At the Annual Convention of the Harvard Business School World Alumni held in Hong Kong in 1997 focusing on the booming Greater China, T. C. Chua from McKinsey & Co. presented a paper entitled "China, The Huge Opportunity to Fail".

By the end of 2002, more than 400 of the Fortune 500 had already threw their hats into this mythical ring. Earlier arrivals may have had the Gold Rush on their mind, but the later-comers could often be characterised as those who did not wish to "miss the boat." One thing remains similar for the oldtimer and the "novices" - opportunities to fail are delivered in equal doses.

The great myth propounded since the opening up of China was "...If the 1.3 billion mainland Chinese buy only one of your products, you will make a huge fortune...". According to Professor Wang Zi-le of China's Institute of Research on International Trade and Economic Co-operations, only approximately one-third of the 394,000 foreign-invested enterprises in China returning a profit in 2002. Only three products have been bought by almost each of the entire Chinese population - Coke, Pepsi and Wahaha.

According to Professor Wang, the mere reality of the large influx of competing foreign firms itself posed the biggest obstacle for each to realize their anticipated profits. Local protectionism and bureaucracy also contributed to the nightmares of many. Those foreign investors who came to China with outdated products and technology or a second- class management team were pressed the hardest. "...Those multinationals came in with the sweet dream of easy dominance of China market, and thus huge profits said Wang. ...Once they got their body and soul inside, they began to feel the blazing heat and numbing chills of this market..."

China never was "a market", says Yao Xiaoqian from IBM's Management Consulting Department. He adds that it is difficult for any foreigner to imagine the huge gap between the cities and the rural communities in China. While internationally the income gap between urban and farming populations is approximately 2:3, in China the ratio gap is well over 1:2.8. Because of this, the urban and farming propulations makeup two distinctly different markets exist in China. If companies persist in maintaining the same brand name and product lines for both markets, they find it necessary to cut prices drastically before the products that are popularly sold in the cities become affordable or acceptable to the rural farming community markets.

Before deciding to go for broke with the one-market one-brand ideal, managers may benefit by taking another look at the map, the logistics, and the costs to the supply chain.

China is about 5000 km from East to West and more than 4000 km from North to South. Temperature differences between North and South can reach as much as 50 degrees Celcius. The rugged terrain in many parts of China that time and time again even bogged down the imperial armies remain a significant test for MNCs. Quite sensibly, most MNCs limit their marketing thrusts to the urban markets, leaving the rural market to the locals.

Many MNCs in China have also become infected by the "Big Organization Disease" - the same disease that either fatally or incurably infected many of China's own state enterprises and characterised by the rapid growth of the organization particularly in middle management levels. I have previously referred to the San Zhu Health Potion case, where an organization grew to a staff complement of 150,000 within 3 years and proceeded to bankruptcy within 7 years. Prior to Uniliver China's vigorous restrucuring in 2001-2002, its expatriate middle to senior management complement grew to approximately 120, compared to 30 after their "forced diet". MNCs should watch their "diet" and not get too carried away by the dream of catching this huge dragon in a hurry. The mere cost of management talent, expecially expat talent, is a key handicapping factor to newly arrived MNCs in a market where they face grassroot locals long experienced in price-cutting wars and marketing guerrilla warfare.

During the first twenty years of its opening up, manufacturing and marketing in China was localized or regionalized. Market players were mostly state-owned and heavily protected by their state, provincial and local governments. Many early foreign entrants into China either sought or were guided by the state towards joint ventures with these state enterprises. Once a joint venture was established, it was also customary for the local government to send in a local management team to provide a "balance" for foreign management. For example, as soon as Beijing Dafa Zhengda was established between the C.P. Group of Thailand, and their local partner, the Chinese side sent in 6 deputy general managers who previously held government positions of section chiefs. At the Zhenda Ningbo Company, another C.P. Group joint venture, the Chinese side also sent in 6 former government officials, one of them the "native king" (refer to earlier article) from the era of Cultural Revolution. It was an open secret that these local deputies were there to ensure the maximum benefit for the Chinese side. Amongst the tasks they were most interested in controlling was construction project bidding and controlling, procurement, and personnel recruitment, selection and management. Thus, when the C.P. Group tried to consolidate raw material procurement of it's 100 feed mills in China, it encountered huge resistence from the local side. Such was the same scenario in Uniliver which had more than a dozen joint ventures in China. In order to ensure cost control, Uniliver sent in more and more expat management until they finally realized that there was more to cost control in China than devising policy and accounting.

