Coca-Cola’s reentry into China was a minor revelation. In 1979, thirty years after the Communist Party’s takeover when foreign brands were kicked out, China’s economy was just starting to open. The symbolism of red and white bottles in Red China rang heavy: The country was announcing itself open to foreigners, foreign trade, and even a touch of capitalism.
At the same time, Coke (KO) was a mystery to an entire generation of Chinese when it reappeared just over 35 years ago today. It is a proud anniversary for a soda and company that never had it easy in the country. Since the takeover in 1949, when Coke’s bottlers were nationalized, Chairman Mao Zedong had openly derided the fizzy brown drink as a bourgeois concoction. Many Chinese only knew it from tales of a previous life, or, if they were lucky, the few remaining posh hotels where one could still find a bottle or two.
Like much of China’s economy in the late 1970s, the soda industry was provincial: Beijing had a drink called Arctic Ocean with polar bears on the bottle, Guangzhou had a Pearl River specialty, Qingdao another. The market was fragmented and largely unregulated. Coming off a lost bid for the Soviet Union, which rival Pepsi then controlled, Coca-Cola desperately wanted a piece of one colossal Communist country.
When Deng Xiaoping rose to power following Mao’s death in 1976 and spoke of a new open-door policy, the U.S. company’s reentry appeared a lot more likely. Behind the scenes, back-channeling had already begun. Coke was only a piece of it: President Jimmy Carter’s administration was busy establishing diplomatic relations with China at the same time.
When Coke finally broke into the once-closed economic backwater, no one could have predicted China’s three-decade rise. Nor could Coke have known just how hard things would be. Over the years, the company has been barred from selling for a year; forced to teach managers who grew up during the Cultural Revolution the basics of business; sold to consumers who said its signature drink tasted like traditional Chinese medicine; and partnered with governments who never wanted to see it succeed too much. How Coke turned China into its third biggest market (and what will surely become its largest any day now) is the story, told here in detail, of its time in the People’s Republic of China.
Part I: Getting Back In
Mark Pendergrast (author, For God, Country & Coca-Cola): Coca-Cola was an archetypal symbol of Western capitalism and consumerism, which the Chinese Communists presumably were vehemently opposed to.
Lub Bun Chong (author, Managing a Chinese Partner): The Chinese hated all things Western. And then Coke comes in and says, “Guys, we want to sell Coke.”
David Brooks (executive vice president and chairman, Coca-Cola Greater China): My father was a diplomat who worked for George H.W. Bush when they had a liaison’s office in Beijing, in the early days before diplomatic relations. I was probably the first or one of the first American students to go to Chinese public middle school in 1976. It was that era of Cultural Revolution-based education. I went to a commune to work in fields for a month. I worked in a factory. It’s hard to conceive today how closed off China really was—it was like North Korea today.
Peter Lee (first president of Coca-Cola China): In the summer of 1977, I got a call that Coca Cola’s chairman J. Paul Austin wanted to see me. I had never met Austin—I was a little Coke chemist in the laboratory and I had accepted a new assignment to travel to Coca-Cola Far East’s base in Hong Kong. Austin said, “I want you to be an eye for the company and see what China is going through this year.” He was very frustrated because Coke did not make it in the Soviet Union. He hoped he could do something significant before he retired.
Ian Wilson (former Coca-Cola vice chairman): We had to counter Russia. Paul said, God help you if you don’t get in [China.] (1)
Lee: I began to develop some contact with the China National Cereals, Oils and Foodstuffs Corporation, or what today we call COFCO [One of China’s state-owned import-export companies —Ed.] I sent many telexes to different departments over six or seven months. I never received a response. Then suddenly, in December 1978, I received a response. It said, “We understand what your company could offer. We welcome you to come to Beijing for negotiations.” That’s all.
Wilson: Dick Holbrook [Assistant U.S. Secretary of State for East Asian and Pacific Affairs under President Carter] was working on normalization. He said, “My God, if you sign before we do, let me know.”
