How can foreign companies enter China successfully


Published on

This report may bring you great value if your company is planning to enter or further develop in China: include case studies of companies which entered the Chinese market (AT&T, KFC...); success stories, failure stories; Do's & Don'ts to succeed in China from a corporate point of view, Hope it helps! Just let me know: (realized at Insead during 'Strategies for Asia Pacific' curriculum)

Published in: Business
1 Comment
  • actually,for brand building, using internet marketing and social media marketing you can build brands for all kinds of products much more effectively and economically.

    The Thing is, almost all these shoppers will use internet on their mobile and at home/university/work. On wich they spend a lot of time looking at products, blogs, weibo messages etc. Having good references there and a strong website is, in my opinion the most effective method.

    For more information about this;
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

How can foreign companies enter China successfully

  1. 1. Strategies for Asia Pacific STRATEGIES FOR ASIA PACIFIC How can foreign companies enter China successfully? Alfonso Abella Antonio Bellver Cedric Page 1 of 20
  2. 2. Strategies for Asia PacificINTRODUCTIONOur case study consists in the analysis of the reasons why companies succeed in enteringthe Chinese domestic market and why other players fail to reach profitability.We began by analyzing multiple cases of MNCs entering China (KFC, AT&T, Carlsberg,Peugeot, Lion Nathan, Jeep, P&G, McDonalds, Volkswagen, Ahold) and derived themain characteristics of the Chinese market (section I), which should be taken into accountby foreign companies before entering this unique market.In section II, we present and analyze KFCs case as an example of success history inChina. This is followed by two cases of companies (Beijing Jeep and AT&T) thatstruggled in their Chinese operations (section III). With these mini-cases, we intend tounderstand the reasons of success and failures of different companies.Finally, we conclude with what, in view of our analysis and conclusions presentedthroughout the document, should be the success model for foreign companies in China(section IV). To wrap up, we end up with the DOs and DONTs for the success of foreigncompanies in China (section V).I. EIGHT REALITIES ABOUT THE CHINESE MARKETThere are eight characteristics that make China a unique market and that any firm tryingto enter it should take into account:1. China is not a single large market, but many smaller, dissimilar marketsDisposable income varies significantly from one province to another and ~65% of thepopulation lives in rural areas:Figure 1: Income distribution among different Chinese provinces Per Capita Disposable Income (RMB, 2000) Shenzhen 20.240 Guangzhou 13.967 Shanghai 11.718 Average Urban 6.280 Average Rural 2.253 Rural Henan 1.986 GDP (RMB bn) 500 and up Rural Shaanxi 1.444 400-499 300-199 Rural Guizhou 1.374 100-199 0-99 Only 36% of China’s population live in urban areas Source: China Statistical Yearbook; Economic Research Unit/USDA; Economist Intelligence Unit; BCG data baseIn most cases, Chinese companies have their own branch company in each province / citywith separate management control, e.g. Bank of China in Shanghai and Beijing are Page 2 of 20
  3. 3. Strategies for Asia Pacificentirely separate operations. Provincial power is often greater than at headquarters,branches run their own operations and P&Ls and headquarters is usually limited tosetting policies.As an illustration, we can quote Tex Gunning, president of Unilever Bestfoods Asia:“Foreigners still think they can tackle China in one go, when they would never start in 17countries in Europe at once.”2. Many MNCs have shown that entering China is not difficult, but making moneyis very toughThe evolution of MNCs in China presents some similarities in the first stages of theirChinese adventure: entry, some initial success (due to the acquisition of the most valuablecustomers and the focus on main cities), broader ambitious to become market leaders andheavy losses as a result of the sustained investments. Finally, some companies manage tobecome profitable (we analyze the reasons of their success below using the KFC case),while others remain losing money or performing poorly (analyzed based on Beijing Jeepand AT&T cases).Only 41% of MNCs operations in China are profitable, while 34% of them are reported tolose money. The result is shown in the graph below:Figure 2: MNCs performance and profitability in their Chinese operationsProfitability Long term Survey: Profitability of China Operations profitable Some initial success growth with • Skim of most new business % 100 valuable customers 25 Unprofitable • Focused on top 34 38 cities 75 Broadened 25 Break Even ambitions to become a Time 25 market leader 50 24 Entry into Profitable China 25 50 41 38 0 Overall Manufacturing Services Heavy losses Remain in Loss resulting from the trap sustained Source: China Profitability Survey; BCG database investments3. Long term commitment is key as payouts are rare in the short termChina is a very demanding market and payouts are mostly long term. Research showsthat 50% of the companies that invest in China expect profitability only in the long term.And firms that do not know the Chinese market underestimate the investments needed toenter the market. Page 3 of 20
