See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/227561032

When Local Beat Global: The Chinese Beer Industry

Article  in  Business Strategy Review · January 2003

DOI: 10.1111/1467-8616.00182

CITATIONS READS

19 4,905

1 author:

Loizos Heracleous
The University of Warwick
151 PUBLICATIONS   4,210 CITATIONS   

SEE PROFILE

All content following this page was uploaded by Loizos Heracleous on 12 December 2017.

The user has requested enhancement of the downloaded file.

 Business Strategy Review, 2001, Volume 12 Issue 3, pp 37-45

When Local Beat Global:

The Chinese Beer Industry
Loizos Heracleous

In the mid-1990s, dozens of foreign brewers entered

This article is about a rare example of the Chinese market. They were lured by 1.25bn
failure by the world’s biggest global brand Chinese consumers with increasing affluence, a
companies. In the 1990s the world’s top rapidly-growing beer market, and relatively low
consumption rates per capita which they interpreted
beer producers tried to set up in China. as indicating huge future potential. They made multi-
After years of failing to break into the million dollar investments in state-of-the-art
market, many of them have recently been production facilities. A few years later, most of them
were still operating at a loss, and many wished they
cutting back, even selling their new state-
had never entered China. Their once-promising
of-the-art production facilities to local ventures were sucking funds into a black hole.
brewers. A few, however, have succeeded
A minority of foreign brewers managed to succeed in
in entering the China market. This article
this hostile marketplace, against intense competition,
discusses how they did so and the lessons with different rules of the game than in developed
their experience holds for other companies markets, and razor-thin margins. Why did most
looking to invest in China. China’s long- foreign brewers fail, and how did the few who
succeeded do so? What competitive strategies were
anticipated entry into the WTO has made involved in each case? What should foreign companies
this issue important even for companies do now?
which have hitherto ignored it.
The failure of the global giants has been highlighted
by the success of local brewers. In spite of older plants,
Expatriate veterans of the China beer wars of the generally untrained management, problematic human
1990s were so traumatized by their experiences resources, lower product quality and weaker
in the world’s second-largest beer market that they marketing capabilities, local brewers seem to be
talk about them in linguistic shorthand. “It was winning the competitive game. As foreign brewers
the corporate Vietnam,” says Tim Murray, a started retrenching in the late 1990s, many local
former sales and marketing manager for Australia- brewers took advantage of this situation to acquire
based Foster’s, the brewer that led the foreign leading edge technology on the cheap. So far, the
charge into China in 1993. “It's hard to get over.” Chinese beer market belies the widespread belief that
(Lawrence 2000) the onward march of global brands is inevitable.