The difference between the C.P. Group and Uniliver was that all C.P.'s 100 feed mills produced similar kind of feeds and the management of the individual joint ventures were forced to compete with one another in cost effectiveness and profitability. The joint ventures of Uniliver were making different products and could not readily be compared to each other. In addition, the local side could even be a rival or indiffident parties which were neither interested in c-ooperating with other Uniliver joint ventures nor caring about anything other than benefits to the individual local side itself. Thus, when Uniliver attempted to buy out all the joint venture into its holding companies, it encountered strong opposition from its local partners. Uniliver went ahead anyway and proved that it was all worthwhile doing.

China's ancient book of Warfare read that "The proud armies are bound to be defeated."

When MNCs first entered the China market it was 50 to 100 years behind the West. They came with high confidence and looked far into their "New World" with golden dreams although being troubled occasionally from gaps of cultural understanding and the divergent governmental administrative systems. With their vast capital, technology, and product lines, early arrivals such as Coke, Pepsi, and P&G practically scooped up their entire target markets with the power of their marketing offenses and buying out of exisiting local leading brands. Having gained overwhelming dominant market shares with relative ease during their early years in China, they might even have considered simply gliding along happily ever after.

During the mid 80's to mid 90s, it was practically unthinkable to imagine any real competition arising from within China itself, especially from previously little known manufacturers. But many MNCs were rather unceremoniously given a rude awakening when reports from major marketing research companies such as A.C. Neilson began to show companies like P&G, Uniliver, Cisco, Henkel and IKEA, that they cheese was no longer as readily available. Local products had either overtaken them or already matched their market-share.

Very possibly the only reason that provincially targeted companies like Nan Feng, Si-bao and Zhejiang Nice were not bought up, squeezed out, or smashed up by P&G and Uniliver was that they were too small, too remote, and too insignificant. Early on they were not within the competitive sights of the giant MNCs.

Nan Feng positioned itself as the maker of low price detergent for rural consumers. It had an advantage of being situated on the shore of a large salt lake in the countryside of the remote Shanxi province. Readily available raw materials helped them succeed with a low cost low price strategy. In 1995, it started driving its market by painting 600,000 square metres of crude advertising for "Qiqiang" on brick walls and smoke stacks mainly in the northern part of the country (being furthest from the P&G territory which produced its products in Guangzhou in the south). Its first sales promotional team consist of 3000 sales persons being supported by the "drums" and "gongs" band in the north and the lion dance troupes in the south. All these ads and campaigns were considered rather primitive and crude in the eyes of most modern consumer product managers. As the local detergent factories became squeezed to the verge of bankruptcy by P&G during the early 90s, Nan Feng quietly merged them in and set up manufacturing bases in Xi'an, An-Qing, Guizhou, and Inner Mongolia, again areas not within focus of P&G's strategists. By 1999, "Qiqiang" became the No. 1 detergent brand in China on the back of its mainly rural sales. Then in this very same year, it announced its invasion of the cities, beginning with Beijing and Shanghai.

Zhejiang Nice was ranked the second smallest detergent factory in China, situated in the very remote town of Lishui near the border with Fujian province. So behind the outside world was Lishui, that the inhabitants of this town raced to see the first train passing through the town in 1998. Many in this town had never seen a train in their lives. By the year 2000, it was hauling in 340 million yuan of profits from sales of 2.5 billion. It's profitability was nearly 25 times that of the next competitor.

Zhejiang Nice started manufacturing "Diao Brand" detergent in 1999. By 2000, it's own and over two dozen contracted factories simply could not satisfy the rapid rise in consumer demand for "Diao" products. Interestingly, four of the OEM factories belonged to Henkel of Germany and another two belonged to Procter and Gamble. The 29 OEM factories spread across 19 provinces in all parts of China.

The OEM localized manufacturing saved Nice approximately 600 yuan RMB per ton of detergent produced in inward and outbound transportation costs. After paying 200 to 300 per ton to its contracted manufacturers, Nice could very well afford its low low price strategy and still reap a huge profit from its sales of 500,000 tons in 2000. With its OEM job orders, it helped the Xuzhou Henkel factory recover from its 40 million RMB losses and make it profitable. Nice expected to manufacture and sell more than 1 million tons in 2001. In 2001, Zhejiang Nice, accounted for 95% of profits made by all firms in detergent industry in China.

