Doing business in a changing China

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Deng Xiaoping’s famous phrase mo zhe shi tou guo he, or “crossing the river by feeling for stones,” resonated throughout China. For many who participated in the growing pains of China’s economic transformation, an experimental, learning-by-doing approach paid off.

Leading practices in China

In the 1990s, Deng Xiaoping’s famous phrase mo zhe shi tou guo he, or “crossing the river by feeling for stones,” resonated throughout China. For many who participated in the growing pains of China’s economic transformation, an experimental, learning-by-doing approach paid off. US companies that carefully managed such risks as inadequate infrastructure and regulatory uncertainty—while taking advantage of China’s manufacturing prowess and market size—grew accustomed to reaping rich rewards. But now, as new patterns of growth, investment, and consumption emerge in the aftermath of the 2008–09 recession, successful Western companies are adapting to change by developing a more nuanced understanding of China’s dynamic sociopolitical and cultural processes. They recognize that China’s own commitment to many of its new priorities—rather than direct pressure from the West—may provide the strongest basis for cooperation and collaboration.

Becoming adaptive and agile

Yum! Brands—the parent company of restaurants Kentucky Fried Chicken, Pizza Hut, and Taco Bell—understands and adapts to China’s local practices and changing priorities. The first KFC opened in Beijing in 1987, and even as its fast-food restaurants expand rapidly throughout China, Yum! Brands continues to deliver an upscale dining experience. The company successfully operates in more than 650 cities in mainland China, managing upwards of 3,500 restaurants. The operating profits of its Chinese division grew to $600 million last year from just $20 million in 1998.7 Lily Hsieh, chief financial officer of Yum! Brands’ China division, says the company knew it “needed to adapt its brand essence to the local market in a way that offered distinctive value.”

As Yum! Brands rapidly expands its presence throughout China, it is reaching far beyond the prosperous cities of coastal China. Thanks to a combination of government push and market pull, inland China is emerging as the new epicenter of the country’s growth. A few companies recognize that just as Chinese corporations are competing against one another, so are Chinese provinces and municipalities—and that opens up new windows of opportunities. “There is a clear difference in operating styles compared with Beijing and Shanghai,” says Hsieh. “Our approach is to adjust expectations as we move farther west. We are investing more time and effort in these regions to educate people about the value of developing mutually beneficial propositions at mutually acceptable costs. While we actively engage regulatory touchpoints, we tend to go beyond the letter of the regulation—with an understanding of the human element surrounding that.”

In China, that often means partnering with central and local authorities in supporting priorities such as maintaining social stability through steady employment and improving the environment through more efficient use of resources. “The government wants to see e-commerce grow, so we’ve been made to feel very welcome,” says SC Lee, executive vice president of California-based Internet electronics retailer Newegg. “We also provide intangible benefits—for example, by helping develop cities the government wants to upgrade.”

Newegg, along with other companies, was invited to invest on favorable terms in Jiading, a suburb of Shanghai. Lee recounts how during last year’s economic slowdown, when other companies’ plans stalled, Newegg earned tremendous goodwill by becoming the first to complete its development in Jiading. At the same time, the company is tackling the inconvenient geographic variations in innovative ways. To deliver uniformly high-quality customer service throughout China, Newegg has built its own logistics company for sorting and deliveries instead of relying on external dispatchers.8

If the midsize Newegg’s greater nimbleness and heritage (it was founded by a Taiwanese American) provide it certain advantages in a changing China, large US companies have their own set of core strengths. Adept at tackling a host of issues, from coping with counterfeiting to increasing transparency and control over its supply chain, Nike is now confronting a new challenge in China: greater competition from local Chinese athletic apparel and footwear companies that can make more-rapid inroads into inland China at lower price points. Nike, however, is confident of maintaining its market leadership in China. Denson explains: “We continue to emphasize creation of a very specific awareness around the Nike brand and what it stands for, and we have to continue educating consumers that there’s a difference. As economic prosperity continues to inch westward, it is opening up marketplaces and consumer accessibility; and we have the patience to wait for the consumer [in inland China] to trade up.”

7 Yum! Brands press release, May 4, 2010.

8 Loretta Chao, “Newegg Bets on B2C Growth in China,” Wall Street Journal, May 19, 2010.

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