Pepsi Grows potatoes in China
HKU693
LU JIANGYONG
TAO ZHIGANG
PEPSI GROWS POTATOES IN CHINA
After entering China in 1982, Pepsi continued to do well in the country, offering a wider range of products than its arch-rival, Coca-Cola. Pepsi’s potato chip business was successful despite competition from other multinational rivals and Chinese domestic brands. As its potato chips became more successful, however, the problem of how to secure a supply of quality potatoes also grew. In the North American market, Pepsi relied on external suppliers for its potatoes. But in China, it ran into problems sourcing locally as well as asking its US supplier to grow potatoes on its behalf in China. The matter was further complicated by the fact that the Chinese government had banned the import of potatoes. Faced with numerous obstacles in sourcing potatoes in China, how could Pepsi go about securing this critical input?
Could it grow its own potatoes as it was already doing in other markets? If so, how could it secure the land needed to ensure that it would enjoy economy of scale? If it relied on subcontractors, could it build a stable and reliable pool of potato suppliers in China in the face of China’s immature agribusiness industry?
China’s Agribusiness
The Agricultural Sector
As part of the rural economic reform during the late 1970s, Deng Xiaoping decided to replace the communal system with the household responsibility system. The government withdrew its control on the cultivation of grains, giving rural farmers the power to decide what to grow for themselves. 1 Under the policy, many farmers began to grow fruits and vegetables, which enjoyed a higher market price, and kept only a small portion of their land for growing grains to feed their families.
Growing fruits and vegetables was a labour-intensive activity that tapped into China’s competitive advantage of cheap labour. As the Chinese economy developed and opened to the
1
Wang, Q.B. (March/April 2004) “China’s Potato
LU JIANGYONG
TAO ZHIGANG
PEPSI GROWS POTATOES IN CHINA
After entering China in 1982, Pepsi continued to do well in the country, offering a wider range of products than its arch-rival, Coca-Cola. Pepsi’s potato chip business was successful despite competition from other multinational rivals and Chinese domestic brands. As its potato chips became more successful, however, the problem of how to secure a supply of quality potatoes also grew. In the North American market, Pepsi relied on external suppliers for its potatoes. But in China, it ran into problems sourcing locally as well as asking its US supplier to grow potatoes on its behalf in China. The matter was further complicated by the fact that the Chinese government had banned the import of potatoes. Faced with numerous obstacles in sourcing potatoes in China, how could Pepsi go about securing this critical input?
Could it grow its own potatoes as it was already doing in other markets? If so, how could it secure the land needed to ensure that it would enjoy economy of scale? If it relied on subcontractors, could it build a stable and reliable pool of potato suppliers in China in the face of China’s immature agribusiness industry?
China’s Agribusiness
The Agricultural Sector
As part of the rural economic reform during the late 1970s, Deng Xiaoping decided to replace the communal system with the household responsibility system. The government withdrew its control on the cultivation of grains, giving rural farmers the power to decide what to grow for themselves. 1 Under the policy, many farmers began to grow fruits and vegetables, which enjoyed a higher market price, and kept only a small portion of their land for growing grains to feed their families.
Growing fruits and vegetables was a labour-intensive activity that tapped into China’s competitive advantage of cheap labour. As the Chinese economy developed and opened to the
1
Wang, Q.B. (March/April 2004) “China’s Potato