You'd think that Danone, one of the biggest makers of milk
products, should have had an easy time entering the world's
fastest-growing dairy market. But the French conglomerate, which
has been successfully selling biscuits and mineral water in China,
flopped with its dairy offerings. In 2002, after a $10-million-plus
investment, it withdrew its dairy products from the Chinese market
and sold its facilities there.
Other multinationals have also struggled to make headway in
China. The problem isn't a Chinese aversion to foreign brands. Nor
is it the brands' starting point: Almost all aim first at the
premium segment. Rather, it's their approach to broadening market
Perhaps the biggest barrier for multinationals is entrenched
local competition. Successful firms tackle China through a mix of
global and local brands.
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A handful of multinationals point to a better path. Through a
careful combination of pricing, cost reduction, distribution and
acquisitions, they've turned a toehold in China's premium segments
into a rapidly expanding market. They use three key strategies:
Closing the price gap. Chinese consumers won't shell out
70% to 100% premiums for foreign products, as Parmalat discovered
when it introduced fruit yogurt there for 24 cents a cup. Chinese
consumers stuck with local brands at half the price. As a rule of
thumb, they may pay 20% to 30% more for world-class brands.
Companies using local suppliers can close the price gap,
however. After Colgate began sourcing ingredients and manufacturing
in China, the price of its 65-gram tube of toothpaste dropped
almost 63%, and the price differential between Colgate and local
brands fell sharply. Cutting production costs and passing the
savings on to consumers helped Colgate become China's top oral-care
Adding products and channels. It makes sense for most
foreign brands, because of their cost structures, to start at the
top, as Colgate did. But it's crucial to break into the mass market
quickly. Back in 1979, when Coca-Cola began offering its pricey
soft drink, it captured a sliver of the market. But Coca-Cola
reduced expenses by manufacturing locally, setting up 34 bottling
plants and partnering with three bottling groups. Harnessing system
economics, the company cut production, marketing and distribution
costs; it then added products, such as herbal tea drinks and Coke
Light. Now it sells more than 20 drinks for about 25 cents a can,
only slightly more than local brands, and claims more than half the
market for soft drinks in China.
Bringing local brands on board. Perhaps the biggest
barrier for multinationals is entrenched local competition. The
most successful firms tackle China through a mix of global and
local brands. Anheuser-Busch, which leads the premium beer market
with Budweiser, recently purchased a controlling stake in Harbin
Brewery, China's fourth-largest brewer. The acquisition allowed
Anheuser-Busch to reach the masses and, along with Anheuser-Busch's
minority position in Tsingtao, China's number one brewery,
consolidated AB's position in the market.
Even Danone is now taking a cue from Anheuser-Busch. It recently
purchased a stake in Bright Dairy & Food, one of China's
largest dairies. The move should improve Danone's cost structure
and competitive position, giving it yet another chance to milk the
world's fastest-growing dairy market.
Ann Chen, a Bain
partner in Hong Kong, leads the firm's Consumer Products practice
in greater China. Vijay Vishwanath, a Boston-based partner, leads
Bain's Global Consumer Products practice.
For a fuller account of
how multinationals can succeed in China, click here to read "Expanding in
China," which appeared in the March 2005 issue of Harvard
Business Review. Also, listen to Ann Chen highlight the keys to
extending your company's reach in China in an audio slideshow presented here.