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Encountering Chinese Networks

Western, Japanese, and Chinese Corporations in China, 1880-1937

Sherman Gilbert Cochran (Author)

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Hardcover, 269 pages
ISBN: 9780520216259
September 2000
$57.95, £39.95
Big businesses have faced a persistent dilemma in China since the nineteenth century: how to retain control over corporate hierarchies while adapting to local social networks. Sherman Cochran, in the first study to compare Western, Japanese, and Chinese businesses in Chinese history, shows how various businesses have struggled with this issue as they have adjusted to dramatic changes in Chinese society, politics, and foreign affairs.

Cochran devotes a chapter each to six of the biggest business ventures in China before the Communist revolution: two Western-owned companies, Standard Oil and British-American Tobacco Company; two Japanese-owned companies, Mitsui Trading Company and Naigai Cotton Company; and two Chinese-owned firms, Shenxin Cotton Mills and China Match Company. In each case, he notes the businesses' efforts to introduce corporate hierarchies for managing the distribution of goods and the organization of factory workers, and he describes their encounters with a variety of Chinese social networks: tenacious factions of English-speaking compradors and powerful trade associations of non-English-speaking merchants channeling goods into the marketplace; and small cliques of independent labor bosses and big gangs of underworld figures controlling workers in the factories.

Drawing upon archival sources and individual interviews, Cochran describes the wide range of approaches that these businesses adopted to deal with Chinese social networks. Each business negotiated its own distinctive relationship with local networks, and as each business learned about marketing goods and managing factory workers in China, it adjusted this relationship. Sometimes it strengthened its hierarchical control over networks and sometimes it delegated authority to networks, but it could not afford to take networks for granted or regard them as static because they, in turn, took their own initiative and made their own adjustments.

In this book Cochran calls into question the idea that the spread of capitalism has caused business organizations to converge over time. His cases bring to light numerous organizational forms used by Western, Japanese, and Chinese corporations in China's past, and his conclusions suggest that businesses have experimented with new forms on the basis of their historical experiences—especially their encounters with social networks.
Sherman Cochran is Professor of History at Cornell University. He has written Big Business in China (1980) and has co-authored (with Andrew C.K. Hsieh and Janis Cochran) One Day in China (1983).

Chapter 2

Standard Oil Company

On January 22, 1882, John D. Rockefeller formed the Standard Oil Trust and led Western businesses down the path from personal capitalism to managerial capitalism. As characterized by Chandler, Standard Oil was "the first of the great industrial consolidations" in America and the world.[note 1] As early as the mid-1880s, from its headquarters at 26 Broadway in New York City, Standard Oil's "extensive managerial hierarchy began to coordinate, monitor, and plan for this global industrial empire." Its "interrelated three-pronged investment in production, distribution, and management...made it a first mover on a global scale.[note 2] In the vanguard of businesses blazing a new trail, Standard Oil adopted a policy of extending its managerial hierarchies abroad as well as at home, and it thus might well seem, in retrospect, to have set the stage for a dramatic encounter between Western and Chinese business practices in China during the late nineteenth century.

In the event, Standard Oil postponed this dramatic encounter until the early twentieth century. Although the company carried out its policy of establishing foreign affiliates in all of the world's other major markets by 1891, it did not do so in China until more than a decade later.[note 3] In the meantime, in China it surrendered almost all control over the marketing of its kerosene to a sole Chinese agent between 1883 and 1893, and it then took at most indirect control over marketing by delegating authority to Chinese compradors between 1893 and 1903. For these twenty years, 1883-1903, it withheld its corporate hierarchy from China and delegated authority for the distribution of its goods to Chinese social networks.

Marketing through a Chinese Agent, 1883-1893

After forming a trust in 1882, Standard Oil appointed a Chinese merchant, Ye Chengzhong, to be its sole agent in China from 1883 to 1893 and left kerosene distribution for China entirely in his hands. Before 1883 Standard Oil had relied on Western trading companies to market its kerosene, which was virtually all burned in lamps for illumination in East Asia, and in the 1870s and early 1880s it had made a very sluggish start in China compared to Japan and the Dutch East Indies. As shown in table 1, by 1880 U.S. exports of kerosene (nearly 100 percent of which came from Standard Oil) included only 97,000 barrels delivered to China compared to 3.3 times more to Japan and 5.5 times more to the Dutch East Indies. By contrast, in 1885, two years after Standard Oil transferred its account to Ye, exports to China shot up to 551,000 barrels--5.7 times more than in 1880--and surpassed the amount shipped to either Japan or the Dutch East Indies. Thereafter, in the early 1890s, exports to China grew steadily, if less spectacularly.

Ye was more successful than Standard Oil's distributors in other countries because of the nature of his control over marketing in China. In analyzing the roles played by Ye and other Chinese distributors of foreign goods, it is tempting to characterize them as mere "compradors"--in-house middlemen between East and West--who were marginal figures in China's economy and society, and historians have attached this label to Ye.[note 4] But between 1883 and 1893 Ye reached far beyond the confines of Standard Oil's Shanghai office and managed the marketing of its kerosene every step of the way throughout at least three of China's regions--the Lower and Middle Yangzi and North China. As the historian Hao Yen-p'ing has perceptively observed, figures like Ye should be considered as at least "comprador-merchants", because "the comprador was not only a commercial middleman but also usually an independent merchant in one way or another."[note 5] Even this designation is not adequate as a description of Ye because it does not convey the large scale of his operation.

Ye Chengzhong's Interregional Trade

Before landing Standard Oil's account in 1883, Ye Chengzhong at age forty-three had already created a flourishing interregional chain of shops. Although wealthy at this relatively young age, he had not been heir to a family fortune. On the contrary, his family had been impoverished for several generations, and in his youth his own generation at first seemed equally ill-fated. Born in Zhenhai County, Ningbo prefecture, in 1840, he was only five when his father died, and at eight he received less than six months of formal education in a village school before going to work to help support his mother and his four sisters and brothers. Certainly no scion of an elite family, he acquired his wealth in a remarkable mid-nineteenth-century rise from rags to riches.

