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

Chief Executive, The, June, 2004

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.