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THE MARKETING OF A CONSUMER PRODUCT

IN PEOPLE REPUBLIC OF CHINA

A CASE STUDY OF A HONG KONG

SHAMPOO MANUFACTURER

by

STEVE CHUI CHI YIK

CHARLES LEE YEE KAI

RESEARCH REPORT

presented to

The Graduate School

In Partial Fulfilment

of the Requirements for the Degree of

MASTER OF BUSINESS ADMINISTRATION

TWO-YEAR MBA PROGRAMME

THE CHINESE UNIVERSITY OF HONG KONG

May 1985

（徐子翼）

（李以楷）

Charles F.Steilen

3

ABSTRACT

The economic. reforms and the open policy of China

since the fall of The Gang of Four trigger a series of

economic changes and much business opportunities are open

for foreign companies.

The rising of average income level of Chinese

citizens, together with government policy of upgrading the

life of people, increase demand for imported consumer

products and this provides a large potential market for

manufacturers and importers of high quality consumer

products.

However, the development of the huge virgin consumer

product market in China is no easy job. It needs qreat

patience, tactful interpersonal skills, large capital

investment and the expectation of a slow return.

One thing encouraging is that Chinese businessmen are

now quite willing to learn and accept western marketing

techniques. Though the media, the distribution outlets and

the sales force are not up to the western standard now, it

is improving rapidly.

For companies which have the patience and the

determination to develop the 1-billion population huge

market, they will sure get paid off in the near future.

7

ACKNOWLEDGEMENTS

We would like to express our deepest

appreciation to Dr. Charles F. Steilen, our project

supervisor for his valuable comments, suggestions and

insight.

Special appreciation and thanks are due to the

management team of Cheers Corporation, especially to Mr.

Dominic Fung, the Managing Director for their support,

assistance and encouragement.

TABLE OF CONTENTS

ABSTRACTS

ACKNOWLEDGEMENTS

Chapter

I INTRODUCTION

Reasons for the research

Nature of the research

Organisation of the research

II STATEMENT OF PROBLEMS IN MARKETING OF

CONSUMER PRODUCTS IN CHINA

Entering the market

Appointing distributor

Distribution

Advertising & promotions

Financial & human resources

Marketing mentality of Chinese businessme

Conclusions

III HYPOTHESIS FORMULATION

Hypothesis

Methodology

Scope of research

Limitation of research

Significance ofthe research

Conc1usions

IV BACKGROUNDS ON CHINA TRADE

Political and economic reforms

Changes and development in consumption

structure in the China market

Opportunities open up for China traders

Conc1usions

iii

iv

1

1

2

2

4

4

4

5

6

6

7

8

9

9

9

11

11

12

12

14

14

16

18

19

V BACKGROUND OF THE COMPANY 21

History of the company 21

The product portfolio 22

The market 22

The organisation 22

Conclusions 23

VI ENTERING THE MARKET 24

Alternatives 24

What american No.1 had done 25

Conclusions 25

VII APPOINTING DISTRIBUTOR IN FUJIAN PROVINCE 29

The experience of American No.1 29

Negotiation 29

Submitting marketing proposal 30

Agency agreement 30

VIII DISTRIBUTION OF THE PRODUCT INTO CHINA 32

Distribution outlets for shampoo products

in China

Distribution objectives selected by American 1

No.1 35

Distribution outlets selected by American No. 36

Conclusions 36

IX OBJECTIVES AND STRATEGIES 38

Market positioning 38

Products 41

Price 46

SaIesforce 49

Ad v e r t i s i n g 52

Promotions and Public Relations 57

Evaluation and control 62

Budget control 63

X MARKET DEVELOPMENT STRATEGIES FOR THE WHOLE CHINA 65

XI CONCLUSIONS 69

71

74

APPENDIX

BIBLIOGRAPHY

1

CHAPTER I

INTRODUCTION

Reasons for the research

The open up of the China market for foreign countries

is perseived as a golden chance for expansions by many

marketers. The huge size of the market and the absence of

keen competition all make them anxious to tap this market

potential However, outsiders know so little about China

after a long period of closing door policy. The

primitive market structure and the poor marketing knowhow

of China businessmen all make outside marketers puzzled and

they are searching hard to formulate a marketing approach

that can be fitted into the distinctive nature of the China

market. Though most marketers are very experienced

professionals with proven record of success in more

sophisticated markets, they lose thier confidence in the

China market as they are not sure whether Western marketing

techniques can be applied in China.

The small Hong Kong manufacturers, keen on selling

their products to China, are facing the same problems as

Western multinational corporations. Apart form ignorance

about the China market, Hong Kong manufacturers have one

additional problem-- the limitation of human and

financial resources.

The authors of this research are very sympathetic

2

with those small Hong Kong-manufacturers and this research

is conducted with the hope that the findingd of this

research can throw some light on the problems in China trade

and can help these manufacturers in the develop meto of the

China market.

Nature of the research

The authors of the research are quite clear that

marketing strategies are different industries and even for

companies of different sizes in the same industry. So it is

very hard to search marketing problems which can be

generalised to all kinds of products for all kinds of

companies. A horizontal survey is not feasible so a

longitudinal study is undertaken in this research.

A case study method is adopted tracing real life

problems encountered by one typical company in different

stages of development-of the China market. Though it is

impossible to generalise the findings to other industries

it calls the attention of Hong Kong manufacturers to

pitfalls in doing China trade and some recommendations are

given as guidelines for their references.

Organisation of the research

The whole research is divided into eleven chapters

with Chaper I explaining the reasons fpor doing the research

, nature of the research and the organisation of materails

in this research. This chapter explains the basic skeleton

3

of the whole research.

Chapter II outlines questions which the researchers

want to find answers to through this research. In Chapter

III, the authors put forward their hypothesis and explain

the methodology by which this research is done. In the next

chapters IV and V, some background information is given for

the China market and the company based on which this case

study is done.

In the succeeding three chapters, VI, VII and VIII,

problems in different development stages are analysed and

recommendations. are given. A comprehensive study of the

whole marketing model is put forward in Chapter IX. Chapter

•.X gives some recommendations for ambitious manufacturers

whose aim is the entire China market. In the last chapter,

an overall conclusion of the whole research is given and

lessons learned from the case study are highlighted.

4

CHAPTER II

STATEMENT OF PROBLEMS IN MAREKTING

OF CONSUMER PRODUCTS

IN CHINA

Foreign companies entering into the China market face

various problems. The degree of seriousness of these

problems varies with the size of the company as well as the

nature of the business undertaking.

.In this research, the researchers would like to

concentrate the problems anticipated by small Hong Kong

manufacturers that try to market its products to China. In

the following sections, main problem probably encountered

by China traders are listed with the hope to find an answer

through this research.

Entering the market

The main problem in trying to enter the China market

is to find out the appropiate channels. Publishing

advertisement on trade magazines, participating in trade

shows and direct contacting the authorized agents are means

of arousing the Interesta of the China agents. However, it

is very important to use the correct mean of channels e.g.

some magazines are specially circulated among a particular

industry.

Appointing-agents

5

A good, capable and. responsible agent can save' the

pricipal a lot of trouble and .help effectively* in

distributing the products. However it is difficult to

identify such agent. In addition, it is frequent in China

that more than one unit may claim that they are the

authorized agent for a particular industry. The conflict

between the pricipal in appointing the right agent among the

candidates is also a problem.

Negotiating with agent on the agency agreement is a

tedious task. It always takes a long time to arrive at good

agreement. Chinese are very good negotiators and they are

very patient to wait for the principal to take the first

step to compromise.

Reliability of the agent is essential. Sometimes the

agent would place orders without letter of credits and you

have to take the risk and put trust and confidence in them.

It provides a definite risk for, the principal, but

fortunately Chinese businessmen always keep their promises.

One addition risk is that Chinese businessmen do not like to

sign written contract unless at the very later stage of the

negotiation. and they value verbal agreement rather than

written ones.. Mutual trust is essential.

Disribution

There is limited number of distribution channels for

consumer products to be marketed in China. The commonest

ones are shopping arcades, supermarkets in large hotels,

friendship department stores, beauty salons etc. It is

6

essential to distribute the products approplately, to

different retailing outlets. The merchandisers in China. are

usually inexperienced and they have no concepts on western

merchandising techniques. So one problem waited to be solved

is to increase their merchandising knowhows.

