Strategies for Entering China's Diverse Markets

Strategies for Asia Pacific

STRATEGIES FOR ASIA PACIFIC

How can foreign companies enter China successfully?

Alfonso Abella
Antonio Bellver
Cedric Brusselmans
www.luruico.com

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INTRODUCTION
Our case study consists in the analysis of the reasons why companies succeed in entering
the 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 the
main characteristics of the Chinese market (section I), which should be taken into account
by foreign companies before entering this unique market.
In section II, we present and analyze KFC's case as an example of success history in
China. This is followed by two cases of companies (Beijing Jeep and AT&T) that
struggled in their Chinese operations (section III). With these mini-cases, we intend to
understand the reasons of success and failures of different companies.
Finally, we conclude with what, in view of our analysis and conclusions presented
throughout the document, should be the success model for foreign companies in China
(section IV). To wrap up, we end up with the DOs and DON'Ts for the success of foreign
companies in China (section V).

I. EIGHT REALITIES ABOUT THE CHINESE MARKET
There are eight characteristics that make China a unique market and that any firm trying
to enter it should take into account:

1. China is not a single large market, but many smaller, dissimilar markets
Disposable income varies significantly from one province to another and ~65% of the
population 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 base

In most cases, Chinese companies have their own branch company in each province / city
with separate management control, e.g. Bank of China in Shanghai and Beijing are

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entirely separate operations. Provincial power is often greater than at headquarters,
branches run their own operations and P&Ls and headquarters is usually limited to
setting 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 17
countries in Europe at once.”

2. Many MNCs have shown that entering China is not difficult, but making money
is very tough
The evolution of MNCs in China presents some similarities in the first stages of their
Chinese adventure: entry, some initial success (due to the acquisition of the most valuable
customers and the focus on main cities), broader ambitious to become market leaders and
heavy losses as a result of the sustained investments. Finally, some companies manage to
become 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 Jeep
and AT&T cases).
Only 41% of MNCs operations in China are profitable, while 34% of them are reported to
lose money. The result is shown in the graph below:
Figure 2: MNCs performance and profitability in their Chinese operations
Profitability
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
investments

3. Long term commitment is key as payouts are rare in the short term
China is a very demanding market and payouts are mostly long term. Research shows
that 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 to
enter the market.

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Figure 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 database

4. Joint ventures are not the golden solution and often entail more problems than
the benefits they provide
Many MNCs have relied on Joint Ventures with local companies to help them in their
Chinese operations. In other cases, regulatory issues forced many foreign companies to
seek local JVs partners to enter the market.
Many MNCs have found the JVs difficult to Figure 4: WOFE vs. JV profitability
manage due to the lack of control, different Wholly Owned Foreign Enterprises are more
profitable than Joint Ventures
motivations and incentives, wildly different
expectations and partners assigned by Wholly Owned
Joint Ventures
Foreign Enterprises
government influence rather than through
commercial sense. Profitable
Unprofitable
38% 42%
In case of JVs, partner selection is critical. For 62% 58%
example, Volkswagen success is due in part to
its partner, SAIC, one of the best industrial
partners in the country. On the other hand,
2.3 years Time to break even 3.2 years
difficulties with their partners led Unilever and 2.6 years Original expectation 2.9 years
Bass to give up ownership to local partners. Shorter Longer

Source: China Profitability Survey; Lit Search; BCG DB

As shown in the graph above, the percentage of profitable cases is greater for wholly
owned foreign enterprises than for JVs (~60% of WOFEs are reported profitable versus
the ~40% of JVs) and the time to break even is longer in JVs operations.

5. Transition to local execution is vital to sustainable success
The Chinese market is unique and it is difficult to compete against local firms without
adapting operations to local execution:

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‚ 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 consideration
Although China entered the WTO at the end of 2001, there are a lot of Government
regulations in different industries to be considered when entering the Chinese market. A
good relationship with the authorities is key for the success of foreign companies. Close
cooperation with the government and demonstration of goodwill can be of great help for
MNCs entering China.
American International Group (AIG) has taken advantage of the close relation of its
former chairman, Maurice Greenberg, with Zhu Rongji and Jiang Zemin. Becoming the
first 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 before
opening new stores in China. As a result, Carrefour was forced to sell several stores and
its CEO had to issue a formal apology while its senior executives pledged to respect
government authority in the future.

7. Chinese management decisions are complex
It is difficult to predict the behavior of Chinese companies as in many cases the financial
rationale 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.