Like many others suffering from Ningbo prefecture's economic decline in the mid-nineteenth century, Ye set out as a sojourner to seek his fortune in Shanghai, 150 kilometers northwest of his native place. In 1853, at age thirteen, with the help of an old family friend, he became an apprentice at a grocery store in Shanghai's French Concession and began making deliveries on the Huangpu River in his employer's sampan. Within three years, he raised enough capital to open his first store, a small shop in the Hongkou district of Shanghai, and six years later, in 1862, he was able to start a larger store called Shunji Imports (Shunji yanghuo hao), which specialized in hardware (wu jin).[note 6]

From this base, Ye proceeded to build up an interregional chain of eighteen stores, all specializing in the import and export of hardware. He identified these as chain stores by giving them names that contained "Shunji" (the name of his original store) plus a character representing the store's location; for example, his store in Hankou was known as Han Shunji, the one in Tianjin was named Jin Shunji, and the one in Nanshi, the southern district of Shanghai, was called Nan Shunji (South Shunji). In the Lower Yangzi he introduced eleven such stores, six in Shanghai and one each in Ningbo, Wenzhou, Nanjing, Wuhu, and Zhenjiang. In the Middle Yangzi he owned three, two at Hankou and one at Jiujiang. In South China he opened one at Guangzhou. In North China he had two more, one each at Tianjin and Yantai. And in Northeast China he had yet another, at Yingkou. To supply these stores, he gradually acquired a fleet of ten large junks that were seaworthy for coastal as well as riverine shipping.[note 7] By the time of his death in 1899, his assets were valued at between six and eight million ounces of silver (taels).[note 8]

Thus, despite his humble origins, Ye Chengzhong developed one of China's biggest businesses and used his stores as wholesalers and retailers to distribute Standard Oil's kerosene. He built up this chain of stores and exercised his authority over and beyond it by taking advantage of strong connections with associates from his native place.

Ye's Native-Place Ties

If Ye's ancestors did not bequeath wealth to him, they did give him a native place that was famous for its members' financial success and subethnic solidarity. Since the tenth century his birthplace, Ningbo prefecture, had been known for producing merchants with commercial acumen and fierce loyalty to their native place, and in the nineteenth century, after Shanghai eclipsed Ningbo as a port, Ningbo merchants created an extensive network of native-place associations that dominated finance in Shanghai and managed trade between the Lower Yangzi and other regions.[note 9] Themembers of these and other native-place associations preferred to confine their dealings to fellow natives from their home localities because they spoke each other's local dialect and expected eventually to return home where the reputations of their families, lineages, and native places were at stake.[note 10] As an heir to Ningbo's long tradition and as a participant in Ningbo merchants' nineteenth-century networking, Ye took full advantage of his native-place connections to manage interregional distribution of Standard Oil's goods.

At the highest managerial level of his operation, Ye entrusted fellow Ningbo men with responsibility for distribution of Standard Oil's kerosene. In the Middle and Upper Yangzi regions, his Ningbo associate was Ding Shen'an. Based at one of Ye's Hankou shops, Ding took responsibility for marketing goods delivered to Yangzi River ports west of Jiujiang (leaving Yangzi ports east of Jiujiang under Ye's own supervision from Shanghai). In North China Ye assigned comparable responsibilities to another trusted Ningbo associate, Wang Minghuai. Before sending Wang north, Ye had employed Wang in Shanghai at his first import-export shop, Old Shunji (Lao Shunji), and in 1880, on opening his branch in North China at Tianjin, he sent Wang to manage it.[note 11]

While delegating responsibility to Ningbo men such as Ding and Wang, Ye kept their operations strictly subordinate to his own. Ye retained absolute authority in Shanghai to place all orders with Standard Oil (including those for the Middle and Upper Yangzi, North China, and other regions) and made all decisions about allocations of available supplies to every distributing point in China. He settled accounts with Ding, Wang, and other regional distributors on a monthly basis and paid them sales commissions of 2 to 3 percent. On these terms, Ye distributed Standard Oil's kerosene through his subordinates as long as he served as Standard Oil's agent, and subsequently the company retained Ding as a comprador until 1915.[note 12]

Ye was also inclined to recruit Ningbo men for lower-level staff positions. Favoring people from one's native place was typical of nineteenth-century Ningbo traders who, in the words of the historian Susan Mann, relied on "a close-knit and carefully controlled system for recruiting Ningpo [Ningbo] youths into trade in Shanghai."[note 13] In fact, even by the standards of Ningbo chauvinists, Ye ranked above the rest. Within Shanghai he aligned himself with Ningbo people by becoming a leader of Shanghai's Ningbo guild (Siming gongsuo) and by making major donations to several of Shanghai's Ningbo charities: 200,000 taels to establish an elementary school, Chengzhong Xuetang (named after himself); 20,000 taels to set up a charitable hall, Huai De Tang, to care for widows and children of deceased members of his staff; 30,000 taels for a Shanghai cemetery reserved for burials of Ningbo people; plus annual contributions to these and other charities that provided food, clothes, medicine, and coffins for Shanghai's poor.[note 14]

Meanwhile Ye contributed directly to his native place by building several schools and vaccination clinics, buying 400 mou of land for his ancestral temple, and donating 30,000 taels to establish a charitable hall, Zhong Xiao Tang, for housing and feeding destitute members of his own lineage. As noted by one of Ye's eulogists after his death in 1899, "His intense love for his fellow provincials of Chekiang [Zhejiang province, home of Ningbo prefecture], among whom no one ever appealed to him in vain, has made his name idolized by them."[note 15]

Ye's Relations with Westerners

Ye made an effort from an early age to cultivate relationships with Westerners. Before arriving in Shanghai at age thirteen in 1853, he had no preparation for dealing with Westerners, but thereafter he consciously trained himself for the task. On his first job delivering groceries in the French Concession, he began to learn pidgin English, and ten years later, in the early 1860s, after opening his first small shop, he hired instructors to teach him and his staff English, commercial law, and customs regulations at night.[note 16] Through this self-training, Ye learned to deal with foreigners in person and in English, and after becoming Standard Oil's agent in 1883, he regularly used his learning to protect and enhance his position, especially in holding his own against Jardine, Matheson and Company, China's leading British trading firm, which coveted the kerosene trade in general and Ye's account with Standard Oil in particular.

Although enthusiastic about selling kerosene, Jardine's was reluctant to commit itself to major oil schemes in China without Ye's cooperation. Jardine's was optimistic about the future of the kerosene trade because it was impressed by China's rising imports, especially after 1882, when a cheap kerosene-burning lamp was produced by Chinese manufacturers in Guangzhou (Canton) and sold widely in China. In a report prepared by Jardine's in 1884, its managers could barely contain their excitement over the prospects for imported kerosene:

The chief portion...is due to provincial demand, 511,770 gallons having been sent into the interior under transit pass (1/2 of import duty), of which 380,780 were sent by Chinese. The above facts are remarkable as showing no prejudice against the foreign origin of any article will prevent a ready sale, provided its price, quality and general utility show it is adapted to the wants and purses of the most numerous class of consumer.[note 17]
Eager to make this "ready sale," Jardine's presented a series of proposals to Ye.

