Open Thread Friday 7-3-2020
Let's look at three American corporations with significant influence in our society which expanded various parts of their business into China. Kentucky Fried Chicken (KFC) was the first fast food franchise to enter China. Google has made two attempts to enter the high tech market in China and exited. Nike first saw China as a source of cheap labor and later a major market for sales.
KFC first restaurant in China was opened in Beijing in 1987. At the time KFC was owned by the American corporation PepsiCo.
Indeed, KFC enjoyed significant first-mover advantage when it kickstarted China’s fast-food restaurant industry in the 1980s. It beat out local Chinese competition in the 1990s because of its increasingly sophisticated management techniques. And when faced with rising domestic competition and maturing consumer tastes in the 2000s, KFC adapted with significant localization efforts to avoid obsolescence.
Seen in the context of 40 years of reform and opening—during which KFC transformed from an expensive novelty to a market trailblazer to a localization pioneer to a first-among-many-equals in an intensely competitive industry—the latest spin-off of Yum China seems to simply signify the increasing, and perhaps inevitable, convergence of Chinese and American business.
KFC’s success in China must also be couched in the successful policies associated with reform and opening. China’s fast-food market would not be as developed without opening to KFC, and KFC’s business would not be as profitable without entering China. Trailblazers like KFC imported to China best practices on how to manage a restaurant chain, build a nationwide supply chain, and maintain high levels of customer service and dining experience. KFC also showed other American restaurants—like McDonald’s—that China’s market was possible to crack.
As a result, same-store sales for Yum Brands’ China Division (of which KFC represented around 75% of the operating profit) declined 13% in 2013, 5% in 2014, and 4% in 2015. Yum attributed this dip to short-term consumer concerns, and demonstrated its long-term commitment to the China market by continuing to open hundreds of new stores each year.
KFC China’s fortunes began to turn around in 2016, when Yum China spun off from Yum Brands to focus entirely on the continued expansion of KFC and other restaurant concepts in the China market.
How Google took on China—and lost in the MIT Technology Review
When www.google.cn launched in 2006, the company had gone public only two years before. The iPhone did not yet exist, nor did any Android-based smartphones. Google was about one-fifth as large and valuable as it is today, and the Chinese internet was seen as a backwater of knockoff products that were devoid of innovation. Google’s Chinese search engine represented the most controversial experiment to date in internet diplomacy. To get into China, the young company that had defined itself by the motto “Don’t be evil” agreed to censor the search results shown to Chinese users.
Central to that decision by Google leadership was a bet that by serving the market—even with a censored product—they could broaden the horizons of Chinese users and nudge the Chinese internet toward greater openness.
On January 12, 2010, Google announced, “We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all.”
But officials refused to cede ground. “China welcomes international Internet businesses developing services in China according to the law,” a foreign ministry spokeswoman told Reuters at the time. Government control of information was—and remains—central to Chinese Communist Party doctrine. Six months earlier, following riots in Xinjiang, the government had blocked Facebook, Twitter, and Google’s YouTube in one fell swoop, fortifying the “Great Firewall.” The government was making a bet: China and its technology sector did not need Google search to succeed.
Google soon abandoned google.cn, retreating to a Hong Kong–based search engine. In response, the Chinese government decided not to fully block services like Gmail and Google Maps, and for a while it allowed sporadic access from the mainland to the Hong Kong search engine too. The two sides settled into a tense stalemate.
The Chinese government had pulled off an unexpected hat trick: locking out the Silicon Valley giants, censoring political speech, and still cultivating an internet that was controllable, profitable, and innovative.
AlphaGo your own way
With the Chinese internet blossoming and the government not backing down, Google began to search for ways back into China. It tried out less politically sensitive products—an “everything but search” strategy—but with mixed success.
Despite the retrograde climate, Google capped off 2017 with a major announcement: the launch of a new AI research center in Beijing. Google Cloud’s Chinese-born chief scientist, Fei-Fei Li, would oversee the new center. “The science of AI has no borders,” she wrote in the announcement of the center’s launch. “Neither do its benefits.” (Li left Google in September 2018 and returned to Stanford University, where she is a professor.)
In a speech to the Dragonfly team, later leaked by The Intercept, Ben Gomes, Google’s head of search, explained Google’s aims. China, he said, is “arguably the most interesting market in the world today.” Google was not just trying to make money by doing business in China, he said, but was after something bigger. “We need to understand what is happening there in order to inspire us,” he said. “China will teach us things that we don’t know.”
Nike, an Oregon company has made its fortune using intellectual property laws, marketing and contract manufacturing to maximize profits. An early adapter of contracting with foreign manufacturers to keep labor costs low in Taiwan and South Korea.
The shoemaker was plagued with accusations that it used sweatshop labor all through the 1980s and 1990s until by 1998, Nike founder Phil Knight pledged to purge the company’s supply chain of sweatshop labor.
