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Like all other markets – China had its own similarities with the globe just as it has its own characteristics that are uniquely Chinese.

The similarities help global consumer products such as Motorola RAZRs, Nokia 1100s, Apple iPhones and iPads, Honda Accords, Big Macs, Snickers chocolates, Louis Vuitton handbags, and Kleenex succeed brilliantly in China with minimal or no change at all. Yet, it is equally true that China is a special market in more ways than one. Due to its historical and present-day sociopolitical and economic structure, its large and diverse population, different climates and foods, China requires MNCs to have an open mind. KFC has been offering menu items like its Lao Beijing Zhuan'r (fried chicken strips, lettuce, onions, and plum sauce wrapped in a tortilla) for nearly a decade.

Motorola developed its MING line of smart phones in China specifically for Chinese consumers, and launched the device in China in 2006. The device and its successors -also local creations – were huge hits for the company in China, and were eventually exported as well. Volkswagen modified its B2 line (Passat/Quantum) to create a new car for China, the Santana.

The Santana was a big seller for VW, and eventually made it to Japan, Brazil, and Mexico as well. Procter & Gamble has been offering toothpaste products designed for local palettes for over five years. BMW, Audi,Mercedes Volvo – just about every luxury carmaker- have adapted their designs to suit Chinese preferences by making them longer on average by 120-144 mm.

This is aimed at the Chinese car buyer who believes that when one is buying a car worth half a million dollars why settle for small.

From a corporate standpoint, what really separates China form any other developed or developing country is its culture and the speed of change that the country is undergoing. The other critical factor that makes China very unique is the cost structure. Together, these three factors provide many opportunities and challenges for MNCs that come here.

1. Culture

It is said that in China piety and kinship almost always win over so called professionalism. This has its roots in culture.

Relationships (Read Box – Guanxi on next page) are more important than contracts. One recent and notable example of kinship and relationships was during the 2008-tainted infant milk powder scam in “China, where many brands of milk powder were found to contain melamine that affected thousands of infants in the country. During the crisis, the owner of Mengniu – one of the major dairy companies in China—when faced with a cash flow crisis reached out to his fraternity of local Chinese business leaders. They all pitched in and Mengniu weathered the crisis. This is something unimaginable in many of the Western markets, but not considered surprising in China. In fact, leaders of most local businesses have their own informal inner circles, such as the Shanghai Jiezhang in Shanghai and the Canton Club in Hong Kong and Beijing and the Chang Jiang Business School Club are just some of the well-known places where they discuss business and help each other in times of need. These clubs and groupings are almost like the local fortifications against the MNC onslaught and even government regulations.

MNCs can learn from such kinship. There is nothing stopping MNCs from uniting in times of crisis to ward off threats from various quarters both competitive and regulatory.

Guanxi

The word guanxi describes the basic dynamic in personalized networks of influence and is a central idea in Chinese society. It is about “connections” and “relationships”. Guanxi describes a personal connection between two people in which one is able to prevail upon another to perform a favor or service. Guanxi can also be used to describe a network of contacts, which an individual can call upon when something needs to be done, and through which he or she can exert influence on behalf of another.

In addition, guanxi can describe a state of general understanding between two people: “He/she is aware of my wants/needs and will take them into account when deciding his/her course of future actions which concern or could concern me without any specific discussion or request.”

1. It takes time to cultivate.

2. It is not a substitute for good business sense.

3. It does not make a bad business deal a good one.

4. It should not be used as a way to skirt the law.

5. Guanxi does sometimes make things go more smoothly.

6. The value of guanxi varies from industry to industry. For instance Guanxi is of virtually of no importance in getting your trademark or Wholly Owned Foreign Enterprise (WOFE) registered in China.

In China, usually friends and relatives become business partners instead of professionals and business partners becoming friends. It is little surprise that unlike in West where professional/business networking (linkedin.com) has developed

independently of social networking (facebook.com), China's online professional business networking is still underdeveloped in spite of its huge and fast growing online population.

It also is said that the most talented business people in China are great human observers who can analyze the people elements of a business situation. Lawyers in the West find loopholes and use legal reasoning; the Chinese people find people who can nudge their interests this way or that way.1

It is because of such cultural factors that the MNC needs to hire talent that is a blend of local Chinese, overseas Chinese, and people of other nationalities. As the chief executive of one major multinational put it, “You cannot develop in China with white faces.” If you try, you and your management will be perpetual outsiders. On the other hand, you also cannot develop in China with purely homegrown Chinese faces, or you will not be able to integrate the operation with the rest of your organization.