Si-bao was a manufacturer of skin-care products based in Wuhan. Having carefully market tested its hair shampoo products, Si-bao decided to give its shampoo a brand name of its own, instead of using the same brand name as its skin care product. So "Slek" was born. From the very beginning, it foregoed the then widely used nationwide network of distributors. It started building a marketing network of its own. Through massive advertising in its home base city of Wuhan with the appeal "Double action in-depth protection while giving the natural bright beauty to the hair". The tag line proved to be an overwhelming success. In 1997, Slek set up branch companies in 12 provinces with 63 marketing and sales centers employing more than 20,000 staff, mostly POP sales staffs. Even at this stage, it's impact may well still not have been of much interest to P&G.

In 1997, the Slek calvery introduced its shampoos into tens of thousands of selling points, putting up POP banners and sign boards that turned many stores and their own in-store sales promotion centers into seas of red. The instruction from HQ was to take control of all of the most prominent point of purchase displays, and to be seen side- by-side with P&G shampoos. In 1998 as P&G focused attention on delivering a knoock-out blow to local competitor "Olive", it failed to pay any attention to the advancing "Slek", thus helping "Slek" gain market share to the extent that it surpassed the former No. 4 brand - Unliver's "Lux". Within the very next year, in 1999, it overtook Pantene's No. 3 spot with 10% market share compared to Pantene's 6.5%, becoming one of the top 3 brands. Its market share continued to rise to 15% in 2000.

According to A.C.Neilson, the two top selling detergents in China market in 2002 were "Diao" (Vulture) and "Qiqiang" (Surprisingly Strong) - both new local brands from Chinese manufacturers. They were followed by "OMO" and "Breeze" from Uniliver. Proctor and Gamble's brands just made the last two spots on the Top Ten list.

2002 Market surveys report the top selling hair shampoo brands as Rejoice, Slek, and Head and Shoulder. Pantene, another proud brand of P&G had already dropped from the top three brands since 1999. While in 1997 P&G was still mustering nearly 70% of the market (Rejoice - 35%, Head & Shoulder - 17% and Pantene - 16%), by 1999 Pantene was assaulted by a proliferation of counterfeit products and their market share dropped to 6.5%. Slek took over their third position with 10% market share. With an extremely aggressive point-of-purchase sales promotion onslaught, Slek's market share rose to 15% in 2000 replacing Head & Shoulder as No. 2 behind Rejoice with a dwindling 30% market share. The preliminary figures for 2002 must certainly be disconcerting for P&G and Uniliver, as combined they now command only 55% of the Chinese hair shampoo market. P&G's CEO is philosophical - stating recently that - "Slides in market share is expected after our early successes in dominating the market".

P&G and Uniliver are not alone in experiencing a rude awakening to this new China market. The world's leading carbonated soft drink makers, Coke and Pepsi either bought up or squeezed out all 8 major beverage manufacturers that existed during the early 80's. Again hidden warriors emerged from the carnage, in the form of previously unknown and untested new competitors Wahaha and Kangsifu. Wahaha started with a 140,000 yuan loan and 3 employers as a small factory in a school distributing stationery and ice cream in 1987. In 2001, it sold 2.5 million tons of bottled water, milk and cola type beverages attracting a total income of 6.2 billion yuan. During the same period Coke sold 1.3 million tons and Pepsi sold 900,000 tones of their cola-flavoured carbonated beverages. The instant noodle champion Kangsifu won 47% of the approximately 300 million ton bottled Chinese tea drink market during the same year.

According to Chu Ke-xiang from IBM Management Consulting - "Amidst this on-going globalization and WTO trend, Chinese consumers are moving away from "name brand" or "foreign brand" preferences... ...Where foreign named brands used to bring trust, reliability and brand loyalty, Chinese consumers seem to have grown out of that now." Research indicates that Chinese consumers now spend more time in front of display shelves, reading product descriptions with an interests never exhibited by consumers before. They ask point of purchase sales staff pointed questions. In all, it is clear that the brand name is no longer the almost sole factor in Chinese consumers' buying decisions.

In the microwave oven market, Galant triggered the first price war in August 1996 with average price reductions of 40%. Fourteen months later it announced another price cut across the board of 29 to 40% and in 1998, it launched a huge give away "Buy 1 and get 3 free" campaign increasing its sales volume to 4.5 millon units. They soon dominated 60% of the China market, and practically pushed all foreign brands to the side lines. This should have satisfied the company's desire to become the No. 1 microwave supplier in China and in the world. Not so. In June, 2000, Galant introduced another 40% across-the-board price cut aiming at totally eliminating their rivals. Four months later, in October 2000, it cut its prices for all hi-end microwave ovens by another 40%. Again, in January, 2002, it lowered the hi-end prices by another 30% in order to "make the hi-end lines accessible to common Chinese consumers". As if being the world's largest microwave makers was not enough, in February, 2002, it cut the average prices of its air conditioners by 35%.

