FREE ESSAY ON KFC IN CHINA

KFC IN CHINA

KFC in China
In 1986, Tony Wang was Vice President of the Southeast Asia division of KFC. He had an
opportunity of bringing the world's largest chicken restaurant company into the world's
largest populated country. Wang was an experienced entrepreneur and had been working for
KFC for seven years. No other fast food companies were currently operating in the
People's Republic, so Wang did not have anything to go by and nothing to help him
evaluate the attractiveness of the Chinese market. The main downsides of operating in
China were huge demand on managerial resources and the low prospects of significant hard
currency repatriation. 
The first decision that Wang was faced with was where to open the location of the first
KFC. Obviously there were differences from city to city but a reliable way to evaluate
these differences did not exist. Wang was interested in the enormous potential of the
Chinese market, but he knew that many other companies had failed in similar ventures.
Ta-Tung, (Tony) Wang was born in the Sichuan province in the People's Republic of China
in 1944. He moved to Taiwan when he was young and graduated from the Chong-Yuan
University with a degree in engineering. He later moved to the United States, and in 1973
completed a masters degree in management science from the Steven's Institute of
Technology in New Jearsey. He then attended New York University where in 1975 he received
his post-master's certificate in international business management.
Wang joined KFC in 1975 at the headquarters in Louisville. Wang was convinced of the
large potential for American-style fast food in China. He attended a lecture by the mayor
of Tianjin(the third largest city in China), who spoke of the many opportunities for
investment in his city. Wang was asked by the mayor to sit on a council to advise on
improving the fast food industry in Tianjin. 
KFC was currently owned by R.J. Reynolds who were very interested in getting into the
Chinese market to sell their cigarettes. American smokes were in high demand in China.
Wang had the support of top management. He spoke perfect Mandarin and English and was as
comfortable working in New York as he was Beijing. He also had experience negotiating
with the Chinese. 
As Tony Wang investigated more and more into the necessary requirements, concerns were
beginning to grow. He knew that Chinese workers would have problems working under the KFC
guidelines. Time-consuming, expensive training programs would be a necessary requirement.
As well their large capital outlays would be needed to find and negotiate a partnership,
to sign a lease and gain operating permits.
Wang began to thoroughly research the Chinese market. The first are that he began to look
at was location. The reason that this was so important was because the location would
have dramatic impact on the profitability, future expansion to the rest of China, and the
managerial resources commitments. Four cities were selected as potential locations for
the first store: Tianjin, Shanghai, Guangzhou, and Beijing.
Tianjin - The major advantages of Tianjin were the established contacts that Wang had
there. As well, it was only one of three municipal governments in China that were not
controlled by the Central Government in Beijing. The major problems with Tianjin were it
lacked a convenient supply of grain-fed chickens. The chickens there were fed using fish
meal-fed chickens. The Chinese place great emphasis on freshness and taste. They also
were not a very popular tourist location. Wang expected most profits to be in Renminbi,
but some foreign currency would be needed for profit repatriation and purchasing needed
supplies, that can only be purchased outside of China.
Shanghai - Shanghai has over 11 million people, and is regarded as China's most
prosperous business centre. Shanghai is home to a large variety of Western hotels,
business facilities and tourists, however its also is not a very popular tourist spots
because of the pollution and loud noise. The investment could not be justified if it did
not supply an adequate amount of foreign currency. . However it did contain several feed
mills and the largest poultry supplier in China.
Gangzhou - Gangzhou is located in Southeast China only a short distance from Hong Kong.
Gangzhou is recognised for it preferential treatment for foreign investment. It has
greater autonomy in approving foreign investment projects, reducing tax rates, and
encouraging technological development. Many tourists visit Gangzhou because of its close
proximity to Hong Kong. As well any operations could be managed directly from the
existing Hong Kong operations. As well Wand did not anticipate difficulty finding a
supplier for chicken.
Beijing - Beijing is the second largest city in China. It is the political and cultural
centre and has relatively high levels of affluence and the education of its inhabitants.