When Nike was founded in 1972, the company contracted with factories in Taiwan and South Korea to manufacturer shoes and related goods. Over the next two decades, workers in these countries successfully lobbied their governments to win improved wages and the right to form labor unions. Faced with these new challenges, Nike moved much of their production to countries like China, Indonesia, and Vietnam, where it is illegal for workers to organize, and where wage rates are some of the lowest in the world.
This year Nike found itself in the middle of the Uighur issue.
China compels Uighurs to work in shoe factory that supplies Nike
After intense international criticism of the Communist Party’s campaign to forcibly assimilate the mostly Muslim Uighur minority by detaining more than a million people in reeducation camps, party officials said last year that most have “graduated” and been released.
But there is new evidence to show that the Chinese authorities are moving Uighurs into government-directed labor around the country as part of the central government’s “Xinjiang Aid” initiative. For the party, this would help meet its poverty-alleviation goals but also allow it to further control the Uighur population and break familial bonds.
Security at the factory is tight. Factory administrators told a Post reporter this was a Nike requirement — Nike inspectors were visiting that day — but locals said it was also to monitor the Uighur workers.
“Some would say they use national-level security standards,” one of the street vendors said. “They keep a detailed account of the workers’ entries and exits, and they have to obey a strict schedule, coming to work or leaving the compound only at specific hours.”
Combining support for sports and slick marketing plans to create sales of shoes and apparel worked as well in China as the US.
Americans have dreamed of penetrating the elusive China market since traders began peddling opium to Chinese addicts in exchange for tea and spices in the 19th century. War and communism conspired to keep the Chinese poor and Westerners out. But with the rise of a newly affluent class and the rapid growth of the country's economy, the China market has become the fastest growing for almost any American company you can think of. Although Washington runs a huge trade deficit with Beijing, exports to China have risen 76% in the past three years. According to a survey by the American Chamber of Commerce, 3 out of 4 U.S. companies say their China operations are profitable; most say their margins are higher in China than elsewhere in the world. "For companies selling consumer items, a presence here is essential," says Jim Gradoville, chairman of the American Chamber in China.
The Chinese government may have a love-hate relationship with the West — eager for Western technology yet threatened by democracy — but for Chinese consumers, Western goods mean one thing: status. Chinese-made Lenovo (formerly Legend) computers used to outsell foreign competitors 2 to 1; now more expensive Dells are closing the gap. Foreign-made refrigerators are displacing Haier as the favorite in China's kitchens. Chinese dress in their baggiest jeans to sit at Starbucks, which has opened 100 outlets and plans hundreds more. China's biggest seller of athletic shoes, Li Ning, recently surrendered its top position to Nike, even though Nike's shoes — upwards of $100 a pair — cost twice as much. The new middle class "seeks Western culture," says Zhang Wanli, a social scientist at the Chinese Academy of Social Sciences. "Nike was smart because it didn't enter China selling usefulness, but selling status."
As recently as seven months ago Nike sales in China was leading growth for the company.
Nike Inc.’s second-quarter earnings results are proving the increasing importance of China to the brand.
The sportswear giant logged profits that surged 32% to $1.1 billion, or 70 cents per share, well above forecasts for earnings of 58 cents per share. Revenues advanced 10% year over year to $10.3 billion, topping analysts’ predictions of $10.1 billion.
One of Nike’s biggest takeaways in last 90 days was the performance of Greater China, which continued its streak of double-digit growth and saw quarterly sales jump 23% on a currency-neutral basis to lead growth in the Beaverton, Ore.-based firm’s international business.
Market watchers were also positive on Nike’s Q2 growth. In a distribution note, Susquehanna Financial Group analyst Sam Poser explained that the political turmoil between China and the United States has not led to backlash from Chinese customers.
“Our checks indicate that the Nike brand is not perceived as a U.S. brand in China. Rather, Chinese consumers view Nike as a global athletic brand not associated with any particular country or part of the world,” he said. “Nike has been entrenched in China for over three decades and has deep-rooted, well-established relationships not only with the Chinese government, but perhaps more importantly with the Chinese consumer.”
This week the trade war and coronavirus appear to be making an impact.
Nike reported disappointing quarterly financial numbers Thursday, but Donahoe said the pending layoffs are not related to those poor results.
No one expected the company to enjoy a good quarter in the midst of a global pandemic. But few expected the company’s sales to decline by 40% or its losses to surpass $700 million.
Shares were down more than 7% Friday morning at $94.21. The stock has traded between $60 and $106.62 in the past year.
The reorganization isn’t about cutting costs, Donahoe said. It is intended to create a better environment for completing important tasks. Th subject line on his email to employees, a copy of which was obtained by The Oregonian, read “Transforming Nike Faster.”
This series of blog posts on The Saker is long and excellent read for a deeper understanding of China's recent history and potential impact on the world. The author in his own description
By profession I’m an Engineer and Consultant, but my first love was and is History and Political Science. In retired life, I’m pursuing higher study in Economics.
Open thread all discussions are welcome.
Enjoy your 4th of July