The odds of any foreign firm becoming an insider in China are long. There are two reasons for this. First, foreign firms are not competing in China with hundreds of multi-billion-dollar Chinese enterprises but instead are competing against a multi-trillion-dollar monolith (which my co-author and I label “Enterprise China” in a new book by the same name). This monolith directly owns and controls around a third of the country’s GDP via 150,000 State-Owned Enterprises (SOEs) and directs another third of GDP via large companies that it heavily influences (SIEs or State-Influenced Enterprises). Second, the odds are long because the second pillar of Enterprise China’s three-part competitive strategy calls for ensuring that indigenous Chinese companies dominate domestically.
Despite long odds, it is possible for a foreign firm to become an insider in China through an “in China for China” strategy that includes significant investment, adjustment, and autonomy. Two examples illustrate this difficult but potentially fruitful path.
INDUSTRIAL INSIDER: HONEYWELL
Honeywell China has seen its revenues soar from $360 million in 2004 to more than $6 billion in 2020, only Honeywell’s revenues in the United States are larger. By 2021 Honeywell China had facilities across more than 30 cities and employed more than 13,000 people. Its insider status in China was highlighted in 2020 when Honeywell opened a new R&D center in Wuhan and Chinese Premier Li Keqiang commented, “I shouldn’t do any commercial promotion for any company, but I highly appreciate this move [by Honeywell].”
To achieve this insider position, Honeywell China made a number of significant investments over the last 20 years. One of the more notable investments was made by Honeywell China’s president, Shane Tedjarati, who personally invested significant time and effort learning Mandarin and developing strong relationships with China’s leadership. In fact, Tedjarati’s Chinese fluency progressed to the point where he was able to hold meetings with Chinese officials without interpreters. The strength of his relationships was evidenced in 2019. That year Honeywell China was named by the People’s Daily for possible blacklisting because its products were included in U.S. arms sales to Taiwan. However, through the strength of his relations, Tejarati convinced key Chinese officials that Honeywell simply sold equipment to the U.S. government but had control over the countries to which the U.S. government supported with that equipment. As a result, Honeywell was able to escape being listed among the sanctioned U.S. defense companies.
Many foreign firms in China try to operate at the higher end of the value curve and avoid competing in the more intensive middle and lower parts of the curve. However, achieving insider status requires being able to compete where rivalry is the most intense. For example, a Honeywell unit, Garrett Motion, produced turbochargers for vehicles in China. These were some of the best turbochargers on the market and they commanded a price premium. However, soon 100 Garrett look-alikes appeared on the market under names such as Carrett, Farrett, Parrett, Tarrett. Even though the products of these imitators were inferior, they were 40% cheaper. Consequently, the imitators sold well and took market share from Garrett.
Rather than shy away from these competitors and this segment of the market and simply move up the value curve, Garrett created a no-frills version of its turbocharger and priced it on par with the knockoffs. In short order, only three of the 100 imitators remained, and they became suppliers to Garrett.
Honeywell China’s insider status was also supported by the significant amount of autonomy granted by headquarters. As an example, Honeywell headquarters allowed Honeywell China to help SOEs in their support of the Chinese government’s Belt & Road Initiative (BRI). Honeywell China provided a large number of SOEs with hardware, software and solutions that helped them undertake massive infrastructure projects across nearly two dozen countries targeted by the BRI.
CONSUMER INSIDER: YUM CHINA
Becoming an insider in the industrial space where there are hundreds of customers is one thing, but doing it in the consumer space where there are literally hundreds of millions of customers is another thing. Impressively, in 2021, Yum China generated $9.8 billion in revenue inside the country, which was nearly ten times more than its largest domestic rival Lao Xiang Ji (Home Original Chicken). At that point, Yum China had nearly 10,000 restaurants in over 1,400 cities in China, including 7,300 KFC and 2,300 Pizza Hut restaurants. This was more than twice as many outlets as its next closest competitor, McDonalds. As testimony to its insider status, in 2021 Yum China had a staggering 577 restaurants just in Shanghai and 535 more in Beijing. As further evidence of its insider status, in 2020, Yum China was named the Official Food Services Sponsor of the 2022 Olympic and Paralympic Winter Games in Beijing, which allowed it to use the imagery of the Beijing 2022 Olympic Winter Games in its advertising and promotional activities.