It is also the tourist centre of China, with many attractions located in and around
Beijing. A Beijing location would also give a higher profile. This could be good and bad.
If they received approval from central government they would be able to enter the rest of
the Chinese market without hassle. However, because of the higher profile the government
might decide that they would not fit in to the Chinese landscape, which would prevent
them from ever succeeding. Outside of Beijing there were also numerous poultry farms.
Wang knew that the location was the most important and would decide whether KFC would
succeed or not. There were currently no other competitors in the Chinese market so now
was the time to strike and take advantage of the situation, but the risks were high and
he had to weigh out these risks for a huge gain or loss. 
In early February 1987, Wang decided to open operations in Beijing. This was decided
because of Beijing's high amount of tourists and its autonomous municipal government.
However, he was feeling more worried about the venture. KFC just recently signed a joined
venture partnership. Wang's worries were stemming from the difficulty he had been
experiencing getting things done in a city governed by a bureaucracy that seemed
impossible to either understand or work with. He felt that he would never be able to find
a location in the city and government approval on everything was required. Wang was also
concerned whether Chinese workers would be able to meet KFC's demands for cleanliness,
quality and service. 
The establishment of a joint venture was considered essential because Wang described them
as, completely impossible for us to understand. In fact, trying to do so is a complete
waste of time. Trying to understand investment regulations, winning approval for
operating licenses, leases, and employment contracts could certainly prevent them from
proceeding. A local partner was not required under Chinese law, however Wang felt it
would in setting up operations and maintaining its continued viability.
Through ties that R.J. Reynolds had with the Ministry of Light a partnership was formed
between KFC and the Beijing Corporation of Animal Production, a Beijing city
government-controlled producer of chickens. After careful inspection KFC found that this
would indeed work out because they already produced 3 of the approved breads of chicken
required for operations. 
Negotiations with the Poultry producer commenced with Mr. Jue Xia, a senior manager in
the Beijing corporation. Xia felt that it would be to meet KFC's large demand because
they did not have access to more excess reserves of grain. Xia was also hesitant about
KFC's quality standards. However, they thought that a partnership with a Western firm
would be beneficial for them by gaining valuable international experience, and Xia felt
the Tony Wang was unlike most American managers; he was a man he could deal with. 
The Beijing Corporation helped Wang find a chicken supplier but they lacked close contact
with the government agencies that would be essential to setting up operations. So a third
partner was needed. Both partners agreed that the Beijing Tourist Bureau would be able to
meet their requirements. The Tourist Bureau was responsible for the supervision of the
construction and operation of all hotels and restaurants in Beijing. They had lots of
experience speeding up the construction of many Western hotels, and had many types
participated in a joint venture in these operations.
During these negotiations it happened that KFC was sold the Pepsico. During this time KFC
was the second largest fast food chain in the world. It was initially thought that Animal
Production had only come on board because of pressure from the Ministry of Light
Industry, who wanted to win points with Reynolds, so the acquisition came at a bad time.
But as it turned out Pepsico's connections with the government in Beijing were even
stronger than Reynolds, so negotiations continued with a renewed interest. 
To convince the partners to become part of the venture, Wang offered a guarantee of five
percent return on equity, much better than they could receive domestically. This sealed
the deal in winning over the partners. KFC retained 60% of ownership, The Tourist Bureau
received 27%, and Beijing Animal Production took 13%. This was the actual breakdown of
assets that each partner was contributing to the arrangement. This deal was privately
pre-approved as acceptable in negotiations with the Foreign Economic Development and City
Planning Commissions. The approval of the partnership also required on the sharing of the
corporation. With one-half coming from KFC and the other half split between the other two
partners. The deal also stated that the chairman would be appointed by Animal Production
and the vice-chairman would be appointed by the Tourist Bureau. 
This concerned Wang because of loss of control of operations. Wang countered by
establishing the new store as a franchisee. With the franchiser being KFC's head office
in Singapore. This would require 3% of royalty payments to be paid to the head office,
and require the store to purchase it seasoning mixes from the head office, both using
hard currency. Wang also appointed a day-to-day general manager to Beijing, who would be
appointed by KFC and have control.
