swiftly. “It seems to me … that this is the number one team sport…. We have European and American influences coming in here, as coaches, as camps. They’re flying kids to the States, they’re flying kids to Australia…. [N]aturally you’re going to start seeing some benefits from those programs. In the last five years, I’ve seen a huge change in the development of Chinese players. The Chinese are getting experience from outside and taking it seriously.”

Perhaps Yao was only a catalyst for the acceleration of basketball’s export to China, and going forward, organic growth in basketball interest will generate revenues even without more Chinese superstars. The private-sector commitment to the sport is finally converging with a rapid relinquishment of government control. One can only wait and see if world-class basketball remains a spectator sport or becomes a sovereign national passion in China, and if the transition to “basketball with Chinese characteristics” will prove successful.

This article was written by Fay Bou, David Chen, Sarah Guo, Frank Han and Mark Liao, members of the Lauder Class of 2012.