<<to the amazement of many, China has turned into a profitable domestic market in relatively short order. A critical mass of foreign companies are capitalizing on dramatic changes that include the emergence of urban consumers, more-open local governments, the rapid spread of modern retail outlets and the entrepreneurship of the Chinese.>>
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China Market Finally Pays Off --- Foreign Companies Are Scoring With Huge Consumer Base
Asian Wall Street Journal; New York, N.Y.; Jan 9, 2003; By Leslie Chang and Peter Wonacott;
Start Page: A1
ISSN: 03779920
Abstract:
China is now Eastman Kodak Co.'s second-biggest film market after the U.S., and its sales in China are growing faster than in any other major market, the American film giant says. Food conglomerate Groupe Danone SA of France has in the past six years built a $1.2 billion business in China that is profitable in all its divisions. Germany's Siemens AG, selling everything from washing machines to high-speed railways, saw double-digit-percentage profit growth last year in China, now its No. 3 market after the U.S. and Germany. The KFC restaurant chain, owned by Yum Brands Inc. of the U.S., opens a new store every other day in China, all funded by its Chinese profits. "China is an absolute gold mine for us," Yum's chief executive, David Novak, told analysts recently.
KODAK: Under a tropical evening sky in Xiamen, executives from Eastman Kodak pile out of a minibus to be greeted by hundreds of cheering workers. They climb to a stage festooned in red-and-gold Kodak colors, and a worker reads a poem commemorating the 20-millionth Kodak disposable camera produced in this seaside city. "Kodak, I love you," the employee gushes.
One early Kodak campaign, "99,000 Will Make You a Boss," offered all the necessary photo-development equipment, training and a store license for the U.S.-dollar equivalent of a one-time fee of less than $12,000. Kodak negotiated a deal with Bank of China, one of the country's largest banks, to arrange financing for individual operators lacking capital. As the number of distributors and outlets boomed, Kodak factories have supplied these "minibosses" with competitively priced cameras and film. That is thanks to a big bet Kodak made on manufacturing in China in 1998, when it picked up three debt-laden state firms and many of their workers for more than $1 billion. In return, Beijing barred new foreign-invested film factories for four years.
Full Text:
Copyright Dow Jones & Company Inc Jan 9, 2003
Beijing -- FOREIGN COMPANIES, at last, are cracking the China code.
For years, multinationals poured money into China in elusive pursuit of a billion consumers -- feeding the myth of China as a perpetual market of tomorrow, a fool's paradise that sucks in money even as hope of profits recedes year by year. China's vast numbers fueled those inflated expectations.
Says Albert R. Schlesinger, chairman in Asia for Ball Corp., a packager based in Broomfield, Colorado, that has invested in China since the early 1980s, "We sold 40 cans per person in the U.S. Repeat that 1.3 billion times in China. We thought: We'll roll the world." Instead, Ball announced in 2001 that it was shutting five of its plants after investing more than $300 million in China.
Even those who did make money figured China would serve mostly as a low-cost export base, churning out toys, textiles, machinery and increasingly high-tech equipment to export to the developed markets of the world. Instead, to the amazement of many, China has turned into a profitable domestic market in relatively short order. A critical mass of foreign companies are capitalizing on dramatic changes that include the emergence of urban consumers, more-open local governments, the rapid spread of modern retail outlets and the entrepreneurship of the Chinese.
It is a dramatic and largely unheralded change. According to an August report by the American Chamber of Commerce, 64% of about 200 companies surveyed in China say they are profitable. Profits from more than 31,000 foreign-invested manufacturers in 2001 rose 13% to $17.4 billion, after jumping 70% the previous year, figures from the National Statistics Bureau show. While part of that rise reflects the number of new companies coming to China, a recent report by the United Nations Conference on Trade and Development noted that a third of foreign investment in China now comes from those companies reinvesting profits, suggesting healthy returns from their China operations. And growth in many of these companies' sales and profits is happening fast.
China is now Eastman Kodak Co.'s second-biggest film market after the U.S., and its sales in China are growing faster than in any other major market, the American film giant says. Food conglomerate Groupe Danone SA of France has in the past six years built a $1.2 billion business in China that is profitable in all its divisions. Germany's Siemens AG, selling everything from washing machines to high-speed railways, saw double-digit-percentage profit growth last year in China, now its No. 3 market after the U.S. and Germany. The KFC restaurant chain, owned by Yum Brands Inc. of the U.S., opens a new store every other day in China, all funded by its Chinese profits. "China is an absolute gold mine for us," Yum's chief executive, David Novak, told analysts recently.