If Galant sold its product overseas at prices lower than its domestic prices, the FTC and the EEC would certainly huddle together and deliver an "Anti-dumping tax" on the feisty company. But what can they do if it reduced the prices in its own home market?

In an earlier article, you might recall a curious promotion of selling color TVs by weight. If so you will remember that this was a "sarcastic" move to protest the reduction of color TV prices to an unthinkable level - below $50 USD for a 21 inch new color TV and $150 USD for 29 inch models. In this market of approximately 20 to 21 million sets per year, Changhong sold about 8 million sets, followed closely by TCL, Konka, and other local brands. A visit to any store nowadays will confirm that foreign brands have almost disappeared from the under 29-inch TV display sections. The ongoing price war certainly hurt local makers as aggregated profits in the past years amounted to only 540 million comparing to Sony which made 1 billion yuan profit on sales of merely 1 million sets. Toshiba sold only half a million sets and made about 500 million yuan in profits. These Japanese firms have discovered for themselves some Anti-Dumping protection that works more effectively than the FTC and EEC!

As mentioned in earlier article, Volkswagen boasts one of the most successful sino-foreign joint ventures (with Shanghai Automobile), their Santana model becoming almost synonymous with automobiles in China. However, when First Automobile of Changchun was selected to join Volkswagen in the latter's second joint venture in China in 1991, the partnership did not prove as successful. By 1996, when the Shanghai venture had reached 200,000 units in car sales, the Changchun venture had provided less than 10,000 units. Rumours that the German side were considering withdrawal from the joint venture were frequent.

In 1996, a new general manager from the Chinese side, a Mr. Lu Lin-nai who speaks fluent German was appointed. Sales starting picking up immediately with favourable recognition for the reliability of it's Jeda model immediately. In 2001 Jeda sales surpassed 100,000 units and then 200,000 units in 2002. As of the end of 2002 back log orders for the car have already taken care of production for four months ahead. There had been suggestions that production capacity would be expanded from its current 150,000 units per year design with an investment of 2 billion yuan, but the expansion plan was flatly rejected by the Chinese side. The Chinese partner preferred receiving its share of profits in dividends than to continue with re-investment in the joint venture

"Why make more Jeda's, when the brand belongs to VW anyway?" was the comment overhead from one insider and was quite representative of the stormy relationship between the partners on-going on from the time of sickness to the time of good health.

Festivities to celebrate the sales success in Changchun were abruptedly cancelled three days before the scheduled date of December 23, 2002 due to "Special circumstances." It was reported that key top executives of First Automobiles were busy with other engagements elsewhere and were not available for the celebration. Mr. Lu's 4 year term was extended by two years in 1999 on account of his outstanding performance in turning the company around from the red but Lu left his job as the general manager of the joint venture at the end of his extended term in 2001. He was stripped of his political party membership, "detached" from the company, and rewarded with the dismissal of all of his immediate relatives in the company's employ. He was accused of siding with the foreign partner during his tenure while he failed to satisfy the local side's desire to take out their profits rather than reinvesting the average annual profit of 1 billion yuan each year back into the company. He was also accused of having not done enough to obtain the German side's support for the upgrading of the local side's own product, the Red Flag. The German partner had provided the partner with the technology from its 1980 Audi model as part of the joint venture agreement and had since hestitated to help upgrade the Red Flag, - the pride of local Chinese automobile industry. It also charged a 15% management fee on spare part purchases from Germany.

On the date scheduled for the celebration of First Automobile-Volkswagen's Jeda sales, the new general manager Mr. Qin Huan-min was not in Changchun but in Tianjin - joining the celebration with its other partner Toyota Motors to mark the first jointly produced Toyota Bora from the production line.

The joint venture agreement signed in August 2002 called for an investment of 23 billion yuan to produce 300,000 to 400,000 units of luxury-to-compact automobiles annually. The Japanese side had agreed to provide First Automobile with technology from Toyota to raise the Red Flag to a brand new level. Toyota had also agreed not to charge any management fees on purchases of spare parts for the jointly produced automobiles.

After they have skimmed through their Chinese economic and marketing data and information, MNC strategists are well advised to take a good look at Chinese historical stories where more often than not, "A small flickering proceeds to consume the entire mountain and plains". Even the ruling Manchus found themselves naturalized by the Han culture 300 yers after their reign over the Han people.

As one Japanese executive - one of thousands being sent to China from Japan - recently told me in his perfect Mandarin -

"...We understand Chinese a lot better than those Westerners. That's why we have more successes than the American and the European...".