Ye commanded deference from Jardine's such that his endorsements confirmed some proposals and his opposition killed others. In the mid-1880s, for example, as soon as he consented to a joint account with Jardine's, it was used to import as much as 380,000 gallons of kerosene per annum. Then, early in 1890, when he vetoed a plan by John Macgregor of Jardine's to import refined oil from the United States, it was promptly dropped. By the same token, later in the year when he agreed to buy stock in the proposed London & Pacific Petroleum Company through which Jardine's intended to develop oil-bearing property in Peru, this new firm was established and put into operation, albeit only briefly, until 1894.[note 18]

In each of these cases, Ye demonstrated his capacity to prevail over the foreign managers of the most powerful Western trading company in China. In addition, this evidence points to the conclusion, as Edward LeFevour has observed in his study of Jardine's, that Ye's "hold on the kerosene market in China was usually unchallenged in the eighties and nineties."[note 19] During these two decades, Ye's net profits from the sale of Standard Oil's kerosene amounted to more than 100,000 yuan per year.[note 20]

Ye's Dismissal and Legacy

Despite Ye's iron grip on China's kerosene market during his ten years as Standard Oil's sole agent, the company finally fired him. It dismissed him on the grounds that he and his Chinese associates had abused their credit privileges and had committed fraud.

Since becoming an agent for Standard Oil, Ye had perennially violated the company's rules. For example, he had regularly taken advantage of its policies to gain more access to liquid capital than the company allowed. Whereas he was given a grace period of 90 to 100 days between his acceptance of goods and his payment for them, he gave his agents a grace period of only 25 to 30 days and used the credit during the interim to finance his own investments.[note 21]

After repeatedly complaining about Ye's financial manipulations, the company was prompted to act in 1893. In this instance Ye hoarded kerosene while the company's price was low, sold it at a higher price after market demand had risen, and pocketed the difference between the company's specified retail price and the actual sales price. Exasperated with Ye and determined to widen its Chinese sales force beyond his network, Standard Oil refused to renew his appointment.[note 22]

As soon as Ye was fired, Jardine's jumped at the chance to take his place as Standard Oil's agent. "The [Jardine] firm's interest in kerosene is now quite a full one," one of Jardine's executives wrote privately to another in 1893,[note 23] and in the same year Jardine's presented to Standard Oil a comprehensive plan that would have made it the sole agent throughout Asia for both Standard Oil and one of Standard Oil's affiliates, American Tidewater Company. But once Standard Oil ceased to rely on Ye, it finally began to consider extending its own worldwide marketing system to China. After negotiating for nine months, it declined Jardine's offer.[note 24]

Marketing through Chinese Compradors, 1894-1903

Between 1894 and 1903 Standard Oil faced its first serious competition in China, but it responded to the challenge by creating only a small-scale marketing system there. In 1893 it belatedly extended its administration for worldwide marketing into China, assigning responsibility for China (and the rest of Asia) to Standard Oil of New York, and this subsidiary, in turn, set up the company's first offices and appointed its first Western salaried sales representatives in China. But these Western sales representatives did little more than transfer responsibility for marketing from Ye Chengzhong to Chinese compradors. The superficiality of this change was evident in the contrast between Standard Oil's approach and the more aggressive tactics of its new rivals for China's market.

Standard Oil's Marketing System

Between 1894 and 1903 Standard Oil continued to rely on no more than a handful of Western salaried representatives in China. In 1893, on dismissing Ye Chengzhong, it hired British merchants in Shanghai and Hong Kong, provided them with minimal logistical support, and found that they, in turn, delegated authority to Chinese compradors in those two cities and to a foreign trading company in Hankou.

In Shanghai Standard Oil chose as general manager of its China headquarters an Englishman named Henry J. Everall. In residence at Shanghai since the 1880s, Everall had studied the Chinese language and had worked in Shanghai for the American Trading Company--a firm later characterized by Standard Oil's in-house magazine as the "repository from which so many of the Company's North China pioneers were drawn."[note 25] Like other foreign general managers of trading companies, Everall hired a Chinese comprador as a salaried employee to recruit other Chinese employees for the firm and to guarantee their personal integrity and business transactions.

Perhaps in reaction against Ye, Everall did not recruit compradors from Ye's native Ningbo. Instead he turned to Shanghai's other leading merchant group, the Cantonese from Xiangshan (later known as Zhongshan), a coastal county that contained Macao and was near Hong Kong and Guangzhou in South China. If Everall expected to avoid the kind of favoritism that Ye had shown toward family and native place, then he was mistaken to choose the Cantonese from Xiangshan. Between the 1860s and the 1890s, they had come to dominate the ranks of Shanghai's compradors by recommending family members and native-place associates to foreign firms, and, on their retirement, they had regularly bequeathed their own positions to relatives and other Xiangshan men. In fact, they had become so dominant that the very term "Xiangshan men" was used in the late nineteenth century to designate "the comprador class."[note 26]

Whether or not Everall was aware of the Cantonese compradors' network of family members and native-place connections, he enmeshed Standard Oil in it by seeking advice from Wei Wenpu, a leading Xiangshan man who by the 1890s had long served as comprador for one of Shanghai's oldest Western-owned financial institutions, the Chartered Bank of India, Australia, and China. Predictably, Wei recommended Chen Yichi, who was Wei's own son-in-law and the son of another well-connected Xiangshan comprador, Chen Shutang (a.k.a. Asong). In 1894, although Chen was only twenty-four years old at the time, Everall accepted Wei's recommendation, appointed Chen comprador, retained him throughout the late 1890s and early 1900s, and thus made Standard Oil's Shanghai office as dependent on a social network of Xiangshan compradors and distributors as it had previously been on Ye's social network of Ningbo merchants.[note 27]

Outside Shanghai Standard Oil's marketing system for China had only one other office before the early twentieth century. Located in Hong Kong, it, like the one in Shanghai, was opened in 1894 as a district office (qu hang) with a Western general manager who depended for marketing on a Chinese comprador, Huang Zhaorong. Known as the Hong Kong and South China Branch, this office was responsible for sales in Southeast, South, and Southwest China, whereas the Shanghai office, known as the Shanghai and North China Branch, covered all of the rest of the country except the Middle and Upper Yangzi.[note 28]

In the Middle and Upper Yangzi regions, Standard Oil had no office of its own, entrusting its distribution there to the Hankou office of C. Melchers and Company. This firm was well positioned to market Standard Oil's product because it had opened offices in Hong Kong in 1866, in Shanghai in 1877, and in Hankou in 1884 and had become the biggest German-owned trading firm in China during the late nineteenth century.[note 29] Like other German trading companies, Melchers specialized in opening China's market to newly introduced products,[note 30] and in Hankou it promoted kerosene by taking daring measures not tried by Standard Oil's own offices. For example, after evaluating Chinese commercial houses and designating sales territories for them, it confirmed their appointments as distributing stores (jingxiao dian) by boldly allowing each to take a certain amount of kerosene without making a security deposit. Besides granting credit, it protected the sales stores against price fluctuations between the time of kerosene delivery and the settlement of accounts. If prices rose in the interim, Melchers allowed distributing stores to pay the original (lower) price for the goods, and if the price fell, it allowed them to pay the current (also lower) price. Melchers' commissions to these Chinese distributing stores varied according to each one's volume of business and location and ranged between 2 and 5 percent.