© London Business School

38 Loizos Heracleous

Eastern Promise actual per capita consumption was interpreted to indicate

In 1995-2000, the average annual growth of the world high potential for growth. Annual beer consumption
beer market was 2.6%. Sales were almost flat in was around 85 litres per capita in North America, and
Western Europe and grew by only 1.2% in North close to 70 litres in Western Europe. Even the world
America. The Asia-Pacific market, by contrast, grew average was around 20 litres. But in the Asia-Pacific
at 7.7% pa during the same period. According to the region, consumption was less than 10 litres. Growing
report by Goldman Sachs from which these data are per capita GDP in Asia was also expected to fuel
taken, the future for the Asia-Pacific region in 2000- consumption growth, since beer consumption and
2004 looks equally rosy: at 8.1%pa, growth is expected expenditure in emerging markets were income elastic.
to exceed every other region except Eastern Europe Whereas the income elasticity of beer expenditure in
(15.5%). China is the largest market within Asia Pacific, developed countries was only 0.4, in emerging markets
accounting for two-thirds of consumption. Table 1 it was 1.35, indicating that a 1% increase in GDP per
shows the size of the world beer market in million capita would lead to a 1.35% increase in beer
litres, with actual and projected growth rates. expenditure. China’s economy was healthy and was
expected to remain so in future: the average rate of
Table 1 China’s GDP growth throughout the 1990s was 10%;
Size of market and Growth Rates of Beer Industry
and projected GDP growth for 2001-2005 is 8%.
Region/Country Litres 1995- 2000E-
(mn) 2000E % 2004E % In contrast to many countries, the structure of the
Western Europe 30,996 0.1 1.2 industry in China was also promising. Globally, the
Asia Pacific* 28,521 7.7 8.1 top five beer producers had only 28% combined
North America 26,084 1.2 2.1 market share in the mid-1990s, as compared with 94%
Latin America 23,727 3.7 4.9
for the soft drink industry, and 43% for the spirits
Eastern Europe 13,410 5.6 15.5
Japan 7,073 (4.3) (0.9)
industry. In most countries, the high fixed costs
Africa & Mid East 6,523 2.4 4.7 involved in beer production had created national
World 136,334 2.6 5.2 oligopolies controlled by local companies. In Korea,
China 18,516 8.6 6.7 for example, the top three players controlled 99% of
Other Asia Pacific** 2,963 12.2 21.8 the beer market, in Australia and the Philippines 96%,
Australia 1,779 0.7 1.0 and in the US 80%. This consolidation led to big
South Korea 1,957 7.8 5.0 economies of scale and high levels of profitability,
Philippines 797 0.7 4.0
which, with few exceptions, was positively correlated
Vietnam 796 17.4 8.3
India 552 9.4 11.9
with national consolidation levels.
Taiwan 490 (1.2) 1.4
New Zealand 314 (3.1) (1.4) China was different. In the mid-1990s over 800
Indonesia 168 (1.3) 11.5 producers competed for market share. As they
Malaysia 131 2.0 3.5 considered whether to invest in China, the big global
Singapore 58 2.4 5.9
players knew that they did not have to face well-
Total Asia-Pacific 28,521 7.7 8.1
entrenched local oligopolies. Compared to some other
* Asia-Pacific figures include Australia and New Zealand
industries, the Chinese Government was also relatively
but exclude Japan.
** 'Other Asia Pacific' includes countries not listed in the welcoming to foreign investment.
Table.
Source: Goldman Sachs 2001 The Lemming Rush
The Chinese Government’s open-door policy may have
One reason for the growth of beer consumption in been a mixed blessing. From only four foreign brewers
emerging Asian markets is their favourable in China in 1992 (San Miguel, Asia-Pacific Breweries,
demographic profile. The higher the proportion of Pabst, and Beck’s), the number grew to 16 in 1995
younger people, the higher the beer consumption and continued on upwards. By 2001, major foreign
growth potential. In the 1990s, 50% of the population brewers operating in China included Annheuser-Busch,
of China, and over 60% in the Philippines, Malaysia, Heineken, South African Breweries (SAB), Carlsberg,
and India, was under 30 years old. The figure is 38% Interbrew, San Miguel, Kirin, Lion Nathan and Foster's.
in the UK, 35% in Japan, and 33% in Germany. Low In the words of Tim Murray, a former Foster's executive:

Business Strategy Review

 When Local Beat Global: The Chinese Beer Industry 39

“1994 was the lift-off time, when everyone

came and looked around and saw no branded Tsingtao: Local Hero
products … The trouble was, 80 other Tsingtao is one of the oldest and most famous
companies did the same thing on the same day. Chinese breweries, and the first mainland
And there still isn’t a premium market.” company to list on the Hong Kong stock
exchange. It is one of the better-managed local
Most of these companies built state-of-the-art
brewers, in an industry often characterized by
breweries and promoted their global brands. Almost
all plants ran at a loss due to low capacity utilization firms with non-existent quality control
and low selling prices which depressed margins. This systems, sloppy, unhygienic and unsafe
situation took its toll. Foster's, for example, sold two operational practices, and human resources
of its three Chinese breweries in August 1998 following steeped in the historical mentality of a
heavy losses. Its last brewery, located in Shanghai, was centrally-planned economy where pay had no
recently running at a 40% utilization rate, suggesting relation with performance and employees were
the potential of a full-scale market exit from China. rarely motivated to contribute beyond their
By the end of the 1990s, all the top ten brewers in specific job scope (Gleave et al 1998).
China, representing around 21% of market share, were
local companies (Everatt and Nawar 2000). What Tsingtao was one of the local competitors
went wrong? And why did a select few like SAB and which took advantage of the difficulties of
Kirin do better than the rest? foreign entrants. It made several acquisitions,
over 30 by early 2001, more than doubling its
Market Entry and Differentiation Strategy of production volume to around 1.5m tonnes,
Foreign Competitors and easily beating the second largest
Li Giurong, the Chairman of Tsingtao (see box), has competitor, Yanjing, by 400,000 tonnes.
highlighted the differentiation strategy of most foreign Tsingtao chairman Li Guirong believed that
competitors and its associated problems: volume was critical to gain competitive
“When they came in to invest, they brought advantage, and that despite the company’s
the best equipment and the best technology … 53% gearing there was still more scope for
The quality really was good. But they had to expansion:
sell high-priced beer to get high returns.” “Taking over companies, you do have
(Lawrence 2000) to spend money … But our debt
Vast distances and weak infrastructure, combined with burden is just 53% … so we still have
consumers’ preference for their local brew, made some maneuvring space. Plus, we have
China’s beer market extremely fragmented. In spite good credit with the banks, and the
of the fact that the level of taxation on the beer retail interest rate on loans is very low. So
price in China was one of the lowest in the world at we can do more investment … If you
19% (as compared with South Korea at 53.5%, don’t have a certain market share, if
Australia at 52.8% or the UK at 44.6%, for example), you aren’t of a certain scale, you can’t
beer producers in China found it hard to make a profit, talk about having overall
generally operating at capacity utilization levels of just competitiveness.” (Lawrence 2000)
50-65%. The problems faced by foreign entrants can
One of the company’s most publicized
be summarized under four heads:
acquisitions was its purchase in mid-2000
● The high price-sensitivity of consumers. for US$18m of a 75% stake in a Shanghai
brewery owned by Denmark’s Carlsberg.
● A high level of loyalty to local brands.
The plant had assets worth US$66m, much
● The difficulty of converting brand awareness into of it in state-of-the-art imported production
actual purchases. equipment. According to the Chinese press,
● The notoriously underdeveloped distribution the brewery had been running up losses of
systems. over $10m a year.

Autumn 2001
40 Loizos Heracleous

Price sensitivity Distribution difficulties

Selling expensive beer was always going to be According to Chinaonline.com, Bass also suffered from
problematic in a country where consumption of China’s notorious distribution problems:
premium beer was at most 5% of the total, and where
Bass faced distribution problems caused by local
beer sometimes sold cheaper than soda. In effect it
protectionism. Refused licenses to sell bottled
is a commodity product. The price of local beer in
beer in certain cities, the brewery had to focus
China was an average of US$0.20-$0.30 throughout
on draft beer, despite the lack of on tap facilities.
the 1990s. Foreign brands were priced around 400-
Even nature was against them – besides regular
500% more expensively than local brands. But price
floods blocking road and rail, winters at –35C
was important to consumers. According to analysts,
froze the beer in the draft piping.
“no factor contributes more heavily to local brewer
dominance … than pricing” (Steinman 1999). The Bass was not alone. Distribution problems were
leading local brewers, for their part, appeared to common in most industries in China. It is exceedingly
be consciously using their volume efficiencies to difficult to find reliable distributors in this huge
engage in predatory pricing and to exploit country. A study by McKinsey found that the typical
consumers’ price sensitivity. distributors in China scored either “very poor” or
“low” on all indicators of quality: physical delivery,
Local loyalty sales, merchandising, promotion, and collection (Ayala
As in the rest of the world, beer consumption in China and Lai, 1996). Pending China’s entry into the World
had an intensely local nature, with patriotic feelings Trade Organization (WTO), analysts predicted that
attached, which potentially meant that global beer “the most profound change wrought by WTO
brands could remain nothing more than a passing membership will be the opening of China’s distribution
curiosity (Benson-Armer et al 1999): According to Li channels” (Perkins and Shaw 2000).
Guirong,
How One Foreigner Succeeded
“Chinese have a very strong sense of home place
South African Breweries (SAB), the seventh largest
… If I live in a place, I want to drink my local
competitor globally, is one of the rare success stories
brand … I don’t go into a place and say, ‘My
among foreign brewers in China. According to the
Tsingtao beer is better than your beer. My
company’s 2000 annual report, its beer sales in China
quality is better than yours. So why don’t you
rose by 38% over the previous year. It made direct
drink me?’”
equity investments in the local brewer making one of
Failure to conver t brand awareness the country’s oldest brands, Snowflake, in the
Foreign brewers employed competitive weapons that northeastern industrial city of Shenyang. Today, SAB
worked well in the West, and were strongly advocated controls 90% of the Shenyang market. In 1999 the
by management consultants as the right thing to do company increased capacity by 40% at its breweries
(Benson-Armer et al). These included building global in four different cities and made new investments in
brands through expensive advertising campaigns three new breweries in other cities. During 1999, SAB
aimed at differentiating premium beer in the eyes of and its local partner also purchased the Foster's failed
consumers and loading the product with emotional Tianjin brewery.
associations. In China, such campaigns mostly proved
a waste of time and resources. They created significant SAB entered China in 1994 via a joint venture with a
awareness but not the desire or the ability to pay the Chinese venture-capital firm, China Resources. China
premium price for the beer. For example, Bass Resources has been important to SAB’s success in
launched its Tennent’s lager in Beijing and Shanghai China, providing knowledge of the local environment,
in 1996, “to a fanfare of bagpipes and kilted and guanxi (relationships and connections). According
Scotsmen”, (www.chinaonline.com 2000) only to to SAB’s managing director for Asia:
discover that Chinese consumers stuck to their local
“Our partners are the China experts. They have
brews which were selling at around 20-25% of
experience of doing business there. As a result
Tennent’s price. A local consumer stressed that “I’ve
they have amazing contacts that can cut the
heard of Tennent’s, but local people should drink
red tape surrounding many issues: they can
local beer!”

