PEPSI'S PITCH TO QUENCH CHINESE THIRSTS Chairman Donald Kendall turned his board of directors into traveling salesmen as they barnstormed China. They toasted many an official with the 130 cases of Pepsi they brought along. In their wake, bottling plants will rise, and maybe even Pizza Huts.
By Louis Kraar RESEARCH ASSOCIATE Alison Bruce Rea

(FORTUNE Magazine) – MANY mass-marketers dream of selling to China's one billion people. Some think of the market less elegantly as two billion armpits. To PepsiCo, though, the market is mouths, and the People's Republic is especially enticing: it is the most populous country in the world, and Coca-Cola does not yet dominate it. To pitch for the business, PepsiCo Chairman Donald Kendall, 64, turned his board of directors into a band of high-class traveling salesmen. In January he paraded them through China on an eight-day, four-city tour that cost more than $400,000 and had all the pomp and complexity of a state visit. Armed with a letter of introduction from former President Nixon, the PepsiCo directors wound up in Peking sipping Pepsi with Premier Zhao Ziyang. Kendall's high-level hard sell offers a case study in how to get into tightly controlled Communist markets. He used the same kind of huckster diplomacy to get Pepsi into the Soviet Union in the early 1970s. After signing a contract with the Russians to distribute Stolichnaya vodka in the U.S., Kendall took the Pepsi directors to Moscow for a round of meetings with high Soviet officials that eventually led to his establishing 16 bottling plants in the U.S.S.R. The delegation to China included PepsiCo's three inside directors, seven of ten outside directors, and an accompanying cast of 49. It was something of a last hurrah for Kendall. After 22 years as chief executive, he plans to retire this spring, turning the job over to President D. Wayne Calloway, 50. Like most state visits, this one was part of a grand design. A cola war is building in China. Coke got there first, making what it thought was an exclusive deal with a central government trading company in 1978. In the Chinese-language version of the agreement, however, ''exclusive'' became ''priority.'' A year later, when Deng Xiaoping began giving local and provincial governments more autonomy, Pepsi grabbed the chance to enter regional markets. PepsiCo built two bottling plants, in Shenzhen and Guangzhou, with about the same total production capacity as Coke's four plants in China. China could be a hot market. At the equivalent of 13 to 15 cents per 12-ounce bottle, a lot of Chinese can afford a Pepsi. Coke charges about the same for 6.5 ounces. So far, bottlers say they sell everything that comes off the line. PepsiCo has invested only $9 million in China, though on the trip Kendall repeatedly threw around a figure of $100 million over ten years. He said Pepsi would build an unspecified number of bottling plants and a factory to make cola concentrate, which is now shipped in from Ireland. Kendall also talked to the Chinese about selling PepsiCo's Frito-Lay snacks in China and building Pizza Hut restaurants. But Pepsi faces obstacles. The Chinese masses have been quaffing tea for thousands of years. And though Chinese leaders are hungry for Western investment, they are more interested in computers and modern industrial technology than plants to make cola. ''We're selling refreshment,'' concedes Calloway, ''which is not the first thing that a country like China may need.'' To soften the market, Kendall used his directors as door-openers. With economic decision-making pushed down to regional and local leaders, there are lots of new doors to open. ''The Chinese put great emphasis on success,'' says director Clifton Garvin, 64, chairman of Exxon, ''and this is a board of successful people.'' At stop after stop Kendall told his Chinese hosts: ''We have directors who can solve most of your problems.'' Exxon, for instance, is exploring for oil in Chinese coastal waters. Dresser Industries, whose chairman, John Murphy, 54, went along, sold China some $200 million of oil and gas services in 1985. Others in the entourage: Thomas A. Murphy, 70, former chairman of General Motors; attorney William T. Coleman Jr., 65, former U.S. Secretary of Transportation; Harvard Business School Professor Andrall E. Pearson, 60, a former PepsiCo president; economist Arnold R. Weber, 56, president of Northwestern University; and Sharon Percy Rockefeller, 41, daughter of former U.S. Senator Charles Percy and wife of Senator John D. Rockefeller IV, who was elected to the board at a meeting in Guangzhou. While spouses went along and did a little sightseeing, the tour mostly consisted of working lunches and dinners and back-to-back meetings. In each city directors were assigned to buttonhole particular Chinese officials. Thick briefing books described who among the Chinese had the power to make which decisions. Says Michael H. Jordan, 49, PepsiCo's executive vice president and chief financial