  4. 4. Strategies for Asia PacificFigure 3: Companies expected profitability and investments in the Chinese market 50% companies expect profitability from China Firms not yet in China underestimate investments only in long-term investment Expectation of Investment Profitability In China Not yet in China 15 % 60 56 50 5 50 21 44 4 56 9 2 40 74 31 32 7 29 30 7 20 14 13 11 9 8 Up to 5% 6-10% 10 3 11 - 15% 16 – 20% > 20% 0 < 3 years 3-4 years 5-6 years > 7 years Overall Already in China Not yet in China Investment As % Of Annual Revenue Needed Source: Deloitte Touche Tomatsu 2002 survey; Access Asia; Lit Search; Company websites; BCG database4. Joint ventures are not the golden solution and often entail more problems thanthe benefits they provideMany MNCs have relied on Joint Ventures with local companies to help them in theirChinese operations. In other cases, regulatory issues forced many foreign companies toseek local JVs partners to enter the market.Many MNCs have found the JVs difficult to Figure 4: WOFE vs. JV profitabilitymanage due to the lack of control, different Wholly Owned Foreign Enterprises are more profitable than Joint Venturesmotivations and incentives, wildly differentexpectations and partners assigned by Wholly Owned Joint Ventures Foreign Enterprisesgovernment influence rather than throughcommercial sense. Profitable Unprofitable 38% 42%In case of JVs, partner selection is critical. For 62% 58%example, Volkswagen success is due in part toits partner, SAIC, one of the best industrialpartners in the country. On the other hand, 2.3 years Time to break even 3.2 yearsdifficulties with their partners led Unilever and 2.6 years Original expectation 2.9 yearsBass to give up ownership to local partners. Shorter Longer Source: China Profitability Survey; Lit Search; BCG DBAs shown in the graph above, the percentage of profitable cases is greater for whollyowned foreign enterprises than for JVs (~60% of WOFEs are reported profitable versusthe ~40% of JVs) and the time to break even is longer in JVs operations.5. Transition to local execution is vital to sustainable successThe Chinese market is unique and it is difficult to compete against local firms withoutadapting operations to local execution: Page 4 of 20
  5. 5. Strategies for Asia Pacific ‚ Local cost structure: on average, local firms present lower costs than foreign companies mainly due to production costs (local labor is much cheaper) and material costs (local suppliers prices are more competitive). The cost advantage of local firms can be up to ~35% compared to foreign companies. ‚ Targeted products: Chinese needs and tastes differ from those abroad. Therefore, it is crucial for foreign firms to develop products targeted to the local market. Success examples present products specifically developed for China: Coca Cola introduced drinks adapted to Chinese tastes, Volkswagen adopted mature models to target key Chinese segments and McDonalds / KFC adapted menus to local tastes and targeted stores to kids. As we will see below, one of the reasons for Beijing Jeep’s failure was its inability to adapt its products to the local needs and tastes. ‚ Staged localized management: it is important to build a team of local executives who know the business environment and competition (e.g. for Motorola over 75% of employees and 25% of managers are Chinese).6. Regulatory issues are a key considerationAlthough China entered the WTO at the end of 2001, there are a lot of Governmentregulations in different industries to be considered when entering the Chinese market. Agood relationship with the authorities is key for the success of foreign companies. Closecooperation with the government and demonstration of goodwill can be of great help forMNCs entering China.American International Group (AIG) has taken advantage of the close relation of itsformer chairman, Maurice Greenberg, with Zhu Rongji and Jiang Zemin. Becoming thefirst foreign company granted licenses to operate in 4 major cities such as Beijing,Suzhou, Dongguan and Jiangmen.As a counter example, Carrefour failed to seek approval from central