Business Strategy Review

 When Local Beat Global: The Chinese Beer Industry 41

bring their other commercial operations to bear of the pie in 2001, this was well down on the over
in a number of areas, they have access to people, 800 competitors in the mid-1990s, before the wave of
they know the market and understand the rate bankruptcies and consolidation started (Granitsas
of change required. We have been able to 2001). Consolidation is expected to continue, reducing
harness our knowledge of the beer industry with the number of competitors to around 325 by 2004
their knowledge of China and come up with an (Everatt and Nawar 2000). Commentators predict that
awesome team.” given this rate of consolidation the total number of
(Everatt and Nawar 2000, p10)

The company had substantial experience of competing

SAB’s China Strategy
in less developed countries, which proved to be a key
SAB’s 2000 annual report (p21) summarizes its
ingredient of their success. According to the managing
China strategy:
director for Asia:
“SAB continues progress in its Asian
“SAB International had a solid understanding of
the dynamics of less advanced economies through stronghold: the north east provinces of
its experiences in other developing markets, Liaoning and Jilin. SAB’s investment with
including sub-Saharan Africa and eastern Europe. its Chinese partners, CRE, began in 1994
SAB International managers were accustomed to with the Shenyang Snowflake brewery.
managing factories with unreliable energy sources, Consumption in the north-east,
inconsistent supply and delivery of inputs, traditionally a beer-drinking region, is
unskilled labour pools, and the use of older amongst the highest in China at 22 litres
technology and plant infrastructure” per person. We have three breweries in
Shenyang: Snowflake, Winery and
In addition, SAB quickly learned some of the Wanghua producing in total around 5
peculiarities of competing in China: million hl per annum and serving a market
“China cannot be regarded as a single country place which has a population of around 7
because of the distances, differing levels of wealth million. Our strategy has been to stimulate
and sophistication, weather patterns and fierce demand and then follow with incremental
parochialism. Very quickly we decided on a increases in capacity, thereby managing
process of building geographic strongholds. This our capital investment prudently. The
would allow synergies in distribution as well as marketplace is a developing one and by
allow economies of scale to be effected …” helping to improve the quality and
(Everatt and Nawar 2000) consistency of the local beers, we have
developed trust and credibility with the
SAB’s strategy has consistently been to use local
consumer. This is critical to developing a
brands, rather than global ones; to aim at the low end
wider brand portfolio. Currently only
of the market using a competitive strategy of cost
around 10% of beer sold is consumed out
leadership; to skilfully employ local allies; to
of the home, providing scope for increased
dominate specific local regions and then move
outwards to more regions; to make conservative and sales volume as the on tap trade develops.
measured capital investments; and to carefully try to It has been crucial to our success that we
understand local consumer behaviour and tailor its have focused on the local beers (rather than
strategy to it. This strategy paid off. SAB has operating brewing other SAB brands), and by
profit margins of around 13%, rapidly expanding sales creating consistency of product it has been
and growing market share, a far cry from most of its possible to establish rational pricing in the
loss-making competitors. market place, improved volumes and
market share gains. In Shenyang we have
The Future around 90% market share and we are
In 1999, the top three competitors controlled only 9% confident that we shall see further gains,
of the market. Although some 500 brewers and 1,500 on all measurements, in the years ahead.”
beer brands were still eagerly competing for a share

