By Allen J. Morrison & J. Stewart Black
After decades of effort, many foreign firms have concluded that becoming an insider in China is a fool’s-errand. As we report in our recent book, Enterprise China, foreign firms face two seemingly insurmountable barriers while operating inside China. 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 we label “Enterprise China”). 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 part of Enterprise China’s multi-part competitive strategy calls for ensuring that indigenous Chinese companies dominate domestically. It isn’t surprising that the odds are stacked against foreign firms.
Despite long odds, China remains the world’s second largest economy and in some industries has become the world’s largest market. China is not going away any time soon. So figuring out how to compete and win in China has become an increasingly challenging and yet an increasingly crucial hurdle to surmount.
Any serious firm that competes to win understands the importance of being an insider in their markets. And this is certainly the case for foreign firms operating in China. Central to achieving this is an “in China for China” strategy. Such a strategy requires significant investment, adjustments, and local autonomy. But it pays big dividends. 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. To achieve its 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 when Honeywell escaped being listed among the sanctioned U.S. defense companies giving it insider access to many key Chinese accounts.
Often 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. Facing this reality, Honeywell’s Garrett Motion unit created a no-frills version of its turbocharger and priced it on par with the knockoffs. Today, only three of the 100 imitators remain, and they became suppliers to Garrett.
None of this would be possible unless 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 State Owned Enterprises (SOEs) as they participated in the Chinese government’s Belt & Road Initiative (BRI). Honeywell China has been able to provide a large number of SOEs with hardware, software and integrated solutions that helped them undertake massive infrastructure projects across over one hundred countries and organizations targeted by the BRI.
Few would disagree that becoming an insider in China’s consumer space, with literally hundreds of millions of customers, represents a daunting challenge for a foreign firm. Impressively, in its 2022-2023 fiscal year, Yum China generated $10.34 billion in revenue, up a whopping 7.3% over the previous year. Yum China’s sales were nearly ten times more than its largest domestic rival Lao Xiang Ji (Home Original Chicken). In 2023, Yum China had nearly 13,000 restaurants in over 1,900 cities in China, including 9,000 KFC and 3,000 Pizza Hut restaurants. This was more than twice as many outlets as its next closest competitor, McDonald’s. As testimony to its insider status, in 2023 Yum China opened its 500th KFC store in Shanghai, nearly three times more than in New York City which had just 176 stores. 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.
How was Yum able to do this? 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 in Beijing. 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, company’s growth came in part because of significant menu and format adjustments made to better fit the local market. In 2022 alone, Yum China launched 500 new or heavily modified products. It 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.
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 also 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 and included hundreds of millions of members.
Despite mounting negative news coverage, growing trade frictions, and the looming presence of Enterprise China, China remains a lucrative market for many foreign companies. The experiences of Honeywell and Yum illustrate that it is possible to succeed in China by becoming an insider. Insiders are not interlopers or transients. Rather, they are fully committing to China as evidenced by decades of investment in time and management attention, significant adjustments to products and services, and restructuring and re-staffing to accommodate high levels of local autonomy.