government beforeopening new stores in China. As a result, Carrefour was forced to sell several stores andits CEO had to issue a formal apology while its senior executives pledged to respectgovernment authority in the future.7. Chinese management decisions are complexIt is difficult to predict the behavior of Chinese companies as in many cases the financialrationale is not dominant: ‚ Goals and strategy: many Chinese firms have some state ownership, leading to multiple conflicting goals (state policy versus business objectives) and lack of strategic discipline. ‚ Organization: Chinese firms present a complicated organizational structure, with a weak corporate center and lack of appropriate management responsibilities. Processes are not often institutionalized. ‚ People and culture: employees have little autonomy and there are few mechanisms in place to evaluate, motivate and develop staff. Page 5 of 20
  6. 6. Strategies for Asia Pacific ‚ Leadership: it is difficult to balance the diverse demands of key stakeholders, which generates the inability to make quick decisions. Moreover, decisions are not often driven by financial rationales.8. Local competitors are fierce and rise very quicklyForeign firms can expect fierce competition from local companies in many industries.China is the leading global producer and exporter of many products, as shown in thegraph below:Figure 5: Chinese leading global producers 20% China 70%export/Worldconsumption Clocks & Watches (% volume) 30% Leading global Bicycles producer 15% Apparel Toys 10% DVD players Motorcycles Air Leather shoes conditioners Mobile phones 5% Refrigerators TV Furniture(1) Semi- Washing machines Medical conductors(1) equipment Synthetic Steel Wheat Rice Cement Passenger cars Rubber Oil 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% China consumption /World consumption Source: China statistics yearbook, China economy statistics yearbook, World economy (% volume) statistics yearbook, Press search, BCG databaseFurthermore, local competitors rise very quickly. Lets look at some relevant examples: ‚ Haier: leading player in many white goods segments globally. Fast development form SOE refrigerator manufacturer to large white goods firm, implementing Western business practices, high service and good quality. ‚ China Mobile: evolved from nowhere to Chinas largest mobile operator with the worlds largest subscriber base (~150 million). Self-funded subsidiaries in 18 provinces. ‚ Huawei: Chinese reseller of imported telecom equipment is expanding to compete in the global markets (Europe and US). Its competitive advantage is based on low R&D and product costs, high reputation and partners in the local markets. Page 6 of 20
  7. 7. Strategies for Asia PacificII. SUCCESS STORY: the KFC caseKentucky Fried Chicken (KFC) is one of the largest fast food chains inthe world. Together with Pizza Hut and Taco Bell, it is one of the mostsuccessful brands of the YUM group. Since it was created in the early1930’s in the Southern USA, KFC has been rapidly expanding throughthe use of franchising. After the company was sold to the Americangiant, Hubelin International in 1974, KFC received increasing supportto develop its overseas activity and began its operations in newemerging markets of Latin America and Asia.KFC entered China in the early eighties after several successful experiences in otherAsian countries, notably Japan, Malaysia, Singapore and Philippines, and also in India.These previous contact with Asian culture allowed KFC to understand some of thecultural differences and adapt their strategy to the local market. The first two outletsopened in Beijing in 1987. Today KFC has more than 1,200 outlets all around China (80of them in Beijing), representing the biggest market for a YUM brand after the USA.Although KFC entered firstly in the regions with highest GDP per capita (see Figure 1),its business model has also been successful in poorer areas of China.Following the analysis of the case, the factors that lead to the success of KFC are relatedto three main issues: the partnership with local companies, the adaptation to the culturalspecificities and the good relationships with the government.Join-ventures with local partnersPrior to its expansion in China, KFC management acquired solid experience in emergingmarkets and contemplated financial risks as one of the major threats. In these previouscases, KFC had often chosen the franchising alternative in order to minimize the financialrisk of the venture. However, this business model was not an option in China given thestrict foreign investment laws. As a result, KFC decided to enter the Chinese market inpartnerships with local companies, following a 55/45 agreement (KFC dominatingposition).Like most of the western