Advertising- Promotions

Identifying the suitable media to carry across the

message is important. TV is not so common in China and the

programmes are usually not very attractive. Thus the

effectiveness of using TV is a question. Billboard, radio

and promotion activities may be more useful. The problem of

finding the suitable and effective media should be paid with

more attention.

There are only a few foreign advertising agents

operating in China e.g. Ogilvy and Mather, Interpublic. The

rests are local advertising firms and their standars are

doubtful. However, they do have better connections.

Placing advertisement in China has a lot of

restrictions e .g. you cannot exxagerate on your product

quality, you should avoid using words like Red China,

Communist China etc. Thus it is important to censor the

advertisement before use otherwise you may be putting

yourself against the Chinese law.

Financial_ human resources

The greatest problem of a small manufacturer is its

financial limitation. China trade is a long term investment

and the company has to drain a lot of money to support its

7

operations in China. Thus sound financial structure of the

company is essential.

Foreign exchange is another great problem waited to

be solved. Many provinces or units in China do not have the

authority to use the allocated foreign exchange.

Chinese businessmen still do not possess the

necessary marketing knowhows to market the products. Finding

knowledgeable marketing persons to take up the marketing

activities is an important issue. In addition, the work load

of the management of the Hong Kong manufacturer would surely

increase and a balance between their works in China and Hong

Kong is needed. One final problem is to find a good mean to

motivate the Chinese salesmen and other supporting staffs.

Marketing-mentality-of-the Chinese businessmen

Chinese businessmen usually do not have the

knowledges of western marketing. Thus the approach used by

Chinses businessmen and that used by foreign investors tend

to be different. It is important to have mutual

understanding and willing to accept each others ideas. In

addition, the Hong Kong manufacturers should watch for

wrong or ineffective marketing ideas of their Chinese peers.

The Chinese are eager to ask for transfer of

technology and marketing knowhows. But the Hong Kong

principal may not be willing or ready to transfer all the

knowhows and technology. Thus there may be conflicts

existing.

8

Conclusion

In the above sessions, main problem areas are

identified which can be summarized as the underdeveloped

market structure, poor marketing knowhow of Chinese

businessmen and the impact on financial resources of the

company. It is hoped that in the following chapters,

answers can be found for the above questions.

9

CHAPTER III

HYPOTHESIS FORMULATING

Though in the preceding chapters, a number of

problems are identified, the researchers have much faith

adn confidence that small Hong Kong manufacturers can be

successful in the China market. Their experiences gained in

the Hong Kong market can be applied to the China market with

some modifications. So, in this chapter, the hypothesis of

this research is presented.

Hypothesis

A small Hong Kong shampoo manufacturer positioning

its hair-care products as foreign-made, good quality, well-

established in Hong Kong but with pricing comparatively

cheap can successfully penetrate the China market. (with

Fujian as the selected location)

Methodolody

This research. is a case study based upon the

experience of a local shampoo manufacturer whcih had just

started its China operations a few years ago. It is hoped

that with a thorough and in-depth analysis of the various

stages of doing business with China, we can identify some of

the major problems faced by-new comers to the China market.

Afterwards we hope to come up with recommendations for

10

solving those problems in China trade.

Since the research is a case study, most of the

materials were obtained from the local shampoo manufacturer.

We gathered the information from personal interviews with

the management of the shampoo manufacturer, discussions with

the agent in China, literature research of the existing

documents of the local manufacturer. In addition, we also

did many library surveys as well as personal interviews with

other local companies that had frequent business contacts

with China-so as to provide enough background knowledges and

insights to the shampoo business in China. The researchers

went to Fujian Province several times to experience real

market environment of shampoo business in China. One of

researcher also worked hand in hand with the shampoo

manufacturer in formulating the marketing plan and related

strategies of the company's shampoo products marketed in

Fujian.

The study is set up by first formulating a appropiate

hypothesis for the shampoo manufacturer to market its

products in Fujian. Then the researchers would evaluate the

alternatives that can be used in each stages of marketing

the products compare the methods employed by the shampoo

manufacturer to that suggested by the researchers to see the

pros and cons of each method give comments and evaluations

for each stage. After that, the researchers would evaluate

the actual results of the shampoo manufacturer in China

trade to arrive at recommendation for penetrating the China

11

market. Finally, insights and lessons for this case would be

remarked to provide a general reference and guidelines for

future China traders.

SCOPE, LIMITATIONS SIGNIFICANCE

OF THE RESEARCH

Scope of the research

The research was a case study and so the whole study

was centered around the local shampoo manufacturer "Cheers

Corporation" (American No.1).1

It was a longitudinal study starting from the early

beginning when Cheers Corporation-started the ideas of

exploring the China market to the end when all the marketing

strategies were carried out.

All the problems discussed were taken from the

incidences of the Cheers Corporation i n opening up the China

market. Problems from other companies were only used as

references.

Limitation of the research

Since it was a case study so the problems and

solutions in the research cannot be generalised to other

12

business in China trade. However we hope that certain

insights can be learned from this case to provide experience

for future China trade.

Significance of the research

Through the case study of a company that had started

its China trade operations for five years, the researchers

hope that the following objectives can be achieved:

1) To explore the difference between a capitalistic market

and a socialistic market with respect to, various

elements of the market mix.

2) To evaluate market potential of consumer products in

China.

3) To identify main obstacles encountered by new entrants

to the China market.

4) To examine. to what extent can marketing theory be

applied to the China market and what kinds of

modifications are needed.

5) To serve as a reference for companies which plan to

enter the China market.

Conslusion

The findings of this research is specially helpful

for small Hong Kong manufacturers with the comapny set up

similar to that of American No. 1. Some of the problems and

limitations cannot be applied to large multinational

corporations.

13

Though some problems Identified in this research are

specific to the shampoo industry, most other general

marekting problems are applicable to other industries. For

instance, the poor reach of the advertising media, the poor

marketing knowhow of the distributor and the underdeveloped

distribution channels are problems common to all marketers.

So manufacturers selling products other-than shampoo can

also use this research as a reference.

14

CHARTER IV

BACKGROUNDS ON CHINA TRADE

Before the background of the company under study is

introduced in the next chapter, a brief account of

political and economical reforms happened in China in recent

years is given in this chapter. The external environment,

including the consumption pattern of the people,

opportunities in the market in which foreign marketers will

market their products, will also be portrayed in this

chapter.

Poltical and Economic reforms

After the downfall of the 'Gang of Four', a group of

more practical and far-sighted political leaders under the

leadership of Deng Xiao Ping emerged. In the eight years

after the death of Mao Tse Tung, Deng has installed the

revolutionary notion that people will produce more if given

incentives. Deng and his pragmatic colleagues have brought

the most sweeping reform ever attempted under the banner of

Marxism. They have transformed the nation's agricultural

system, awakened its cultural life and increased the income

of millions of peasants tremendously.

The gross social output was 989.4 billion yuan in

1982 which was 9% up compared with that of 1981. The gross

industrial and agricultural output was 829.1 billion yuan in

1982 which was 8.7% up from the previous year. All these

15

indicate the fast economic progress of the nation. People

are getting richer than in the past and spending power

increases. The total value of retail sales of commodities

was 25.7 billion yuan in 1982, an 9.4% increase over last

year. A huge but not well developed market of 1 billion

people for consumer products is opened up for foreign

trading companies. The largest billboard which was once used

to displayed Mao's portrait is now replaced by

advertisements of camera, cigarette and brandy.

The whole philosophy of life began to change in the

heart of the once conservative communist nation of' poor is

virtue' to' eat better and live better' and this was

recently declared by the chairman of the Communist party,

Mr. Hu Yao Bang. He told the people to prepare for the

training of the second generation into a stronger, healthier

and more energetic nation. People were also told by him to

spend a little more on daily necessities and wear more

colourful dresses so as to get rid of the outdated image of

' blue and white' society

With the opening of the door of China and changing

relationship with the world, external influnences especially

Western, Japanese and Hong Kong flood into the nation. From

the Daqing oilfield in the north to Canton in the south,

from Shanghai in the east to Lanzhou in the west, 1600

foreign specialists are now working to boost the China's

economy. Some 128 American firms have offices in Beijing and

many Japanese, European and Hong Kong companies are trying

16

to set up their offices or subsidiaries in the Four Special

Economic Zone and the 14 coastal cities.