To enhance the Chinese stores' appeal to customers, Melchers advertised widely, putting up posters, painting walls, handing out colored cards, and selling cheap German-made wall lamps (chiang deng). In Melchers' territory it identified Standard Oil's kerosene with its home country of Germany by labeling the product "German" and thus implied (misleadingly) that it produced as well as distributed the goods. As a Chinese former employee of Standard Oil later recalled, Melchers' sales techniques "stimulated great interest at Standard Oil," and it retained this German trading company as its agent in the Middle and Upper Yangzi until 1912.[note 31]

Although Melchers' Hankou office was more innovative than Standard Oil's offices at Shanghai and Hong Kong, the combined efforts of all three did not increase the company's sales in Hong Kong and China as fast as its sales were rising worldwide. As shown in table 2, between 1884 and 1894, under Ye's agency, Standard Oil's sales in China as a percentage of its worldwide exports had jumped from 3.5 to 11.3 percent and had risen in Hong Kong from 3.2 to 7.8 percent. Between 1894 and 1903, by contrast, despite its investments in marketing, the company's worldwide exports to China and Hong Kong between 1899 and 1903 slipped downward to an average of 8.8 and 6.6 percent respectively. Meanwhile, as the share for China of Standard Oil's worldwide sales diminished, the American company faced a challenge there from European oil companies.

European Oil Companies and the Introduction of Bulk Distribution

In the late 1890s, compared to American-owned Standard Oil, European oil companies introduced new and more effective techniques for supplying kerosene to China. As shown in table 3, in 1889, with the arrival of the first imported kerosene from Russia, the United States had ceased to be China's sole supplier of kerosene, but before the company's dismissal of Ye Chengzhong and its installation of its own marketing system in 1893, the American share had still amounted to a full three-fourths of the market. Between 1895 and 1904, by contrast, as kerosene began reaching China from Sumatra as well as Russia, the American share dropped from 75 percent to an average of 45.8 percent per annum.

Since Standard Oil supplied almost 100 percent of the kerosene exported from the United States to China throughout the period, this decline in the American share deeply concerned the company's management. In 1897 W. H. Libby, Standard Oil's well-traveled troubleshooter for overseas operations, suggested trying "almost anything that would foreshadow and advertise some new and aggressive Eastern policy."[note 32] In the same year one of his colleagues, F. Q. Barstow, grumbled, "Every day makes the situation more serious and dangerous to handle," and he predicted, pessimistically, "If we don't get control of the situation soon, the Russians, Rothschilds [a Paris-based combine that dominated oil production in Russia], or some other party may."[note 33] In fact, by 1897 two of Standard Oil's rivals had already begun to "get control of the situation" in China.

One of these rivals, Marcus Samuel of the English trading firm M. Samuel and Company, was the first to introduce bulk distribution of kerosene into China. In the early 1890s Samuel had cut the costs of handling and transportation in Asia by shipping kerosene in tank steamers, railroad tank cars, and horse-drawn tank wagons and by storing it in tanks installed in Asian cities. In 1891 he had won from the Rothschilds a ten-year contract that had allowed him to distribute their Russian oil as long as he sold it east of Suez. The next year, 1892, he had convinced operators of the Suez Canal to lift the ban on the shipping of bulk oil through the canal, and by the end of 1894, this Russian bulk oil had been carried to China by tank steamers and pumped into newly built storage tanks in the coastal ports of Shanghai, Xiamen, Shantou, and Hong Kong. Under the management of Samuel's affiliate, Arnhold, Karlberg and Company, this Russian bulk oil became available on arrival in China at two-thirds the price of Standard Oil's kerosene.[note 34]

Samuel gained this price advantage over Standard Oil in China because in the nineteenth century the American company shipped bulk oil in tank steamers only to Europe. In the 1890s (as in the 1870s and 1880s) it continued to transport all of its exports to Asia in wooden cases that each contained two five-gallon tins of kerosene. Although Samuel was initially surprised to discover that Chinese wholesalers greatly valued Standard Oil's wooden cases and tin cans and refused to supply their own containers, he overcame this problem by building canneries in several Chinese ports where Chinese workers had the task of transferring kerosene from large tanks to small tins.[note 35]

Immediately after Standard Oil's kerosene monopoly in China was broken by this English trading company, the American firm was also challenged by a Dutch firm, Royal Dutch (an English translation of Koninklijke, an abbreviation of Naamlooze Vennootschap Koninklijke Nederlandsche Maatschappij tot Exploitatie van Petrleumbronnen in Nederlandsch-Indie). Like Samuel, Royal Dutch transported oil in bulk using tank steamers, and it added an organizational innovation by operating these steamers within a comprehensive wholly owned industrial consolidation. Hence, from the oil's point of origin in Sumatra to the kerosene's distributing points in China (and other countries), Royal Dutch kept procurement, refinement, transportation, and distribution under its ownership. Reducing transportation costs to China was easier for Royal Dutch than for Standard Oil, because, as noted by Henri Deterding, Royal Dutch's sales manager in the late 1890s, "compared with Pennsylvania, Sumatra and Java was 'just around the block' from Shanghai and Hong Kong."[note 36]

More difficult, Deterding recognized, was the task of lowering the cost of local distribution within Asia, and he gave it top priority. "The first step I want to take," the thirty-year-old Deterding announced on assuming his position with Royal Dutch in 1896, "is replacing the [Singapore] Straits agents by private employees....I am thinking of a larger and better-regulated sale."[note 37] In China, as in the Straits settlement, he assigned salaried employees to replace trading companies as managers of kerosene transactions, and by the end of 1897 he established offices in several Chinese cities--not only Shanghai and Hong Kong but also Hankou, Zhenjiang, Tianjin, Fuzhou, Xiamen, and Shantou.

