Summary: Article
Yum Brands Inc, of Louisville, KY, which owns KFC and Pizza Hut has developed a new restaurant named East Dawning. East Dawning is a bright, clean fast-food restaurant with an eye on efficiency and an atmosphere similar to American-style fast food chains. According to surveys commissioned by Yum Brands, locals disliked the atmosphere at existing Chinese fast-food places which are described as cramped, dirty, and hot.

Yum Brands has experience operating in China with KFC which opened its first location in China in 1987. Approximately 16% of Yum’s profits come from the Chinese market where they operate 2,000 KFC and Pizza Hut restaurants – 3 times as many as McDonald’s. During this time, KFC has learned a lot – tweaking flavors to appeal to local tastes. They have spiced up their chicken (which was already popular in China) and added traditional dishes such as a soupy rice called congee.

In 2004, Yum opened the first version of East Dawning as a test. This test proved to be a failure as it was too slow. The food cooled down before it could be served and traditional dumplings could not be prepared fast enough. Yum closed the location within a year. Version 2 of East Dawning opened up about a year ago with a focus on being “more Chinese” serving traditional Chinese drinks instead of soda and offering about 50 different menu items to accommodate different regional tastes of their customers.

Detractors say that East Dawning will fail since Yum Brands is underestimating the complexity of Chinese food. Yum wants to have standard menus at all East Dawning locations, but critics claim that is an overly simplistic approach. Further, some Shanghai residents say they are not willing to pay East Dawning’s prices. A typical meal includes an entrée, soup and a vegetable costs approximately $2.30 which is comparable to a meal at KFC.
East Dawning also faces local competition such as Yonghe King.
Yum hopes to begin television advertising and has aspirations to expand in China. They also look to the future to replicate the East Dawning concept in other Asian countries.

Commentary:

It looks to me like Yum Brands is trying to beat the Chinese at their own game – preparing Chinese food. It seems to me that this will be an uphill battle. The article doesn’t comment on what a similar meal would cost at a local competitor such as Yonghe King, but if the price difference is significant, I don’t see how East Dawning will be widely accepted. Also, the article does not comment on the quality of the food as compared to the local fare. Again, if the food isn’t significantly better, I think East Dawning will not appeal to the masses.
I hope to track down either an East Dawning or a Yonghe King (or both) to do a side by side taste test. Any and all classmates are invited to assist.

I also question Yum’s strategy to enter the market in the big cities. I think about a city like San Francisco – not many fast food restaurants as compared to local restaurants. Now compare to a small town – the ratio of fast food to local restaurants is reversed. Would East Dawning do better in smaller markets where there is less competition? Of course, perhaps if Shanghai residents don’t want to pay $2.30, a more rural citizen may not be able to pay $2.30.

One remaining item to note from this article. Yum represents that they would like to expand to other countries, yet they only have four restaurants currently. This is compared to the 10 East Dawning locations they hoped to have opened by the end of 2005. Yum claims they are having trouble finding locations. My gut tells me that they could find locations if they were ready to open more locations. I think perhaps East Dawning is not going to be the success Yum Brands is hoping for.

Questions to contemplate and comment on:

1. What would your reaction be if a Chinese company setup shop in the USA and attempted to compete with us head to head on something that you identify as 100% American. Let’s be complete traditionalists…a Chinese firm creates a pie shop that focuses on Apple Pie. The Chinese Apple Pie has a flaky crust and the most flavorful apples you could imagine. This company starts to take market share away from Marie Callendars, Baker’s Square, AND Mom! How do you feel about this?

2. Another product that could be considered 100% American would be the automobile. Has Japan effectively come to our country, setup shop here, and beat us at our own game of building and selling cars? Every major Japanese car company has a multitude of automobile manufacturing plants spread across the USA. Is this any different than what Yum Brands is trying to do with East Dawning?

3. Now consider the sale of IBM’s Thinkpad division to Lenovo. IBM, a stalwart of American ingenuity, no longer owns the Thinkpad name or reputation they built over the past couple decades. IBM voluntarily sold to Lenovo, a Chinese company. Is this bad for the USA or is it allowing the whole world to operate as one market?

Submitted by Erik Slayter

China has roughly 20 percent of the world’s population but only roughly 6 percent of its arable land.  Further, as China develops that 6 percent of arable land is likely to decrease.  This poses huge issues re: feeding its population in the future.  Read the following front page Wall Street Journal article, “Giant Neighbors Russia, China See Fault Lines Start to Appear” (see also related article) [subscription may be required].  What do these article suggest is one way China can help ease its food problem?  What present and future geopolitical issues does this pose for Russia and China?  What about the US?  Is this development good or bad for the US?

