The sugar trap of market normalization – Ramsey Fahs
On December 13, 1978, two days before the announcement of Sino-American normalization, Coca-Cola became the first foreign corporation allowed back in to the People’s Republic of China, and just celebrated its 40th anniversary of relations with China. Representatives of President Jimmy Carter, another of Georgia’s more famous exports, had to politely request that Coke delay announcing the deal to avoid the embarrassment of the US being beaten to the diplomatic punch by a purveyor of carbonated sugar-water.
Coca-Cola was an unlikely candidate for this particular milestone. In the decades prior to the agreement, the company had eagerly tied its business practices to the American government’s aim of defeating global communism and promoting democracy. In China, meanwhile, anti-American propaganda smeared Coca-Cola as one of the worst incarnations of American imperialism. Yet the little-known story of how Coke went from imperialist shill to the first foreign brand welcomed back to the PRC illustrates forces that still define the economic relationship between China and American business.
Throughout the Mao years, as noted by Chuck Kraus in a new article in Diplomatic History, anti-US propagandists repeatedly targeted Coca-Cola. In 1950, Minister of Culture Mao Dun warned in the People’s Daily that Coca-Cola and its efforts to spread “American civilization” was just as dangerous as the nation’s formidable military, which China was at that time fighting in a proxy war against in Korea. Chinese periodicals used the term “Coca-Colanization” to describe the way the drink undermined sovereignty and local culture. Others emphasized that Coca-Cola accompanied American troops wherever they went. (On this last point, the propagandists may have been on to something: by the end of WWII, Coca-Cola owned 64 international bottling plants that had provided refreshment to American combat troops, the vast majority of them paid for by the US government.)
After the war, Coca-Cola came to see itself as a crucial force in America’s global campaign against communism”
On a more symbolic level, Coca-Cola became one of the best illustrations of the communist argument against capitalism. Coke isn’t much more than sugar, carbonation and water; it has no productive utility. Coke’s widespread success was largely due to aggressive marketing, which beat out rivals such as Pepsi-Cola. That so much manpower and so many material resources went into convincing people to drink something that was unhealthy and unproductive reflected some of the best communist points about waste in capitalist societies. It’s hard to argue that millions of dollars invested in convincing consumers to purchase one soda over another is a socially prudent use of capital.
If the Chinese Communist Party didn’t like Coca-Cola to begin with, the feeling was mutual. After the war, Coca-Cola came to see itself as a crucial force in America’s global campaign against communism. At a convention for international bottlers, a placard read, “When we think of Communists, we think of the Iron Curtain, BUT when THEY think of democracy, they think of Coca-Cola.” Given Coke’s baggage and Chinese perceptions of the drink from the 50s to the 70s, Coke should have been among the last brands welcomed back to China. How were they the first?
In part, Coke succeeded because they turned their talent for government relations toward China. Piqued by losing out to Pepsi in the quest to sell sugary soda to the USSR in 1972, Coca-Cola Chairman J. Paul Austin became fanatic about beating Pepsi to the PRC. Kraus describes how the tall, red-headed Georgian became a frequent visitor at the PRC Liaison’s office in Washington, always arriving with boxes of Coke (and in one case a refrigerator, after he realized the office’s Spartan set-up meant they were drinking the stuff at a tepid room temperature, not refreshingly chilled). In Hong Kong, Peter Lee, a chemical engineer appointed by Austin to find a way into the Chinese market, sent endless unrequited Telexes and attended the China Import and Export Fair in an attempt to cultivate contacts in the PRC’s Foreign Trade Office. The company also provided financial support for several cultural exchanges between the two countries. Finally, in December of 1978, Lee was invited to Beijing to negotiate with COFCO, the state-owned enterprise responsible for foodstuffs and beverages. Their agreement established a joint-venture bottling plant in Beijing and rights for Coca-Cola to sell its product to tourists at friendship shops and hotels. Later, Coke would be allowed to sell surplus soda in the Beijing market only. So successful were Austin’s lobbying efforts that when Deng Xiaoping visited the United States in early 1979, a trip to the Coca-Cola headquarters in Atlanta was on his itinerary.
The agreement provided Chinese officials with two tangible benefits: foreign technology and foreign exchange. Tong Zhiguang, a Chinese official who worked first at the Chinese Liaison Office in Washington and then at COFCO, was the biggest champion of the deal, according to Kraus. While working in the US before normalization, Tong accepted Austin’s invitation to tour the Atlanta headquarters. Though no fan of Coke’s taste, Tong was impressed by the company’s quality control and management practices. He saw that having a bottling plant in Beijing would introduce superior food production technology to China, and that limiting sales of the drink to foreign tourists could generate much-needed foreign exchange, bringing more dollars into China. When he left the Liaison office for COFCO in 1978, Tong became an advocate for Coke’s entry.
Onlookers thought Coke’s success meant that China was taking the first step toward full market liberalization, maybe even political liberalization”
Coca-Cola was happy to trade its technology for market access in China, because that’s what they have done in every international market (except North Korea, to date). The company works, essentially, as a franchise. Foreign partners operate almost every part of the business in their respective countries, usually only importing from Atlanta a special concentrate containing Coke’s “secret formula.” Coke had long since made decisions about which parts of their intellectual property and technical know-how they were happy to give up.
American onlookers thought Coke’s success meant that China was taking the first step toward full market liberalization, maybe even political liberalization. This idea – that the more Chinese citizens drank Coke, ate McDonald’s and watched basketball, the more they would embrace American values and the more liberal the Chinese Communist Party would become – has had a surprisingly long shelf life. For the Chinese officials greenlighting the deal, though, it was no more than a pragmatic trade made in pursuit of the tangible benefits of technology and foreign exchange. This approach to foreign businesses has remained fundamentally consistent. Required joint venture arrangements for foreign businesses and their accompanying tech transfer requirements remain one of the biggest sticking points in the ongoing trade conflict between the US and China.
Today, Coke can be found practically anywhere in China and, as a recent report uncovered, continues to enjoy a cozy relationship with the Chinese government. Coke advertisements are plastered across the country, and the company served as a lead sponsor of the 2008 Olympic Games in Beijing. For all its marketing and lobbying, though, Coca-Cola executives might have felt a little let down as they celebrated 40 years in the PRC at the end of last year. Though China is the third-largest market for Coca-Cola (behind only the United States and Mexico), per capita consumption there, as of 2012, lags far below the world average and for countries with a similar per capita GDP. Like the American government, Coca-Cola found that diplomatic normalization and Reform and Opening have not created the China they dreamed it might. ∎