Under Deterding's management, Chinese imports from Sumatra doubled in 1897 and again in 1898, bringing Royal Dutch no less than one-third of China's kerosene trade by 1901. This meteoric rise prompted Standard Oil to dispatch two of its top executives to Asia to investigate, and from them the American company received confirmation of Royal Dutch's remarkable record. "In the whole history of the oil business," the awed Americans reported to their superiors at Standard Oil's headquarters in New York, "there has never been anything more phenomenal than the success and rapid growth of the R. D. Co."[note 38]

If Standard Oil was troubled by Royal Dutch and Marcus Samuel as separate threats in the late nineteenth century, it felt still greater competitive pressure when its two rivals joined forces in the first years of the twentieth century. Between 1900 and 1902, while they were still separate, Standard Oil tried to drive them out of the market by cutting prices. As C. M. Pratt of Standard Oil bluntly stated the company's strategy, "We want to keep and enlarge the gallonage rather than increase profits."[note 39] But this strategy backfired. Not only did it bring down Standard Oil's own profits (resulting in book losses for the company in China and other Asian markets during 1901 and 1902), it also caused Samuel (by then head of Shell Transport and Trading Company) and Royal Dutch to band together with each other and with Rothschilds to form a joint marketing company, the Asiatic Petroleum Company (APC), which was responsible for distributing all three oil companies' kerosene in competition with Standard Oil throughout Asia.[note 40]

Asiatic Petroleum Company's Distribution

On June 27, 1902, APC was formally established. It immediately made a bid for control of China's market by recruiting Chinese distributing agents who operated on a grander scale than those carrying Standard Oil's kerosene. In its new marketing system for China, APC invested at least three million British pounds sterling--two million through its China headquarters, which were set up at Shanghai, plus another million through its office in Hong Kong.[note 41] APC drew on this financial backing to recruit Chinese compradors and agents who resembled Standard Oil's earlier sole agent, Ye Chengzhong. Just as Standard Oil had left distribution first in Ye's hands and subsequently in compradors' hands, so too did APC distribute through a combination of Chinese compradors and agents.

In APC's headquarters at Shanghai, it hired a comprador, Tao Bingjun, who was strikingly similar to Ye. Like Ye, Tao took advantage of ties to family and native place. Tao hailed from Ningbo, Ye's home, and hired two of his sons and several of his other relatives as staff members in APC's Shanghai headquarters. When he retired, he bequeathed his job to his son, Tao Tingyao.[note 42]

Outside Shanghai, APC similarly allowed its Chinese sales agents (daili chu) to rely on their own social networks. Its single biggest agent, Fu Shaoting, for example, was permitted to recruit other sales agents and set the boundaries of his sales territory according to his own specifications. Like Tao in Shanghai, Fu assigned APC positions to family members--brothers, cousins, and other relatives--and extended his marketing throughout all of Jiangxi province and half of Hunan province, with distributing centers in the cities of Zhangshu and Ji'an.[note 43]

In China's other regions, merchants held sales territories of comparable size.[note 44] According to a Chinese former APC employee, these merchants typified APC's sales agents: "APC usually recruited commercial agents [daili shang] who were Chinese merchants [hang shang] running big commercial firms [banzhuang]. For them, selling kerosene was only a sideline. APC took advantage of their preexisting economic status.[note 45] Taking APC's kerosene as a mere "sideline," these Chinese merchants distributed it along with a variety of other consumer goods: hardware (as Ye had done earlier in distributing Standard Oil's kerosene), groceries (za huo), grain, soy sauce, pickles (da jiang yuan), imported yarn (yang sha), or imported flour (yang fen). Not until later did Chinese agents begin to specialize in kerosene, and even then they generally carried four additional products--cigarettes, matches, candles, and soap--which caused their firms to be known as the Five Foreign Goods Shops (wu yang zi hao).[note 46]

To win cooperation from the Chinese merchants, APC offered a range of benefits. It paid commissions on sales of 2 to 4 percent, and it covered all expenses in each merchant's locality for the salaries of APC's employees, the rentals of local offices and storage tanks, and the administrative expenses for clerical supplies and postage. In addition, APC lent prestige, which, according to one Chinese observer, served as an important attraction to some of APC's early agents: "These merchants did not benefit much from their work for APC. But they thought they got face [you mianzi] when they landed an account with the big foreign company."[note 47] APC also attracted Chinese agents by requiring them to abide by no rules except that they make cash deposits, which varied in amount according to the volume of each agent's business. Otherwise APC left its Chinese agents free to rely exclusively on social networks of family members and native-place associates and to expand their sales territories however they wished even at the expense of other APC agencies.

By offering this combination of high material incentives and minimal supervisory restrictions, APC quickly enlisted many of China's leading merchants as agents and captured a large share of the country's kerosene market. Pleased with these initial results, APC thereafter routinely renewed the contracts of its Chinese sales agent and consistently retained the policy of nonintervention in their business practices.[note 48]

APC and the European oil companies that owned it thus posed a direct challenge to Standard Oil in China at the turn of the century. Their investment in bulk distribution in Chinese cities and their recruitment of Chinese sales agents throughout the country gave them greater market access than Standard Oil enjoyed at the time. In light of this record and Standard Oil's shrinking market share, it is hardly surprising that Ralph W. Hidy and Muriel E. Hidy, in their history of Standard Oil's worldwide operations, have assessed the company's efforts to market goods in China between 1894 and 1904 as "relatively ineffectual."[note 49]

Marketing through a Chinese "Native Staff," 1903-1914

Shortly after the turn of the century, Standard Oil rebounded from its failures in China and made an aggressive bid to regain predominance there. Between 1903 and 1914, as Standard Oil's vice president, W. E. Bemis, noted at the time, it created a new marketing system in China by investing no less than U.S. $20 million--as much as it spent in all the rest of Asia combined.[note 50] Not only did it build a physical plant for bulk distribution on a far grander scale than Samuel, Royal Dutch, and APC had done. It also set out to transform its Chinese agents' social networks by imposing rules that were to be enforced by newly recruited Western and Chinese salaried employees. In other words, it tried to overcome its European rivals by extending its corporate hierarchy deeply into China's market for the first time.

Bulk Distribution Nationwide

To establish an infrastructure for its Western and Chinese employees, Standard Oil installed in China a physical plant consisting primarily of storage tanks, canneries, and tankers. The company built the tanks and canneries and sailed the tankers in all of China's nine regions, and it concentrated them most heavily in cities at the cores of the country's richest and most populous regions.[note 51]

For its storage tanks outside treaty ports, Standard Oil had no legal means of acquiring property because China's treaties with Western countries barred foreigners from buying Chinese land except in designated "concessions" within treaty ports. To circumvent this provision, the company used senior Chinese staff members or commission agents (jingli) as dummy fronts. Outside foreign concessions, it had a Chinese buy land in his own name, submit the deed to the company's legal department in Shanghai, and sign a "lien form" saying that as a debtor he had mortgaged the land to the company, his creditor. By these means the company documented its claim to property outside treaty ports where it built storage tanks, warehouses, offices, and other buildings. In areas where it had not yet established contacts with Chinese agents, it persuaded Western consuls and missionaries to recruit Chinese to buy land on its behalf.[note 52]

To supply and draw on this network of storage tanks, Standard Oil launched its own fleet and constructed its own canneries. From the United States, it exported kerosene to China in large steel tank steamers capable of docking in coastal and riverine deep-water ports. To reach tanks in less accessible Chinese cities, it transferred the kerosene onto its own low-draft steamers, iron and wooden barges, railway tank cars, and motor tank trucks. Of all these vehicles, perhaps the most famous were its riverine vessels, which numbered in the hundreds--several times more than those of the leading Chinese shipping firm, China Merchants' Steam and Navigation Company. Like Standard Oil itself, these ships had Chinese names that began with the Chinese character for "beautiful" (mei), which can also mean "American": the Meifu, Mei'an, and Meiping on the lower reaches of the Yangzi River; the Meichuan, Meitan, Meixia, and Meilu on the Chuan River in the Upper Yangzi region; the Meiyun and Meiying on smaller waterways.[note 53] From the tanks, Standard Oil's canneries in China drew kerosene that was poured into five-gallon cans and then packed into wooden cases, two cans per case. To reach cities lacking canneries, Standard Oil loaded cases onto ships, junks, sampans, pack animals, and other forms of conveyance.