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‚ 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 quickly
Foreign 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 the
graph below:
Figure 5: Chinese leading global producers
20%
China 70%
export/World
consumption 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 database

Furthermore, local competitors rise very quickly. Let's 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 China's largest mobile operator with the
world's 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.

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II. SUCCESS STORY: the KFC case
Kentucky Fried Chicken (KFC) is one of the largest fast food chains in
the world. Together with Pizza Hut and Taco Bell, it is one of the most
successful brands of the YUM group. Since it was created in the early
1930’s in the Southern USA, KFC has been rapidly expanding through
the use of franchising. After the company was sold to the American
giant, Hubelin International in 1974, KFC received increasing support
to develop its overseas activity and began its operations in new
emerging markets of Latin America and Asia.
KFC entered China in the early eighties after several successful experiences in other
Asian countries, notably Japan, Malaysia, Singapore and Philippines, and also in India.
These previous contact with Asian culture allowed KFC to understand some of the
cultural differences and adapt their strategy to the local market. The first two outlets
opened in Beijing in 1987. Today KFC has more than 1,200 outlets all around China (80
of 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 related
to three main issues: the partnership with local companies, the adaptation to the cultural
specificities and the good relationships with the government.

Join-ventures with local partners
Prior to its expansion in China, KFC management acquired solid experience in emerging
markets and contemplated financial risks as one of the major threats. In these previous
cases, KFC had often chosen the franchising alternative in order to minimize the financial
risk of the venture. However, this business model was not an option in China given the
strict foreign investment laws. As a result, KFC decided to enter the Chinese market in
partnerships with local companies, following a 55/45 agreement (KFC dominating
position).
Like most of the western companies entering China (see Figure 3), KFC contemplated
this new market as a long-term opportunity. However, in many cases KFC had to face
potential partners that were only interested in short term benefits. Therefore, KFC had to
closely monitor their partners as they rarely comply with the corporate standards and the
strategic plans of the company. During its expansion process, finding equilibrium
between corporate control and cultural sensitivity was one of the main concerns for KFC
management. The choice of talented partners and employees has been a key factor for the
success of KFC’s expansion in China: KFC is very strict in the selection process and
targets 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 value
chain and how it fulfils the strategic needs of the food chain in China.

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Main added value of the partnership in each step of the value chain:
Figure 6: KFC's 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
channels

KFC was prudent in its expansion strategy and did not take the risk of directly
undertaking huge investments. It rather started with a limited number of partnerships,
learning from these experiences and after that, expanding gradually using the
accumulated knowledge and the value-added of the partnerships.

Cultural fit and local execution
KFC has taken into account the local characteristics of the Chinese market. Since its
arrival to Beijing, KFC adapted its menu and offered Traditional Pekin Chicken roll and
the possibility of replacing the French-fries by rice. A few years later, KFC introduced
preserved sichuan pickle and shredded pork soup in the menu as well. Although still
considered as a foreign restaurant, Chinese customers appreciated the respect for their
traditional food. Besides some “exotic” dishes, the menu also presented some common
options 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 small
premium 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 vary
in the different regions of China).
KFC outperformed in the inter-cultural management by combining the precise dose of
western values (American way of life, freedom, efficiency, individualism, property,
democracy) with pure Chinese cultural elements. This harmony is partly derived from the
relationship between KFC and its partners. KFC granted its partners a high degree of
autonomy in tactical decisions, while maintaining a tight control of the long term
objectives.

Relationships with the Government
The modernization of the agriculture and the food industry, particularly that related to the
poultry, was a priority for the government of China during the eighties. When KFC
arrived, it was one of the first fast-food chains and there was still a huge lack of these
kind of services in China. Therefore, the government considered that the company would
be beneficial for the Nation. KFC developed solid links with Tianjin government and
Beijing. This allowed KFC to easily overcome the bureaucratic process and have the

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adequate support to expand its activity. As it will be later reflected in Figure 7, an
adequate relationship with the government will be one of the key factors to develop the
organization structure in China. For this purpose, the first mover advantage played a key
role in the success of KFC.
KFC chose some partners with solid connections with the local officials, which facilitated
the red tape at a different layer of power. Furthermore, the local knowledge of the
language, the culture, the geography and the different administrative mechanisms also
helped to accelerate the establishment of new outlets.