companies entering China (see Figure 3), KFC contemplatedthis new market as a long-term opportunity. However, in many cases KFC had to facepotential partners that were only interested in short term benefits. Therefore, KFC had toclosely monitor their partners as they rarely comply with the corporate standards and thestrategic plans of the company. During its expansion process, finding equilibriumbetween corporate control and cultural sensitivity was one of the main concerns for KFCmanagement. The choice of talented partners and employees has been a key factor for thesuccess of KFC’s expansion in China: KFC is very strict in the selection process andtargets partners that can demonstrate a track record of excellence and ethic behavior.KFC also takes into account the contribution that the partners can make to KFC’s valuechain and how it fulfils the strategic needs of the food chain in China. Page 7 of 20
  8. 8. Strategies for Asia PacificMain added value of the partnership in each step of the value chain:Figure 6: KFCs value chain and value added R&D Supply Logistics Manufacturing Sales • Market place • Access to good • Acces to • Advertising and expertise quality poultry distribution promotions channelsKFC was prudent in its expansion strategy and did not take the risk of directlyundertaking huge investments. It rather started with a limited number of partnerships,learning from these experiences and after that, expanding gradually using theaccumulated knowledge and the value-added of the partnerships.Cultural fit and local executionKFC has taken into account the local characteristics of the Chinese market. Since itsarrival to Beijing, KFC adapted its menu and offered Traditional Pekin Chicken roll andthe possibility of replacing the French-fries by rice. A few years later, KFC introducedpreserved sichuan pickle and shredded pork soup in the menu as well. Although stillconsidered as a foreign restaurant, Chinese customers appreciated the respect for theirtraditional food. Besides some “exotic” dishes, the menu also presented some commonoptions that allowed KFC to enter the day-to-day life of the Chinese people.The Asian “taste” was also reflected in the structure of the facilities and the restaurants,where the functionality and the effectiveness were the main priorities.Concerning the prices, the foreign origin of the restaurant allowed to charge a smallpremium over the standard price of food (around 10-12 yuan per menu). Nevertheless,prices had to remain affordable and coherent with the standards of life (which could varyin the different regions of China).KFC outperformed in the inter-cultural management by combining the precise dose ofwestern values (American way of life, freedom, efficiency, individualism, property,democracy) with pure Chinese cultural elements. This harmony is partly derived from therelationship between KFC and its partners. KFC granted its partners a high degree ofautonomy in tactical decisions, while maintaining a tight control of the long termobjectives.Relationships with the GovernmentThe modernization of the agriculture and the food industry, particularly that related to thepoultry, was a priority for the government of China during the eighties. When KFCarrived, it was one of the first fast-food chains and there was still a huge lack of thesekind of services in China. Therefore, the government considered that the company wouldbe beneficial for the Nation. KFC developed solid links with Tianjin government andBeijing. This allowed KFC to easily overcome the bureaucratic process and have the Page 8 of 20
  9. 9. Strategies for Asia Pacificadequate support to expand its activity. As it will be later reflected in Figure 7, anadequate relationship with the government will be one of the key factors to develop theorganization structure in China. For this purpose, the first mover advantage played a keyrole in the success of KFC.KFC chose some partners with solid connections with the local officials, which facilitatedthe red tape at a different layer of power. Furthermore, the local knowledge of thelanguage, the culture, the geography and the different administrative mechanisms alsohelped to accelerate the establishment of new outlets. Page 9 of 20
