Nestlé’s Michael Garrett has made a bet he expects to lose. The executive vice president for Zone Asia, Oceania and Africa has bet his chairman a dinner at the Shanghai Hyatt hotel that by 2010, China will be the company’s second largest market after the US.

Currently China stands around 16th or 17th in the Nestlé market list – although without the fall in the value of the dollar (to which the renminbi is linked) it might have made 12th. Whatever, China has to grow an enormous amount for Mr Garrett to win and most likely, it will not make second place before 2012 and 2015.

But he made the bet anyway to make a point: the importance of China to Nestlé’s worldwide operations. The statistics which the company is using for its planning show why it is so fixated with China.

Big middle class

Currently China has 350 million people out of a population of 1.2 billion who are wealthy enough to buy Nestlé products; compare this to India which only has a middle class of 70 million in a population almost as large. “That’s the big difference, that’s why China is so important [to international companies]. It’s the distribution of wealth to the middle classes,” says Mr Garrett.

Looking further out, it gets even more exciting. Nestlé research shows that, by 2010 in Mr Garrett’s region, an additional 120 million people will be able to afford packaged goods (such as flour, sugar, rice etc), an additional 630 million will be able to afford convenience foods (Nestlé type products) and an additional 100 million will have incomes of $30,000 a year. In 2002 Mr Garrett’s Zone Asia, Oceania and Africa was about half the size of each of the other two Nestlé regions, the Americas and Europe. In six years’ time the proportions will change substantially in favour of Asia.

Understanding that a market will grow is one thing, however, successfully exploiting it quite another. Nestlé was one of the first investors in China and made profits from day one. How did it achieve this success?

“From the outset, we would not go into China unless three criteria were met: we had majority ownership, management control and a royalty agreement for technical assistance and the brands,” says Mr Garrett who has worked with Nestlé since 1961 and took over as head of Asia and Oceania in 1993.

Lengthy negotiations

As a result the negotiations dragged on for a large part of the 1980s and the first factory was only finally opened near Harbin in the north eastern province of Heilongjiang in 1990. (Nestlé had a sales presence in China going back to 1908.)

“To put us to the test they gave us the worst milk district in the whole of China,” says Mr Garrett. “But we made profits from the start and the farmers loved supplying us because they were paid in cash. Nestlé farmers tend to be the ones with tin roofs whereas other farmers only have thatched ones.”

Today Nestlé has 25 factories in China and intends to expand their capacity, rather than building many new ones, to meet the growing demand. One additional factory is planned for 2007.

The major project for the company now is to ensure it has the correct sales network. Nestlé has a secret map identifying 165 cities with a catchment population of one million people where it needs to have outlets.

Mr Garrett may lose his bet with the chairman – but no doubt he will still be toasted for ensuring Nestlé’s place in the world’s fastest growing market.