The influx of external ideas from capitalist

countries has changed the life style and consumption pattern

of Chinese people much. People use Cannon camera, watch TV

programmes from Hong Kong on Hitachi TV set, drink Coca-cola

and wear western style clothes. People begin to admire

imported goods very much and are willing to consume with

higher prices. This change in consumer behavior and the

increase in income together create a huge potential virgin

market for imported consumer goods.

Changes and development in the consumption

structure in the China market

The consumption structure of the China market has the

following changes:

(1) The rate of increase of consumption level increases

high income, high spending power families increase in

number.

In China, the family is considered as high income

family if the average annual family income is above $720RMB.

In villages, it is considered rich if the average annual

family income is above $500RMB. It is because their income

and consumption level is more than double the average

standard, so they have the necessary purchasing power to buy

expensive products. According to data from census survey,

such type of families is scarce in the 50 century, however

17

it represented 13%. of city population in 1983 12% of

village population, totally to 1200 million population., In

addition, the rate of increase of such families is at a

speed of 5% per annum.

(2) Due to the reduction in the gap between city and

village consumption power, the consumption of

commodities in village occupies half of the total

retailing business of society.

Taking the ratio of consumption level of people in

villages to that of people in cities as an example: in 1952.

the ratio was 1:2.4 in 1965 it was 1:2.4 in 1978 it was

1:2.9 in 1983 it became 1:2.2.

The daily consumption of farmers has changed from a

self-sufficient situation to a product-consumption

situation. In 1983, the portion of money spent by farmers in

purchasing products from 'the market to that of their total

expenses was 60.7% while it was only '38.7% in 1978.

(3) The potential purchasing power increases tremendously

consumers are saving up money for selective purchasing.

As the income level of people increases, the

potential purchasing power also increases. In 1983, the

average net purchasing power of each individual in China had

increased 24 times that of 1952.

The total savings of people also increases. People

begin to be dissatisfied with the existing available

products and become more selective.

18

(4) The seasonal fluatuation pattern of consumption of

people become more flatten. The difference between good

and poor selling seasons narrows.

In the past, the first and fourth seasons were good

selling seasons because it was only at that time of the

year that the workers had the extra money from year-end

bonus to purchase those products they wanted. However, due

to the increase in income of the people, they can save up

the money and use them when necessary. So they can in fact

purchase at any time of the year. There is thus lesser

difference between good selling seasons and poor selling

seasons. Products can be marketed throughout the year.

(5) The demand of the market is moving towards the middle

and higher ends.

The taste of the people is moving towards the middle

and higher end. They begin to appreciate famous brands and

foreign products.

A famous slogen in China is food must be nutritive,

clothing must be beautiful, consumer products must be good

quality, living place must be comfortable which can best be

used to summarise the changing of people's attitude towards

consumption.

Opportunities open up for

China traders

With the open up of the China market numerous

companies, large or small, are flooding into the one billion

population market.

19

Many of these companies are backed up by

multinational companies with sound financial, human and

technological supports. They handle with large contracts,

negotiate with important units or government divisions and

try to develop a long term relationship with China. They

enjoy much more priviledges and have better bargaining

power in dealing with China trade.

However a lot of small companies also want to get a

share in the one billion population market. Some of these

small companies are successful in surviving and make a

fortune out of it. But much more are less lucky and suffer a

lose.

Is the China market really an unexplored treasure for

China traders? Can a small Hong Kong manufacturer with its

limiting resources penetrate the China market and compete

with the multinational giants? Can the western marketing

knowhow be applied in China?

The researchers hope that through this research

project we can probe out some of the problems facing a small

Hong Kong shampoo manufacturer in penetrating the China

market. We hope that we can formulate a hypothesis for that

shampoo manufacturer and then by following the steps taken

by that shampoo manufacturer and together with our marketing

knowledges we can evaluate the validity of the hypothesis

and arrive at some concrete conclusions.

Conclusion

With a brief understanding of the external

20

environment of the China market, we can introduce the

company upon which our case study is done. In analysing

marketing problems, special attention is paid to the unique

market situation of China.

21

CHAPTER V

BACKGROUND OF THE COMPANY

As this research is a case study based on the real

life experince of a company engaging in China trade, it is

important to give a brief introduction about the background

strengths and limitations of the company. With. the

internal strengths and weaknesses of the company in mind,

readers can understand more deeply about strategies adopted

by the company.

History-of company

About 10 years ago, a small company called Cheers

Corporation was formed by the Fung's brother as an importer

of shampoo products from the United States. The eldest

brother, Dominic Fung was. the Managing Director and his two

bothers David and John were Sales Managers. Their main

business was to import the "Royal 42" egg shampoo and sell

them to retailers. The sales of the company increased

rapidly. The company started its local manufacturing

facility several years ago. Cheers now buys its products

from a local contract manufacturer which Dominic also holds

a minority share. Now the company has owned several brands

of hair care and skin care products, and the brand "American

No.1" is the best selling item. The annual sales exceeds

HK$10 millions.

22

The Product Portfolio

The product portfolio of the company is as follows:

Hair Care Products

The company has a whole range of shampoos

conditioners and conditioning shampoos under the following

brands: "American No.1", "International No.1", "Royal 42",

"Chris".

Skin Care products

The company has a liquid soap under the brandname "Bo

Bo" and "American No.1", lotion and cream under the

brandname "American No.1".

Baby Line Products

The company has a range of baby shampoo, baby lotion

and baby o i l under the brand name 'American No. 1'.

The Market

Apart from Hong Kong (the main market which occupies

over 80% of total sales), Cheers also sells its products to

Singapore, Malaysia, Vietnam and some small Pacific islands

under its subsidiary company "American No.1 Pacific Shampoo

Products Ltd." (referred as American No.1 in this paper).

Now China becomes a second major market of the company apart

from Hong Kong.

The Organizational Structure

The company is a typical Chinese company with the

family members holding key positions in the company. Tho

23

eldest brother is the chief executive officer as well as, the

head of the family who has absolute command on marketing,

finance, production and internal management. A organization

chart is shown in Appendix I.

Conclusion

With a rough picture of the company profile, we can

examine in the following chapter marketing problems

encountered by this company. Special attentions are paid to

how a company like American No. 1 adapted itself to the

China market.

24

Chapter VI

ENTERING THE MARKET

After. the understanding of the structure and nature

of the research, background information of the China market

and strengths and weaknesses of the company selected for

case study, in the following chapters the rest arch proceeds

to analyse problems in different stages of development

encountered by the company selected for case study.

In this chapter, we will wxamine the first step of

doing China trade - entering the market. The ability to

enter through the right channel is critical for future

success.

There are many different ways through which a company

can gain access to the China market. Some of them are

similar to that used in other more sophisticated markets but

some are specific only to the unique market structure of

China.

Alternatives

The following methods can be considered to enter the

China market:

1) Some advertisements can be placed on popular trade

magazines from which China companies will seek resources for

products of Hong Kong.

2) A joint venture can be set up with one local China

trading company which has all the connections and knowlege

25

about the China market. Compensation trade, or direct

investment in local manufacturing facilities are also

possible.

3) A wholly-own subsidiary can be set up in China to market

the products directly by the company.

4) Some small Hong Kong trading companiesfunctioned as

middleman can be appointed to distribute the products in

China.

5) A China trading company can be apponited as distributor

catering for all marketing activities in China. The national

corporations, offical trading companies under the control of

Foreign Trade Bureau, or some newly establshed trading

companies can be considered. Multinational corporations are

more experienced and have better connections while new

trading companies are more flexible and willing to accept

new marketing knowledge.

What American No.I had done

without previous experience in the China market,

American No.1 did not venture to invest directly in local

production or to set up its own office in China in the

beginning stage. Amercan No.1 had appointed several small

trading companies which claimed to have good connections

with China as middleman. Several printed advertisements

were placed on popular trade magazines and a lot of

enquiries came.

Conclusions

26

It Is wise for American No.1 to abstain from setting

up a wholly-own subsidiary in China or to start its own

manufacturing facilities in the early development stage.

