Coke and the myth of Guanxi

There is a reason Coca-Cola is in 200 countries around the world, and it has to do with their uncanny ability to make friends as needed.

It’s an ability which it demonstrated as far back as World War II, when they managed to operate in Germany, as they supplied Allied citizens and troops.

In 1978, due to careful maneuvering and communications, Coke was selected as the only foreign company allowed to sell packaged cold drinks in China. About $5 billion later, Coke has 16 percent of the carbonated drinks market, employs 50,000 people and China has become Coke’s fourth-largest market. Coke’s future plans include another $4 billion investment over the next three years.

Very good for a company whose name, Coca-Cola, rendered phonetically in Chinese sounds like the words for “bite the wax tadpole” or “female horse stuffed with wax.” Of course, being smart, the company headed off this brand nightmare by selecting a close phonetic equivalent, kekou kele (a Pinyin Romanization), which roughly means “let your mouth rejoice.”

Coke re-entered the Chinese market with 30,000 cases of imported soda, which it was only allowed to sell in three major cities – Beijing, Shanghai and Guangzhou. The buyers were mostly foreigners, as it could only be bought with hard currency or foreign script, which only foreigners and a few privileged locals had. Today, Coke has more than 30 bottling plants dotting all but the Western regions of China.

So how did they do it?

When Coca-Cola came back to China in 1978, it wanted to set up its first bottling operation in Shanghai, one of three cities it had bottling operations in prior to 1949. The Shanghai government rejected the company’s request. Luckily Coca-Cola’s joint venture partner, China Oil and Food Corporation (COFCO), was willing to vacate one of its plants in Beijing, a roast-duck plant, for Coke’s first bottling plant. It turned out to be a shrewd move, as it put Coke in close proximity to the central government and COFCO’s headquarters. At a time when all foreign joint ventures were under the direct scrutiny of the central government, it made communications and obtaining the necessary permits easier and quicker.

In 1978, China had only one orange carbonated drink which was distributed nationally. It was considered a luxury item. There were numerous local bottling and beverage operations in almost every city, but they were plagued with outdated equipment, poor marketing and bloated employment rolls.

Coke adopted a “Think globally act locally” strategy which allowed the company to use its 450 brands selectively as they developed new products which appealed to the more health-conscious tastes of Chinese consumers.

Coke used its expertise to build a manufacturing, sourcing and logistics network that allowed them to efficiently control costs and service the market. Localizing brought down costs and created a local supply chain which puts 600 million U.S. yearly into the Chinese economy. Today, 99 percent of the ingredients are sourced in China and Coke has logistic facilities in every Chinese city with more than 1 million people.

Coke fought off capitalist suspicions and anti-American feelings engendered by incidents like the bombing of the Chinese Embassy in Belgrade, by advertising campaigns featuring Chinese athletes, culture and history.

Coke made friends and alliances with groups with powerful allies within the Chinese government. These included, in addition to COFCO, the Swire Group, Kerry Properties and the Coca-Cola Bottling Investment Group.

In 1927, when Coke had three bottling plants in Tianjin, Shanghai and Qingdao, it used a British company which had strong ties within China. In 1978, Coke had to deal with the Chinese government directly. The strategy adopted is a Coke classic (excuse the word play): create bottling operations jointly owned by Coke and a few “friendly and useful” allies, then manage the partnerships by retaining exclusive control and sale of the Coke concentrate.

The “friendly and useful” allies get rich and naturally tend to be very protective of their newfound horn of plenty. This last piece of magic is accomplished through the Coca-Cola Bottling Investment Group. State-of-the art bottling plants run by experienced managers and technicians, financed at low rates by international financial sources, buy the Coke or other soda concentrate from Coke and create an evergreen money tree.

In Coke’s case they actually gave their first three bottling plants directly to the Chinese government, the first one in Guangzhou was turned over in 1982 and the second and third ones in Xiamen and Zhuhai in 1984. The “gifts” were part of a long game, which gave permission for Coke to expand its sales and distribution. Thereafter, a number of new faces, Chinese, started joining the ranks of the Coca-Cola Bottling Investment Group and the rest was history, or at least until Sept. 3, 2008.

By 2008, Coke was a legend in the foreign investment community. They seemed to have the kind of Guanxi, or relationships, other companies could only dream about. One of only a few foreign groups to have navigated their Joint Venture (JV) with success and profits, they seemed untouchable.

On Sept. 3, 2008, Atlantic Industries, a wholly owned subsidiary of The Coca-Cola Company, agreed to buy China Huiyuan Juice for three times its previous day’s closing price. The major shareholders agreed, but the deal was scuttled by the Chinese Ministry of Commerce over monopolistic concerns, because the combined entity would control 37 percent of the fruit juice market.

So where did the train fall off the tracks?

At a time when the Chinese government is striving to encourage its companies to develop their identities and ability to climb the value chain, there is little interest in fattening the bottom line of foreign companies, no matter how well connected.

Huiyan was a leading star of Chinese enterprise and was already exporting to 30 countries around the world, including the United States. Coke’s financial, marketing and manufacturing strengths, combined with Huiyuan’s sourcing, production and distribution, would have produced an unstoppable market player that would have monopolized the market, which was not something Beijing was looking for.

It was an overreach, which Coke realized, and which is why they are pursuing an internal growth strategy. It is also an example of how Guanxi in China is situational, not institutional, and a lesson for all those coming to China’s markets.

Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.

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