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In 1986, Tony Wang was Vice President of the Southeast Asia division of KFC. He had an opportunity of bringing the world's largest chicken restaurant company into the world's largest populated country. Wang was an experienced entrepreneur and had been working for KFC for seven years. No other fast food companies were currently operating in the People's Republic, so Wang did not have anything to go by and nothing to help him evaluate the attractiveness of the Chinese market. The main downsides of operating in China were huge demand on managerial resources and the low prospects of significant hard currency repatriation. The first decision that Wang was faced with was where to open the location of the first KFC.
Obviously there were differences from city to city but a reliable way to evaluate these differences did not exist. Wang was interested in the enormous potential of the Chinese market, but he knew that many other companies had failed in similar ventures. Ta-Tung, (Tony) Wang was born in the Sichuan province in the People's Republic of China in 1944. He moved to Taiwan when he was young and graduated from the Chong-Yuan University with a degree in engineering. He later moved to the United States, and in 1973 completed a masters degree in management science from the Steven's Institute of Technology in New Jersey. He then attended New York University where in 1975 he received his post-master's certificate in international business management.
Wang joined KFC in 1975 at the headquarters in Louisville. Wang was convinced of the large potential for American-style fast food in China. He attended a lecture by the mayor of Tianjin (the third largest city in China), who spoke of the many opportunities for investment in his city. Wang was asked by the mayor to sit on a council to advise on improving the fast food industry in Tianjin.
KFC was currently owned by R. J. Reynolds who were very interested in getting into the Chinese market to sell their cigarettes. American smokes were in high demand in China. Wang had the support of top management. He spoke perfect Mandarin and English and was as comfortable working in New York as he was Beijing.
He also had experience negotiating with the Chinese. As Tony Wang investigated more and more into the necessary requirements, concerns were beginning to grow. He knew that Chinese workers would have problems working under the KFC guidelines. Time-consuming, expensive training programs would be a necessary requirement.
As well their large capital outlays would be needed to find and negotiate a partnership, to sign a lease and gain operating permits. Wang began to thoroughly research the Chinese market. The first are that he began to look at was location. The reason that this was so important was because the location would have dramatic impact on the profitability, future expansion to the rest of China, and the managerial resources commitments. Four cities were selected as potential locations for the first store: Tianjin, Shanghai, Guangzhou, and Beijing. Tianjin - The major advantages of Tianjin were the established contacts that Wang had there.
As well, it was only one of three municipal governments in China that were not controlled by the Central Government in Beijing. The major problems with Tianjin were it lacked a convenient supply of grain-fed chickens. The chickens there were fed using fish meal-fed chickens. The Chinese place great emphasis on freshness and taste. They also were not a very popular tourist location. Wang expected most profits to be in Renminbi, but some foreign currency would be needed for profit repatriation and purchasing needed supplies, that can only be purchased outside of China.
Shanghai - Shanghai has over 11 million people, and is regarded as China's most prosperous business centre. Shanghai is home to a large variety of Western hotels, business facilities and tourists, however its also is not a very popular tourist spots because of the pollution and loud noise. The investment could not be justified if it did not supply an adequate amount of foreign currency... However it did contain several feed mills and the largest poultry supplier in China. Gangzhou - Gangzhou is located in Southeast China only a short distance from Hong Kong. Gangzhou is recognised for it preferential treatment for foreign investment.
It has greater autonomy in approving foreign investment projects, reducing tax rates, and encouraging technological development. Many tourists visit Gangzhou because of its close proximity to Hong Kong. As well any operations could be managed directly from the existing Hong Kong operations. As well Wand did not anticipate difficulty finding a supplier for chicken.
Beijing - Beijing is the second largest city in China. It is the political and cultural centre and has relatively high levels of affluence and the education of its inhabitants. It is also the tourist centre of China, with many attractions located in and around Beijing. A Beijing location would also give a higher profile. This could be good and bad. If they received approval from central government they would be able to enter the rest of the Chinese market without hassle.