Without experience and connections in the China market, it

is too risky to invest too much capital in*China. Moreover,

the financial burden on a small company like Ameican No. 1

is too heavy when return on investment in China is usually

very slow. The operating cost of maintaining an office in

China and all remuneration given to the staff stationed

there are very expensve.

The using of small Hong Kong tradng companies as

middleman is not effective as they do not have either the

ability or the resources to help develop the China market.

Sometimes, the brand name image will even be damaged by

them.

The appointment of a distributor seems to be the best

way for a small company like American No.1 which does not

have the experience and financial resources to market its

products directly. But the selection of a capable

distributor s the key to success. The import of consumer

products needs the approvement of the Foreign Trade Bureau.

The distributor must be an experienced one with good

connections with the trade and have foreign exchange to pay

for the merchandise.

A number of national.corporations are responsibe for

import and export of different kinds of merchandise in

China. For instance, there are the China National Arts and

27

Crafts Imports. and Exports Corporation, China National

Chemicals Imports and Exports Corporation, China Natinal

Cereal, Oil and Foodstuffs Imports and Exports Corporation

and China National Instruments Imports and Exports

Corporatoion. All these national corporations have branch

office in Hong Kong The most direct way is for the Hong

Kong small manufacturer to approach the right corporation

directly.

The placement of some advertisement on trade

magazines is also very good strategy to publicise the

product and some China companies which arc interested in the

product will take the initiative to tender an enquiry. This

can be regarded as a supporting move which helps in finding

a good distributor.

Though the channels of entrance are similar to most

of other markets, some unique features of the Chinese system

are listed below:

(1) Since China is not a completely free market, the

approvement of the government is needed for import of

products for the local market. The manufacturer must first

check its products can get approvement or not.

(2) The poor marketing knowhow gives the manufacturer a hard

time when it appoints a distributor in China. In more

sophisticated markets, the distributor is capable of taking

care of most of the marketing. activities. But in China, the

ability of transfering the marketing knowhow to the

distributor is the key to success.

(3) Many companies do not have much confidence towards the

28

socialist sustem of China so most of them are not so willing

to invest directly in China as in Western countries.

29

Chapter VII

Appointing Distributor in Fujian Province

Appointing distributor is a very common practice in

international marketing in western countries but the

procedure is different in China. The style of Chinese

businessmen is also different from people in western

countries. So in this chapter, the research reviews

experience of American No.1 to understand the procedure of

appointing as distributor.

The experience of Amercan_No.1

American No. 1 had experienced the submitting of

marketing proposal, the tedious and prolonged negotiation

and the signing of an Agency Agreement. This seems to be a

usual procedure encountered by any manufacturer who is

appointing a distributor in China.

Conclusions

Some lessons can be learned from the experience of

American No.1 in appointing a distributor.

Negotiation

1) It is a very tedious and time-consuming process to

negotiate with Chinese businesmen and great patience is

required.

30

2) At different stages of the negotiation, Chinese

businessmen from different ranking will attend the

negotiation with the lower rank executives collecting

information at the early stage.

3) Chinese businessmen will adjourn the negotiation and show

unwillingness to resume the negotiation if they are not

satisfied with some of the terms and conditions.

Submitting marketing proposal

1) The manufacturer will be asked to submit a marketing

proposal in Chinese language to introduce its products, the

company and the marketing. This is a very important document

from which China businessmen will select products for local

market. The criteria for selection is an experienced

marketing company, a good marketing plan, high quality

products at reasonable price and full support to the

distributor.

2) About ten copies of the proposal should be submitted as

these copies will be circulated to leading outlets,

wholesalors and other officials involved. The selection of

any product needs consensus from all parties involved.

3) Some sensitive words like "red China ", " Communist

"China must be avoided-in order not to upset the Chinese.

Agency -agreement

An agency agreement will be signed when a compromise

is reached after prolonged negotiation and the agreement

usually consisted of the following areas:

31

1) The areas in which the distributor will represent the

product of the manufacturer.

2) The duration of the agency contract.

3) Duties of the distributor.

4) Duties of the manufacturer.

5) The method of payment.

6) Sales objective and target.

At the time of signing the Agency Agreement, the

manufacturer must watch out for the following pitfalls:

.1) China businessmen do not trust written document: very

much. They will sign a contract easily but may not leave up

to its committment so easily.

2). Apart from what is committed in the Agreement, the

distributor will ask many extra supports when needs arise.

So a margin must reserved for future request.

Companies planning to appoint a distributor in China

must bear in mind the business style of Chinese businessmen

and make preparation for it.

After a distributor is appointed, the merchandise

will be distributed into the China market. In the next

chapter, the research will go into detailed examination of

the distribution in China.

32

Chapter VIII

DISTRIBUTION OF THE PRODUCT

INTO CHINA

Distribution is one very important aspect of the

marketing mix. In different countries, the distribution

channel is different. Marketers need to select the best

combination of distribution outlets suitable for their

products. For fast consumer goods, mass distribution is

usually adopted while selected dealers method is used for

expansive durable goods. In this chapter the research will

.give an introduction to the distribution system for shampoo

products in China and distribution strategies for American

No. 1 are analysed and commented.

Here is a brief account of retail outlets for

shampoo products in China:

Distribution outlets for shampoo products in China

Before the modernisation programme of PRC, investment

in the distribution or serice sector was considered as non-

productive. All capital was allocated to the production of

industrial and consumer goods.- Investment in the

distributive sector was 1.5% of total investment during the

period of China's first five year plan(1952-1957) after

which it began to decrease. In 1978, the percentage of

33

distributive investment to total investment was cut down to

only 0.46. The total number of retail outlets of consumer

goods in China had been reduced from 2.8 million in 1957 to

1.3 million in 1978, an increase of 53%. The number of

retail outlets as per 1000 persons in 1957 was 10, but it

has been reduced to 1.5 in 1980.. In proportion to

population growth over the past thirty years, retail outlets

have obviously been underdeveloped. Also the percentage of

persons employed in the distributive sector has decreased

from 1.4% in 1957. to 1% in 1978.. Although the distributive

sector has been improved since 1982, it is still very

underdeveloped.

Shampoo products can be distributed in the following

outlets:

A. Department Stores

These are traditional large size stores where all

kinds of consumer products are available for sales.

Friendship Store is one of the largest department store

chains and it is under tight control of the government.

B. Shoppng Arcade

These outlets are newly developed which become very

popular in recent years. During holidays, people from

nearby villages will travel to visit these shopping arcades

and they are usually very crowded. Shopping arcades can be

found both in new commecial centres and hotels.

C. Small Sundry Stores

They are scattered small outlets which sell only

34

limited number of items. Food, drinks and some houehold

products are their main products.

D. Supermarkets

They are the most newly developed outlets which

mainly sell imported goods at a very high price. There are

only a small number of supermarkets now in China but it will

become more popular in the near future.

E. Beauty Salons

Nowadays, people in China go to beauty salons for

hairdressing much more frequent than before. Some brands of

shampoo will be recommended by hairdressers. Shampoo can be

bought in the salon. So beauty salon are very good places

for publicity of the product.

Distribution outlets selected by American No.1

The distribution objective of American No.1 was to

select several large and busy retail outlets, mainly

department stores and shopping arcades, for display of the

full range of products rather than achieving mass

distribution because it was easier to decorate in-store

display in fewer locations so as to keep a high class image.

Moreover, sales force was not large enough to reachs been

improved since 1982, it is still. very underdeveloped.

35

Shampoo products can be distributed in the following

outlets:

A. Department Stores

These are traditional large size stores where all

kinds of consumer products are available for sales.

Friendship Store is one of the largest department store

chains and it is under tight control of the government.

B. Shoppng Arcade

These outlets are newly developed which become very

popular in recent years., During holidays, people from

nearby villages will travel to visit these shopping arcades

and they are usually very crowded. Shopping arcades can be

found both in new commecial centres and hotels.

C. Small Sundry Stores

They are scattered small outlets which sell only

limited number of items. Food, drinks and some houehold

products are their main products.

D. Supermarkets

They are the most newly developed outlets which

mainly sell imported goods at a very high price. There are

only a small number of supermarkets now in China but it will

become more popular in the near future.