Skeptics think they have heard it all before. Since Marco Polo visited China more than 700 years ago, merchants from the West have salivated over the country's commercial potential -- and mostly been disappointed. Recent history is littered with the dashed plans of foreign companies that made disastrous miscalculations about China. McDonnell Douglas Corp., with Chinese partners, spent nearly two decades and billions of dollars trying to build commercial aircraft in China before its acquirer, Boeing Co., pulled the plug in 1997. British brewer Bass PLC, Australia's Fosters Group Ltd. and Miller Brewing Co. of the U.S. all made high-profile exits when a hoped-for market for pricey beer failed to materialize for them. The litany of failures has fed the conventional wisdom that China is an unprofitable market.
Compounding the myth, multinationals are extraordinarily close-mouthed about their mainland operations. There are many reasons: Companies that are profitable often book their earnings through subsidiaries offshore where taxes are lower. They also fear drawing attention from competitors or local tax authorities if they openly boast about making money. The corporate reticence makes it difficult for outsiders to gauge investment returns, and has led many to dismiss the China market as pure hype.
China continues to be one of the most challenging markets around, owing to brutal price wars, back-stabbing business partners, widespread counterfeiting, and a slow-moving and sometimes arbitrary judicial system. But here is how some of the most successful players in China are turning a profit:
KODAK: Under a tropical evening sky in Xiamen, executives from Eastman Kodak pile out of a minibus to be greeted by hundreds of cheering workers. They climb to a stage festooned in red-and-gold Kodak colors, and a worker reads a poem commemorating the 20-millionth Kodak disposable camera produced in this seaside city. "Kodak, I love you," the employee gushes.
Kodak is loving China back. "There were a lot of people that were burned and hurt and called China a shattered dream," says one of the executives, Ying Yeh, a vice president for Kodak. "But I never had any doubt."
Kodak has about 8,000 photo stores across China, one of the country's largest retail networks in any sector. The company taps the desire of many Chinese to run their own businesses while helping them negotiate the ins and outs of setting up shop on their own. Because of China's vast size, foreign companies seeking national reach must rely to an unusual extent on such a far-flung network of people, then find ways to tie their interests to the company's own.
One early Kodak campaign, "99,000 Will Make You a Boss," offered all the necessary photo-development equipment, training and a store license for the U.S.-dollar equivalent of a one-time fee of less than $12,000. Kodak negotiated a deal with Bank of China, one of the country's largest banks, to arrange financing for individual operators lacking capital. As the number of distributors and outlets boomed, Kodak factories have supplied these "minibosses" with competitively priced cameras and film. That is thanks to a big bet Kodak made on manufacturing in China in 1998, when it picked up three debt-laden state firms and many of their workers for more than $1 billion. In return, Beijing barred new foreign-invested film factories for four years.
The gamble helped Kodak, a distant fourth when it arrived in China in 1994, to leapfrog rivals including Fuji, which relies on imports to stock its stores. Today, Fuji's China market share has shrunk to 25% compared with Kodak's 63%. Other film manufacturers are vying for the remaining 12%, according to a recent survey from China Central Television. Recently, Kodak said it was slashing as many as 1,700 jobs world-wide and moving much of its production of disposable cameras to China, both for export and domestic sale.
The company is now expanding in China's poorer west. In a country where fashion and new lifestyles spread at warp speed, many Chinese are buying their first cameras to record the change. Says Paul Walrath, a plant manager in Xiamen and a 26-year Kodak veteran, "We're counting on great performance in China to drive the company where we want to go."
DANONE: Like Kodak, French food group Danone was a relative latecomer when it started building its China business. It decided to piggyback off the successes of domestic brands rather than to build all its businesses from scratch, in 1996 buying a controlling stake in Hangzhou Wahaha Group Co., an enterprising maker of vitamin-enriched milk drinks targeted at children. Danone embarked on a massive expansion for Wahaha, building multiple plants across the country, backed by a huge advertising campaign, that pushed annual sales from 800 million bottles when it bought the company to four billion bottles within two years.
It then quickly leveraged that scale, distribution network and brand-name recognition into a new business: bottled water, for China's increasingly health-conscious population. Through the same obsessive focus on scale and speed, Danone has built Wahaha into China's biggest bottled-water company -- and made China into Danone's biggest water market, with $908 million in revenue in 2001.
In launching a new drink, Danone expects that prices will collapse by 50% within three years, thanks to local competition. Only through investing heavily up front is it possible to achieve economies of scale and, hence, profitability. "You need to recover your investment before the price wars start," says Simon Israel, Danone's Asian-Pacific chairman. "I've never seen anything move so fast as it does in China."
Rare for multinationals, Danone acquires Chinese companies but continues to sell products under the Chinese companies' own brands. The strategy has smoothed the way for a steady diet of acquisitions and curried favor with Chinese executives and officials, who are loath to see national brands go under. Today, 80% of Danone's sales here are under Chinese brands.
The company has so played down its multinational origins that it was asked by the government to help Wahaha manufacture a "domestic" cola to take on Coke and Pepsi. Thus did Danone, which doesn't sell soft drinks anywhere else in the world, become the parent of Future Cola, which holds the No. 3 spot in China and is known as "the Chinese people's own cola."