Read the following Wall Street Journal article, “What’s Going on in China?” re: corporate transparency.   What are the pros and cons of this disclosure system?  How does this differ from the US?  In your view is this a baby step or a major step for China in combatting the argument by the West that “everything done in China is corrupt, done in the shadows, corporate transparency is a joke, etc.?”

I hope to set up a visit for us to a textile factory in China.  Chinese factories as a whole are often criticized for being inefficient, making shoddy products, etc.  That may or may not be true, depending on the item, factory and industry.  But in the case of textiles, if we assume that is true, what business opportunities does this front page Wall Steet Journal article, “Clothes Made Abroad Create Factory Jobs in LA for Mr. Fix-It“, indicate are presented to, at least, entrepreneurs in the Los Angeles fashion district?  What other business opportunities do you see coming out of such defect work?  Does this article take the wind out of the argument by many trade protectionists in the US that once a job leaves the US (e.g., textile manufacturing) that no comparable jobs come back our way?  Discuss.

Lots happening in China. Some good. Some bad.

Re: the latter, check out this article in the Wall Street Journal from a few months back (”Health Crisis: Chinese Doctors Tell Patients To Pay Upfront, or No Treatment“) [subscription may be required], and these related articles from this past week’s New York Times (”Boy’s Death at China Hospital Spurs Riot Over Care and Fees” and “China’s Muslims Awake to Nexus of Needles and Aids“) [ditto]. These articles shook me up about as much as anything I have read about China over the years (I suspect it’s largely because I now have children of my own).

The health care issue is a time bomb for China. The government has to get its hands around this issue, and sooner rather than later, or I would imagine that the social unrest in China, once and if it breaks, could be huge.

On a different note, rather than an “ah shucks, that sure is messed up and I feel bad for them” gut reaction, what opportunities do you see as MBA students trained in business, for health care consultants and providers in the US, including insurance companies, with respect to China as a possible market for their products and services? It seems to me that there are opportunities, indeed, here for such players from the West to come in and collaboratively work with the Chinese to address this mess and make a positive difference for the average Chinese citizen. What openings do you see in this regard?

Update (January 4, 2007): For a recent Wall Street Journal article that shows some hope and progress on this issue, see Hospital Caters to China’s Wealthy and Poor.

Great sessions today with Dr. Whitaker! When you see him on campus or in town, be sure to thank him for his time. See also this recent related Wall Street Journal article that appeared, A Small Firm Takes on Chinese Pirates.

I want you to put yourself in his shoes trying to make a “pitch” to a government official in China to move forward with and support one of their “block and knock” raids. What would be your talking points? In thinking this over, also remember Dr. Morris’ history talk on resistance in China to giving the West another chance to carve it up like a melon — what things would you touch on and/or try to avoid in your pitch to this Chinese government official to convince him/her move forward and help you against one of their own countrymen? For those of you reading James McGregor’s, One Billion Customers, as a hint and for some ideas, be sure to check out Chapter 4 in his book (Dancing with the Dinosaurs).

Also, I want you to give some thought to why IP violations in China are so difficult for the Chinese government to deal with and shut down. Why is this the case? What are the political, economic and social barriers to China doing so? (Here, don’t focus on the Confucian reason often given by the West of “it’s a complement to be copied” — rather, focus on the possible political, economic and social constraints. I think the Conufucian reason stated by many Westerners is a red herring because Confucianism really states the the complete man/women emulates behavior of high moral integrity and character and I am not sure that copying someone else’s work fits that bill).

Finally, for those who also had the good fortune to be in Dr. Anderson’s class and hear Dr. Whitaker talk about lobbying, you were able to see a facet of the cold, harsh reality and landscape of American politics and our system. While in China, when we visit an English Corner, you will likely be asked by one of the locals whether you think the US or Chinese “system” is better. Most of Americans will say, “the US, of course”, but then you will be asked why. If you then give the normal American easy out answer of “we have more freedom” they will push you on that, and then ask “what is freedom?” and “what makes you think we don’t have that (freedom) in China”? What will you tell them in response to both questions that is credible, true, and sincere? Relatedly, an American who has lived in China (Hangzhou) for the last 5 years, Mark Jones, has also done a lengthy, very insightful and thought-provoking peace on freedom, governance and the development of a civil society in China that I would encourage you to read. Though I may not agree with all of his points and a few things he mentions do not match up with my own experience in China, I still thought he made some great points that have caused me to rethink some of my own perceptions and biases re: China and the West. What he writes will also help get you inside the head of the Chinese and better see and undertand how they see the world (including the US) and certain issues (and many thanks to the China Law Blog for bringing my attention to this post by Mark Jones).

On the 10th of October the European Commission took a decision to accede to the request of Union of Polish Deep Frozen Products’ Producers and to clap temporary antidumping duties on import of frozen strawberries to EU countries. So, starting from the 18th of October frozen strawberry suppliers from China will pay 34.2% of antidumping duty in addition to the standard duty on import of frozen strawberry. The antidumping duty has been launched for 5 years.