With the benefit of this logistical infrastructure, Standard Oil gained access to all parts of China. To manage distribution wherever its tanks were located, it recruited Western--mainly American--sales representatives.

Recruiting Westerners for China

When asked by American newspaper reporters in 1913 what had been the key to Standard Oil's marketing strategy in Asia, one of the company's American executives in New York replied, "Superior manufacturing and distributing methods. But most important--superior men!"[note 54] By "superior men," he meant the Americans who had been recruited and trained to serve the company as salaried sales representatives.

To attract promising recruits, Standard Oil offered its representatives more lavish salaries and benefits than were available at any company or other organization of any kind in China. It paid a starting salary of $2,000 gold per year, compared to starting salaries of $1,200 for a representative of British-American Tobacco Company and $1,000 for a Chinese-speaking American foreign service officer. It led its recruits to believe that at the end of their first three years each of them would return home for a six-month furlough with a salary of $5,000, and to entice a successful man back to China for a second tour, it more than fulfilled this promise.[note 55] In China, it covered all of the costs of its Westerners' housing and medical needs--with care supplied by its own physicians--and subsidized the cost of their board and insurance, up to $3 per day for board and 3 percent of their salaries for insurance. To ease fears about the future, it guaranteed that on retirement each representative would receive a pension amounting to 60 percent of his average salary during the last five years of his employment.[note 56]

The company's new American recruits found life luxurious on this budget. "Frankly speaking," wrote one, Harold Sheridan, to his mother on arriving in Shanghai in 1913, "we are living like princes out here,...and the East has 'got it' over any other place in the world for excessive luxury at comparatively no expense."[note 57] At age twenty-two, he reveled in his new privileged position.

We lead a very easy and extremely luxurious life. Our servants do everything for us, from cleaning our guns, boots, helmets, etc.; keep our rooms immaculate at all times; serve tea or a light lunch in our room at any time; keep our clothes aired and pressed; our huge daily pile of sweaty clothes are taken every day to the laundry by them.{ä}I tell you, I can easily understand the fascination of the Far East where living is cheap, and a white man need never lift his little finger unless he cares to.[note 58]
Sheridan's salary far exceeded not only his Chinese servant's pay but also his Chinese translator's wages, which annually amounted to $144 gold, a mere 7 percent of his wages.[note 59] Excited by his sudden financial elevation above the Chinese people around him, he took pride in what he perceived to be his racial superiority. He exulted to his mother six months after his arrival, "400,000,000 yellow people look up to you and respect you as a superior being because you are white, and are pleased to render you services of any description befitting what they consider your fitting position. It's great out here."[note 60]

Besides providing high salaries and benefits, Standard Oil also gave its Western salaried representatives a limited amount of training. In the first years of the twentieth century, the American company began encouraging its representatives in China to take language lessons by offering to cover their tuition costs. In addition, it gave them on-the-job training in the Chinese language as well as technical subjects--accounting, transportation, management. On the theory that firsthand exposure was the best teacher, it sent them as observers to travel with experienced Western sales representatives and their Chinese assistants.[note 61]

By requiring their salaried representatives to study and use Chinese on the job, the company expected them to achieve command of the language, and to prevent backsliding, it employed a language specialist, based in Beijing, to travel around the country conducting impromptu tests and placing those who failed in remedial courses. One Dr. Kerr (Ke'er Boshi) held this position as language specialist before World War I, and on his retirement he was succeeded by a Dr. Mann (Man Boshi). In 1912 Standard Oil opened a school at its New York headquarters for training new recruits, but its three-month course gave little attention to foreign languages and none at all to Asian ones.[note 62]

By the standards of Western companies in China at the time, Standard Oil's training program seems to have been relatively sophisticated, but it was far too superficial to produce American China specialists capable of replacing Chinese compradors and sales agents. From outside its training program, Standard Oil acquired some expertise on China by recruiting resident Westerners: missionaries such as V. G. Lyman, R. J. Corbett, and S. S. Corbett; diplomats such as a former British consul named Newman; and students such as the Yanjing (Yenching) University graduate H. S. Hopkins.[note 63] Still, it could not extend its corps of specialists much beyond this handful without a longer and more rigorous language training program. As Harold Sheridan joked in a letter to his mother during his first year in China, "I'm taking two Chinese lessons a week now--in a short time I will write you a letter in Chinese. (About 15 years equals a short time.)"[note 64] His jocular attitude toward learning the language, his limited success along these lines, and his heavy dependence on Chinese translators seem to have typified the experiences of Standard Oil's Western representatives in China. At best, their feelings toward language study were mixed, as reflected in this flippant comment in the company's in-house organ, the Mei Foo Shield: "To the Soconyite, [the study of Chinese has been a] perennial source of woe--did we hear somebody say, joy?"[note 65]

By paying high wages and giving recruits some language training, Standard Oil assembled a staff of Western salaried representatives that was qualified to supervise marketing at its distributing centers in China. But for the purpose of widely recruiting and closely monitoring Chinese commission agents, the company depended on a Western-trained "native staff."

Training a "Native Staff"

[note 66] In the first years of the twentieth century, as Standard Oil assigned more Westerners to China, it added a large number of English-speaking Chinese staff members to work with them.[note 67] It treated these Chinese staff members differently than it had treated its Chinese compradors and agents. Rather than deal with them on the basis of personal guarantees and give them full latitude to market goods through their own social networks, Standard Oil recruited them in open competitions and trained them to prevent Chinese agents from violating the company's marketing policies.

