Consumer goods companies have long poured investment into China, driven by visions of the country’s billion consumers and the belief that first movers will reap a permanently disproportionate share of one of the twenty-first century’s biggest markets. In one market in particular, packaged foods, the scope is undeniable: in 1998, packaged food will account for 20 percent of the country’s $200 billion food and beverage sales, or $40 billion. Sales of some items, such as milk powder, instant noodles, biscuits, and soft drinks, have already topped $2 billion.

Yet despite this potential, most foreign food and beverage companies are find-ing it difficult to attain even modest profitability in China. Pre-tax returns on invested capital for the 2,500 largest food and beverage joint ventures were less than 6 percent in 1995.¹ Even among the 200 largest joint ventures, average returns were only 3 percent for those operating for three years or less, and around 10 percent for those in operation for four or more years (Exhibit 1)—certainly below the risk-adjusted cost of capital for China. Moreover, returns among these ventures vary enormously, from minus 36 percent to 60 percent.

These erratic results, coupled with the Asian economic crisis, are...