Polish farmers, dealing with commercial cultivation of strawberry, felt serious business competition with China suppliers in 2004 for the first time. At that time, during the strawberry harvesting time in Poland the price on the frozen Chinese strawberry, delivered to EU, was about 0.6 EUR per kilo, when the production cost on strawberry cultivation in Poland at the same time was on about 0.55 EUR per kilo level, as estimated by analysts. Taking into account charges for freezing and delivery to EU, to compete with China, Polish producers had to sell strawberry with great losses for themselves. For example, in 2004 Polish exporters of frozen strawberry could not propose it to customers in the EU countries cheaper, than for 1 EUR per kilo.

The situation went worse in 2005, when Chinese suppliers began to supply frozen strawberry for 0.46 EUR per kilo already, herein that expenses for strawberry production in Poland grew highly. That situation led to substantial reduction of strawberry areas in Poland, which were traditionally the main strawberry supplies to the EU markets. With launching of the antidumping duties Polish producers hope to recapture the production profitability of this traditional for Poland berry and to increase its export to the markets of European Union.

This article shows how countries, in this case Poland, deal with China undercutting farmers. This can possibly lead to countries farmers’ demise. China was delivering frozen strawberries to the EU for a price that Poland could not compete with after taking into account charges for freezing and delivery to EU. Suppliers from China will now pay an antidumping duty in addition to the standard duty on import of frozen strawberry. Poland was the main supplier to the EU and was threatened and now hopes to recapture their profits as they regain their exports to the EU markets. This is happening not only within the strawberry market. China is undercutting many countries in various industries. China also does not allow many imports, except for necessities, and exports a lot.

Here are some questions to reflect on, respond to, or debate my opinons on them.

1. Is it fair to limit the trade of Chinese strawberries if they are the most efficient producer?
a. I feel it is not fair in the slightest bit because they are not creating a fair trade envirionment, as they do not have a “perfect” environment for strawberry growth and are exporting using a different tactic.

2. Who will be hurt by the tariff onf Chinese strawberries?
a. European consumers because of a more expensive product
b. Chinese producers because an increased quantity at a lower price
c. The international strawberry industry because of redirected trade flow from China. As of now they do not allow us to import to China becuase we have “harsh chemicals and pests”, even though they have said “our strawberries are larger and taste better”.

3. Is China fully representing all the costs of production?
a. No, they have communist land practices.
b. It appears China has non transparent agricultural subsidies by the government, allowing them to gain international market share and show that their contry is rising. The speaker today showed us how China used to pull into ports with luxurious ships and trade, even thought they didn’t need the goods, to show they were back and ready to be in charge.

4. Is China practicing a predatory strategy in agricultural commodities?
a. Potentially they are and it is apparent in other commodities they export.

Submitted by: Victoria Whelan

Thursday, November 9 from 11:00 am to 12:00 pm, Room 206 — OCOB Professor Steve Whitaker will discuss IP theft and piracy in China (lunch provided).

Click here, here and here for several relevant links from the China Law Blog dealing with IP rights and disputes in Asia that I encourage you to peruse before Dr. Whitaker’s talk as they will give you some things (and context) to think about.  After Dr. Whitaker’s talk, come back this post as I will post some questions for your to discuss!!

Finally, several students have already gone to the central blog for the China trip and posted some great stuff re: Dr. Morris’ presentation last week and/or the CBC show “China Rises”. Please get going on your central blog comments while things are fresh in your mind!  To that end, check out this recent post on the China Law Blog that nicely ties together branding in China (or the lack thereof) to cultural differences.  See/read IN PARTICULAR “David’s” November 5 (5:18 pm) very insightful comment — some great stuff there about flying under the radar in China versus the American branding strategy of cranking out a press release every time something good happens in a company, and think about how this ties directly into what Dr. Morris talked about re: history and how some American firms that do this are running afoul of China’s hesitance/memory of being carved up and invaded by foreign powers - this time economically rather than militarily — and if you have been following the NY Times and Wall St. Journal lately there are signs that China may be slowing the influx of FDI into the country.

An FYI, if you are interested (Dr. Morris emailed me this invite and you are welcome to attend) …

Next week Cal Poly will be hosting a speaker, Megan Greene from the University of Kansas. She will be giving a public address titled “A Government in Motion: Change and Continuity Across the Taiwan Straits.” Her research, including a forthcoming book from Harvard University Press, explores themes of continuity and change in the way the Chinese Nationalist (Kuomintang) party-state governed both on mainland China (1927-1949) and on Taiwan (1945-2000). This question is of importance today as the People’s Republic of China government today looks to the Nationalist model as it attempts to oversee a similar process of economic development. Greene is also co-editor of a forthcoming (Routledge) volume of essays on Taiwan at the turn of the century, entitled Taiwan Enters the Twenty-first Century. The talk will be on Tuesday, 11/14, 12:00-1:00 p.m., UU 220.