KFC is one company that learned quickly how to do things the Chinese way. In spite of the fact that it entered the China market after McDonald's, today it leads the latter in the fast food market. KFC's success in China is largely attributed to its hyper-adaptive mode of operation. (See Box Below: KFC, China – An American company with Chinese characteristics).

KFC, China – An American Company with Chinese Characteristics³⁵

Localization of Supply Chains

1. Unlike McDonald's, which brought along its key strategic partners to China, KFC invested time in understanding the market and developing local partners.

2. The process of preparing the local supply chain took less time and turned out to be a less capital-intensive approach 3. This also yielded greater flexibility to KFC as it could adapt its menu much faster than others

4. Even today, KFC commands superior margins and its innovations are a gold standard in the fast-food retail industry in China

Localization of Talent

1. The first generation of senior managers were hired from Taiwan – as Taiwanese are arguably the most attuned to the  

Chinese way of working

2. By the time the first generation of senior managers retired – KFC had groomed enough local talent to step into their shoes and take the organization forward Localization of Products

The company is widely acclaimed for its localized menu that goes far beyond the fried chicken

l Chinese-style porridge for breakfast

l Fresh salads for lunch

l Beijing chicken roll with scallion and seafood sauce for dinner

l Spicy diced chicken – resembling a popular Sichuan style dish

l Youtiao, (fritters of twisted dough) a very Chinese breakfast item and Danta a Chinese custard tart.

Localization of Government and Public Relations Practices.

1. KFC Food Health Consultative Committee

¡ In October 2000, KFC China invited a number of Chinese health experts and government health officials to join this newly established committee

¡ This was a strategic move to engage the best and most influential minds in China to provide professional expertise in popularizing public awareness and knowledge of maintaining a healthy and nutritional diet (KFC does not engage in such activities in any other market)

2. KFC Health Food Policy White Paper

¡ In 2003, KFC announced this white paper in an attempt to turn around the rising sentiment against Western fast food based on a growing realization that fast food correlates with obesity among children

¡ In the white paper the company pledged its intention to live within the standards set by the Chinese government in all areas of food safety and increase the awareness of nutritional requirements, a balanced diet and exercise 3. Proposal for New Fast Foods

¡ Through this, the company drew a contrast to traditional Western fast food along the lines of menu choice, local taste, balanced nutrition, cooking methods and food safety

¡ Traditional fast food suffers fixed menus with limited product selections -the new fast food would continuously develop new product varieties to better accommodate Chinese taste preferences.

China has an open mind and it is prepared to learn from the world. In fact, the progress that the country has achieved in the past 30 years is a result of its receptiveness to new concepts and ideas, and the desire to make them work for China.

The Chinese government is known to consult many international experts in different domains – from economics and

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management to media and marketing. The question that MNCs need to ask themselves is while China is learning from the world, are they themselves learning from China? What is stopping them?

2. Speed of Change

“So much has changed in China that sometimes I find it hard to believe that I have lived in the same country my entire life.” – Middle-aged businessmen in Guangdong China is moving fast and changing faster, but this is an environment that not many MNCs have been structured to compete in. The MNC business model in China needs to be configured to address the many non-stop changes and challenges, especially with respect to regulations and customers¹

Regulations: The many new regulations and constantly changing laws and systems are both a result of and the reason behind the speed of change in this market. The Beijing City Government's decision to limit the number of new cars on city roads – an example discussed above – shows how quickly the government can react to bring about change. Another recent example of such regulations is the energy conservation targets that the government handed out to provinces. If we look at the Beijing subway map of today and compare it with that of 2001, we can see how different it looks now from just a few years back. (See map below) It does not require much imagination to realize that for this rapid expansion of the subway network, many houses and structures would have been relocated or removed. China is one of those very few developing countries that can acquire land quickly and develop it as per the master plan. The government's master plan cannot be changed but with more coordinated government liaison teams and a system of connections at the right places one can better prepare for these in advance.