Autumn 2001
42 Loizos Heracleous

brewers may reduce to just 100-200 in the longer term

(Steinman 1999). Some even predict that the global Table 2
China’s Business Environment at a Glance
players will ultimately defeat the locals: “ultimately,
a handful of giant players – beer’s equivalent of P&G Policy towards private enterprise and competition
and Nike – will dominate the industry and capture 2001-2 Improved competition from the break-up of state
most of the available profit” (Benson-Armer et al monopolies. WTO membership opens access to
1999, p9). restricted markets.
2003-5 Consolidation of leading state-owned industries
Competition in this market will be intense and undergoing state-sector restructuring. Greater
role for the private sector. Increased access for
unforgiving. Competitive battles in the short and
foreign companies and products. Strong residual
medium term will be fought on two dimensions: the protectionism in some key sectors.
low end mass market, and the race for market share,
Policy towards foreign investment
volume and consequent economies of scale though
2001-2 Foreign investment encouraged in strategic
both acquisition and organic expansion. High sectors. Restrictions remain in many areas.
marketing expenditures and significant brand
2003-5 Gradual opening of previously protected areas
awareness of global beer brands has not proven of the economy in line with WTO commitments.
sufficient to encourage enough Chinese consumers to
Foreign trade and exchange controls
pay the huge price differentials charged by foreign
2001-2 Limited realization of the trade regime.
entrants. Local consumers have preferred to stick to Restriction on capital flows remain.
their local brews; also demonstrating their patriotism
2003-5 Further easing of tariff and non-tariff barriers.
by doing so. Limited relaxation of restrictions on capital flows.
Taxes
Foreign brewers build their hopes on future economic
2001-2 Improved collection, tightened assessments and
conditions. GDP growth is projected to continue at
audits. Crackdown on tax fraud and evasion.
an average of 8% from 2001 to 2005, with consumer Introduction of rural tax reforms to replace ad
price inflation of less than 3% over the same period hoc levies and fees.
(up from 2% during 1996-2000). GDP per head in 2003-5 Broadened tax base. Gradual ending of unequal
2000 was equivalent to $870 ($4,670 at purchasing tax treatment, but some preferential rates and
power parity). China’s business environment rankings concessions retained inland. Rural tax reform
were set to improve slightly from an average of 5.33 extended nationwide.
out of 10 during 1996-2000, to 6.06 during 2001- Financing
2005 (EIU 2001). Table 2 below gives a summary of 2001-2 Efforts to put state-owned banking system on a
important aspects of China’s business environment for more commercial footing. Greater opening of the
the period 2001-2005. financial sector to foreign participation.
2003-5 Continuing efforts to rid state banks of bad
Achieving brand awareness and increased market loans. Foreign financial institutions granted
access to the same customers as state banks.
share will be crucial for the success of foreign entrants
in the Chinese beer industry, but patience may prove The labour market
even more important. How long, however, should 2001-2 Large, poorly skilled workforce. Deficiencies in
quality.
foreign brewers stay in China and keep losing millions
of dollars per year? Will a premium market develop 2003-5 Persistent shortages in skilled labour and
expertise. Marginal increase in supply of highly
soon enough to save their fortunes? Should they
skilled workers.
change their strategy to compete in the low end of the
market, and give up on promoting their global brands? Infrastructure
Should they focus on making equity investments in 2001-2 Accelerated development of the interior.
Persistent bottlenecks.
local beer companies with brands unknown in the West
and sub-standard technology? Which is the right way 2003-5 Continued improvement in all areas, and a
number of major projects completed or nearing
to go?
completion. Infrastructure remains inadequate
for the size of the country.
Source: Country Forecast: China. Economist Intelligence Unit, April 2001, p3