E. Beauty Salons

Nowadays, people in China go to beauty salons for

hairdressing much more frequent than before. Some brands of

shampoo will be recommended by hairdressers. Shampoo can be

bought in the salon. So beauty salon are very good places

36

for publicity of the product.

Distribution outlets selected by American No.1

The distribution objective of Amercan No.1 was to

select several large and busy retail outlets, mainly

department stores and shopping arcades, for display of the

full range of products rather than achieving mass

distribution because it was easier to decorate in-store

display in fewer locations so as to keep a high class image.

Moreover, sales force was not large enough to reach every

outlet. Furthermore, the renminbi price was still too high

so that average consumers were unwilling to pay so much for

a shampoo. People would only purchase occasionally during

festivals or other present-giving seasons. There were about

fifteen retail outlets where American No. 1 products were

available for sale.

Conclusions

American No. 1 is very wise to select some large and

prestige outlets rather than gaining mass distribution for

shampoo products.

There is a slight difference in the application of

marketing concepts in Western countries and in the China

market. For instance, in Hong Kong shampoo is regarded in

Hong Kong as a daily necessity and over 80% of the total

population use shampoo to wash their hair. So shampoo can

be purchased in nearly every drugstore, supermarket and

convenienct store. Mass distribution is the best way to

37

achieve the largest penetration.

While in China, a large number of people are still

using soap to wash their hair. Shampoos,' especially those

expensive foreign made brands, are regarded as luxurious

products which people will only purchase occassionally

during festivals. So mass distribution is not the best

strategy to obtain the largest profit.

Apart from retail outlets, department stores and

shoppng arcades also serve as a display centre for American

No.1 products. This is very effective in image building and

publicity.

In the next chapter, a detailed analysis on various

marketing activities are done and comments are given based

in the experience of American No.1.

38

CHAPTER IX

OBJECTIVES AND STRATEGIES

In this chapter, focus is put on how the company

adapted itself. to to marekt environment of China to achieve

marketing objectives by employing various marketing

strategies. the objective of this chapter is to test whether

Western marketing techniques can be applied in th China

market and what kinds of modifications are required.

Now we will examine various aspects of the marketing

mix. The situation in the China market, objectives and

strategies adopted by American No 1 and implications from

the case are listed in details in the following sections.

Market positioning

The concept of market positioning in China is as

useful as it is in western countries. For foreign-made

brands, the price is at a very disadvantages position

compared with that of local brands. So the only way a

foreign brand can do is to identify consumer needs in the

upper end market that cannot be satisfied by local brands.

American No.1 was very clever to position its

products as high quality imported shampoos for those who are

dissatisfied with local shampoos and are willing to pay more

for a better shampoo.

39

For imported foreign-made products whose prices' are

much higher than those of local-made brands, position at the

upper end market seems to be the only way to success.

Though the price is double that of local brands people will

buy occassionally during festivals and this is the result of

the growing trend of buying famous brands.

Identifying target market

With specific market positioning, specific target

markets are aimed at. A product positioned at the upper end

market must aim at the segment where people can afford to

pay more and are willing to pay more.

In China, the shampoo market can be segmented as the

following:

1) Local people using soap.

2) Local people using locally-made low price brands.

3) Local people using imported foreign brands.

4) Foreigners living in china using mainly imported foreign

brands.

Though market size of categories 3 and 4 are small

compared with I and 2, it is growing as more people are now

working in China and income level of China people is rising.

American No.1 was very clear that its products could

not sell to categories I and 2 at present when the price was

double that of local brands. So the product was positioned

at the upper end with categories 3 and 4 as its target

markets.

40

Conclusions

This strategy proved to be very successful and the

product is now quite popular in the upper end market. A

high-quality imported image is set up. In the future when

local production is started which lowers production cost and

saves 60% of import duty, the target market can be extended

to the mass market.

41

Product

In order to be successful in a market, the product

must either suit the taste of the people or change the taste

of the people to suit the product. But it is much difficult

and time-consuming to use in the latter method which needs

heavy advertising to achieve this aim. For a small

manufacturer which does not have much money to do

advertising but expects quick return, the selection of

products which suit the taste of local people seems to be a

suitable strategy for him.

Another strategy is to sell products with distinct

product features and packaging which differentiate the

product from locally-made brands.

The shampoo market in China is not crowded with only

a few competing branas. Main competitors can be classified

as follows:

A. Upper Market Segment

CharacteristicsBrand OriginBrand - - - - - - - - - - - - - - -- - - - - - - - - -

High quality, smallWest GermanyWella

size,-high price,U.S.A.Revlon

beautiful packaging.U.K.Cussons

42

B. Middle Market Segment

Brand CharacteristicsBrand Origin - - - - - - - - - - - - - - -

Kao Japan Satisfactory quality,

beautiful packaging,

Medium price,

Small size.

C. Lower Market Segment

CharacteristicsBrand OriginBrand - - - - - - - - - - - - - - -

Lower quality, big size---------ChinaFlower Bee

ChinaMaxam poor packaging,

low price.

Big size, cheap priceNon-branded H.K.

better quality and

packaging than China

products.

China made shampoo, such as Flower Bee and Maxam,

is the market leader because of the low price and good

distribution network. Those non-branded low quality shampoo

from H.K. captures a very insignificant market share because

they do not have the financial and human resources to set up

good marketing strategy. Among the high quality imported

shampoo, Kao and Wella enjoy the largest-share.

Customer preference

A. Taste

The taste of China consumers is different from that

of western countries. For instance, herbal shampoo stros.ing

43

on natural fragrance and_ feeling is very popular in

developing countries but not in China. Chinese consumers are

very keen on green apple and vitamin shampoo.

B. Foaming

Shampoo with heavy foaming quality is perceived as

high quality shampoo.

C. Fragrance

Strong fragrance is preferred as Chinese consumers

regard shampoo as some sort of cosmetics.

D. Packaging

The bottle design must be different from those of

local products. Bottle with a snap cap is regarded as the

symbol of imported products because this type of cap cannot

be found in China made products. Though most Chinese

consumers cannot read English labels, they perceive it as a

symbol of quality. But Chinese labels must be added to

provide product information and usage instructions.

Amer ican No.1's product strategy

1) Product variety

The income level and the taste of consumers make it

unjustified to sell the full range of American No.1 products

into China but selected items are chosen.

Green apple shampoo, egg shampoo, vitamin E shampoo

and a low price brand "International No.1" were chosen

because a preliminary consumer testing reviewed that the

above products are most welcome by Chinese consumers.

44

2) Product quality

Very strong foaming and fragrance were used in the

formulation of the shampoos.

3) Product packaging

The following five different kinds of packaging were

used for different purposes:

A. Sachet pack- for sampling and promotion use.

B. 4-oz - for trial use and used as premiums.

C. 8-oz - for personal use.

D. 16-oz - for family use.

E. Promotion twin pack- one bottle of shampoo and one

bottle of conditioner were packed together in a PVC bag and

is sold at a discount to push sales.

In order to create an imported image, the snap cap

that most foreign brands used was selected for all bottles.

The universal product code, a symbol of the U.S.

products, was printed on the bottle though it had no

practical use.

Although not many Chinese can read English, the

English label was used but a translated label was sticked

on.

Conclusion

The following lessons are learned from American No.1

in its product strategies:

(1) A product which sells very well in a sophisticated

45

market may be -a total failure in the China market

(2) For a small manufacturer who does not have much money to

do advertising, the best strategy is to.design a product

which suits the taste of local consumers.

(3) The product must be have distinct features to

distinguish itself from local products.

(4) Even though the price is higher, a product with superior

quality can also be successful in the China market.

46

Price

Production cost of China-made products are much

lower than that of foreign-made products. The labour cost,

rental and electricity charge are very low compared to

western level. Apart from that, an import duty is exerted on

most of the imported goods. The import duty of shampoo is

about 60% of CIF value of the merchandise and 120% for

cosmetics. Hence, foreign-made imported products are in o.

very disadvantages position to compete with local brands

For the mass market segment, income level of consumer

is low and they are either price conscious or unable to

afford the high price of imported goods. So imported

foreign goods are completely out of the mass market. What

they can aim at is the upper end segment.