Although it seemed like all major challenges were over, they weren't. The approval of the
partnership did not give any operating authority for KFC in the city. They needed a
Licence to Execute a Business Activity. Approval of this required the signatures of the
District government, the Commerce Department, the Taxation Department, the Health
Department, and the Food Supply and Logistics Department. None of these agencies and had
any coordination, so approval from each separately was required and this could take
months or years. Tony Wang stated:
 We are pioneers in China, but so are the Chinese. However, whether they want to learn or
not is another story. Many Westerners make the same big mistake in China: they assume
that they can just pay to have the required work done or at least expedited. This just
doesn't work in China. The Chinese are not motivated by a desire to do things right
simply for the sake of doing things right. They don't want your help in speeding up the
process. They just want to avoid problems. And unless we can convince them otherwise, we
are their biggest problem.
A license was necessary before a lease could be signed, but Wang was worried that a
desirable location might not be found. All buildings and possible space in Beijing is
occupied. As well, Chinese regulations stated that new tenants would have to guarantee
the employment of any workers left jobless when a new tenant took over. This worried Wan
because he would be stuck with a number of unskilled Chinese that hew would have to
employ.
The first store that was to be opened Wang wanted it to be big and flashy because it
would determine the future success of KFC in China. However this was strategically a good
idea it ran counter to the culture in China were there was a history of hostility towards
Western culture. 
In February 1987, a license was issued by the city, allowing KFC to operate in Beijing.
The Tourist Bureau played an integral role in speeding up the application. Under the
license KFC was given a tax remission for two years; profits in three years, four and,
five would be taxed at 16.5%, with profits thereafter taxed at 33%
Wang now had to select a site open the first location. But no matter where a location was
chosen KFC would still require a building permit, as well as hookups for electricity,
water, gas, and heating before the store could open. Wang discovered that many of these
services were difficult to obtain, and it was not uncommon for applications to not be
processed for months. Another concern was the company's ability to secure import licenses
needed to bring equipment into the country: pressure frying machines, cash registers,
blending and cutting equipment for the kitchen. Each one required separate permits that
could take months to attain.
During all these negotiations Tony Wang realized that no one had thought to test market
the area. It was known that the Chinese liked chicken, and from KFC's success in Hong it
was assumed that it would be accepted here, but now one had time to find out for sure and
they were forced to cross there fingers. Another problem was finding a reliable potato
supplier of quality potatoes. If they were unable to they would have to use mashed
potatoes, and Wang did not know how the Chinese would receive this.
But the largest concern facing Tony Wang was whether or not the Chinese employees could
meet the quality, service, and cleanliness requirements. They Chinese emplyees would have
little appreciation for KFC's international standards of cleanliness or product quality.
Most domestic organisations lacked any incentive programs, work was seen as something to
be avoided, and service was a foreign term. The KFC organization would not allow the
store to open if these levels were not met. The ironic part was that Chinese consumers
would accept less then what was required. This would create conflict with the partners.
Tony Wang also wondered what KFC would do with the soft currency that the venture would
generate, and wondered whether or not there would even be any profits.
Wang was face with three options: 1. Pull out. Cut the company losses and avoid negative
publicity if the venture failed. This would further research and and KFC could try to
re-enter in a few years when there was more complete information. 2. Go ahead slow. Take
more time evaluating the situation to make sure the partnerships were secure and the
market would accept KFC, however this would invite competitor response. 3. Go ahead full.
The market had high potential for success of KFC and with 1.1 billion people large
potential for profits. 
Wang decided to go full ahead. The location was finally found. The central government
approved the least because Wang sold them on the idea that the restaurant would represent
a symbol and statement of the People's Republic open policy with the West. The lease was
finally approved in April of 1987. However they did not have the building permit which
would allow them to make necessary renovations. They also required hookups for gas, water
and heating. Applications were continually lost or just went unanswered.