The moves have handed Danone dominance despite its late start. The company in 2001 did $1.2 billion in sales in China and claims to be China's largest food company. All three of its divisions -- water, biscuits and dairy products -- are profitable, and operating-profit margins are higher than the company's global average, giving Danone operating profit in 2001 of at least $140 million in China. The company has more than 50 plants and 25,000 employees nationwide, all built up in the past six years.
PROCTER & GAMBLE and COCA-COLA: While many consumer-products companies are targeting China's urban middle class, companies seeking growth are also reaching out to poorer and harder-to-reach parts of China. In October, Procter & Gamble Co. unveiled its bag of 10 Pampers diapers that sell for 10 yuan ($1.21). Similarly, in small cities and towns, P&G's Tide laundry detergent goes for 50 U.S. cents a bag.
Coca-Cola Co., which has seen eight straight years of profits in China, says sales are growing faster here than anywhere in the world. It already reaches 600 million consumers in China's large and midsize cities, but its latest drive focuses on reaching the other half of the population. A survey the company conducted in Yunnan, a largely rural province in the southwest, revealed that most consumer offerings, from ice cream to drinks, cost the equivalent of between six and 36 U.S. cents, which meant a 30-cent can of Coke was too expensive for many. Coke's solution: to boost its returnable-bottle business, in which a customer drinks a Coke on the premises of a shop or restaurant. The business, which drives down costs because bottles and crates can be reused many times, brings the price of a Coke serving down to a single yuan. "We're looking for this to be a solution for our rural markets," says Nick Moore, regional manager for north and southwest China.
Such minute price distinctions, it turns out, are crucial in a price-sensitive market like China's. At a dimly lit Internet cafe in Tangshan, where customers can surf the Net for an hour for just 24 U.S. cents, 2,000 cases of Coca-Cola sold last year, compared with 300 cases in 2001, before Coke launched its cheaper drinks in returnable bottles. "Customers always want the cheapest thing to drink," says the cafe's owner. "Now, the Coke is the same price as the water."
YUM BRANDS: Recently, it took Yum Brands only a day to get most of the approvals it needed to set up a Pizza Hut restaurant in the central city of Zhengzhou, compared with one month for its first KFC store in the city three years ago.
Globalization is burrowing into China much faster than anyone expected and bringing huge benefits to foreign companies. Local governments are opening doors to foreign companies in ways they hadn't in years past. They now see foreign investors as an asset, rather than merely a threat to local competition. Their operations are often among the biggest providers of jobs and payers of taxes, and cities compete aggressively to woo them with investor-friendly policies.
When the restaurant chain set up its first China store in 1987, the venture was seen as so politically sensitive that the site required the approval of the Beijing mayor, and foreign novelty was a big part of its appeal. But as fast food has become part of the Chinese landscape, KFC has sought to position itself as a part of daily life. The chain now sells soup, rice and Chinese breakfast porridge, all in China only. It does its own tests and product launches with minimal input from the home office. "We're free to create our own products. Our company is not a company that micromanages from a distance," says Sam Su, president of Greater China for Yum Restaurants China.
KFC now has about 800 restaurants in China and plans to open 200 a year for some time to come, and China is the company's biggest source of profit after the U.S.
Companies like KFC are also taking advantage of China's low-cost commodities and manufacturing to sell products domestically. KFC now imports only 5% of its raw materials, mostly corn on the cob and potatoes. About 80% of a new Motorola phone is made in China. Coke buys plastic bottles, cans and sugar locally, rather than shipping soft drinks by railway from Hong Kong as it did in its earliest days.
YORK INTERNATIONAL: The Pennsylvania-based maker of heating and air-conditioning equipment dominates sales of sophisticated systems in China's hotels and office buildings. The company installed the $7 million system in Beijing's glitzy Oriental Plaza. But lately, the company has been doing something that seems counterintuitive: selling $900 central air-conditioning units to individual family apartments, one of the country's most cutthroat markets.
Rather than clustering at the premium end of the market -- a field that is often crowded with too many foreign players chasing too few consumers -- successful multinationals are taking the battle to their Chinese competitors' turf. The margins may be thinner, but the consumer base and potential payoff are exponentially larger.
Even companies of huge industrial heft are moving downscale. Siemens recently scrapped a European-style washing machine with 10 settings in favor of a basic version that runs just hot, warm and cold water. The simple machine is less expensive and quieter, and its strong sales have given the company confidence it can push other products into low-price categories such as machine tools.
To penetrate smaller Chinese cities, York has beefed up sales teams and spread them over 35 offices, as far afield as Urumqi in China's west. Kam Leong, York's Asia president, says the effort delivered $36 million in new business last year, making China the company's fastest-growing major market. "You need to be a full-range company and not just focus on one area," says Mr. Leong. "We understand how big the market is now, and we are far from [fully] exploiting it." |
