This is the Chinese version of how the McIlhenny family made a fortune selling their fiery hot Tabasco sauce.

Tao Huabi, a 60-year-old woman in Guiyang who barely knew how to write her name six years ago, has turned her hot pepper sauce into a 700 million yuan (US$87 million) business in less than a decade.

From an initial stock of only 100 bottles sent out to local restaurants, Tao's company now produces 800,000 bottles of chilli sauce every day.

Laoganma has grabbed about 90 per cent of China's chilli sauce market. Its products can also be found in the condiment aisles of shops in Europe, the United States, Australia, Japan, South Korea and throughout Southeast Asia.

The company is now at a crossroads.

The dilemma it is facing is how to upgrade and expand its production capacity without compromising the traditional flavour that made the brand so popular in the first place.

An even more pressing concern is how to protect its intellectual property rights (IPR) in a market plagued by rampant counterfeiting.

"Laoganma has reached a critical point," Tao says. "Our next step will determine the company's future."

Many manufacturers of traditional Chinese food, such as fermented bean curd, pickles and Pu-erh tea, face the same problems as Laoganma. Some opt not to expand because of quality concerns, while others are pushed out of business by fake products.

"The flavour of the chilli sauce could become completely different after small technical changes, which could kill us," says Xie Yinbang, assistant general manager at Laoganma.

One of the most pressing issues is to shift to gas power, Xie says . The company currently relies on burning coal.

A key step in pepper processing at Laoganma is frying crushed dry chillies and rapeseed oil until it turns red. The duration and temperature of the heating process is critical to achieving the best flavour, and the chilli burns if it is heated for too long at an intense heat.

Laoganma has only been using coal from the beginning, but the local government in the company's home base of Guiyang, Southwest China's Guizhou Province, has been promoting the use of clean energy sources such as gas.

"Almost all households here now use gas," says Xia Gang, director of Guiyang's Nanming District.

"We want to keep the city green, but we don't want to hurt Laoganma, which is a very important enterprise for the city and the province."

Laoganma is concerned that its employees, who are accustomed to burning coal, would find it difficult to control the temperature with gas.

"We have to take this step, though," Xie says.

The assistant general manager adds that Laoganma will spend 10 million yuan (US$1.2 million) on frying process reforms. The sauce manufacturer is co-operating with a company in Zhejiang Province to upgrade its frying equipment. It hopes to maintain the original flavour when burning gas and to increase production volume through the frying process.

Another problem is that the company has yet to fully automate its production process.

On cursory inspection, it appears that modern machines washing and sterilizing bottles on conveyor belts have eliminated the need for traditional craftsmanship. The staff, however, still use big ladles to scoop the chilli sauce and package it.

"Given our production volume, most people are surprised to see that," Xie says.

Xie says many European companies that provide food-processing equipment have visited Laoganma.

"None of them have invented a bottling machine that is specially designed for us, however."

Unlike other types of sauce, Laoganma's is made of chilli oil, ground chilli and seeds, black beans and peanuts.

"For each bottle, the liquids and the solids must be evenly mixed," Xie says. "The bottling equipment we have can't deal with this."

Big battle

IPR protection is another issue Laoganma has to face.

The company has been combating counterfeit products since 1998. Chilli sauce is a common condiment in China and many people know how to make it.

"It's really hard to eradicate fake products," Tao says.

"With a wok and a ladle, everybody can make chilli sauce, but the flavour is different."

Laoganma won a lawsuit against a sauce manufacturer in Central China's Hunan Province in 2001. The company used the Laoganma name and similar labels on its products.

"We spent three years on that case. I was flying to Beijing three times a week," Xie recalls.

Laoganma finally received 400,000 yuan (US$49,444) in compensation from the offending party.

But from the beginning of this year, there has been a resurgence of fake "Laoganma" manufacturers in Central China's Henan and Hunan Provinces and East China's Jiangsu Province.

Laoganma's sales revenues dropped for the first time in its history in March this year. Its sales revenues in June slipped to 5,300 yuan (US$655). Monthly revenues averaged 5,800 yuan (US$717) last year.

The Ministry of Public Security, the Guizhou government and the local public security bureau formed an anti-fraud team and began cracking down on fake products in those provinces in June.

The team won its first battle in July by targeting four counterfeit factories. Laoganma's sales rose 38 per cent after the campaign. Sales reached 7,800 yuan (US$964) in August.

"The government support definitely helps," Xie says.

"It is extremely difficult for companies to police fake products in other provinces. We even can't enter a counterfeit factory without their permission if we go there alone."

Laoganma has registered 46 similar trademarks, such as "Laoganniang" and "Laomagan," to prevent other firms from using copycat names. It has also registered trademarks in the United States, Canada, Japan, Hong Kong and Taiwan.

Hot business

Laoganma has four factories employing 1,800 people in Guizhou Province.

Tao stumbled into the chilli sauce business 15 years ago.

She never went to school and her husband died when she was in her thirties.

She used her savings to open a noodle stand in 1989. The noodles were served with Tao's homemade pepper sauce, and they proved extremely popular. Many customers even began buying extra sauce to take home.

"I gradually realized that many people were just coming for the chilli sauce," Tao says.

A friend in the noodle business suggested that Tao open a chilli sauce factory. She took the advice to heart, and started a plant in the neighbourhood in 1996.

Laoganma, which literally means "old adoptive mother" in Chinese, is Tao's nickname.

A young man who she supported through school, Ouyang Zhigang, gave her the name. Tao let the poor student eat for free and often gave him money. Ouyang and his classmates often came to eat noodles at Tao's stand. They all called her "Laoganma." Soon most people she knew were addressing her by the nickname.

Many local restaurants and grocers began selling Laoganma pepper sauce. Within a year, Tao opened her company, Guiyang Nanming Laoganma Special Flavour Foodstuff Co Ltd.

The illiterate woman soon found it difficult to manage a business that was growing almost 50 per cent annually. Her two sons started giving her a hand, and she put together a management team of young university graduates and experienced sales managers. Management staff frequently upgrade their skills by visiting companies in coastal areas and take classes at business schools.

"I may be a country bumpkin, but I don't want my staff and my company to seem unsophisticated," Tao says.

Laoganma has become a leading enterprise in China's underdeveloped southwest.

It is the largest purchaser of raw materials from 300,000 local farms that produce rapeseed oil, chilli and other raw materials.

"This company alone has greatly improved farmers' incomes in Guizhou," Xia says.

Laoganma has established seven farms in counties that produce the best chilli in Guizhou. Seed sowing techniques, fertilizers and harvesting methods have been standardized to ensure quality, Xie says.

The company has rented a new factory site covering 23 hectares. The first phase will start production in October. By the time it is completed in 2008, the enlarged factory is expected to boast a production volume of 2 billion yuan (US$247 million), more than doubling the capacity in 2004.

One workshop at the new factory will be completely dedicated to exports, Xie says.

Laoganma's export volume reached 10 million yuan (US$1.2 million) last year.

"It's a small figure compared with our total sales, but we are eager to expand overseas," Xie says.

Laoganma is now in talks with Taiwan-based Uni-President to provide chilli sauce for its instant noodles, which control nearly 20 per cent of China's instant noodles market.

"It will be a mutually beneficial partnership," Xie says.

(China Daily 09/19/2005 page9)