China’s market for fast-moving consumer goods has exploded over the past decade. And as millions of households cross the income threshold for packaged goods consumption, the market is likely to continue to outpace growth in the overall economy. By 2000, some 260 million people will already be able to afford packaged consumer products, making China the world’s largest market in many mass consumer goods categories such as beer and biscuits. Not surprisingly, winning in China has become a top priority for ambitious multinational corporations (MNCs), many of whom see China as a once-in-a-lifetime opportunity to catapult themselves into position for global leadership.

But what will it take to win in China? By 2000, the leaders will have achieved category market share of at least 20 to 25 percent nationwide—probably more if they are considered clear winners. For mass market categories such as food, beverages or personal care, this implies sales in excess of $1 billion—10 times more than the average company in a McKinsey survey of 13 leading MNCs in 1995—and rapid expansion of salesforces, representative offices and joint ventures. But market leadership will be increasingly difficult to achieve.

For one, the competition is rapidly escalating. In most categories, the number of international competitors has jumped fivefold since 1990, forcing companies to become more and more aggressive in their pursuit of consumers. Meanwhile, consumers are trying many new products, often trading categories off against one another due to still limited disposable income.

Transportation is another problem: enormous distances coupled with poor infrastructure add up to a major headache. It can take up to a month to transport a container by rail from Beijing to Guangzhou in the south, a distance of 1,900 miles. A similar length journey in the United States—Baltimore to Houston—would take a week. Distribution, meanwhile, is expensive as the vast majority of retail outlets are small stores or kiosks, and distributors (who are usually state-owned) provide a very poor service.

Joint ventures, though often a necessary route to expansion, can prove exceedingly difficult to manage. Chinese partners might, for example, resist investment in brand and channel development, want to sell to anyone, anywhere, and oppose personnel cuts.

Finally, good local sales managers with the right kind of experience and professional approach are hard to find and increasingly expensive.

Current approaches often fall short

In this environment, many MNCs are finding their current approaches, while reasonable on the surface, inadequate. They can even lead to destructive cycles that halt or reverse early successes. MNCs typically take one of three general approaches in China.

Limited commitment is often the response to significant past investments and the belief that the company should now be reaping some rewards. But unless a company continues to invest in sales and distribution and augment local partners’ weak skills, it will be overwhelmed by more committed competitors and fail to build a strong organization.

Some MNCs, recognizing the challenges of launching brands properly in China, decide to focus on a narrow range of products. They assume it is futile to compete with cheap local goods and position their products at the top. But the frequent result of a narrow focus is higher unit sales and costs than competitors that have a broader range of products, and disinterested distributors who are likely to gravitate toward higher-volume competitors. Again, the outcome is an eventual drop in market share.

A third group of MNCs is much more committed and concentrates on rapidly expanding volumes. They move aggressively into new cities and a large number of smaller outlets. While this approach can lead to impressive share gains, it can easily spin out of control, resulting in unpredictable pricing and positioning and unplanned cashflow problems.

Principles for success in China

Success in China requires boldness. From the outset, MNCs must play to dominate. What is needed, therefore, is an integrated approach that allows MNCs to build momentum in core markets and rapidly replicate these successes in other markets across China.

The first step is to ensure dominance in base markets, as dominant players enjoy a disproportionate share of profits that can be used to fund further growth. Moreover, early success will help win corporate commitment. Dominance is achieved by entering early and building channel and consumer momentum by focusing on the key requirements of distributors, retailers, and consumers. This requires committing enough resources to build logistics and marketing and sales capabilities, and reducing reliance on weak joint venture partners.

Second, companies must gradually extend this dominance, prioritizing resources on markets likely to pay the best rewards but being careful not to get shut out of secondary markets. The way to do this is to define individual markets as groups of cities clustered around key regional capitals. The proximity and economic ties of the cities should help speed entry and maximize scarce management and financial resources (see Exhibit 1). Which market or city clusters to target first will depend on both the attractiveness of the market, and whether the MNC can feasibly dominate that market given factors such as the current level of competition or how much investment will be needed.

Third, MNCs must work to sustain their hard-won dominance by ensuring control of all aspects of the business. This will entail taking increasing control of any joint ventures that appear to be hampering expansion, and investing heavily in human resources—usually with a heavy expatriate presence to provide leadership and by training locally-employed staff. Crucially, sustained dominance will depend on balancing corporate aspirations and commitment levels with cashflow requirements which can often be negative as MNCs rush to enter new cities first.