officer, ''Personal relationships at a high level help cut through bureaucratic bull.'' To Sharon Rockefeller it was ''the ultimate campaign trip.'' Kendall made sure his hosts knew of his connections with Nixon and Vice President George Bush, both well regarded in China. Kendall is finance chairman for Bush's 1988 presidential campaign, and his friendship with Nixon goes back to Nixon's famous kitchen debate with Soviet Premier Nikita Khrushchev at an American exhibition in Moscow in 1959. PepsiCo sent advance teams into each city to nail down last-minute arrangements. Staffers carted along 130 cases of Pepsi- Cola and gifts of leather briefcases and wallets for Chinese officials. Says Rockefeller: ''Don Kendall could teach a lot of American politicians lessons.'' Here are highlights (and a few low points) of PepsiCo's star-studded sales trip: SHENZHEN. On a balmy day the group takes a chartered bus across the Hong Kong border. Shenzhen is one of four so-called special economic zones that offer tax breaks to foreign investors. Big Pepsi billboards dot the road to the Happiness Soft Drink Factory, a joint venture set up in 1982 with a state- owned enterprise. Kendall walks along the spotlessly clean bottling and canning lines that use new American machinery, pausing to sip Pepsi from a bottle fresh off the line. He tells his Chinese partners that Vice President Bush, who visited the plant last year, claims its product tastes ''better than Pepsi in the U.S.'' Happiness exports about 70% of its output to other Asian markets. Liang Xiang, the local Communist party secretary, praises Pepsi's export earnings. Replies Kendall: ''I'm pleased to hear a word I had not heard before from the Communist party -- profits.'' GUANGZHOU. Traveling the 92 miles from Shenzhen in a special railroad car, the / executives sip Pepsi and discuss strategy for the next stop. They will attend the opening of a new bottling plant, but the main objective is to lobby the mayor and other officials for permission to build a concentrate factory that would supply Chinese bottlers throughout China. That night PepsiCo throws a banquet for acting Mayor Zhu Senlin. Kendall introduces Sharon Rockefeller as ''a very attractive girl.'' She winces. (At other stops he repeatedly describes her as ''our newest and prettiest board member.'' She keeps wincing.) Business talk at the head table goes so well that Richard Norton, vice president for the region, tells colleagues: ''I'd be very disappointed if we didn't have 15 plants in China by 1990.'' Next morning Guangdong province Governor Ye Xuanping, who was mayor of Guangzhou when Pepsi agreed to build the plant there, serves the directors tea in his office. Kendall sips and says: ''Someday we hope to convert you to serving Pepsi.'' The governor takes the Chinese view of change: ''It will take you 2,000 years to reach that goal.'' After an awkward silence the directors, for want of anything else to do, applaud. Escorted through traffic by police cars, PepsiCo's motorcade sweeps across town for the new plant's grand opening. Firecrackers explode like machine-gun fire. The ceremony is outdoors. The weather is sunny and warm. Flies buzz around the spectators. In his speech Kendall stresses that the Guangzhou operation will generate hard currency by making plastic bottles that the Shenzhen plant will fill with cola for export. Afterward he goes aloft in a hot-air balloon emblazoned with Pepsi's logo; then Chinese officials take a ride. The following day PepsiCo's board assembles in a private room at the White Swan Hotel for a meeting. ''The last time we met outside the U.S.,'' says Kendall, ''was in 1974, when our first Soviet plant opened.'' Sitting around a table bearing jade tea cups, directors vote in Sharon Rockefeller and approve the $380-million acquisition of Seven-Up. The group boards a chartered DC-9 of CAAC, China's national airline, for the flight to Shanghai. Hostesses walk the aisles with trays of Pepsi. Kendall asks for Stolichnaya vodka and gets it. Neither beverage is usually offered by the airline. SHANGHAI. PepsiCo's mission in China's major commercial center is to nail down another bottling plant. Shanghai is 1,125 miles north of Guangzhou, and the weather is decidedly nippier. As the directors alight from their * limousines at the Xi Jian guesthouse, a dragon dance (two acrobats inside a costume) greets them. The manager had insisted on the welcoming gesture and later wants to put it on PepsiCo's bill. After some behind-the-scenes discussion, the guests are not charged for their own greeting. PepsiCo hosts Shanghai's former mayor, plus municipal and party officials, at an elegant 16-course dinner of such delicacies as steamed pigeon soup and sauteed quail. The Hong Kong Chinese doctor brought along by PepsiCo has a few patients with stomach troubles. The hosts suggest the food in Guangzhou must be to blame. A Chinese band plays 1940s American pop tunes and dancing winds up the evening.

