When Google launched a self-censored Chinese version of its website last year, many thought it had sold its soul to the devil. Why would Google agree to restrict its Chinese users from accessing thousands of terms deemed sensitive by the Chinese government? Because a censored version of Google in China is more profitable than no Google in China. Whether it’s Google, Nike, Wal-Mart, PepsiCo, or KFC, the Chinese marketplace has become a gold mine that U.S. companies no longer can ignore. China’s economy is thriving and consumer spending is at an all-time high. Since the late 1970s, the Chinese government has instituted economic reforms and has been increasingly opening the country to world trade. It joined the World Trade Organization in 2001 and only one-third of the Chinese economy remains under state control. And while these reforms have made it easier for U.S. companies to access the Chinese marketplace, it’s important for them to completely understand China’s economic landscape, its people, and their culture before entering. One of the latest big U.S. companies to enter China through acquisition has been Home Depot, which announced in December the purchase of Home World Group’s HomeWay unit, which has 12 stores in six cities. Home Depot carved out a toehold in the home improvement market that it describes as $50 billion a year in sales and growing at a compounded annual rate of 20%. But it also took on challenges with its investment. Although China’s 1.3 billion citizens make it the world’s most populous country, the wealth gap between urban dwellers and those residing in poor rural communities is also the largest in the world. Sixty percent of China’s population still lives in farming communities and 75% still lives at or below the poverty level. Still, its economy is growing faster than any other country’s, and is the second-largest behind the United States, which it’s expected to pass within the next half-century. In 2002, China for the first time attracted more foreign investment than the United States. China’s booming economy and rise in consumer spending can be directly attributed to its emerging middle class. Although the class currently makes up only about 10% to 15% of China’s population, it’s the fastest-growing population segment in the country. Within the next 15 years, China’s middle class is expected to rise from 130 million to 650 million – double the current population of the United States – and form the biggest consumer marketplace on the planet. As U.S. companies target the Chinese middle class, it’s important to understand that because it’s such a rapidly growing segment, it’s still a relatively immature market that does not have clearly defined shopping and spending habits. We do know that the Chinese tend to believe that Western goods are of a higher quality. They also tend to spend their disposable income not on products they need but, rather, products that will enhance their social status. A trip to the local KFC is more of a social event – a place to see and be seen – than it is about getting a quick and convenient meal. And because the use of credit is still not as widely accepted in China, consumers are more likely to save for longer periods of time and then buy the most expensive, highest-quality products available. While larger companies with well established worldwide brands have the name recognition to expand into China, many smaller or lesser-known companies have found that entry into the market is more easily done by partnering with a Chinese company to generate sales and deliver their products or by acquiring a business that already has established brand awareness in the country. Early stumbles in the market But even well-established companies with broad name recognition must be careful when positioning themselves in China. When Coca-Cola launched in China, it originally went by the name “Ke-kou-ke-la.” Unfortunately, the company later discovered that the phrase means “bite the wax tadpole” or “female horse stuffed with wax,” depending on the dialect. After researching thousands of Chinese characters, it changed the name to “Ko-kou-ko-le” – which is loosely translated as “happiness in the mouth” – and has become the No. 1 soft drink in China. Since opening its first store in 1987, KFC has become the leading fast-food provider in China, and its human symbol – Colonel Sanders – has become an icon. But KFC’s success in China didn’t come without trial and error. Its slogan, “Finger Lickin’ Good,” translates as “eat your fingers off.” The company also discovered it couldn’t just offer Chinese consumers its U.S. menu and expect to be successful. KFC’s ability to modify its menu to suit local tastes and preferences has been key to its success in the country. Targeting China’s growing interior As the 2008 Olympics in Beijing approaches, companies across the globe will attempt to duplicate KFC’s and Coca Cola’s successes as they enter the Chinese marketplace. But instead of entering by way of the large, industrialized coastal cities, U.S. companies may be better suited to target the emerging middle class in the country’s less saturated interior. As China’s middle class grows, so will cities in its less-developed interior. Incomes are growing at a faster rate in the country’s rural communities that in its urban areas, and within the next 10 years, the number of cities in China with populations exceeding 1 million is expected to increase by 100. What many are calling the second industrial revolution – the rise of China’s middle class – offers U.S. companies unprecedented opportunities. But with opportunity comes responsibility. China’s middle class is still relatively uncharted territory that requires careful attention. Gary Muddyman is CEO and Managing Director of Conversis, a provider of globalization, internationalization, localization, and translation services. (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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