Silicon Hutong

We're from the FDA. We're here to help.

In the Hutong

Scoffing at pessimism

1952 hrs.

Richard over at AsiaBizBlog (just blogrolled - not sure what took me so long) is less than impressed with the idea that the FDA will open an office in China. He believes, not without justification, that the office will be a non-factor in the effort to improve the quality of China's exports of non-farm foods, medicines, and medical devices.

Watching the Watchers

I tend to agree. Unless the FDA is prepared to seriously staff-up its efforts, even getting deep access to factories (by no means a given, as Richard points out) will not be enough to regulate the immense and growing flow of consumables out of China and into the U.S.

Where they will help, though, is in certifying and monitoring third-party inspectors, and anything else they can do to help promulgate a quality-control system based on commercial standards and contractual requirements rather than government regulation and inspection.

There are already a decent number of enterprises and organizations engaged in product inspections in China, ranging from massive companies like the SGS Group, to entrepreneurial operations like David Dayton's Silk Road International, to religious purity inspectors like the Orthodox Union. What is missing is a guardian to watch the guardians, and the FDA would likely be better off spending its time on that effort, and on requiring U.S. importers to show proof of inspection by one of these outfits.

I suspect that over time they will get this (if they don't already), and that the noises that made by the Secretary of Health and Human Services suggesting his A-Team of eight inspectors were going to personally clean up the collective act of China's factories were, in fact, nothing more than spin for the home audience.

A Reason to Believe

Richard also noted that the Foreign Ministry is already publicly prevailing on the U.S. to accept certificates issued by the Chinese quality inspection department on goods to be exported to the United States.

It would serve us all well to remember that for a long period after the U.S. discovered a few cases of Mad Cow disease in American beef, the Chinese authorities refused to accept any beef approved by the United States Department of Agriculture until such time as PRC regulators could be convinced that the U.S. system had taken appropriate action to eliminate the danger, and the USDA approval was once again credible.

In the wake of an ongoing sequence of quality issues that have killed and injured far more people than Mad Cow ever did, China needs to appreciate that rebuilding the credibility of its certification authorities will likewise be a process, one that I expect the new FDA offices could assist by observing and providing feedback on the Chinese certification process.

If, however, the FDA receives something less than the full cooperation of Chinese factories and authorities, U.S. acceptance of any Chinese government certification will be a long time coming - even if this gets turned into a political football between Beijing and Washington.

UPDATED: Why Krispy Kreme is Doomed in Mainland China

In the Hutong
Breathing those little airborne cotton balls
2056 hrs.

Via Danwei, China Economic Review is quoting Krispy Kreme's HK CEO explaining why the confection pushers are planning to start their invasion of the People's Republic of China in Shenzhen.

"Shenzhen is a migrant city, many are from the north, and the people are more receptive to fried products."

Krispy Kreme is doomed in China.

Write it off.

It's going the way of Jack-in-the-Box. Or Wendy's.

You Don't Really Want to Be Here, Do You?

First, any company that would stoop to concocting such a nonsense justification for locating a high-value franchise somewhere is engaged in some high-level self-delusion. I would bet that real reason they're going to do Shenzhen first is that the HK CEO is getting stuck with the job on the mainland, probably likes his mid-levels flat, and doesn't want to be flying to Beijing or Shanghai all the time. Shenzhen, on the other hand, is 45 minutes from Central by car.

Second, if Krispy Kreme was really serious about China, they wouldn't hand the responsibility to a guy in Hong Kong. They would do their research and put a guy on the ground in Shanghai, Beijing, or somewhere else in China to act as representative, get to know the local government, and find local franchisees. Behaving like you need to enter China from Hong Kong, then Shenzhen, is a modus operandi far more appropriate to China's circumstances circa 1990.

Third, if Krispy Kreme really understood the way into China, they would start someplace where there are a lot of people who already like donuts, can't get them, and will form long, slavering lines outside their door each morning. If you're afraid of Shanghai, go with Beijing. Call me crazy, but tens of thousands of American and Canadian businesspeople, students, diplomats, and families seem like a built-in market for a store or ten, better (especially initially) than a million or two migrant workers and their factory bosses.

Alas, Krispy Kreme appears content to sit in Hong Kong and wait for the franchisees to come to them, and then invade the market slowly.

Watch the Other Guy Feel the Stones

Time to study the tactics of companies like Starbucks, McDonalds, KFC, Pizza Hut, Dominos, and Papa John's. They knew where their ready markets were, started with those places, put people on the ground in the mainland separate from Hong Kong, and have insanely thriving businesses today because of it.

And, as The Village Grouch correctly points out, Krispy Kreme can also build on the experience - and failure - of Dunkin Donuts in Beijing. In the late 1990s, Dunkin rolled out about 10 stores very quickly, many located in the same space as their Allied-Domecq sister company, Baskin-Robbins.

However, they did little or no consumer education, and when faced with the choice between something they knew and liked - ice cream - and the cakey things they found too sweet for their palates, the uneducated consumer went with what they knew.

Beijing is without a franchised donut store today. But that has as much to do with timing as anything, and it could be argued that the timing is far better today than it was a decade ago.

Where Giants Have Trod

American-born, Thai-based billionaire Bill Heinecke helped to bring Pizza Hut to China in the early 1990s. (If you ate at Pizza Hut in Beijing back then, thank Bill.) However, the going was slow, the joint venture arrangement difficult (as they are), and Heinecke's group sold their shares after a few years and went back to selling pizza in Thailand, which they did quite well.

After a spat with Yum Brands, the parent company of Pizza Hut, Heinecke founded his own pizza chain, The Pizza Company. Seen any of those popping up in the Hutong lately? Right.

Now, after Pizza Hut, Domino's and Papa John's (not to mention the superior product at Kro's Nest) have all established a foothold, The Pizza Company comes to a market where it must fight for a crust, rather than cut itself a large slice of the pie.

So heads up, Krispy Kreme. You have neither the money nor time to burn on timid, ill-conceived strategies in China.

A Last Word

The above said, I must add the caveat below.

Many of us still remember the days when "experts," Chinese and foreign, were saying that pizza would never sell in China because Chinese lack the enzyme required to digest cheese and other milk products. The aforementioned chains give lie to that.

Beware of people who give you reasons why something will work someplace and won't work another. There is no substitute for ignoring all of the naysayers and getting in there and trying.

Fortune in China usually tends to favor the brave and the wise. Be both.