Next morning Chinese-made Red Flag limousines carry the directors to Fudan University, widely regarded as the Harvard of China. The limos fly Pepsi banners. The Pepsi group gets a warm reception in rooms almost as cold as a meat locker. Still wearing his overcoat, Kendall begins a speech to students and faculty by saying: ''This isn't exactly the kind of climate that encourages drinking our product.'' Kendall announces that his company will pay full expenses for two Chinese students to attend Northwestern University, where they will be known as PepsiCo Fellows. Weber, president of Northwestern, tells the Chinese academics: ''In this case a soft drink is translated into hard currency for education.'' To the relief of many travelers weary of exotic food, lunch is a Western meal. At the table Kendall endorses a letter of intent to build a Shanghai bottling operation. The document promises a joint effort to develop such food- processing industries as tomato paste for export to PepsiCo's Pizza Hut restaurants in the U.S. After lunch Kendall says, ''Let's go to a free market,'' and pulls a few companions into his limo for a dash to Wu Yuan Road in western Shanghai. Chinese farmers still have to turn a predetermined amount of their produce over to the government. But under Deng's economic reforms, they can haul any excess into the big cities and sell it at street markets for whatever they can get. Kendall's big frame and arching white eyebrows make him stand out among the crowds. He buys some dried mushrooms. He examines pig tendons and paws scrawny potatoes (''You'd never get a good potato chip from this''). He decides against sampling rice-flour pancakes being cooked at a Chinese fast- food counter. Finally he whips off his coat and gets a sidewalk tailor to sew on a button. A frantic seating shuffle erupts just before that night's banquet, but Kendall and the directors are unaware of it. Various Chinese officials demand places close to Kendall. This scramble for status in a classless society drives the Pepsi support staff to distraction. Eventually the comrades are placated. At dinner Kendall's wife, the former German Baroness Sigrid Ruedt von Collenberg, tells vice mayor Ye Gongqi that she never knows what smiling Chinese are really thinking. Ye likens Chinese feelings to a vacuum bottle of hot water, ''cool outside, but warm inside.'' In a toast Ye acknowledges that it's hard for foreigners to understand China's new economic reforms. ''Actually,'' he says through an interpreter, ''some points are so new that we don't understand them ourselves.'' PEKING. The temperature is just above freezing, and some PepsiCo staffers dig out their fur hats. For all China's economic decentralization, the capital is still the power center. Top leaders can veto local decisions. Kendall, his Nixon letter at the ready, is going to the top. In a parade of Cadillac limousines, PepsiCo's directors speed through the guarded gates of Zhongnanhai, a compound where Chinese leaders live and work. TV cameras cover their arrival and U.S. Ambassador Winston Lord is on hand to greet them. Speaking through an interpreter, Zhao, dressed in a well-tailored Western suit, gets right down to business. Without being specific, he proposes ''cooperation in the food industry.'' Kendall says that's a fine idea. Sensing his guests' anxiety over the risks of political changes in China, the premier assures his visitors that ''the open-door policy and reforms will not change for a long time.'' Peking has recently cracked down on corruption, he adds, but that ''doesn't go against the reforms . . . There's nothing to be scared about.'' Kendall hands Zhou the Nixon letter, then says that Vice President Bush ''asked me to convey his regards.'' Bush, says Kendall, is ''getting very active in preparing to run for President in 1988.'' Premier Zhou chuckles. With military precision waiters march in with cold cans of Pepsi-Cola. Zhou says that the Chinese characters used to spell Pepsi also mean ''everything is good.'' Kendall, perhaps only half-joking, asks: ''Can I use that in my advertising campaign?'' Zhou smiles. AT A FINAL PepsiCo banquet in the Great Hall of the People, Kendall declares in a toast that Chinese leaders ''from the provinces to here have asked us to expand our operations into food and restaurants.'' Perhaps, but Calloway confides to a companion that Chinese Pizza Huts will not start popping up immediately. Later Kendall remarks to Ambassador Lord that the light-industry minister has just promised speedy approval of Pepsi's Shanghai bottling plant. Lord says, ''I don't hear that from many of our businessmen.'' Robert Briggs, Pepsi's point man for China, sums up his view of the trip: ''It moved our effort ahead by at least 1 1/2 years.'' Taking the Chinese view, that leaves 1,998 1/2 years to go.