YUM! meets the Chinese Dragon

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YUM! and its irrepressible CEO David Novak have set sail from the shores of America to find fame and fortune overseas.

I hope that they have taken several copies of Andrew Hupert's admirable book on negotiating with the Chinese, The Fragile Bridge: Conflict Management in Chinese Business.

Here are 3 lessons Novak and his team are going to have to learn, especially when the first bird flu wipes out 1/2 the intangible value associated with KFC in China.

1. Conflict is seen differently.

Hupert claims:  "The Chinese will tell you that harmony is the way to go and that disputes are unnecessary - and they may well believe it. Conflict, however, actually serves an important role in relationship-oriented Chinese business.

It is often the fastest and most efficient way of terminating a partnership that is not paying off or has already served its purpose."

"Already served its purpose."  

Think about that, for one moment.  YUM! is expanding to China, a country with a long memory of having been disrespected and ill-used by foreign devils.  YUM! is bringing to China a trademark, some proprietary equipment, and a marketing fund.

How long will it be before their Chinese partners decide that the association with YUM! brands is no longer worth the royalty payment - precisely because they have copied everything of value?

And how will their Chinese partner achieve this?  

Hupert states: "While neither Chinese law nor tradition give the weaker side too many options, the local partner will resort to a tried and true method for disposing of a partner that is no longer needed.

All they have to do is start a fight and let it spin out of control. They lose face, their culture is insulted, and traditions are disrespected - all due to the arrogance and ignorance of the Western side."

They must walk away from the arrogant Western partner.

2.  The long term relationship may be over quickly.   

Hubert claims: "Westerners are frequently surprised at how often Chinese negotiators seem to destroy value by scuttling the potential for a long-term relationship. [However], it may be that the Chinese have already met their objectives when they learned about your business model or new product design. To them, there is no conflict to be resolved. They never planned to follow through with the deal in the first place."

YUM! is going to turn over confidential information to its Chinese business partners.  But, why should those partners having seen how to fry chicken 8 pots at a time care to carry the YUM! brand and pay royalties for a 20 year term?  YUM! turns over confidential its information; what else can the Chinese do, but use it to put YUM! out of business.  

Anything else would not be fair.

3.  IP wants to be free in China.  

"The Chinese are always trying to help foreigners by showing them how they can turn their ideas (which are supposed to be free) into products (which can be sold).

Westerners are always trying to outsource production (which is cheap) so they can focus on marketing, IP and services (which are expensive).

The Chinese think that making use of other people's IP is a common sense shortcut to success.

Obviously, you don't - and this is a major source of dispute and hostility."

Hupert is making a straightfoward cultural observation.  Not every country treats the same ideas as a source of intellectual property to be protected by laws and enforced by the state.  

The formation of intellectual property law in the US and Britain was a reaction to the secretive trade guilds who refused to publish their trade secrets to outsiders.  

You don't have the same history of trade guilds in China, and so there is a completely legitimate basis for their attitude to "borrowing" IP.

May YUM! live in interesting times.

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About this Entry

This page contains a single entry by Michael Webster published on August 21, 2012 12:02 AM.

Are You an Arrogant Franchisee? Is it Preventing Your Success? was the previous entry in this blog.

What Wall Street Needs to Know about McDonald's US Expansion is the next entry in this blog.

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