However, because of the higher profile the government might decide that they would not fit in to the Chinese landscape, which would prevent them from ever succeeding. Outside of Beijing there were also numerous poultry farms. Wang knew that the location was the most important and would decide whether KFC would succeed or not. There were currently no other competitors in the Chinese market so now was the time to strike and take advantage of the situation, but the risks were high and he had to weigh out these risks for a huge gain or loss. In early February 1987, Wang decided to open operations in Beijing.
This was decided because of Beijing's high amount of tourists and its autonomous municipal government. However, he was feeling more worried about the venture. KFC just recently signed a joined venture partnership. Wang's worries were stemming from the difficulty he had been experiencing getting things done in a city governed by a bureaucracy that seemed impossible to either understand or work with. He felt that he would never be able to find a location in the city and government approval on everything was required. Wang was also concerned whether Chinese workers would be able to meet KFC's demands for cleanliness, quality and service.
The establishment of a joint venture was considered essential because Wang described them as, "completely impossible for us to understand. In fact, trying to do so is a complete waste of time. " Trying to understand investment regulations, winning approval for operating licenses, leases, and employment contracts could certainly prevent them from proceeding. A local partner was not required under Chinese law, however Wang felt it would in setting up operations and maintaining its continued viability. Through ties that R.
J. Reynolds had with the Ministry of Light a partnership was formed between KFC and the Beijing Corporation of Animal Production, a Beijing city government-controlled producer of chickens. After careful inspection KFC found that this would indeed work out because they already produced 3 of the approved breads of chicken required for operations. Negotiations with the Poultry producer commenced with Mr. Jue Xia, a senior manager in the Beijing corporation. Xia felt that it would be to meet KFC's large demand because they did not have access to more excess reserves of grain.
Xia was also hesitant about KFC's quality standards. However, they thought that a partnership with a Western firm would be beneficial for them by gaining valuable international experience, and Xia felt the Tony Wang was unlike most American managers; he was a man he could deal with. The Beijing Corporation helped Wang find a chicken supplier but they lacked close contact with the government agencies that would be essential to setting up operations. So a third partner was needed. Both partners agreed that the Beijing Tourist Bureau would be able to meet their requirements.
The Tourist Bureau was responsible for the supervision of the construction and operation of all hotels and restaurants in Beijing. They had lots of experience speeding up the construction of many Western hotels, and had many types participated in a joint venture in these operations. During these negotiations it happened that KFC was sold the Pepsico. During this time KFC was the second largest fast food chain in the world. It was initially thought that Animal Production had only come on board because of pressure from the Ministry of Light Industry, who wanted to win points with Reynolds, so the acquisition came at a bad time. But as it turned out Pepsico's connections with the government in Beijing were even stronger than Reynolds, so negotiations continued with a renewed interest.
To convince the partners to become part of the venture, Wang offered a guarantee of five percent return on equity, much better than they could receive domestically. This sealed the deal in winning over the partners. KFC retained 60 % of ownership, The Tourist Bureau received 27 %, and Beijing Animal Production took 13 %. This was the actual breakdown of assets that each partner was contributing to the arrangement. This deal was privately pre-approved as acceptable in negotiations with the Foreign Economic Development and City Planning Commissions. The approval of the partnership also required on the sharing of the corporation.
With one-half coming from KFC and the other half split between the other two partners. The deal also stated that the chairman would be appointed by Animal Production and the vice-chairman would be appointed by the Tourist Bureau. This concerned Wang because of loss of control of operations. Wang countered by establishing the new store as a franchisee. With the franchiser being KFC's head office in Singapore. This would require 3 % of royalty payments to be paid to the head office, and require the store to purchase it seasoning mixes from the head office, both using hard currency.
Wang also appointed a day-to-day general manager to Beijing, who would be appointed by KFC and have control. Although it seemed like all major challenges were over, they weren't. The approval of the partnership did not give any operating authority for KFC in the city...
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