Consumer Desire for Novelty: The consumer in China is relatively new to the whole act of consumption. This newfound romance with products makes them constantly desire new products. Many MNCs in consumer products are not always geared for this trend but many have learnt that to do well in China they need to bring out new products continuously.

The Generation Gap: In most societies, developing and developed alike, the generation gap is usually separated by at least 20-25 years. In China, on the other hand, due to the rapid socio-economic changes since the early 1980s, this gap is as narrow as a decade. It is a commonly known that the post 70s generation (70'), the post 80s generation (80') and the post 90s  

generation (90') all think very differently.

This kind of generation gap is not just noticed in consumer markets, but also while interacting with government officials at various levels. The younger among government officials can come across as being globally well traveled and proficient in many Western concepts and languages, too but that does not mean that all of their superiors are like them.

3. Cost Structure

Many exporters from China, that we know personally, are often challenged by their overseas buyers about the lower prices that some of the other suppliers are ready to offer for the same product. It is very difficult for them to explain that in China a visibly similar product might actually be very different in performance. The price differences, as one would learn on a closer examination, are due to compromises made on the durability of the product or its energy, fuel efficiency and eco-friendliness.

Such differences notwithstanding, MNCs need to still compete with these Chinese manufacturers because they cater to a large market both inside and outside of China. MNCs need to be flexible to find ways of matching the cost structures of the local Chinese manufacturers.

GM's upcoming Baojun and Honda's Li Nian are examples of how foreign automobile companies are learning from China and creating brands targeted specially for the world's biggest car market. (Their goal is to boost sales in China's interior, where incomes rose almost 11 percent last year).

Caterpillar is another case in point. The company observed, studied and patiently pursued its interests in China. After decades of waiting and negotiation Caterpillar finally made the breakthrough with the acquisition of a local Chinese company that gives it greater reach in China and a foothold to reach out to more low cost markets outside China. (See Box: Making paper cups in the land of porcelain?)

Making paper cups in the land of porcelain?

The case of Caterpillar in China – Acquiring and Marketing a Second Brand³⁶

In 2009, Caterpillar completed the acquisition of SEM, which it hopes to make a cornerstone of its efforts in the Mainland China.

The buyout took a long time, but it was a big coup for Caterpillar. Eager to build its own national champions, Beijing does not always encourage acquisitions of companies that manufacture earthmoving equipment. In 2008-2009, for instance, the private equity Carlyle Group abandoned a three-year effort to buy a majority stake in Xugong Group Construction Machinery; a company Cat has had a joint venture with since 1994. Caterpillar spent many years working to overcome Beijing's concerns.

The CEO of the company has made dozens of visits to the mainland since 1983, when he began negotiating a technology transfer deal to gain a foothold in China. By 1987, Cat was selling designs for equipment to a dozen Chinese manufacturers.

“We were very weak...(Caterpillar) offered us a shoulder to stand on and allowed us to jump higher,” says Feng Baoshan, a deputy director at the China Machinery Industry Federation, a trade group.

Owens even sent a deputy to visit during the 2003 SARS crisis, a sign of support that may have helped Cat win permission to take a minority stake in SEM in 2005. With the SEM acquisition, Caterpillar can now pursue what it calls a “two-tiered” 

strategy in China. (SEM products are 30% cheaper than CAT's). While it is tempting to think that at that kind of cost structure, Caterpillar may be compromising on quality, the fact remains that the company actually looks at the market with an open mind.

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It is prepared to provide value for different kinds of consumers at different price points. The company will use SEM at the lower end of the market and it hopes to boost sales of Caterpillar-branded gear at the upper end. With the SEM acquisition, CAT now has 16 manufacturing facilities across China and expects sales of $2 billion plus. It plans to spend $100 million to triple SEM's output and expects to open two new plants making Cat-branded machinery.

Cat has pegged its hopes on China's infrastructure boom, which should generate enough business for the company. With SEM under its belt Cat is much more confident of future growth in China.

The classic western way of running a business is to cut the non-profitable part of the business and cruise along. Yet the experiences of many a company in China help us to see things in a new light. Perhaps the non-profitable business is an experience waiting to be uncovered and applied. MNCs can gain a lot in China by looking at the market as an opportunity to learn and develop newer ways of doing things. This will not just help operations in China but will open doors for the company to replicate these experiences in other emerging markets.