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III. STRUGGLE STORIES: the Beijing Jeep and AT&T cases

Carl Crow, an American who marketed pharmaceuticals for foreign firms in Shanghai
between the two world wars, wrote in his 1937 book “400 Million Customers”: “No
matter what you may be selling, your business in China should be enormous, if the
Chinese who should buy your goods would only do so.” Actually, the Chinese never did
and in his 25 years there, Crow's agency failed to launch a single successful product.
This story seems quiet representative for different industries trying to tap into the Chinese
market. Indeed, some of the leading brewers (e.g. Carlsberg, as analyzed in class), car
manufacturers (e.g. Beijing Jeep), and telecom players (e.g. AT&T) have invested
hundreds of millions of dollars in China in 1990s and are still waiting for decent returns
or struggling hard to maintain their once profitable operations.
On the other hand, we can notice that several foreign players who have consistently done
well in China have ignored China’s domestic market and have concentrated on China as a
cheap base for manufacturing.
We will infer from these two cases, some main reasons keeping foreign companies from
generating acceptable returns in China.
These two cases are different in the conditions they relate to. In the Beijing Jeep’s
instance, several elements in the firm-level condition (the partner fit) mainly explained
the company’s failure, while in AT&T case, the macro-level and industry-level played a
bigger role in the firm’s weak performance.

1. Beijing Jeep: When failing to plan means planning to fail
What happened?
In 1979, American Motor Corporation (AMC) began negotiations with the Chinese
National Association of Industry and Commerce (CNAIC). Four years later, in 1983,
China’s first car manufacturer Joint-Venture was established: AMC detained 31% of the
shares, while Beijing Automobile Works (BAW) had 69% of them.
In 1985, the first jeeps were produced and ten years later, Beijing Jeep manufactured
about 32,000 vehicles, its record sales volume and became a cash cow. Based on this
success, Beijing Jeep decided to increase its investments into the Chinese market to total
around USD 400 million.
Chrysler took over in 1987 and Beijing Jeeps were still leading the emerging sport utility
vehicle (SUV) market in China.
However, the competition from Volkswagen and other new entrants in the Chinese
market, 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 to
this early success. Eventually, aforementioned key problems and internal issues soon

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became overwhelming and Beijing Jeep sales declined to bring the company to losses in
1998. Then, the company consistently recorded heavy losses from 1998 to 2002.
Difficulties in getting foreign currency to purchase imported parts resulted in idle
production. 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 in
China. Today, DaimlerChrysler is apparently in talks with several Chinese car
manufacturers about building a new compact car in China. The German automotive giant
also plans heavy investments in non-SUV vehicles – e.g. Mercedes-Benz sedans and
light-duty commercial vehicle.

Analysis: Why Beijing Jeep failed?
As an industry commentator puts it: “Things went sour at Beijing Jeep because there was
never a plan. Chrysler took in armfuls of profits each year, with no thought of brand
building, distribution or customer service.”1 This quote suggests that AMC was looking
for short-term profit maximization, which seems to contradict the aforementioned (Figure
3) long-term prospect required to tap into such a large market.
The lack of business planning and Chinese “ecosystem” analysis from AMC management
led Beijing Jeep to the bottom. We can argue that, according to the Entry Decision
framework, several items on the Macro-level, Industry-level, and Firm-level conditions
could have helped AMC management to foresee the weaknesses of such entry strategy.
Omitting to conduct this kind of analysis actually prevented AMC executives from
foreseeing 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 CarConnection.com.

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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:
high

These discrepancies quickly resulted in Beijing Jeep’s management inability to overcome
local manufacturing issues.
Finally, beyond the Entry Decision framework, it is important to note that Beijing Jeep
failed to meet market changes and adapt its value proposition to the local market (see
Figure 7 below). After more than 15 years, original Cherokee design was unable to
compete with the one of newer models (e.g. the VW Santanas) and, as stated above, the
product range remained limited. This post-entry weakness also played a role in Beijing
Jeep’s low performance.

2. AT&T: Sky is not the limit
What happened?
AT&T, the US telecom giant started to negotiate agreements in 1993. AT&T’s vision
was to become the first foreign investment enterprise to provide telecom services in
China and had billion-dollar hopes. Its initial market entry tactic relied on building an
entire fiber-optic skeleton for Pudong, China’s financial center.
In 1994, AT&T signed informal cooperation agreements with Shanghai government and
regulators. Four years later, AT&T urged the US Government to intervene. AT&T’s
lobbying succeeded and in March 1999, US Commerce Secretary William M. Daley
announced a “framework agreement” on an Internet Joint Venture between AT&T and
Shanghai 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 is
between AT&T, Shanghai Telecom, and Shanghai Information Investments. The three

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companies signed the official joint venture agreement on 5 December 2000 and UNISITI
received permission to operate from March 2001.

