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July 15, 2013

Comment: Nestle’s China investment shows need to think local

Success in emerging markets is dependent on the ability to think locally. However, while domestic players do have the home field advantage, multinational corporations benefit from stringent internal structures and expertise in areas such as supply chain management. Could the best way to drive growth be to combine the strengths of each, creating "multi-local" operations? Nestle would seem to think so.

Success in emerging markets is dependent on the ability to think locally. However, while domestic players do have the home field advantage, multinational corporations benefit from stringent internal structures and expertise in areas such as supply chain management. Could the best way to drive growth be to combine the strengths of each, creating “multi-local” operations? Nestle would seem to think so.

I’ve been to a few factory openings in my time. But never have I attended one as extravagant as the ceremony to officially open the Nestle-Yinlu dairy facility in the eastern Chinese city of Chuzhou last week (11 July). 

The occasion kicked off at 9.28am, a time picked because the Feng Shui master consulted by Yinlu suggested that this would help to guarantee the success of the 370,000 square metre factory.

Drumming girls, a Chinese dragon, cannons firing gold confetti and fireworks (as well as some comparatively dry remarks from Yinlu and Nestle management along with local government officials) followed.

As I sat in the already baking morning sun, an obvious truth was driven home. China, for all its potential size and scope, is an entirely different market to the western countries that so many food multinationals call home. As multinational food groups – from Hershey to Arla – look to bulk up their operations in markets like China, to ignore this simple truth is to court failure.

To get around this, in categories where domestic players have an advantage – so areas excluding nutrition and coffee – Nestle has developed joint venture arrangements with local partners such as Yinlu and confectioner Hsu Fu Chi.

“An important building block for Nestle in China is the development of local partnerships,” Nestle group CEO Paul Bulcke told the audience in Chuzhou. “They allow us to stay closer to the Chinese consumer and meet demands for… healthy, safe and nutritious products.”

Alongside consumer insight, another distinct advantage that Yinlu has is its distribution structure.

Yinlu followed Mao Zedong’s example: starting in the countryside and then moving into the city, one industry pundit explained. This means that, where the majority of multinational corporations operating in China are struggling to get out of second or third-tier cities, Yinlu has a strong rural footprint.

But multinationals do have the upper hand in some areas. Take the Nestle-Yinlu pairing. Nestle brings to the table a lot more than its deep pockets and global R&D capabilities. The company is an expert in supply management and the development of strong internal structures. In the case of Yinlu, in which Nestle took a 60% stake two years ago, the Swiss food giant has helped in the development of a stronger management structure.

As Yinlu chairman Chen Qing Yuan acknowledged in a press conference following the ceremony, the company had previously been run with the entrepreneurial spirit typical of its founders. However, as a company grows and extends its reach these attitudes can only take you so far. 

One Yinlu source told just-food that the company had been presented with a number of options when it was considering how to enter its next phase of growth two-to-three years ago. This included the possibility of a private listing. However, if it had pushed ahead with this option, the demands of trading on the stock exchange would likely have required Yinlu to bring in external management. The partnership with Nestle was considered a favourable option.

By leveraging the local know-how and – never to be underestimated – consumer understanding of Chinese companies and combining this with the rigorous approach to issues such as food safety, supply chain and professional management present in large international corporations and it would seem that you have a winning recipe.

Nestle was certainly keen to emphasise its commitment to its joint venture partnerships in the country.

“The new Yinlu factory… is just one more example of our commitment… to build these partnerships into even stronger businesses,” Bulcke said. “We are on an historic and exciting journey in this country.”

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