  10. 10. Strategies for Asia PacificIII. STRUGGLE STORIES: the Beijing Jeep and AT&T casesCarl Crow, an American who marketed pharmaceuticals for foreign firms in Shanghaibetween the two world wars, wrote in his 1937 book “400 Million Customers”: “Nomatter what you may be selling, your business in China should be enormous, if theChinese who should buy your goods would only do so.” Actually, the Chinese never didand in his 25 years there, Crows agency failed to launch a single successful product.This story seems quiet representative for different industries trying to tap into the Chinesemarket. Indeed, some of the leading brewers (e.g. Carlsberg, as analyzed in class), carmanufacturers (e.g. Beijing Jeep), and telecom players (e.g. AT&T) have investedhundreds of millions of dollars in China in 1990s and are still waiting for decent returnsor struggling hard to maintain their once profitable operations.On the other hand, we can notice that several foreign players who have consistently donewell in China have ignored China’s domestic market and have concentrated on China as acheap base for manufacturing.We will infer from these two cases, some main reasons keeping foreign companies fromgenerating acceptable returns in China.These two cases are different in the conditions they relate to. In the Beijing Jeep’sinstance, several elements in the firm-level condition (the partner fit) mainly explainedthe company’s failure, while in AT&T case, the macro-level and industry-level played abigger role in the firm’s weak performance.1. Beijing Jeep: When failing to plan means planning to failWhat happened?In 1979, American Motor Corporation (AMC) began negotiations with the ChineseNational Association of Industry and Commerce (CNAIC). Four years later, in 1983,China’s first car manufacturer Joint-Venture was established: AMC detained 31% of theshares, while Beijing Automobile Works (BAW) had 69% of them.In 1985, the first jeeps were produced and ten years later, Beijing Jeep manufacturedabout 32,000 vehicles, its record sales volume and became a cash cow. Based on thissuccess, Beijing Jeep decided to increase its investments into the Chinese market to totalaround USD 400 million.Chrysler took over in 1987 and Beijing Jeeps were still leading the emerging sport utilityvehicle (SUV) market in China.However, the competition from Volkswagen and other new entrants in the Chinesemarket, coupled with the new official car sourcing policy from the Beijing government –i.e. the state would no longer mandate purchases of Cherokee models – brought an end tothis early success. Eventually, aforementioned key problems and internal issues soon Page 10 of 20
  11. 11. Strategies for Asia Pacificbecame overwhelming and Beijing Jeep sales declined to bring the company to losses in1998. Then, the company consistently recorded heavy losses from 1998 to 2002.Difficulties in getting foreign currency to purchase imported parts resulted in idleproduction. Moreover, the quality of the manufactured Jeeps was often feeble. Finally,costs skyrocketed and the production of the limited product offering (only two models)plummeted.In 2005, Chrysler brand cars, including the Beijing Jeep, sold around 30,000 vehicles inChina. Today, DaimlerChrysler is apparently in talks with several Chinese carmanufacturers about building a new compact car in China. The German automotive giantalso plans heavy investments in non-SUV vehicles – e.g. Mercedes-Benz sedans andlight-duty commercial vehicle.Analysis: Why Beijing Jeep failed?As an industry commentator puts it: “Things went sour at Beijing Jeep because there wasnever a plan. Chrysler took in armfuls of profits each year, with no thought of brandbuilding, distribution or customer service.”1 This quote suggests that AMC was lookingfor short-term profit maximization, which seems to contradict the aforementioned (Figure3) long-term prospect required to tap into such a large market.The lack of business planning and Chinese “ecosystem” analysis from AMC managementled Beijing Jeep to the bottom. We can argue that, according to the Entry Decisionframework, several items on the Macro-level, Industry-level, and Firm-level conditionscould have helped AMC management to foresee the weaknesses of such entry strategy.Omitting to conduct this kind of analysis actually prevented AMC executives fromforeseeing these roadblocks, resulted in management mistakes and wrong focus,eventually entailing Beijing Jeep’s failure. ‚ Macro-level conditions: AMC biggest mistake on this level was to overestimate the purchasing power of the urban middle class. Basically, Cherokee’s price was unaffordable for them. ‚ Industry-level conditions: AMC underestimated the local competition. On one hand, numerous domestic firms copied products and manufactured them more cheaply. On the other hand, new entrants increased the competitive pressure in the market. ‚ Firm-level conditions: this condition is the most important in the Beijing Jeep’s instance. The different fits between the two partners were relatively poor, also confirming that the Joint Venture’s path might not always be the golden solution (see Figure 4 above):1 “What happened to Beijing Jeep?”, October 23, 2000. The Page 11 of 20
