Doing business in China has never been an easy task for American companies. Despite the tremendous growth of the Chinese economy during the past few decades and the fact that China’s GDP is already half of the US’s, China typically accounts for only a small portion of the revenues and profits of American companies. This is primarily due to a few major barriers. First, government laws and regulations pose various restrictions on the business operations of foreign companies in China. This openly blocks out most expansion opportunities for basic material companies (for example, it is extremely difficult for Exxon Mobil to own an oil field or operate a service station in China – indeed, there isn’t any of these today) and the like. More subtly, the Chinese government blocks out companies like Facebook and effectively kicked Google out of the country. Second, the tastes and demands of Chinese consumers can be significantly different from those of Americans consumers. Taking jewelry as an example, Chinese consumers (especially the older ones) have a huge demand for gold products, but it’s difficult to find any gold products in an American jewelry store (which is instead typically stocked with silver, platinum, and diamonds.)

However, there are a few American companies that have proven to be exceptionally successful in doing business in China. Yum! Brands, which owns chain restaurant brands such as KFC, Pizza Hut, and Taco Bell, is one good example. As of fiscal year 2011, China accounted for more than 40% of Yum! Brands’ revenue and around half of its operating profit. Despite its lackluster performance in its home country, the Kentucky-based company has been growing its revenue in China at around 30% a year. The company owns four brands – KFC, Pizza Hut, Little Sheep (hot-pot) and East Dawning (Chinese fast food) – and has more than 5,000 stores in China. The remarkable success of Yum’s China division over the past two decades can be attributed to a few key factors. First, its image as a western brand was powerful in attracting customers’ attention and loyalty (sometimes, even frenzy) when many parts of China were at the early stage of opening up to the global economy. Second, its operational efficiency and economy of scale reinforced each other, resulting in cost advantage and quality guarantees. Third, Yum has made localization its key priority since its early stage of expansion. It was among the first foreign companies to discover that Chinese consumers value variety in food much more than their American counterparts. As a result, Yum’s KFC and Pizza Hut menus in China each contain more than 50 items, compared to around 30 items in the American menus.  Moreover, Yum’s management observed that KFC’s most loyal customer group – young children – often come to KFCs accompanied by their parents and grandparents, who usually do not order anything or only order a drink (because fried chicken just do not cater to their tastes.) To tap into the wallets of these parents and grandparents, KFC introduced many Chinese fast food items, including chicken congee and pepper beef rice.

Other American companies have learnt from the success of KFC and developed their own models of success (more or less focused on localization) in China. For example, Starbucks observed that while a majority of its customers in the US are “grab-and-go,” most of its customers in China prefer to sit comfortably in the store with their friends. In response, Starbucks abandoned its standard design of small coffee shops and started building spacious and well decorated stores in China. Similarly, Toys “R” Us discovered that Chinese parents particularly love toys which serve some educational purpose. As such, it devotes a huge amount of research and development resources to educational toys in order to get ahead of its competitors in the booming Chinese toy market.

The art of war in the Chinese market is the art of adaptation. Though there are still people who doubt the influence and even the existence of local culture or national character in an age of globalization, there is no denying that Chinese society’s mores play a crucial role in determining how business is conducted in China. A new round of competition has already begun: only corporations that best adjust their mode of business to the Chinese way of life can prevail in this process of commercial “natural selection.”

Sihan Chen is a junior in Jonathan Edwards College, Yale University, majoring in Ethics, Politics, and Economics. He serves as Vice President of the China Economic Forum at Yale and previously interned at Ward Ferry Management in Hong Kong. Contact him at sihan.chen@yale.edu. 

This article appears in the March 2013 issue of China Hands.