Retail price level of shampoo products

The retail price for shampoo of different brands

spread over a wide range and they can be roughly divided

into the following three different levels:

A. Upper price level (branded imported shampoos)

RMB 5.20Wella (West Germany)

RMB 5.30Revlon (U.S.)

RMB 5.20Elseve (France)

RMB 4.00Kao (Japan)

B. Medium price level. (non-branded imported shampoos)

RMB 3.60Cow (Japan)

RMB 3.30F. T. (Japan)

RMB 2.90Funna (H.K.)

47

C. Lower price level (locally produced China brands)

Maxam (China) RMB 1.40

BEE Flower (China) RMB 2.00

In the four special economic zone or in the 14

coastal cities, shampoo can be bought both in RMB and

foreign-exchange certificate (FEC). But, the price in RMB is

usually 1.8 times above that in FEC. This is roughly the

same as the black market price hetwecn the two currencies.

Apart from the higher production cost, imported

shampoos have to pay an import duty of about 60% on C F

value of the goods and this results in a much higher price

than that of local shampoos. The general retail price of a

foreign brand is at least twice that of a local brand.

Price strategy of American No.1

American No.1 had set its price objectives as

follows:

(1) To unify all retail price in different cities of the

same province.

(2) To set the price at the same level as that of the

Japanese brand Kao but lower than that of the West Germany

brand Wella and higher than that of local brands and non-

branded imported products.

The following are retail price for several main items

of American No.1 products:

48

RMBFEC

shampoo

7.024.1316-oz

4.222.488-oz

2.961.744-oz

conditioner

7.554.4416-oz

4.592.708-oz

liquid soap

6.733.9612-oz

Conclusion

The strategy of selling high quality product at

resonable price, higher than local brand but lower than

western brands, proved to be very successful in China. This

satisfied the pyschological needs of Chinese consumers who

are longing for imported famous brands but, can only afford a

slightly higher price than local brands.

There is no way for Hong Kong manufacturers to lower

the price of their products to the same level of local

brands. The only way is to charge a slightly higher price

with high class image.

49

Sales Force

Owing to the lacking of sales training and the low

calibre of salesmen, most sales team in China are not

effective in performing selling job. Moreover, poor sales

management fails to motivate and push the salesmen to sell

aggressively.

Salesmen in retail outlets are not motivated to sell

enthusiastically either. They are incapable of identifying

buyers needs and selling aggressively.

American No.1's sales force obiective

After knowing the deficiency of.the sales force in

China, American No.1 determined to put much efforts to

upgrade its sales force in China.

The following sales force objectives were set:

A. To recruit. one high calibre salesman in each city in

Fujian Province.

B. To upgrade the quality of the salesmen by providing sales

training and preparing good sales kit.

C. To set up incentives scheme to motivate salesmen to sell

aggressively.

In order to achieve the above objectives, the

following strategies were adopted:

Hua Fung had its own sales team to sell the products

to wholesalers and retailers.' There was no problem for Hua

Fung salesmen to gain distribution to the trade.

Within each retailing outlet, there were salesgirls

50

selling the products to customers. But these salesgirls

were not employees of Hua Fung so it was impossible, to

control those salesgirls. However, the techniques and sales

effort of these salesgirls will directly push the sales very

much.

American No.1 put much efforts to upgrade the

salesforce of Hua Fung in two aspects.

Sales training courses were organized for both the

sales team of Hua Fung and salesgirls of department stores

owned by Hua Fung. Salesmen were taught how to sell to the

trade and sales kits were prepared to help them to sell the

products. Sales supervisors were taught about sales

management techniques such as sales routing and sales

reporting system.

Salesgirls were taught how to serve customers in the

department stores. Techniques of ident'i fy ing customer's

needs and pushing sales were included in the training

course.

A local merchandising girl was recruited by Hua Fung

but paid by American No.1. Her responsibility were to make

sure that products within each outlet were displayed

properly and attractively. She had to clean up the shelves

and replace damaged products, to coordinate with different

retail outlets when there was a promotion campaign, and to

collect market, information about competitors. In the

beginning when the newly recruited merchandising girl was

inexperienced in merchandising, two experienced

merchandisers from Hua Fung were temporarily transfered to

51

Fujian to do all the ground works of merchandising and train

up the local merchandising girl. American No.1 had the plan

of recruiting one merchandising girl in each city throughout

the Fujian Province in the near future.

At the present, TV and printed advertising are

expensive, much of the promotion efforts depend on in-storc

promotion. So the building up of a well-trained profes-sional

merchandising team was an important sales strategy of

American No.1.

Conclusion

American No.1 was very successful in upgrading its,

sales force in China and all other Hong Kong manufacturer

selling their products in china should try hard to upgrade

their sales force.

Sales training must be organized and provided to

salesmem in China. Modern sales management techniques should

be adopted and sales management seminars should be held to

upgrade the sales, management knowledges of the Chinese

distributor.

There are much room for improvement for selling

techniques of salesmen in retail stores. Some commission

scheme or other incentive scheme must be formulated to

motivate salesmen to sell. For products which are

comparatively new to Chinese consumers, a good salesman who

can introduce the new product and explain the instructions

is crucial for success.

52

Advertising

In China, the theory and practice of using

advertising to inform the market, to educate the consumer,

to create brand image and to push sales are similiar to that

in Western markets. Different media are available though

the reach is not so satisfactory as that in more sophiscated

markets. From statistical data of 1983, there were 3.5 TV

sets, 20.9 radio sets and 4.2 newspapers per 100 persons.

Advertising agencies providing full range of services

can be hired to take care of all advertsing matters.

The Chinese advertising media is made up of an

assortment quite similiar to that in Western countries-

television, radio, newspapers, magazines, billboards and

cinema.

The costs for various avertising in Fujian province

are listed in the following table:

TV

FFC$ 120030 secondsFuj !an TV

90030 secondsXiamen TV

Radio

10030 secondsFujian radio

8030 secondsXiamen radio

Cinema

6/show30 seconds

News aper

404.2 * 1cmFujian Daily

53

Xiamen Daily 4.2 * 1cm

Road Board

In Fuzhou 40p. m.per sq. meter

In Xiamen 50p.m.per sq. meter

Neon Sign Board

per sq. meter 1200p-m.In Xiamen

Since audience audit is not popular in China and

audience reach is not satisfactory, most foreign companies

do not like to use TV or radio advertsing. Road boards,

neon signs are more popular. Foreign advertising accounts

for only a relatively small percentage of China's total

advertising revenues. In 1982, it was about 10%.

Local advertising agencies offer quite a

comprehensive range of advertising services though the

quality is incomparable to the Western standard.

Advertising control is tighter in China than in

democratic countries. Exaggerated and fraudulent claims,

ugly and sinister displays, oversized or excessively

lengenthy advertisement, and promotion of goods unsuited to

the China market are all prohibited.

American No.1' is advert is inq strateq ies

After considering the advertising stuation in China

and resources available in the company, American No.1 had

set the following advertising objetives:

1) To create brand awareness of American No.1 products.

2) To set up the product image of high quality imported

25

54

shampoo.

The following strategies were adopted to achieve, the

objectives:

At the lauching stage in Fujian, advertising

strategies were as follows:

A. TV advertising

A 60 second color TV commercial was produced in

Mandarin.

The advertising objectives of the commercial were:

1) To introduce the product range under the

brandname of American No.1.

2) To announce a large scale lucky draw during the

Chinese New Year.

A total of 60 spots were booked on Xiamen TV station

for three months.

A hard selling approach was adopted using a local TV

star to introduce American No.1 products and announce the

lucky draw.

B. Print advertising

A printed advertisement was put on one most popular

local magazine and the back cover of Xiamen telephone

directory.

A printed advertisement was also put on both the

and Fujian Daily one a weekXiamen Daily （夏門日报

during the promotion period.

A layout of the printed advertisement can be found in

Appendix III.

55

C. Billboard

Three large billboards were used to promote American

No.1 products in the following locations

1) At the entrance of Xiamen Stadium where many

international sports events are held.

2) At the Xiamen Park.

3) At a crossroad in the centre of Xiamen City.

D. Posters

Large fully colored posters were put in every retail

outlet and at business locations in Xiamen.

E. Other advertising materials

Calenders, pamphlets were also produced and

distributed to every customer visiting the retail outlets in

which American No.1 products were sold.