  12. 12. Strategies for Asia Pacific Chinese Partner (BAW) American Partner (AMC) ̇ Clear willingness of a quick access to new ̇ Motivation to be the first to technology enter a huge (“unlimited”) market ̇ Government pressure to acquire know-how from foreign companies in strategic ̇ Lack of clear plan: short-term Strategic Fit industries profit maximization vs. long- term investment to tap into ̇ Government mandates, each part sourced this huge promising market? from several different suppliers, affecting quality ̇ Lack of automation leading to consistency Capabilities fit problems ̇ Profits and management time spent on ̇ Maximization of profits and workers’ housing and social needs shareholder value Cultural Fit ̇ Acceptability level of quality: low ̇ Acceptability level of quality: highThese discrepancies quickly resulted in Beijing Jeep’s management inability to overcomelocal manufacturing issues.Finally, beyond the Entry Decision framework, it is important to note that Beijing Jeepfailed to meet market changes and adapt its value proposition to the local market (seeFigure 7 below). After more than 15 years, original Cherokee design was unable tocompete with the one of newer models (e.g. the VW Santanas) and, as stated above, theproduct range remained limited. This post-entry weakness also played a role in BeijingJeep’s low performance.2. AT&T: Sky is not the limitWhat happened?AT&T, the US telecom giant started to negotiate agreements in 1993. AT&T’s visionwas to become the first foreign investment enterprise to provide telecom services inChina and had billion-dollar hopes. Its initial market entry tactic relied on building anentire fiber-optic skeleton for Pudong, China’s financial center.In 1994, AT&T signed informal cooperation agreements with Shanghai government andregulators. Four years later, AT&T urged the US Government to intervene. AT&T’slobbying succeeded and in March 1999, US Commerce Secretary William M. Daleyannounced a “framework agreement” on an Internet Joint Venture between AT&T andShanghai Telecom.Actually, AT&T became the first foreign telecom service operator to establish a Sino-foreign telecom services joint venture in China. Called UNISITI, the joint venture isbetween AT&T, Shanghai Telecom, and Shanghai Information Investments. The three Page 12 of 20
  13. 13. Strategies for Asia Pacificcompanies signed the official joint venture agreement on 5 December 2000 and UNISITIreceived permission to operate from March 2001.However, AT&T’s “gold rush” dream did not come true. Indeed, in 2002, the countrysleading industry players, all domestic state-owned firms, still accounted for 99.9% of thetelecoms market.On this matter, Arthur Kobler’s quote, president of AT&T China, at the China BusinessConference in Hong Kong in 2002, is quite self-explanatory: "The state will monopolizethe sector ... for many years to come, China rule-making will remain opaque and the linebetween government and the business will (still) be very thin (…) It will take anothergeneration for the country to be transformed from state capitalism into a private sector-led market economy".AT&T, though it is the first foreign investment enterprise to provide telecom services inChina, only has 25% minority interest in the aforementioned Joint-Venture, resulting in alimited strategic control and even less control of operations2. Furthermore, it can offeronly a limited range of Internet-based services (data hosting) in a restricted region (aspecific area of Shangai).Analysis: Why AT&T failed?It took AT&T 8 years, millions of dollars, and a substantial amount of management timeto set-up a Joint Venture on the Chinese market.There are four main reasons explaining the poor performance of AT&T on the Chinesemarket. In the Entry Decision framework, these mistakes are mainly related to theMacro-level and Industry-level conditions, rather than the Firm-level conditions, as inBeijing Jeep case. ‚ Macro-level conditions: o Unrealistic expectations: AT&T’s size and stature gave it access to top political decision-makers in the US, giving it false confidence that it would prevail. o Inability to pinpoint the useful political decision-makers in China and to build relationships with them: ̇ AT&T placed confidence in Shanghai officials, who, though well-connected, did not have power to push through an exemption to national policy. ̇ Actually, the conservatives in Beijing strongly opposed the weakening ban on foreign participation in telecom sector. ‚ Industry-level conditions o AT&T misunderstood the changes in the Chinese telecom market: the original breakup of China’s telecommunications monopoly was not a sign that China was preparing to open up its markets but rather a result of an internal power struggle.2 It reminds us the control issue we analyzed when reviewing the Korea Beral case during session 9 Page 13 of 20