Standard Oil's open competitions took the form of publicly announced examinations. On this basis it selected young English-speaking Chinese men for admission to a school that it opened at its Shanghai headquarters. After giving each class a six-month training course, the company then assigned those who graduated to its offices in all parts of China.[note 68]

By offering new recruits relatively high salaries, Standard Oil induced Chinese staff members to join the company and begin their climb up its corporate hierarchy. Compared to its salaries for American representatives, Standard Oil's salaries for Chinese were low, but compared to salaries available to Chinese in other companies at the time, its starting salaries were high: 70 yuan per month for a university graduate, 45 yuan per month for a senior high school graduate (gaozhongsheng), and 40 yuan per month for a junior high school graduate chuzhongsheng).[note 69]

The company also offered a new recruit prospects for advancement in one of two specialties, either sales or accounting. In the sales department, a Chinese could rise as high as assistant manager (fu li), responsible for supervising Chinese salesmen (yingye yuan), Chinese interpreters for Western sales representatives, Chinese stock checkers, and Chinese inspectors. In the accounting department, a Chinese could climb as high as chief Chinese accountant and itinerant checker, who earned 300 to 400 yuan per month and had authority over Chinese accountants, Chinese statisticians, Chinese cashiers, Chinese bookkeepers, and other Chinese clerks. Although Standard Oil granted Chinese employees no insurance coverage, no furloughs, and few of the other benefits that it gave to Westerners, it did reward them for long-term service by paying pensions amounting to 30 to 40 percent of each Chinese employee's last annual salary.[note 70]

Once Standard Oil signed up its new Chinese recruits, it sent them away from their home localities to offices in its far-flung marketing organization. From its national headquarters in Shanghai, the company's Western management assigned salaried representatives at several levels: to regional offices (qu hang) in large metropolises (da chengshi) at the cores of China's regions; divisional offices (fen hang) in middle-sized and small cities (zhong xiao chengshi); and suboffices (zi hang) in county seats (xian cheng).

Throughout this elaborate administrative organization, Standard Oil's Western managers retained ultimate authority over their Chinese staff members. Every year Western supervisors set raises for their Chinese subordinates whether they served in offices at the national, regional, divisional, or local level. Every three years the parent company sent a team from its New York headquarters to audit the accounts of its China offices at all of these levels.[note 71]

In conducting daily business, Standard Oil's Western managers were able to monitor the Chinese staff's work because of the company's policy that all internal documents had to be written in or translated into English. Under this policy Western managers took the quality of an employee's English into account when granting raises and promotions. As a result, its Chinese senior staff members spoke and wrote English as fluently as their Western colleagues. Its Chinese clerks kept accounts in English and were able to speak English haltingly. Even its Chinese manual laborers could speak with Westerners in pidgin English.[note 72]

To prevent Chinese employees from diverting or peddling information, Standard Oil maintained a policy of strict security on prices, salaries, transfers, and other decisions within the company. It swore each employee to secrecy on the subject of his salary, and it authorized transfers at the level of the regional office without permitting any say in the decision for lower offices at the divisional and local levels. Standard Oil's ban on the exchange of this information seemed extreme to Chinese employees who customarily gossiped more than Westerners did about such matters, and even Western employees commented privately and repeatedly on the company's determination to maintain secrecy.[note 73]

By maintaining secrecy and deploying its Chinese staff members outside their home localities, Standard Oil sought to limit their reliance on family members, native-place connections, and other social ties in their dealings with Chinese commission agents. Under its Western-style marketing system, the company instructed its staff to recruit these commission agents on a fundamentally different basis than had been previously attempted by itself, APC, or any other Western company in China.

Recruiting Chinese Commission Agents and Subagents

Under its new marketing system, Standard Oil's goal was to have its salaried staff recruit as many Chinese commission agents as possible. Whereas in the past it, like APC, had left marketing exclusively in the hands of compradors and prominent merchants, now its new salaried staff also approached other Chinese merchants outside the compradors' and merchants' social networks.[note 74] Casting its net more widely than ever before, the company offered small as well as large Chinese merchants a variety of incentives to carry its product.

As in the past, Standard Oil required that its agents post cash deposits before accepting goods and paid them 2 percent sales commissions for what they sold. In addition, it began to offer them a wide array of other financial services that its compradors and other Chinese intermediaries had previously offered only to members of their own social networks. For example, it granted credit, releasing goods on consignment and allowing 15 to 30 days before payment was due. On a Chinese commission agent's cash deposit, it paid interest at an annual rate of 5 to 8 percent, and in 1913 it introduced other options--conversion of the deposit into gold or U.S. dollars or investment in Standard Oil's stock. When an agent's sales rose high enough, the company allowed him to take goods whose value exceeded his cash deposit by an ever greater margin. For sales high above usual quotas, it presented an agent with a special gift such as a gold watch. To cover agents' losses, it gave compensation for leakage, provided insurance in case of natural disasters, and supplied legal assistance following robberies. At the annual holiday celebrating Chinese New Year, it hosted banquets for its agents and covered their expenses for round-trip travel to regional offices and for meals and small gifts (such as American-made candy).[note 75]

Besides material incentives, Standard Oil also supplied promotional assistance in the form of advertising. According to one of its former long-term Chinese employees, the company organized a team of more than twenty painters to travel around China's cities and countryside painting walls and billboards, even in "all the impoverished villages and out of the way places" (qiong xiang pi rang).[note 76] The company's most widely disseminated sign read, in Chinese, "Burn Standard Oil's Old 'Eagle Brand' of Kerosene [its cheapest brand] and Use Its Candles and Lamps." In 1907 it introduced kerosene lamps with glass chimneys, and thereafter it exported to China two million per year. It touted the safety and efficiency of the lamp, which at one filling could produce bright and clean light for eleven hours and by burning one gallon of kerosene could give illumination for 240 hours.[note 77] Using this lamp as a promotional device, it sold each one for only a few cents and gave away many other premiums--home furnishings such as mirrors, hammers, and pliers and home decorations such as Chinese New Year's pictures (nian hua), scrolls that served as wall hangings (gua hua), and miniature cards depicting series of Chinese figures and scenes to entice collectors. Needless to say, Standard Oil stamped on each of these devices its own trademark, "Meifu" in Chinese and "Mei Foo" in Roman letters, which means "beautiful and trustworthy."[note 78]

Standard Oil's distribution of kerosene in five-gallon tin cans placed another promotional device in its agents' hands: they became extremely popular in China. As a Western observer noted, Chinese consumers imaginatively modified the cans and used them for a wide variety of purposes: "Five gallon Socony kerosene cans are used as water buckets; cut across diagonally and used as dust pans; knocked down and with wooden wheels added used for a baby carriage!"[note 79] In fact, these cans were so popular that Standard Oil's local agents profited from selling them separately from the kerosene that they contained.