When KFC announced that it would be hiring it was flooded with applications. Management
decided to treat all applicants equally. Referrals would not be accepted. This was a
unique move in China where family contacts are usually used to land highly sought after
jobs. This move created conflict with the partners. Most people were attracted to working
for a foreign joint venture because they paid considerably higher than domestic firms.
Control over workers was mainly attained through three primary moves: hiring, training,
and incentive pay. Under Chinese foreign venture law KFC was given control over hiring
and firing with their own criteria. KFC hired on five key qualifications: acceptable
applicants must be high school graduates, must speak some English, must be presentable in
grooming and dress, must demonstrate a willingness to work hard, and cannot have had
previous work experience. Once employees were hired extensive training began. The
equipment was received and hands-on training was given. Incentive pay played a large role
in improving employee attitudes towards quality, service, cleanliness. To give employees
a slow introduction to the work, the store opened for four hours in the morning and four
in the afternoon, and between times they reviewed what had happened and what needs to be
improved.
Water and electricity and heat were finally obtained. Adequate potatoes for fries were
never found so they decided to offer mashed potatoes and gravy instead. The store finally
opened on November 12, 1987. It opened with a gala affair, speeches were made by the U.S.
ambassador, the mayor, and the chairman. There was also members from the local and
international media.
March 1988, Wang was staring out of the third storey window of the KFC's Beijing
restaurant at the crowd's gathering below. However things were not running smoothly,
although after four months the Beijing KFC was the number one selling branch in the
world. Conflict was arising with the partners and KFC's management style. The partner's
felt that KFC was too strict and pushed as to whether lower standards would be equally
acceptable to consumers. The store manager indicated that the employees required constant
supervision and problems still arose. In one instance he noted:
There are major differences which separate American management practises from the Chinese
perspective. In America, managers try to be objective. They assess peoples' performance.
In China, they judge employees by other criteria. What is their personality like? Are
they friendly? How well can they talk? Let me give you an example. I recently asked one
of our employees to mop the floor. He told me that it had just been mopped. When I pushed
him on this he admitted that he really didn't know when it had been mopped. Finally,
after some arguing he agreed to mop it again. However, when I returned later I saw the
job had not been done. Again, he used the same argument that it was mopped earlier. What
can you do?
They need to supervise employees was a constant strain on local management. Most of them
only wanted to be posted here temporarily, they saw this as an undesirable position. This
required the need to be continually searching for competent managers. When disputes arose
between management and staff the employees ran to the partners for help which put more
pressure on their relationships. The partners felt that it was their duty to advise and
direct on daily operations but as far as KFC was concerned there usefulness was running
out. They were integral in the start-up of operations but not were becoming more of a
nuisance. Another pressing matter was there supply of chicken was already at its maximum
and if KFC wanted to expand it would have to find another supplier if they wanted to
expand.
In April 1988 the decision was made to open to second location in Beijing. The building
that was selected had 60 employees, but only 17 met KFC's hiring requirements. Then in an
unprecedented move the Chinese government found positions for the remaining 43 workers.
KFC partnered with the Bank of China in the summer of 1988. This new partner brought new
opportunities to access further hard currency. They also helped them for alliances with
other poultry suppliers.
In the summer of 1993, KFC operated 16 restaurants in China. KFC continued to receive
invitations from other cities. Among their KFC stores their was only one Chinese owner.
All the other were joint ventures. This was a very important measure to ensure a high
standard of quality.
Major Learning Points
? Make sure you read your company's wishes before proceeding with a venture. Among other
things, this includes understanding the parent's level of commitment to the project,
preferences regarding operating mode, and performance expectations.
? Make sure that you have a commercial way to retain control of the venture. This can be
achieved by introducing technology, expanding the operation, moving locals abroad, etc.
Maintain the option to establish Joint Ventures with other partners elsewhere in China
? Take care in calculating foreign exchange earnings
? Recognize the managerial commitments/opportunity costs associated with the investment.
Would other options provide higher returns?
? Discounted cash flow analyses do not help much in situations of this kind. There are
simply too many variables to make an accurate assessment. Be willing to take a leap of
faith