Business Strategy Review

 When Local Beat Global: The Chinese Beer Industry 43

Issues and Lessons: Doing Business in markets and infrastructure. These should be taken
China seriously and planned for by foreign entrants. In
Only a minority of firms that try to profitably addition to these macro-environmental features, the
penetrate China succeed, and those that do often need story of the Chinese beer industry shows that foreign
several years, local knowledge and deep pockets to entrants should try to gain a deep understanding of
build viable competitive positions. Many consumer behaviour in the particular local market.
multinationals view China as the last frontier of
globalization, and have either entered it or plan to However, the situation in the beer industry, where a
enter it in the near future. Beer is in some ways a special low-cost strategy was more suitable, does not mean
case. But the problems experienced by foreign entrants that foreign firms attempting to build a differentiation
to this market and success of the SAB’s localized position will necessarily fail, as the example of Coca-
strategy helps to place in perspective the perils and Cola illustrates (see box overleaf). In the context of
uncertainties of competing there. technology-related ventures in particular, the Chinese
government is demanding the transfer of state-of-the-
In the beer industry, tailoring the competitive strategy art technology from foreign partners, before giving
to the local environment proved the most important approval to joint ventures (Meyer 2001). Studies in
factor for success. Unsuccessful foreign competitors the electronics industry, in addition, show that firms
attempted to compete based on differentiation that enter China using a capital and technology-
(premium pricing and superior product quality). While intensive strategy tend to perform better than firms
this strategy can be successful in more developed entering with a labour-intensive strategy (Li et al
markets, in this case firms failed to appreciate the 2000).
particular features of the China market: the high price
sensitivity of consumers; the high level of patriotism The case of the beer industry also illustrates the limits
when it comes to drinking beer; the difficulty of of strategic planning in uncertain and volatile
converting brand awareness to actual purchases; and environments. Most foreign market entrants built
the notoriously underdeveloped distribution systems. state-of-the-art breweries with high production
The high level of fixed costs involved in beer capacity, based on the robustness of China’s economy,
production exacerbated the situation. the expected growth of the Chinese beer market (Table
1), and their confidence of capturing a significant
The minority of foreign competitors who succeeded, share. There were too many unknowns, however.
on the other hand, followed a low cost strategy (low Several other foreign competitors were either doing
production costs, merely acceptable product quality or planning to do the same thing shortly after. Almost
and low selling price) combined with the following: all foreign entrants were chasing the same, tiny
careful understanding of local consumer behaviour; premium beer segment. Competitive tactics proven to
investment in local brewers and local brands; gradual be successful in the West were of questionable validity
raising of quality standards and the technological in China. Unforeseen problems cropped up, relating
competence of local brewers they invested in; to such things as distribution infrastructure, apathetic
proceeding cautiously in terms of investment levels workforces, political obstacles and local
and pace; and learning from prior experience in protectionism. This situation highlights the limits of
developing countries. strategic planning but also the virtues of flexibility
and learning from experience.
None of the above strategies is inherently better than
the other; their effectiveness depends on the industry The experience of foreign brewers in China also
and macro-level context. The features of the mainland illustrates the inflexibility of strategic commitments
Chinese context meant that the beer market was not and the high price that has to be paid if the wrong
developed enough to accommodate and respond to commitments are made. For example, foreign brewers
Western-style competitive tactics such as advertising who had been losing tens of millions of dollars annually
blitzes aiming to build emotional/lifestyle associations could not afford to wait until a viable premium market
with the product, and reliance on powerful global segment developed. They felt they had to sell their
brands. Table 2 illustrates several features of the state-of-the-art assets at bargain basement prices. This
Chinese context, especially with regard to labour strengthened their competitors who bought those