Yum China’s journey to becoming an insider began in 1987 with an investment in just one KFC restaurant, which was adjacent to Tiananmen Square. Over the next 15 years, KFC invested in and built out an additional 800 restaurants. During this time of heavy investment in China, KFC became part of Yum! Brands, which also included Taco Bell and Pizza Hut restaurants. Although Yum continued to invest in restaurants in China, their growth came in part because of significant menu and format adjustments made to better fit the local market.
Relative to its largest brand in China, KFC, Yum added items to its menu that were unique to China, such as egg tarts, congee, curry pork chop rice, and the Dragon Twister (a wrap similar in preparation to Peking duck that included fried chicken, cucumbers, scallions, and duck sauce).
As with KFC, Yum grew Pizza Hut in China by adjusting its menu to reflect Chinese tastes. New pizza toppings were added, such as shrimp and salmon, and different bases were created with mayonnaise instead of tomato and cheese. Yum also redesigned Pizza Hut to be a decidedly more upscale experience for its customers compared to its sister restaurants in the United States.
In terms of growing Taco Bell in China, Yum took a more measured approach. It only opened its first restaurant in 2016. By 2020 it had just 11 restaurants in the country, almost all in Shanghai. Yum also positioned Taco Bell as an upscale establishment, selling crayfish tacos and Japanese beer, rather than downscale refried beans and cheese burritos familiar to U.S. consumers.
To further its “in China for China” strategy, Yum also explored more indigenous dining concepts. It launched a new food brand called East Dawning, based initially on merging KFC’s approach to fast food with Chinese cuisine. The concept evolved over time and eventually focused on “serving gourmet Jiangnan cuisine to tourists and visitors in transit.” In 2011 Yum acquired Little Sheep, a hotpot restaurant chain founded in Inner Mongolia. Yum streamlined operations, closed underperforming stores, and developed a more consistent and up-market brand.
In terms of autonomy, Yum took things one step beyond Honeywell. By 2015, Yum China was larger than the rest of Yum Brands globally. To allow its operations in China to fully prosper, in 2016 Yum spun off its China operations, making Yum China an independent company based in Shanghai but listed on the New York Stock Exchange.
After the spinoff, Yum China had complete freedom to focus on its “in China for China” strategy. As part of this strategy, in 2018 it launched COFFii & JOY coffee shops as a direct competitor to Starbucks in China, and a year later, it signed an agreement with two large SOEs, China Petrochemical Corporation (Sinopec) and China National Petroleum Corporation (CNPC), to start a franchise business for its brands embedded in the two companies’ combined 80,000 gas stations.
With its expanded autonomy, Yum China built a digital ecosystem in order to further establish itself as an insider. It created a digital membership program and pay app that spanned all of the company’s brands and restaurants in China. By the end of 2019, Yum China had over 240 million members.
Becoming an insider in China is possible, but the size and scope of Enterprise China and the country’s commitment to ensuring that domestic firms dominate at home make the odds long. For both Honeywell and Yum China, it took decades of significant investment, adjustment, and autonomy to achieve insider status. From these and other examples, it seems clear that no foreign executive should take up an “in China for China” strategy lightly; trying to become an insider in China is not for the faint-of-heart or fair-weather foreign executive.
Written by J. Stewart Black Ph.D., INSEAD Adjunct Professor of Strategy & Leadership Global Chief Leadership and Strategy Officer Squire Patton Boggs.
Parts of this article were adapted from “Enterprise China: Adopting a Competitive Strategy for Business Success” (WILEY 2022) by Allen J. Morrison and J. Stewart Black.
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