What a great and informative session today! If you see Dr. Morris on campus be sure to thank him for his time.

Today’s session forced me to re-think a number of things about myself, culture, society, history, globalization, China, the US, etc. I found the slide and his discussion re: “Which Wang — the globalized basketball star or the nationalistic fighter pilot — will China promote in the future?” to raise a lot of interesting questions. And I must say that EVERY time I hear about Admiral Zheng He’s armada and his 440 foot Treasure Ships I am blown away. Can you imagine being a farmer or carpenter standing on the coast of East Africa or on the coast of India watching those ships sail by? Amazing. In college I took a number of world history classes (one of them was a military history class in college). Not a single one of these classes or their textbooks even mentioned Admiral Zheng and his armada, not even in a footnote. I think they talked about China for 5 minutes in the course and might have had 7 pages total in one chapter in a textbook on China. Unbelievable. I should ask for a partial refund!

What about you? What where some of the helpful takeaways you learned from today? Is China starting to come to life for you? Try to think a little about, read a little about, and talk a little about China each day between now and when we leave in June and by that time you will be surprised what a solid foundation you have built up for the trip to help you better connect the dots when we arrive — but I emphasize that a stronger ability to connect the dots once we get there and fully get your monies worth depends on the time and effort (and the quality) that you put in between now and then (including making this cental blog a meaningful part of your learning experience and discussions with each other to learn and grow).

FYI — here is Thomas Friedman’s “The Two Wangs” NY Times article [subscription may be required] that Dr. Morris mentioned. Also, click here for a great post on the China Law Blog re: the state of blogging in China that nicely relates to our discussion today about Google, Microsoft, Yahoo, etc. and the accessibility of information in China.

I will also post his presentation on the “Docs” section of this blog (password protected) once I receive them.

Professor Carr July 17, 2007 Addendum:  For an excellent modern day follow-up to Dr. Morris’ discussion of Admiral  Zheng He’s fleet and Treasure Ships, read this related Wall Street Journal article [subscription may be required], As China Grows, So Does Its Long-Neglected Navy.

1.  If you have alternative ideas re: communicating from China with folks back home that are different than what I do and refer to in the FAQ document (i.e., I use Skype; perhaps you know prefer a calling card option), please share them with your classmates via your comment below.  How you contact folks back home is up to you.  My skype.com idea is just an suggestion.   Everybody has their own tech preferences.

 2.  Re: passports, we will do this … by the December 20 deadline you need to, along with your completed application (the link to print out that application is now up on the MBA web site!!) and your initial non-refundable payment, you MUST bring your passport into Cal Poly CE when you drop those materials off by that December 20 deadine.  This is a firm deadline — if you don’t make this deadline you won’t be going in the trip.  CE will then make a copy of your passport and return your original passport to you then and there.  Then, please hang on to your passport until I call for them Winter quarter (if you need it back after I call for them, e.g., for Spring break, we can work something out but do give me a heads up if that is the case).

3.  To clarify the blog issues and questions …. you need to create and make one central blog “post” re: a topic of your choice relating to China or the trip by the end of winter quarter.  For an example of a “post” where nobody commented (sometimes happens!!), click here, and re-read page 11 of the syllabus for how to proceed and who to email that draft post to (my student assistant will load your post on the central blog for us). 

Draft something interesting to you and that you think will elict feedback and a response from others - let’s intellectually engage each other, on-line, and in a way that lessens the need to meet and learn from each other in person!  Perhaps you read an interesting article, had an interesting talk with a classmate or professor re: China, saw an interesting feature on CNN about China, etc. 

In addition to the above, you must ALSO make at least three (3) responsive comments EACH quarter on the central blog to a post (or another comment) that has been placed there by me or another student (a “comment” is different than a “post”).  See page 11 of the syllabus for details.  For an example, see comment No. 1 by John Wu by clicking here.  The are plenty of exisiting posts on the central blog that you can read and comment on - it does not necessarily have to be a comment to a post made next month!

Finally, there are several things you need to watch and make a “comment” about it on the central blog.  For example, see page 17 of the syllabus that talks about watching “The Tank Man” feature.  This does NOT count as part of your three quarterly comments on the central blog noted above.

And for your own blog, that is designed for you to post assignments on.  What else you “post” there or “comment” on, is up to you.

4.  Per several people’s questions after today’s session, they are not hearing or listening to how WE (not you) will purchase either a round trip or one way ticket for you in connection with the trip.  You don’t go out, buy your own round trip ticket on the Internet, and then meet us in China.  Not permitted.  See and read, again, pages 36-37 of the FAQ document.  Please comply.