Cracking China: in a new book, Procter & Gamble tells how it brought consumerism to an untapped market.

In the late 1980s, Procter & Gamble launched one of the biggest, most consequential ventures the company had ever undertaken, trying to crack the consumer products market in China. The risks were substantial. The country still had a Communist government, and whether the ruling regime was truly committed to economic liberalization remained uncertain. Moreover, P & G was still establishing itself in the region: As of 1985, the company had full-scale operations in only one other east Asian country, Japan. China, of course, was vastly different. To begin with, it was massive, with a large rural population that remained poor by Western standards and a labor force accustomed to the "iron rice-bowl" of state ownership. A host of unknowns surrounded the idea.

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On the other hand, staying out of China might prove even riskier. The size of the opportunity was breathtaking. If P & G held off while competitors moved in, it would be relinquishing potentially vital strategic ground. Once entrenched in the market, competitors would not be dislodged for decades. Moreover, there was the threat--and the opportunity--of rising Chinese competitors. Executives like Ed Artzt, who strongly championed entry, argued from the basis of P & G's experience in Japan, where ferocious competition had taught the company invaluable lessons about brand building and operational discipline. Ultimately, the logic for entry into China became inexorable.

Procter & Gamble began paying serious attention to China in the early 1980s, as the government began to open local markets to foreign investment. In 1980, China established the first of what became a series of special economic zones, or contained staging grounds for free enterprise. The most prominent zone took root near the village of Shenzhen, in Guangdong Province on the border of the New Territories adjacent to Hong Kong and Macao. Explosive industrial growth transformed the region as a result. In 1984, China expanded the number of economic zones to 14, further widening the scope of capitalist activity. P & G watched these developments with growing interest.

The company conducted its first market research in Beijing and Shanghai in 1985. Foreign commerce remained strictly contained at this point, channeled through "friendship stores," where consumers with access to hard (i.e., foreign) currency could buy a limited range of imported goods. In other words, there was no real Chinese consumer market yet. Nevertheless, P & G wanted to put a team on the ground to get a feel for what it would be like to operate in China. The company sent in Berenike Ullmann, a young, Chinese-speaking market researcher.

Procter & Gamble was laying careful groundwork. Before putting products on the market or setting up operations, P & G wanted to introduce itself to political authorities and the Chinese public. Its goal was to test the effectiveness of several P & G corporate ads. "We went into the market two or three years before we actually started selling products, and started advertising to build up a reputation for the company," Artzt recalled. "It was very, very effective. Every commercial ended with the words P & G. We must have said that a billion times."

The company's first impulse was to go in with laundry brands. After all, P & G dominated the category in the United States with Tide and was in the process of making Ariel a billion-dollar global brand. When P & G dispatched Ullmann back to China in 1986, it was to conduct a laundry research program. Ullmann, accompanied by agency staff from Hong Kong, recalled taking "cameras, fishhook scales, bottles containing samples of beef blood, spaghetti sauce and grass for staining laundry samples ... as well as two large cartons with 750 small plastic bottles."

The results were not particularly encouraging. P & G brands far outperformed local alternatives. But Ullmann's tests also revealed that Chinese consumers held relatively low standards for detergent performance. Marketing P & G brands on the basis of whiteness, brightness or superior cleaning power did not look promising.

On the other hand, Ullmann's work did uncover some intriguing results. Near the end of the laundry testing, the team tacked on some hair-care research. Here they found definite potential. Chinese consumers bought their shampoo in bulk, bringing containers into shops to collect a product that had the consistency of jelly. Against the distinctly low performance of these local brands, Ullmann's team tested Head & Shoulders and Pert Plus (then still in test market in the U.S.). Consumer response registered dramatically.

Procter & Gamble shifted its entry planning toward hair care, and several advantages emerged. The capital investment would be much cheaper. The company's acquisition of Richardson-Vicks during this period also reinforced thinking along these new lines, providing P & G with ready-made bases of operation in nearby Hong Kong and Singapore. Finally, the case of Taiwan, where the company had recently decided to focus on feminine protection and hair care, also influenced P & G's China strategists. The company thought of Taiwan as a kind of large-scale test market for China as well as a market in its own right.

