Introduction

Procter & Gamble (P&G) stands as one of the earliest and most influential Western multinationals to invest in China after the country’s economic opening. Its commitment was clear from the start: P&G began advertising in China in 1985 – three years before it was even permitted to sell anything. The company not only brought international consumer brands to China; it introduced entire product categories that previously had been unknown in the country, from modern shampoo to disposable diapers.

Over three decades, P&G developed suppliers, built distribution systems, trained a generation of managers, introduced modern marketing practices, and invested heavily in public health, education, and sustainability. The economic impact of its operations – direct and indirect – is estimated to be several times the size of its own investments and sales.

Creating product categories

P&G transformed everyday life in China by introducing products the market had never seen. In the late 1980s, much of the population used basic soap or shampoo sold from bulk containers. P&G was among the first to introduce shampoo as a separately packaged product in China. Head & Shoulders were produced in a variety of sizes, down to single-use sachets costing RMB 0.5 for lower-income households.

Over the following decade, P&G rolled out Oil of Ulan (Olay), Rejoice, Safeguard, Pantene, Crest, and Pampers in the country – each helping establish or redefine its category. Pampers alone created an entirely new market: disposable diapers did not exist in China before 1997. By 2011, diapers had reached a 39% market penetration, and by 2014, China’s diaper sales surpassed those of the United States.

Leveraging consumer research

In 2000, P&G launched a major push into developing markets, with China at the center. Thousands of employees were dispatched to live with families across the country to observe real-life consumer habits. As a result, the company discovered that in some parts of China shampoos were used with only a few cups of water because of water shortages, that salt was considered good for tooth cleaning, that hand washing of clothes required different detergents than machine washing, and so on.

These observations drove P&G to create China-specific innovations such as Tide formulas tailored to local water types and the Crest 7 Effect toothpaste to satisfy demand for multi-functional products.

China’s rapid development also created income disparities and difference price segments in consumer markets. An individual or a single household might purchase premium skin care products, mid-tier toothpastes, and low-end detergents. P&G responded by redesigning its innovation model, sometimes starting with a target price – such as a diaper costing US$0.10 – and working backwards.

The research carried out in China has been used to inform P&G activities worldwide, including the debut of its first Bluetooth-enabled smart toothbrush in 2015.

Building supply chains and distribution capabilities

P&G helped modernize China’s supply and logistics ecosystem. It worked extensively with local and foreign suppliers in the country to develop the quality and consistency of inputs that were required for world-class operations. To reduce the cost of equipment, it developed a network of low-cost component suppliers in Asia and Latin America, plus an assembly facility in Shanghai. The system allowed P&G to reduce the cost of production lines by up to 30% and has been so successful that it began exporting equipment back to the US and Europe from China.

On the distribution side, China had limited national consumer goods network in the late 1980s. Most retail purchases were made in small local shops that were supplied by state-owned distributors. By 2010, P&G built nearly 150 distribution centers of its own in the country. The company’s Guangzhou Center, opened in 2010, is P&G’s largest in Asia and second-largest worldwide. On top of providing training for third-party distributors, it even set up shadow management structures for major distributors, supervising daily activities and transferring skills in distribution management.

By the late 2000s, P&G-supported distribution network reached over 500,000 retail outlets across urban and rural China. The company also partnered with the Commerce Ministry to train retailers in 10,000 villages, helping expand rural access to consumer goods. In 2009, P&G embraced e-commerce by allowing its distributors to set up online outlets on Taobao.

Setting up global research and developing human resources

P&G built extensive research and development (R&D) capabilities in China starting with a US$10 million R&D facility in Beijing in 1998. Located next to Tsinghua University, the center developed many formulations tailored for the China market and became a global enter of excellence within P&G for detergents and toothpastes. In 2010, the company opened a new US$80 million R&D center in Beijing – the company’s largest globally – employing scientists from 16 countries and working across all product categories.

P&G also engaged in research cooperation with Chinese institutions. For example, in 2011, P&G signed a strategic cooperation memorandum of understanding with Chinese Academy of Sciences, to cooperate in fields including recyclable bio-materials, substitutes for petroleum, surface technology, and consumer psychology.

From very beginning, P&G invested heavily in recruiting and training Chinese talent. It followed a similar pattern in China as in the US and elsewhere of hiring local people at an entry level and then promoting from within. While foreigners were sent to fill key positions in P&G’s early days in China, as time went on locals increasingly occupied senior positions. By 2015, only around two percent of P&G China’s employees were non-Chinese, and the percentage of Chinese in senior management had increased to 65% from 30% ten years earlier. Eventually, P&G China became a net exporter of managerial talent.

Economic impact on China

Taking the estimates of P&G’s Chinese Mainland sales of US$5.47 billion and distributor and retail margins on P&G products of US$4.53 billion in 2014, the total impact of P&G’s own revenues on the Chinese economy in 2014 was on the order of US$20.25 billion in output, US$6.53 billion in value added (i.e., the GDP contribution), and over 355,523 in employment. The impact of the revenues of P&G’s distributors and retailers was estimated at US$8.93 billion in output, US$4.75 billion in value added, and 246,499 in employment. Thus, impact from what might be called the ‘P&G system’ can be estimated to have reached on the order of US$11.28 billion in value added, and over 612,000 in employment in 2014 alone.

We recognize that these are speculative estimates and that the multiplier method used may tend to overstate economic impacts. However, the estimates do suggest the magnitude of the impact a major foreign company can have on China.

Conclusion

In P&G, we have a story of how comprehensive a major company’s impact can be on a foreign host economy. P&G has been at the forefront in China in developing suppliers, teaching and training distributors, training the workforce, introducing modern advertising and marketing techniques, building up local research and development capabilities, introducing advanced human resource and management systems, and internationalizing its Chinese management staff. In addition, P&G has been a corporate leader in green production standards, public health education, and sustainability reporting to China. Finally, through its various product developments and introductions, P&G has changed the way millions of people in China live.

[This paper contains an excerpt from a larger project initiated by the Hinrich Foundation and undertaken by Enright, Scott and Associates on the impact of foreign investment and foreign enterprises as a whole on China’s economy. The results of the larger project were published in a book by Michael J. Enright, Developing China: The Remarkable Impact of Foreign Direct Investment (Routledge, 2017).]

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