In order to maintain consistence, the same

advertisement listed in Appendix III were used for all kinds

of advertisements. However, a substantiate advertisement

showing only the products was used when the lucky draw was

over.

Conclusions

1) Though TV reach is not satisfactory in China, China

consumers have a strange believe that whatever appears on TV

advertising is high quality, famous brand product. So TV

advertising is indispensable especially at the stage of

image building.

2) Billboards and neon sign at busy locations are very

effective advertising media in China at comparatively low

56

cost. Moreover, audients can have longer time to read the

content.

3) Magazine and newspaper advertising are not very effective

in China as reading habit is not common at present.

4) Different advertising objetives should be used for

different media. For instance,TV is very effective in image

building in China while billborads are good for seling

product benefits. The TV commercial of American No.1 is too

hard-selling which is deficient in building up a high class

product image.

5) Too sophisticated and complicated advertising techniques

cannot be used in China at present because of the limitation

of equippment and skills of creative people.

But as a whole, the media mix of China is a wide

assortment similiar to that in Western markets. Advertising

is improving rapidly now in China and many worldwide

agencies began to set up their branch offices in China. In

the near future, all Western advertising techniques. can be

applied in China and this is a good news for marketcrs.

57

. Promotions and Public Relatons

Various kinds of promotion can be organized in China

as a programme in the whole marketing mix. Lucky draws, free

gifts. and discount coupons are very common promotions

adopted by marketers. As consumers do not have easy access

to foreign novelty items, funny and attractive gifts which

cannot be found in local markets are very good premiums in

China.

Though public relations is a comparatively new

concept to the Chinese people. It isvery effective to build

up company image and good human relationship with local

business network and government by various PR activities.

American No.1' s promotion and PR strategies

Promotion Objectives

1) To increase the values of the product by offering

premiums

2) To supplement advertising when it is too expensive to do

above the line advertising (e.g.TV,newspaper and magazine

ads)

Promotion Strategies

As American No.1 was not willing to spend too much on

above-the-line advertising (e.g. TV, print advertising),

much efforts were put in organising promotions to push the

products.

58

The following promotions were organised:

1) Chinese New Year lucky draw

This was a very large scale promotion held during

Chinese New Year which is the most important festival in

China when everyone goes shopping and gives presents to

friends and relatives. Moreover, it is the time when bonus

is given to staff and thus people have more money to spend.

A lucky draw ticket was given to every purchase of

one single bottle of American No. 1 products. The prizes were

hot items in China such as refrigerator, color TV set, HI-Fi

set and washing machine. These are items which most Chinese

people are longing for but cannot afford them. Thus the

attraction was very large. The value of the first prize was

RMB 4000.

The lucky draw was published heavily through TV,

newspapers, magazine, posters and pamphlets. It was used as

a kick-off promotion for the lauching of American No-1

products in Xiamen.

2) Premiums

A great variety of novelty items were used as

premiums for every purchase of every American Ne.1 products.

Combs, brushes, shoes 6a9, sachet pack and 4-oz American

No.1 products were used as premiums. The use of 4-oz

American No.1 products as premium helped the promotion of

the American No.1 products very much and thus was stressed

by American No.1.

3) In-store display

Some large display shelves were specially made for

59

the display o.f American No.1 products. Attractive point-of-

purchase materials like stickers, posters, hangers were used

to decorate the display shelves. This in-store display can

attract the attention of customers and stimulate impulse

buying.

4) The display competition for retailers

Every retailer was encouraged to participate in the

display competition and to display American No.1 products in

the most attractive way at the most eye-catching location.

Mr. Dominic Fung was the judge for the competition and

expensive prizes were awarded to the winner.. The objective

of the competition were both to build up a good relationship

among retailers, distributors and American No.1 Ltd. and to

encourage good display of American No.1 products.

Public Relations Strategics

In doing business with China, personal relationship

is the most important area. If a good relationship is built

up, everything would be convenient. Thus American No.!

stressed the building up of relationship very much.

The following public relations activities were

organised:

1) American No.i had participated in every trade show

organised in Fujian to promote the brandname of American

No.1. During the trade show, every buyer from different

provinces was given the company's brochure, some items of

samples and some small gifted items such as shoes bag and T-

shirt.

60

2) All wholesalers and retailers were invited to sales and

promotion seminars where there were discussions, questioning

periods and lectures on the topic of Marketing of American

No.1 products in Fujian.

After every seminar, these people from the trade were

invited to free dinner and some gifts were given. Also, some

operation manual on sales and promotion were prepared and

given to them as a guideline for every day operation.

3) During fest i val s, al l whole D.I ers and retail, ers wr.re-

invited to dinner parties and Dominic Fung woul.a thank f^'

thier effort and gifts were given.

4) Both Dominic and the Sales Manager of American No.1

frequently visited retail outlets in Fujian and listened to

their problems to give encouragement to the people in the

trade.

By these public relations activities, a very good

relationship was set up.

Conclusion

From the experience of American No.1 in promotions

and PR activities, we.can learn the following lessons:

1) A company which does not have a large advertising budget

can adopt various promotion programs to attract purchase.

Promotions like lucky draws, premiums are welcome by China

consumers.

2) In comparison to advertising, promotions are not so

61

limited by technology and advertising reach and nealy all

kinds of promotions used in Western markets can be adopted

.in China. At present when market structure of China is

still not very sophisticated, promotions become a very

powerful marketing tool for consumer products.

3) Though the concept of PR is new to the Chinese, it is

very critical for success in China as human relationship is

weighed so heavy there.

4) A small company which cannot afford to do much

advertising can rely on PR activiti^s to build up

relationship

5) Hong Kong small manufacturer, knowing more about lilacs

and dislikes of Chinese people, have an advantage over

Western multinational corporations who are unable to know

the character of Chinese businessmen..

62

Marketing Evaluation Control

There is not much problems for large companies who

can afford to set up their own office in China to market

their own goods. But for a small manufacturer like American

No.1 which can only appoint a distributor in China, the job

of evaluation and control is very difficult.

As the marketing knowhow of the China distribitors

are not up to standard, the more experienced Hong Kong

manufacturers try all means to transfer its marketing

knowhow for the implementation of the marketing plan.

A good marketing evaluation abd control system must be

designed by the manufacturer. But the distributor will be

upset if too tight control is exercised as he is not the

staff of the manufacturer. What the manufacturer can do is

top act as a marketing consultant.

American No-1 was quite successful in developing a

marketing control system for its distributor. The key to

the successful implementation of the system depends on a

good relationship and the mutual trust between the two

parties.

The controlling system adopted by American No.1 was

as follows:

1) Monthly, quarterly and yearly sales targets were set as

guidelines to evaluate the progress of development in the

Fujian market.

2) All marketing and promotion plans, advertising materials

63

were formulated in Hong Kong by American No.1

3) For every promotion, an operation manual was prepared

with detailed procedures for the Chinese people to follow.

4) Monthly reports on sales, inventory and promotion

response were prepared by Hua Fung to provide market

information in Fujian.

Budget Control

As mentioned in the previous chapters, the

manufaturer must make clear estimation of total budget for

the development of the China market. Apart from what is

committed in the Agreement, many contigent expenses and

promotions will be requested by the distributor and this

unlimited expense will put a great burden on the financial

status of the small manufacturer.

American No.1 had been very clever to rcach an

agreement with its distributor on the budget for advertising

and promotion. American No.1 wouold spend 15 cents, 10

cents and 8 cents for the first second and the third year

respectively for every dollar of sales. This sets a ceiling

for the company and the financial controller can make

arrangements.

64

Conclusions

As China is such a huge market and the return on

investment s usually very slow, small manufacturer must be

very careful in budget control so that the company will not

be pushed to financial difficulty by the development of the

China market.

Implication of the chapter

After a detailed review and analysis of various

aspects of marketing activities, we can see the following

.implications

1) Most marketing techniques can be applied in the

China market though some modifications are needed. So

experienced Hong Kong manufacturers can apply their

knowhow to the China market.

2) Though the standard of advertising or the market

structure is still not at a -high standard, it is

improving rapidly. In the near future, marketing

problems arised from the market structure will

disappear.