Lee: It was very cold in Beijing. I made special overcoat just for the purpose, a grey cashmere overcoat. I still have it. In the meeting, there were three people from COFCO. I said, “I understand China now has an open-door policy—it’s open to tourists from all over world. We have a product we believe most tourists would love.” Our eventual goal, I’m sure everyone knew, wasn’t just selling to the tourist population. We signed the agreement on December the 13th, 1978.
Wilson: We got a request from Carter not to announce until he had made an announcement [about normalized diplomatic relations]. In typical Carter fashion, around the fifteenth of December, he announced relations with China at 3 p.m. on a Friday. It went into a weekend media black hole. We called a press conference Monday morning [December 18]. It made the first minute of TV news in every major country, the front page of every newspaper in world. It was an enormous story.
Part II: The Restrictions
Lee: By early 1979, we had our first shipments from our bottler in Hong Kong. The first sale was distributed in some major hotels in Beijing, and then slowly Guangzhou, Shangahi, and other key cities.
Brooks: Initially we were under a restriction of selling for tourists and selling for foreign exchange in three cities—Beijing, Shanghai, and Guangzhou. Those barriers were partly ideological, because Coca-Cola was seen as very Western capitalist symbol. There were a lot of internal debates within the Communist Party: “Should we let these guys in at all?”
Lee: COFCO and others didn’t want a Coke cooler to be too visible. So they put it behind a bar, behind a certain area. Of course I wasn’t very pleased with things like that.
Chong: For quite a number of years Coke was only sold in Friendship stores and foreign hotels. Coca-Cola lost a lot of money in the first two to three years shipping Coke from Hong Kong.
Brooks: We had a mini-crisis in the early 1980s. There were complaints within the Communist Party. I think we did a street promotion in Beijing. [They said,] “How could a foreign company do a street promotion in Beijing? It’s not allowed.” We were restricted from selling for about 12 months.
Part III: The Deals
Pendergrast: Coca-Cola was starting from scratch. It was almost like time-warping back to 1905, when Coca-Cola bottlers were just starting up across the U.S.A.
Chong: In the early ’80s, they decide to build a plant on the ground. China wasn’t ready. So what did they do? Coke got engineers to come in to help them build the thing from scratch. At the time, it was owned by COFCO. So that was a start to the whole thing.
Brooks: The initial ‘80s period was working with governments to get approval to get new bottling plants. Those [plants] were mostly state-owned enterprises. In 1988, we had a breakthrough with a Shanghai cooperative venture. It wasn’t a pure joint venture. Some parts were J.V. 50-50; some parts were 100% owned by the same party. We had concentrate plant, which produced the syrups using our secret formula. That couldn’t be a J.V., because we had to control our I.P.
George Shen (an early employee at Coca-Cola’s Shanghai concentrate plant): At that time we were only permitted to produce 20 to 30 units of the concentrate [one unit equals two tons —Ed.] per year. Now it’s 6 million units per year.
Brooks: Chinese partners, especially in mid ’80s, had come out of the Cultural Revolution. We wanted to put in place performance based incentives for employees. Those kinds of concepts were very radical in China. Things we thought were obvious—”We’re going to build a waste-water treatment facility for this factory”—[business partners would respond] “Well, why are we doing that?” We’d be challenged.
Rick Yan (Author of the Harvard Business Review report, “Short-Term Results”): Almost all of these activities would be considered elementary by Western standards, but they were entirely new to bottling partners and traditional wholesalers in China. (2)
Brooks: When we started hiring salespeople for the Shanghai J.V. in 1988, we had a salary we thought appropriate for China. We put ads in the papers and we had pediatric surgeons coming to apply for jobs. I use to have a couple cases of glass bottles in the corner of the interview room. The pediatric surgeon or dentist, whatever, would come in and say, “I’d like to get a job because you guys are offering good benefits.” I said, “Before you say anything, go and pick up that case and carry it across the room a couple times.” “Oh, this is really heavy.” “Yes, that’s what you have to do. We don’t hire doctors for Coca-Cola salesman jobs, I’m sorry.”
