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This Company Is About to Get Shanghaied in China

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The U.S. has imported some $167 billion worth of goods from China so far this year, compared with exporting just $46 billion worth in return. Our demand for cheaply made Chinese products is so great we've already run up a trade deficit in 2013 of $121 billion -- on top of the $315 billion deficit we racked up last year and the $295 billion one the year before that.

Yet for Chinese consumers, trust in their own manufacturers has hit a nadir. Lead paint in toys, brake fluid and antifreeze in toothpaste, melamine in baby formula and pet food. These are just some of the abuses Chinese manufacturers have inflicted on its consumers, and according to a study commissioned by the the U.K.'s BBC, the past three years have seen the erosion of trust accelerate dramatically.

In fact, international companies are among the most trusted brands in China today, with 13 of the top 20 foreign brands hailing from the U.S. Indeed, seven of the top 10 are American.

Considering all the stumbles Yum! Brands (NYSE: YUM  ) has taken this year in the Orient, you might be surprised to learn that its fried chicken KFC chain still tops the list at No. 1, ahead of Procter & Gamble's (NYSE: PG  ) Pampers and Colgate-Palmolive's (NYSE: CL  ) toothpaste.

For megabrands that have been in China for years and years, such as Coca-Cola (NYSE: KO  ) and McDonald's (NYSE: MCD  ) , it might be a bit of a head-scratcher to know they occupy only the ninth and seventh positions on the list, respectively, though perhaps it's the adage of "familiarity breeding contempt" influencing opinions.

Not surprisingly, though, a company like P&G, which has a diversified portfolio of consumer-oriented products, occupies more positions than any other company on the list, with six products considered to be most trusted. In fact, no other company has a second product on the list, and there's only one Asian company -- Samsung -- that made the cut, suggesting that the leery eye Chinese consumers cast toward their own manufacturers extends beyond just its borders.

Even so, one might get the impression that Yum! was determined to cast itself not only out of the top slot, but off the list completely. Last year it gave chickens unapproved levels of antibiotics and was wracked by an outbreak of avian flu, and just last week it was accused of serving ice cubes that were dirtier than toilet water.

Part of KFC's success was predicated on the idea of "go big or go home." It has more than 4,400 stores in China and is planning on opening another 700 this year. Yet it can't be denied that its troubles are taking a toll, and same-store sales are evaporating, with declines of as much as 30% reported. For its biggest profit center -- the fried-chicken palace accounts for half of Yum!'s earnings -- it's quickly killing off the goose that laid the golden egg.

Where U.S. consumers are weary of high costs and turn to cheap Chinese goods as a salve, rising wages and higher standards of living in China are causing its consumers to seek out quality over price. It's perhaps something American consumers ought to consider as well.

While some brands like Yum!'s KFC may take for granted the goodwill bestowed on them, it highlights that for the company willing to invest in China, there's still an Orient Express to profits. 

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Related Tickers

5/27/2016 4:04 PM
YUM $82.59 Up +0.14 +0.17%
Yum! Brands CAPS Rating: ****
CL $70.59 Up +0.10 +0.14%
Colgate-Palmolive CAPS Rating: ****
KO $44.78 Up +0.09 +0.20%
Coca-Cola CAPS Rating: ****
MCD $123.25 Down -0.54 -0.44%
McDonald's CAPS Rating: ***
PG $81.43 Up +0.21 +0.26%
Procter & Gamble CAPS Rating: ****