3) Small manufacturers whose resources are inferior to

large competitors can also be successful by using

flexible marketing strategies.

65

CHAPTER X

MARKET DEVELOPMENT STRATEGIES

OF THE WHOLE CHINA MARKET

This is a chapter specially for ambitious companies

which aim at the whole China market. For small companies

with limited resources, the best way is to concentrate all

its efforts on one province as a start. Market expansion

is possible when penetration in one province is

satisfactory.

There are many different strategies for market

development adn there is no absolute answer to this the

strategies adopted by American No 1 had proved to be very

successful and can be considered by other manufacturers.

China is a very huge market with thirty provinces and

a total population of one billion. A company that wants to

develop the China .market must have very well-planned

strategies to develop the China market.

American No.1 had well-defined its market development

strategies as follows:

Concentrating on Fujian rovince as astart

Fujian is a province located at the east coast of

China with very good transportation network to both the

outside world and other provinces of China. In Fujian,

Xiamen is one of the four Special Economic Zones where

foreign trade is more flexible and income level of citizens

66

there is higher than that of other provinces.

Within limited human and financial resources and no

previous experience in China trade, American No.1 chose

Xiamen as a test market in China. All resources were used to

penetrate Xiamen and then help to expand to other cities in

Fujian province.

If the Xiamen market were successfully developed, it

will provide a successful reference for the entrance to

other provinces. Moreover, the experience in the development

of the Xiamen market was very helpful in the development of

other markets in other provinces.

Expanding into other province

After the development of the Fujian market, American

No.1 would expand into other provinces. The four Special

Economic Zones and the fourteen coastal cities would be the

target markets.

Direct investment in China to manufacture shampoo

locally was a second step in development. Local

manufacturing can save the 60% import duty now American No.1

is paying. Also, a local manufactured product will win more

local support and the price can be lowered to hit the target

market.

As a long term planning, it is hoped that certain

shampoo of Chinese characteristic are produced and sold to

other Western countries. The "China Fever" will create huge

demand for products of Chinese style.

67

Stressing on building human relationship

Comparing with other foreign shampoo giants like

Wella and Kao, American No.1 is owned by Chinese. Dominic

Fung is very good at building up human relationship and

knows clearly how to deal with Chinese people. The motto of

Helping the'Development of our Country was stressed when

Dominic approached those Chinese businessmen. This can

arouse a national sentiment and win support easier.

To build up friendship and a family link are very

important in dealing with Chinese business. Over result-

oriented approach of the U.S. style cannot be accepted

easily. Sending some presents to the wife and children of

the businessmen or to invite the Chinese couple to dinner at

home are very useful in building up a family link.

It is also very important to watch out for the

pitfall of upsetting one junior staff by approaching

directly his supervisor. If the junior staff contacts the

company in the beginning, it is always wise to respect this

junior staff and not to bypass him in future contacts with

the company.

Earning a low profit margin

The Chinese businessmen are very good price

negotiators and they have good patience to wait for your

price concession. At the development stage, American No.1

clearly revealed its profile margin to Hua Fung and won

their support by contributing most of the margin for

advertising and promotion.

68

Transferring marketing knowhow

The marketing knowhow of Chinese businessmen is still

very poor and advices on all marketing planning and

implementation are needed. However, tight control is

impossible because they are not employees of the Hong Kong

company. The rule of the game is how to use the marketing

knowhow in Hong Kong to do all the planning and to implement

in China by using China's labour resources.

Conclusions

Companies should consider their own strengths and

weaknesses to formulate marketing development strategies

suitable for them. But one safe step is to choose one city

or one province as a test market adn use the successful

story in that province as a reference for entrance into

other province.

Now we have examined all aspects in doing marketing

in China and in the next chapter, we will summarize all

findings and implications to end this research.

69

CHAPTER XI

CONCLUSIONS

This case study reviews problems encountered by one

particular small shampoo manufacturer in developing its

China market, and it is impossible to generalise the

findings to other companies or to other industries. But at

least it gives some ideas for new comers to the China market

and provides some empirical findings for future research.

From this case study, the authors hope that China

traders will pay attention to the following areas:

1) The development of China trade is very time-consuming and

much patience is needed.

2) No high return should be expected at the early stage.

3) Chinese businessmen usually honour their verbal

commitment and they do not like written contracts.

4) Negotiation with Chinese businessmen is very like

political negotiation. It is very important to be patient

and flexible and be able to identify the real decision

maker.

5) It is important to maintain a personal and friendly

relationship with Chinese businessmen. "Face" and mutual

respects are very important.

6) The agent for import should only be responsible for

distribution All marketing planning must be prepared and

controlled by the comapny in Hong Kong.

70

7) Marketing knowhow of Chinese businessmen is still very

poor and the transfer of marketing knowhow to China is the

key to success.

8) It is fortunate that Chinese businessmen are now quite

willing to learn and accept modern marketing techniques.

9) Though modifications are needed, western marketing

techniques can be used in China.

10) Small Hong Kong companies must be well prepared for all

kinds of impacts on its local operations due to the

development of the China market.

From finding of this research, our hypothesis that

a small Hong Kong shampoo manufacturer selling high quality

products at reasonable price can be successful in China is

proved. So other small Hong Kong manufacturers should have

full confidence in the China market. There is much

opportunities for them in China.

71

Managing Director

FinancialSalesMarketing

ControllerDirectorDirector

Sales ManagerISales Manager

MerchandisingSalesSalesSales

SupervisorSupervisorSupervisorSupervisor

Merchandiserstwotwotwo

SalesmenSalesmenSalesmen

ORGANIZATIONAL STRUCTURE OF AMERICAN No.1

Appendix I

72

Target MarketI

[Market Positioning

FeedbackFeedback

Marketing Objectives

PRAdvertisingDistributionProduct

Obj.

Obj. Obj.Obj.

PromotionSalesPrice

Obj.Obj.Obj.

PRAdvertisingDistributionProduct

StraStra.Stra.Stra.

PromotionSalesPrice

Stra.Stra.Stra.

Evaluation Budget Control

THE MARKETING MODEL

Appendix II

华丰公司

美国一号

联合举女

夏门华丰公司门市郜及美国一号特约

店购买美国一号产品一支，即可获

券一张，多买多得抽奖将于年月

在厦门毕丰公司举行：中奖名单将于

年月日刊于厦门日报及福建日报，

厂函通知领取奖品。

玍月日截止参加：

各：毛单车一部

各：身历声音响组合一部

各：吋彩色电视机一部

笔：吋彩色电视机一部

双门电冰箱一部

笔：洗衣机一部

笔：四声道收录音机一郢

名：电风扇收音机一郜

笑：保瑗电饭煲一个

奖：电燭炉一个

奖名：各得美国一号旅行袋一个

及洗发水一支：

吞；门华丰公司所陈列为准）

法幸公旬美国 ― 邑

周年纪念木抽奖

中奖名单在曰刊于厦门日報及福建日报，幷专函通知领取奖品

价値

价値

价値

价値

价値

价値

价値

价値

价値

价値

¥3,900

¥2,550¥2,150

¥1,820

¥1,450¥1,300¥1.100¥ 850

¥ 400¥ 300

The Advertising Layout

Appendix III

74

BIBLIOGRAPHY

Books

Carroll A Nolan. Marketing Sales, Promotion, Advertising.

South Western Publishing Co., 1965.

Wright, Warner & Winter. Advertising. Mcgraw Hill, 1962.

Charles J Dirken & Arthur Kroeger. Advertising Principles

Problems. Irwin, 1973.

Philip Kother. Marketing Management. Prentice-hall, 1980.

McCarthy. BasicMarketing. A Management Approach. Irwin.

5th Edition.

Periodicals

"China Official Annual Report" Kingsway International

Publications Ltd.

Yearbook On Chinese Communism. Institute for the study of

Chinese communist problems.

China Trader Handbook. Edited by Lawrence Fung, the Adsale

people, 1980.

China Business Directory. Phillip M. Perry, World Trade

Directories. Inc. 1980.

China Business Review. National Council for U.S.-China

trade.

ChinaEconomic_News. Economic Information and Agency,

China.

China Market. Economic Information and Agency, China.

China Trade Quarterly. Far East Publishers, H.K.

China Trader. Sino Communication Co. Ltd. H.K.

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