Efforts to identify potential laundry partners, meanwhile, had bogged down. Chinese regulations dictated that foreign businesses enter the country in partnership with local businesses, an approach P & G preferred as well. But Chinese detergent manufacturers reacted coolly to P & G's overtures, and local authorities seemed reluctant to cede control of large factories to foreign investors. When it became apparent the company would be unable, for several years at least, to secure acceptable partnerships with local detergent manufacturers, P & G swung decisively to hair care as its lead entry category.

Other elements of the plan fell into place. Confronting a huge country broken up into provincial regulatory regimes and fractured markets, with patchy infrastructure, P & G decided to concentrate its initial penetration in China's three largest urban markets. Guangzhou (formerly known to Westerners as Canton), on the Pearl River in South China, would provide the first point of entry.

This move would plant the venture near Hong Kong, where expatriate P & G managers would live and base their operation for the first several years. It also positioned the company in one of China's most dynamic markets, the region near the Shenzhen economic zone, which was experiencing explosive growth. In addition, the company targeted Beijing (a natural choice, given both the scale of the local market and the importance of cultivating a relationship with the national government), and Shanghai, China's largest city, which was also undergoing rapid growth.

To facilitate entry, P & G joined with Hutchison Whampoa, a huge trading company based in Hong Kong and increasingly active in China. With Hutchison's help, P & G identified the Guangzhou Soap Factory as a promising initial joint venture partner. In August 1988, P & G and Hutchison struck the deal. Procter & Gamble assumed management control over the new company, called P & G (Guangzhou) Ltd., drawing from P & G's Hong Kong office to provide most of the needed managerial talent.

The venture got off to a fast start. Incoming P & G managers established an effective working relationship with the former general manager of the Guangzhou Soap Factory. Wedged into a small alley in a busy section of Guangzhou, the factory received raw materials carted by tricycles down a narrow alley and ferried manufactured product the same way to trucks waiting in the street. The venture led with Head & Shoulders, producing its first batch in October 1988.

The introduction of Head & Shoulders unleashed a torrent of consumer demand. Guangzhou residents were just beginning to earn disposable income and getting their first exposure to Western brands. "In those early days," recalled Dimitri Panayotopoulos, general manager of P & G China from 1993 to 2001, "our brand launches used to be featured on the evening television news, and consumers used to queue in the department stores in the hope of buying them." The appearance of a high-performing shampoo proved sensational. Chinese consumers had small disposable incomes by Western standards, but they placed high value on personal appearance, especially attractive skin and hair. Head & Shoulders sold--often in single-use sachets priced at half a reminbi each, the equivalent of 14 cents--as quickly as P & G could make it. Even in the countryside, where incomes were much lower, consumers splurged to buy sachets for special occasions like weddings and celebrations.

As P & G acquired operational experience on the ground in China, the company expanded its brand portfolio, entering the skin care market in May 1989 with Oil of Ulan (Oil of Olay). A second shampoo, Rejoice (Pert Plus), soon followed.

The results remained highly encouraging. Presenting to the board of directors in June 1989, P & G President John Pepper reported that the company had invested $4.5 million in China, and that the "start-up has by far exceeded our own and our partners' expectations." Even with sales still concentrated almost entirely in Guangzhou and the surrounding region, China had already become the fifth-largest market for Head & Shoulders. In 1992, the company launched Pantene Pro-V, its new global powerhouse brand, followed shortly by Safeguard bar soap. With each step, overall sales climbed, passing $50 million by late 1991, when the venture achieved profitability, and approaching $100 million by fiscal year 1992-1993.

As it built out basic structures of production and distribution, the company learned more about Chinese consumers. Safeguard's ad campaign, for example, required significant changes. Initially, the company imported its advertising from abroad. "We simply took the very successful Safeguard advertising from the Philippines, and reshot it with Chinese talent," said Panayotopoulos. "There were several copies: one was a father coming home grimy, sweaty and smelly from his football game; one was a teenager worried about her pimples; and one was a little boy who grazed his knee, and his mother used Safeguard to prevent bacteria growth."