Shen: The annual quota thing vanished after a few years. That changed the capacity to millions of units per year. In the late ‘90s, we already had about 20 bottlers. We could make as much as we want.
Huang Lefu, (founder of Zhuhai Zhongfu, which makes plastic bottles for Coca Cola’s Chinese bottlers): In 1990, we only had one location making 300 million bottles a year. In 2000, it was around two billion.
Part IV: The Taste
Zhang Shoujun (one of earliest Chinese employees in Coke’s Beijing plant): It leaves this weird traditional Chinese medicine-like taste in your mouth, but we figured since it was popular in other parts of the world, it should feel welcome in China. (3)
Lee: In the beginning, when people drank Coca-Cola without ice, they felt it was like medicine.
Brooks: In China, Coke had been successful since the 1920s, so clearly there was no barrier to Chinese people enjoying the flavor of our drinks. The challenge we had in the beginning was it not being cold.
Shen: It was a little bit odd to me. Unlike the other sparkling beverages in China at that time, it was full of bubbles.
Brooks: It’s an ongoing challenge today. We’re still doing sampling. We’re focusing on taste and refreshment of the brand.
Shen: I strongly believe Coke is a healthy product. I’ve drank it for many years. I’m in my sixties and no one can tell my age at first glance.
Part V: The Olympics
Brooks: We asked, what does this mean for China? The Chinese called it bai nian: the 100-year games. It had been a dream for many years. Our full direct marketing budget for China—hundreds of millions of dollars—was focused on this for two years.
Pendergrast: Coke would literally roll out the red carpet for the Olympic torchbearers as they ran across China. (4)
Brooks: We initially tested images with consumers like the Great Wall, dragons, Chinese history, Terra Cotta army. They said, “We don’t want to show that old stuff! We want to show the new stuff. We want to show people what our country looks like today and how modern and advanced we are.”
Pendergrast: On March 10, 2008, when Buddhist monks in Tibet protested the long-term Chinese occupation there, China cracked down hard. Two weeks later, the torch run began in ancient Olympia in Greece, where pro-Tibet protestors disrupted a speech by a Chinese official. At Coke’s annual shareholders meeting, Lhadon Tethong, head of Students for a Free Tibet, begged Coke to alter the torch route so that it did not go through Tibet on its way to Beijing. (4)
[The protests and subsequent response resulted more than 100 deaths, rights groups said. —Ed.]
Brooks: We expressed our concern about the immediate events and our hopes for a peaceful resolution. At the time, we also publically reaffirmed our genuine belief that the Olympic Games are a force for good.
Pendergrast: It is certainly fair to say that Coca-Cola was not deterred by political events as it expanded in China, whether that was the massacre in Tiananmen Square or the repression of the Tibetans just before the 2008 Summer Olympics in Beijing.
Part VI: Today
Henrique Braun (President, Coca-Cola Greater China and Korea): The U.S. is the number one market, Mexico is number two, and China alone is the third largest market for the Coca Cola Company.
Brooks: No one realized at the time just how much China would open, and the extent to which the Chinese economy would grow and the consumer market would grow. I think if you asked us what would happen in the mid-90s, I don’t think we would have known. It’s now the biggest beverage market by volume in the world.
Braun: China to me is this giant baby. Big, but the opportunity is there to grow.
Brooks: After 35 years of effort, we have a good foundation, but there are still hundreds of millions who have never even tried a Coke.
Braun: When you look at per-capita consumption per year, today is approximately 40 [8-ounce servings] in China. Globally, you’re close to 90-something. We’ve invested about $9 billion in the country from 1979 to now. We just finished a cycle of $4 billion in investments.
Chong: Former chairman J. Paul Austin gave a very interesting quote when asked how he did the deal in 1979. He said, “All it took was patience. My attitude was not pushy.”