  14. 14. Strategies for Asia Pacific o Regulators had no incentive to promote real competition: it owned and profited from China Telecom’s monopoly. Moreover, Chinese leaders viewed telecom networks as vital to national security, and mandated direct state control.In conclusion, a major cause of AT&T poor performance stands in its inability to fullyappreciate the importance of the regulatory issues in the Chinese telecom sector and tounderstand the complexity of the decision making process. Page 14 of 20
  15. 15. Strategies for Asia PacificIV. CHINA SUCCESS MODELAfter analyzing all the issues of many success and failure cases and studied in detaildifferent success factors extensively documented, we have come up with a success modelthat should help companies in their Chinese operations:Figure 7: China success model Deep Consumer Understanding Right Value and Robust Segmentation Proposition Product Innovation Effective Brand Positioning for China Market Deliver Cost Competitive Strong Efficient Media Effectively Economic Position Distribution Strategy (Scale/Localization) Effective Change Strong HR Design Management Organization for China Skilled Government Senior Corporate Support Relations1. Identify and design the right value propositionPresenting the right value proposition is one of the three pillars for successfully enteringthe Chinese market. This includes a deep understanding of the local consumer and arobust segmentation, positioning the brand effectively and innovating for the Chinesemarket.P&G is a nice example of how to transform global marketing message into a successfullocal marketing program (Safeguard bar soap example): ‚ Global marketing message: "effective germ removal". ‚ Local consumer research - Above 100 in-home visits and shop alongs to understand local usage and purchase behaviours - More than 30 focus groups to identify relevant local messages - Quantitative concept test to determine final communication strategy ‚ Local marketing program: successful ads featured most relevant local usage occasions, emphasizing why "germ removal" was so important to Chinese users. The launch made P&G the No. 1 brand displacing the long term market leader (Lux). Volkswagen managed to adapt its models to target the key Chinese segments: ‚ Santana back-seat was modified to target taxi companies (which represent ~40% of end users) ‚ Audi 100 was adapted to government needs (which represented the majority of high end users until late 1990s) Page 15 of 20
  16. 16. Strategies for Asia PacificRegarding product innovation, KFC and McDonalds managed to introduce tailoredmenus for local markets: ‚ KFC: although chicken is already a product widely accepted in China, KFC introduced innovative products for the Chinese market (Pickle and sliced pork soup in 2002 and Fresh vegetables soup in 2001) ‚ McDonalds: increased the number of products based on chicken (Spicy chicken fillet sandwich in 1999 and Spicy chicken wings). After these introductions, chicken accounted for 30-35% of sales.2. Deliver cost effectivelyLocal firms present a significant cost advantage compared to MNCs entering the market.This advantage can be as much as 35% when considering the manufacturing industry.MNCs should try to diminish this cost disadvantage by transitioning to localmanufacturing and suppliers.Distribution plays a key role in China due to its complicated structure and largegeography. Wholesale channel structures replicate Chinas hierarchy of cities and towns:Figure 8: Typical distribution hierarchy layers in China Approximate number Manufacturer Key of cities and towns accounts Provincial capitals 31 First-tier wholesalers Large prefecture cities 30 to 50 Small prefecture cities 250 Second-tier wholesalers County-level cities 3000 Towns 20,000 Third-tier wholesalers Villages n.a. Rural consumersP&G quickly built scale in sub-geographies before major roll-out was done through 3rdparty distributors: Page 16 of 20
  17. 17. Strategies for Asia PacificFigure 9: P&G rollout strategy and timeline in China Year: 1988 Year: 1989 Year: 1990 Phase 2: Expanding to Phase 3: Covering all of Phase 1: Entry point three metropolitan areas coastal China Beijing Hebei Shandong Jiangsu Shanghai Zhejiang Fujian Guangdong Guangdong Guangdong • • • Guangzhou Guangzhou Guangzhou Year: 1991-1992 Year: 1993 Year: 1994 + Phase 5: Focused inland Phase 4: Restructuring Phase 6: Total coverage expansion • Focused on stockist strategy • Restructured sales force Heilongjiang - 100% P&G trainees from Jilin top local schools Liaoning Beijing - new performance Shanxi Tianjin measurement system: Shanxi payment instead of order Hubei Sichuan Chengdu taking Shaoguan • Launched new payment system • • Guangzhou GuangzhouSource: P&G, BCG databaseFirst, entry was focused on the three main metropolitan areas (1988-1989), expandinglater to all coastal China (1990). After the initial entry, some time was dedicated toconsolidation and restructuring of the sales force (1991-1992). Then, P&G started itsexpansion into interior provinces (1993), finally achieving total coverage (after 1994).3. Design an appropriate organization for ChinaFinally, it is important to build an organization based on the characteristics and demandsof the Chinese market. This dimension, often underestimated by firms, is as critical as theother two success factors described above.Successful foreign firms have managed to develop organizations with the right balancebetween local employees and expatriates. Best practices rely fully on local labor for lowto middle hierarchy levels and include a significant number of "expats" in highermanagement levels (20-25%). The organization should also replicate the structure ofChinese cities hierarchy. As an example, we present Tricon China organizationalstructure: Page 17 of 20
  18. 18. Strategies for Asia PacificFigure 10: Trinicon China organizational structure Tricon China Pizza Hut KFC China Support Center >80% local Regional KFC Co.-1 KFC Co.-2 level . . . . . . . KFC Co.-30 100% City level City A City B City C local (130 cities) Restaurants KFC KFC (> 600) ...... Source: Trinicon China, BCG databaseAdditionally, leading MNCs have leveraged on senior international executives to sponsorthe Chinese operations. Global top management has proven to help in the success ofChina initiatives: ‚ Kodak: China CEO directly reports to CEO, and is also head of International ‚ GE: China CEO, Leading executive ‚ Samsung: China head is one of top three people in the Samsung Group ‚ LG Electronics: China head, successor to group Chairman Page 18 of 20
  19. 19. Strategies for Asia PacificV. THE DO’S & DON’TS FOR FOREIGN SUCCESS IN CHINESE DOMESTIC MARKETDO’s1. Getting the right China strategy: disciplined and well developed business basics ‚ Seek a deep understanding of the real market and its dynamics ‚ Adopt targeted and segmented entry strategies ‚ Have clear and well-thought through business plans ‚ Manage and stage investment risks judiciously ‚ Understand regulatory issues and government position in-depth2. Organizing to effectively execute in China: Unique challenges need distinctorganizational approaches ‚ Institutionalize top management backing at HQ, with right measures ‚ Leverage China capabilities across all ventures and business units ‚ Become an ‘insider’ ‚ Recruit, retain and develop both locals and expats ‚ Recognize stages in organizational developmentDON’Ts1. Expect any sort of immediate and/or large returns ‚ China has traditionally demanded long-term and significant investment2. Try to reach for the unattainable ‚ Be realistic about what the company can offer and the opportunity China presents3. Change logical, business decision-making practices for China ‚ Over-do ‘homework’ for investments; need rigorous and detailed business cases4. Implement a completely Chinese business model ‚ Leverage worldwide tools and practices in a programmed way5. Ignore need for strong organization, capabilities infrastructure and processes toexecute ‚ Expansion often places heavy strain on these resources Page 19 of 20
  20. 20. Strategies for Asia PacificBIBLIOGRAPHY ‚ Annual reports and web sites of aforementioned companies ‚ China Statistical Yearbook ‚ Countries Chambers of Commerce (America, Spain, etc.) ‚ Press search (Factiva) ‚ Literature on success / failures entering China ‚ “Honeymoon’s over” (cover story). February 12th 1994. Wall Street Journal - Eastern Edition. ‚ “Watch out, India”. May 4th 2006. The Economist. ‚ “Looking East”. October 6th 2005. The Economist. ‚ “Bulls in a China shop”. March 18th 2004. The Economist. ‚ “A billion 3, but not for me”. March 18th 2004. The Economist. ‚ “What happened to Beijing Jeep?”, October 23, 2000. The ‚ “Beijing Jeeps bouncing fortunes contain many lessons”, June 5, 2006. South China Morning Post ‚ “AT&T, Datafile of Asia-Pacific Telecommunications”, 1998, CIT Publications Ltd. ‚ ‚ ‚ “AT&T puts a damper on China ambitions”, November 6, 2002. South China Morning Post. ‚ “Delay at China Telecom Hits Foreign Suppliers, Revamp Indecision Slows Business of Others”, February 5, 2002. The Asian Wall Street Journal ‚ “AT&T China revenue up 45 pct, seeks more openings”, March 14, 2006. Reuters ‚ “Text: Department of Commerce Release on Dailey China Trip”, March 31, 1999. US Department of State. ‚ BCG database ‚ Kentucky Fried Chicken website: ‚ Article: “Kentucky Fried Chicken eyes China development”, may 1986 ‚ Article: “KFC and McDonalds — a model of blended culture” in, June 2004 ‚ Article: “Colonel Sanders March on China”, in Time Asia magazine, November 2003 Page 20 of 20