Aspirational Ads

In China, however, the ads failed to connect. "Chinese consumers take advertising very literally," Panayotopoulos said. "So, women who watched the adapted Philippines copy thought Safeguard was designed to treat children's cuts and bruises and to deodorize sweaty men. They told us, 'we don't get dirty and sweaty like the men--so we don't need Safeguard.'" Once P & G put in place new advertising that stressed usage by the entire family, the brand began to acquire stronger share.

A similar scenario occurred with advertising for Rejoice. At first, the company adopted the locker room-themed ads (for Pert Plus) devised in the U.S. and used effectively in other global markets. Since Chinese consumers were unfamiliar with conditioners, positioning Rejoice on the basis of convenience as a two-in-one product was confusing and meaningless. P & G struck a much more resonant note in a new campaign, called "Secret," in 1994. Depicting an airline stewardess, the ads evoked images of travel--particularly exotic to Chinese at the time, with travel restrictions just beginning to loosen.

An early, extended visit to China by John Pepper, the company president, in 1991 affirmed both the central role China was assuming in the company's long-range strategy and P & G's commitment to building a well-rooted organization there, Pepper spent two weeks touring operations and meeting with Chinese customers, consumers and government officials, including Vice Premier Wu Xueqian and the mayors of Shanghai and Guangzhou. China represented "one of the significant strategic growth opportunities for the company over the next 10, 20, 30 years," Pepper said.

Capitalizing on the opportunity was going to depend not only on the quality of the brands P & G put on the market, but also on the character and nature of the company's long-term investment in China. Specifically, Pepper argued, success would depend on three factors: introducing world-class technology; cultivating strong relationships with government officials at the national and especially provincial and local levels; and developing the strongest possible local organization.

In short, P & G approached China not as a market to be invaded, but as an opportunity to build new partnerships and develop local capabilities. Other multinational competitors, including Unilever, SC Johnson, Kao and Colgate, had launched brands in China, but none had prioritized local organization building the way P & G had. In recognition of this commitment, the Chinese government granted the company unusual concessions, including permitting employees to travel across provincial boundaries and to obtain visas for overseas training.

Ultimately, long-term success or failure in China cannot be measured by the market shares of any given brand or set of brands. P & G will stand on the strength of the organization it builds there and the capacity of that organization to contribute to the enterprise as a global whole. The overriding lesson in China remains deeply familiar: Build for the long term. China is proving to be more than an enormous market and more than a series of low-cost factory sites. It is turning into a series of invaluable opportunities for new partnerships, new technologies and new entrepreneurial energy for P & G as it navigates through the next century.

RELATED ARTICLE: Charting Success in China

1980

China establishes special economic zones, opening certain local markets to foreign investment.

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1985

Procter & Gamble conducts its first Chinese market research studies in Beijing and Shanghai.

1988

P & G launches joint venture with Guangzhou Soap Factory. They introduce Head & Shoulders; within 12 months, it claims 15% share of provincial market.

1989

P & G enters skin-care market with Oil of Ulan (Oil of Olay); the company follows up with a second shampoo, Rejoice (Pert Plus).

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1991

P & G opens plant in Huangpu, creating capacity to produce additional brands and serve demand in Shanghai and Beijing as well as Guangzhou. Sales in China exceed $50 million.

1992

The company debuts Pantene Pro-V shampoo and Safeguard bar soap.

1994

P & G rolls out new ad campaign for Rejoice shampoo; featuring a flight attendant, ad evokes images of travel as Chinese government begins to ease restrictions on personal travel.

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1996

Sales reach nearly $800 million.

1997

P & G launches oral hygiene campaign to spread awareness of cavity prevention as Crest toothpaste hits market.

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1998

Unemployment rises in China; consumer spending drops. P & G absorbs heavy losses, especially in laundry detergent market; slashes prices; and consolidates production.

P & G opens Beijing Technical Center for R & D in developing nations, a partnership with Tsinghua University that deepens company's local ties.

Reprinted by permission of Harvard Business School Press. Adapted from Rising Tide: Lessons from 165 Years of Brand Building at Procter & Gamble by Davis Dyer, Frederick Dalzell and Rowena Olegario. Copyright [c] 2004 by the Procter & Gamble Company. All rights reserved.