Fighting the forgers

It was a stroke of marketing genius – broadcast television advertisements to create consumer demand where none before existed, and then merchandise product to meet the new market need. Procter & Gamble (P&G) did precisely that in the Mainland, shortly after establishing its first joint-venture company in Guangzhou in 1988.

Dandruff was the issue and P&G's Head & Shoulders was the product. It was a huge hit, becoming one of the Mainland's leading foreign brands and recognised today by seven out of 10 Chinese households, according to the Gallup Organisation. "I wouldn't say we created a market as much as we met an unfulfilled need," says Mr. Bill Dobson, vice-president for Procter & Gamble (China) Ltd. "We knew we needed to understand what Chinese consumers would respond to and I think you could say this was a demonstration that we had done our homework."

The American personal-care products company has never looked back. Capitalising on its early gains, P&G went on to invest US$300m in 11 joint ventures and one wholly-owned company on the Mainland, manufacturing and marketing 16 of its brands, primarily shampoos, detergents and paper products. Among the P&G goods being made in China are Vidal Sassoon shampoo, Ariel washing detergent and Crest toothpaste.

Although company executives decline to discuss revenues or profits in detail, P&G's operations are among the most successful foreign ventures in the Mainland.

Fighting the forgers
Reliable estimates put annual China turnover at US$750m, which would constitute less than three percent of the group's US$38.1bn in worldwide sales last year. However, chairman Durk Jager said last month that China could come to represent 10 percent of global turnover by the end of the next decade.

Much of P&G's achievement has been due to ensuring the widespread and timely distribution of product. "It's a real challenge," says Dobson. "China's size makes reaching rural areas from a handful of manufacturing sites that much more difficult."

It is a task made more slippery by central government regulations barring foreign companies from establishing foreign-controlled distribution channels in the country. P&G relies upon Chinese freight forwarders and existing state-owned distributors and wholesalers to get its soaps and powders to every Mainland county and township. However, the company also contracts many other local distributors and wholesalers, which transport the goods ex-factory and bring the products to the store shelves. To guarantee its products actually reach the shops, P&G mobilises sales teams throughout the country to make primary sales to local, mostly state-owned distributors and, later, to assist in its physical distribution to each locality.

Despite its delicate handling of such thorny issues, China risk continues to loom large on P&G's radar, a direct result of trademark violation – a phenomenon which shows no sign of abating. P&G puts the cost conservatively at US$ l 50m a year in lost sales. Dobson is more direct: "Counterfeiting is probably the largest single problem in terms of total impact on our overall business."

The primary targets have been the company's middle and high-tier shampoos, with somewhere between 15 and 30 percent of P&G-branded product sold on any given day being bootleg. Counterfeiters have even gone so far as to create line extensions that are not manufactured by the company. "They're very creative," Dobson concedes. "You could probably find Crest shampoo and Safeguard toothpaste."

To help redress the situation, P&G recently formed an alliance with 20 other Mainland based multinationals to lobby the Chinese government for a strengthening of penalties against those manufacturing the rip-offs. Under current laws, prosecution is difficult and requires "extraordinary evidence" that is hard to obtain, Dobson says.

P&G admits its China sales have flattened over the last two years, a casualty of weakening domestic demand. However, the company considers its current sales plateau a short-term event and continues to invest in and plan new product lines for the Mainland. The company recently began to manufacture locally its sanitary napkin, Tampax, and is also preparing to produce its disposable nappy, Pampers.

Guangzhou, where the company employs the bulk of its 4,500 workers and where P&G is the city's largest overseas taxpayer, remains important to the company. "It's where we started and learned the business and established our initial success," says Dobson. "Between Guangzhou consumers, who are very discriminating over quality, and the Guangzhou government, which has been very supportive and helped us enormously, we are very pleased we started here.