Enforcing Company Policies

While using material and promotional inducements to recruit Chinese commission agents and promote high sales, Standard Oil depended on its salaried staff to monitor these agents' business practices and prevent violations of the company's policies. To recruit as many agents as possible, the company set limits on the size of each agent's sales territory. Unlike APC (and like the Chinese government at the time under the Qing dynasty), the company had a law of "avoidance" (huibi).[note 80] The aim of this law was to "avoid" formation of powerful social networks based on family ties and native-place connections. Under Standard Oil's version of the law, a Chinese commission agent was permitted to preside over only one sales territory at a time and was forbidden to employ his sons, brothers, and other relatives as distributors of the company's product.[note 81]

To enforce this policy, Standard Oil carefully recorded who handled its goods all the way to their ultimate destination. It required its commission agents to register (dengji) subagents with its salaried staff members, and it technically retained control over goods until transactions were made with consumers, even in small rural stores (xiangzhen shang dian). In rural areas, its subagents were canvassers or drummers (tuixiao yuan) at periodic markets (pao xiang jian) in small towns where generally kerosene shops furnished the only permanent facilities except for teahouses, wine shops, and eating places. The salaried staff had intermittent contact with these rural canvassers, distributing goods to them on consignment, granting them loans, and reserving part of the company's annual bonus fund specifically for them.[note 82]

According to contemporary observers, Standard Oil made more sales in the countryside than in the cities. A survey done in 1935 found that 54 percent of Chinese farm families regularly bought kerosene.[note 83] This figure suggests that the historian John King Fairbank did not exaggerate when he characterized kerosene as "the most widespread product of modernity since it gave the peasantry better illumination than candles or a wick in wood oil."[note 84] Meanwhile, in China's cities, Standard Oil's sales staff kept track of goods even to the level of retailing. As noted by Hidy and Hidy, who had privileged access to Standard Oil's restricted archives, "In some places, as in Wuhu, for example, the hand of the New York company extended into street peddling."[note 85]

While Standard Oil's sales staff was responsible for scrutinizing its Chinese commission agents' marketing practices, its accounting staff had the task of evaluating their credit ratings. Every morning at ten o'clock the Chinese chief accountant in each branch recorded the ratio of security deposits to value of stocks held by all agents in his jurisdiction. He labeled any agent holding kerosene valued at more than twice his security deposit as a "bad risk"; any agent whose goods ranged from equal to double the value of his security deposit, a "fair risk"; and any agent whose goods were valued at less than his security deposit, a "good risk." Every month the Chinese chief accountant summarized these credit ratings for review by his Western superior. As a Chinese former accountant with thirty-three years of service to Standard Oil later recalled, a mistake on this form "was considered unforgivable" because "the most dreadful thing to a [Western] head man [daban] was bad debts [dao zhang]...[which left] bills unpaid for a long time and piled up official correspondence from all sides."[note 86] To avoid this outcome, the company rewarded consistently punctual agents with annual bonuses of between 1 and 1.5 percent.

Achieving Results

To a remarkable extent, Standard Oil's expensive new marketing system achieved its avowed goals of raising sales and recruiting more agents and subagents. The exact number of Standard Oil's Chinese commission agents in the early twentieth century is difficult to calculate for lack of nationwide data, but the statistics available on three of China's nine regions provide some basis for estimating the total. In North China, one of China's oldest regional economies and most populous areas, the company had 120 to 170 Chinese commission agents. In Northeast China, a developing frontier economy, it had 40 agents. In Jiangxi province, an area low in population and wealth, it had 19 agents. By extension, if North China was representative of China's three largest regions, if the Northeast was representative of the three medium-sized ones, and if Jiangxi was representative of the three smallest, then Standard Oil's total number of Chinese commission agents was at least 500.[note 87]

The number of Standard Oil's subagents is more difficult to estimate because they are less well documented. The few available figures suggest that at least 5 subagents served under each agent. For example, the poor region of Jiangxi had about one hundred subagencies operating under its 19 agents, and the richer region of Northeast China had "several hundred" subagents under its 40 agents. If it is valid to assume that at least 5 subagents worked under the average agent, then the company's subagents numbered at least 2,500.[note 88] Whatever the exact number, it seems likely that one of the company's former Chinese employees was not exaggerating when he recently observed that the Chinese agents' and subagents' shops formed "the major channel [for kerosene]to penetrate into China's urban and rural markets [because] these shops had extensive contacts with local people, had their own sales networks, were reliable, and enjoyed good reputations."[note 89]

Once Standard Oil's new recruits were in place, the company compiled an enviable record of eliminating bad debts and increasing sales. Between 1906 and 1914 Standard Oil's total transactions in China were valued at U.S. $100 million, and on all of this business, it wrote off bad debts amounting to a mere U.S. $440 (634 taels).[note 90] At the same time, Standard Oil's sales swiftly surpassed those of APC and its other competitors. Engaging in repeated price wars, Standard Oil raised its share of China's market from 42 percent in 1900 to 67 percent in 1911, 77 percent in 1921, and 88 percent in 1928.[note 91] As of 1910 Standard Oil sold more kerosene in China than in any other Asian country, and by the late 1920s its marketing system was valued at U.S. $43 million.[note 92]

The introduction of Standard Oil's Western-style managerial hierarchy was critical to its success. In general, it retained the same kind of Chinese commission agents in the twentieth century as it had in the nineteenth, but now it empowered its salaried salesmen and accountants to punish a Chinese commission agent for violating the company's policies. For example, it disciplined one Chinese agent by reducing his sales territory from the whole of Zhejiang province to one city within the province, Hangzhou; and it punished another by trimming his sales territory from the whole of Shanghai to one district within the city, Nanshi.[note 93] Once Standard Oil had its newly trained young staff members in place, it kept them there, retaining the same people for decades until the company was forced to withdraw from China in the late 1940s and early 1950s.[note 94]

Conclusion

In retrospect, Standard Oil's decisive installation of its own marketing system between 1903 and 1914 marked the key turning point for it in China, and its success along these lines bears on the debate (summarized in chapter 1) over whether Western and other non-Chinese businesses ever wrested from Chinese merchants control over the marketing of goods in Chinese history. This case shows that at least one non-Chinese firm did impose its marketing organization on China and, therefore, that Western and other non-Chinese businesses did not always leave their distribution to Chinese networks. To be sure, Standard Oil's experience in the 1880s and 1890s indicates that it distributed through local networks longer in China than in any other major market, and the company's decision not to institute a Western-style system of direct distribution any sooner suggests that it found local networks in China to be the most resilient and tenacious ones in the world. Nonetheless, once the company installed its marketing system in China between 1903 and 1914, it made effective use of its direct control over kerosene distribution, widening its market, defeating its rivals, and dominating China's market throughout the first half of the twentieth century.

Standard Oil unquestionably imposed a Western-style business organization and used direct marketing to achieve the desired results during the early twentieth century, but was it representative of big Western businesses (not to mention small ones) in China? It spent more to install its direct marketing system in China than in all other Asian countries combined, and other Western businesses could not afford to make such large investments without giving the matter careful consideration. Even British-American Tobacco Company, a business with operations in China comparable in scale to those of Standard Oil, paused to compare its Western bureaucratic organization to its Chinese social networks before it decided whether to follow Standard Oil's example.






Chapter 2 Notes


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