However, AT&T’s “gold rush” dream did not come true. Indeed, in 2002, the country's
leading industry players, all domestic state-owned firms, still accounted for 99.9% of the
telecoms market.
On this matter, Arthur Kobler’s quote, president of AT&T China, at the China Business
Conference in Hong Kong in 2002, is quite self-explanatory: "The state will monopolize
the sector ... for many years to come, China rule-making will remain opaque and the line
between government and the business will (still) be very thin (…) It will take another
generation 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 in
China, only has 25% minority interest in the aforementioned Joint-Venture, resulting in a
limited strategic control and even less control of operations2. Furthermore, it can offer
only a limited range of Internet-based services (data hosting) in a restricted region (a
specific area of Shangai).
Analysis: Why AT&T failed?
It took AT&T 8 years, millions of dollars, and a substantial amount of management time
to set-up a Joint Venture on the Chinese market.
There are four main reasons explaining the poor performance of AT&T on the Chinese
market. In the Entry Decision framework, these mistakes are mainly related to the
Macro-level and Industry-level conditions, rather than the Firm-level conditions, as in
Beijing 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

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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 fully
appreciate the importance of the regulatory issues in the Chinese telecom sector and to
understand the complexity of the decision making process.

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IV. CHINA SUCCESS MODEL
After analyzing all the issues of many success and failure cases and studied in detail
different success factors extensively documented, we have come up with a success model
that 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
Relations

1. Identify and design the right value proposition
Presenting the right value proposition is one of the three pillars for successfully entering
the Chinese market. This includes a deep understanding of the local consumer and a
robust segmentation, positioning the brand effectively and innovating for the Chinese
market.
P&G is a nice example of how to transform global marketing message into a successful
local 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)

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Regarding product innovation, KFC and McDonalds managed to introduce tailored
menus 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 effectively
Local 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 local
manufacturing and suppliers.
Distribution plays a key role in China due to its complicated structure and large
geography. Wholesale channel structures replicate China's 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 consumers

P&G quickly built scale in sub-geographies before major roll-out was done through 3rd
party distributors:

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Figure 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 Guangzhou

Source: P&G, BCG database

First, entry was focused on the three main metropolitan areas (1988-1989), expanding
later to all coastal China (1990). After the initial entry, some time was dedicated to
consolidation and restructuring of the sales force (1991-1992). Then, P&G started its
expansion into interior provinces (1993), finally achieving total coverage (after 1994).

3. Design an appropriate organization for China
Finally, it is important to build an organization based on the characteristics and demands
of the Chinese market. This dimension, often underestimated by firms, is as critical as the
other two success factors described above.
Successful foreign firms have managed to develop organizations with the right balance
between local employees and expatriates. Best practices rely fully on local labor for low
to middle hierarchy levels and include a significant number of "expats" in higher
management levels (20-25%). The organization should also replicate the structure of
Chinese cities hierarchy. As an example, we present Tricon China organizational
structure:

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Figure 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 database

Additionally, leading MNCs have leveraged on senior international executives to sponsor
the Chinese operations. Global top management has proven to help in the success of
China 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


V. THE DO’S & DON’TS FOR FOREIGN SUCCESS IN CHINESE DOMESTIC MARKET
DO’s
1. 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-depth

2. Organizing to effectively execute in China: Unique challenges need distinct
organizational 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 development

DON’Ts
1. Expect any sort of immediate and/or large returns
‚ China has traditionally demanded long-term and significant investment
2. Try to reach for the unattainable
‚ Be realistic about what the company can offer and the opportunity China
presents
3. Change logical, business decision-making practices for China
‚ Over-do ‘homework’ for investments; need rigorous and detailed business cases
4. Implement a completely Chinese business model
‚ Leverage worldwide tools and practices in a programmed way
5. Ignore need for strong organization, capabilities infrastructure and processes to
execute
‚ Expansion often places heavy strain on these resources

Page 19 of 20


BIBLIOGRAPHY
‚ 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 CarConnection.com
‚ “Beijing Jeep's bouncing fortunes contain many lessons”, June 5, 2006. South
China Morning Post
‚ “AT&T, Datafile of Asia-Pacific Telecommunications”, 1998, CIT Publications
Ltd.
‚ www.ap.att.com
‚ www.unisiti.com
‚ “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: www.kfc.com
‚ Article: “Kentucky Fried Chicken eyes China development”, may 1986
‚ Article: “KFC and McDonald's — a model of blended culture” in
www.chinadaily.com, June 2004
‚ Article: “Colonel Sanders' March on China”, in Time Asia magazine, November
2003

Page 20 of 20

Strategies for Entering China's Diverse Markets

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