Autumn 2001
44 Loizos Heracleous

Coca-Cola in China
Coca-Cola has been making profits in China since US$26m on advertising in China during 2000. In
1990, having built its first bottling plant there in 1984, it was the first foreign firm to advertise on
the 1930s (Weisart 2001). Much of its success in CCTV, the national television station. In 1996 it
China has to be attributed to the fact that it entered enlisted retired neighbourhood officials to
the country with one of the world’s best-known promote its drinks, increasing its brand
brands. Coke encapsulated a lifestyle that was awareness in the process. 98% of Coca-Cola’s
aspired to by most of the inhabitants of this planet. supplies are procured domestically. The company
This advantage allowed Coca-Cola to succeed in has provided local suppliers with financial
China with a premium, differentiated strategy. assistance and technical advice to help them
Nevertheless, it also did the right thing in terms of improve their quality standards and reliability.
local adaptation. On distribution, the company has built at least
one sales centre with its own fleet of trucks in
It currently has ownership stakes in 24 bottling each town with over 1m population. It also
joint ventures, and two factories producing launched a program called Partnership 101,
concentrate. Most of Coca-Cola’s joint ventures providing around 900 wholesalers with training
are with Chinese government agencies, an example and management assistance in selling its drinks.
of the crucial importance of having good The result is that Coca-Cola’s drinks reach 80%
government relations in China (see also Sanyal and of China’s 1.25bn people.
Guvenli 2001). It has followed a localization
strategy in all aspects of its operations, including The average consumption of Coke in China is eight
marketing, supplies and distribution. Instead of 250ml servings per person annually, as opposed to
simply promoting its flagship brand, it has also 400 servings per person in the US. This is thought
developed local brands through Tianjin Jin Mei to indicate the huge potential of this market. Coca-
Beverage Co, a 50-50 joint venture formed in 1993 Cola commands around 47% market share of
with a government agency. Its Tianyudi (Heaven China’s carbonated drinks market, as opposed to
& Earth) and Xingun (Smart) brands have been 19% held by its rival, Pepsi (Gilley 2001). The
phenomenally successful and outsell its flagship company aims to double its sales in China over
Coke, Sprite and Fanta brands. The company spent the next five years.

assets, making any future success even more unlikely technology. But striking an alliance with the wrong
and creating a vicious circle for themselves. Should partner can open up a can of worms. Differences in
they have stayed in China instead? The problem is each partner’s strategic goals can create destructive
that there is no adequate data for making rational conflicts. Foreign partners almost always have a
investment calculations. Any assumptions on the longer-term outlook and want to invest in such things
timeframe required to build a viable presence in the as brand-building, distribution capabilities, or
premium beer segment, for example, would be little upgrading of operations. Local partners may be more
better than wild stabs in the dark. In this context, the interested in quick profitability. Research suggests that
more conservative approach of brewers following the foreign firms entering China through joint ventures
low cost/localization strategy was more suited to this with local firms should try to gain decision-making
environment because it did not bind the firms to control of critical business functions, develop and
inflexible strategic commitments that would drag the retain an effective sales force, develop and retain
whole market penetration strategy down. capable Chinese managers, and be able to understand
and influence government decisions (Osland and
One final point: foreign entrants also need to take Cavusgil 1996).
care who they partner with. Most firms enter China
through joint ventures with local companies, as With South African Breweries, relationships with the
illustrated in the cases of Coca-Cola and SAB. Local Government were handled by their joint venture
companies usually offer local knowledge and partner, China Resources. Guanxi – long-term
connections, while foreign firms contribute capital and relationships or connections, with implications of

Business Strategy Review

 When Local Beat Global: The Chinese Beer Industry 45

reciprocal favours (Tsang 1998) – is still invaluable in China’s anticipated entry into the WTO, which is
China, not least because of inconsistencies in expected to make it more accessible to foreign
government policy and the underdeveloped and investment, means that a deeper appreciation of its
unreliable legal system. Guanxi can help firms in competitive environment is more critical now than ever
navigating the maze of central, provincial and local before.
government bureaucracy and being able to obtain
redress in commercial disputes. However as China
enters the WTO, opens up its markets further, develops Loizos Heracleous ([email protected]) is an
its institutional frameworks, and begins respecting Associate Professor at the National University
intellectual property, the importance of guanxi may of Singapore.
decline in the longer term. The one certainty is that

References
Ayala, J. and Lai, R. (1996) China’s consumer market: Li, J., Qian, G., Lam, K. and Wang, D. (2000) Breaking
A huge opportunity to fail? McKinsey Quarterly, 3: into China: Strategic considerations for multinational
56-71. corporations, Long Range Planning, 33.
Benson-Armer, R., Leibowitz, J. and Ramachandran, Meyer, A. (2001) Technology transfer into China:
D. (1999) Global beer: What’s on tap? McKinsey Preparing for a new era, European Management
Quarterly, 1: 2-13. Journal, 19 (2)
Chinaonline.com (2000) China beer market loses its Osland, G. and Cavusgil, T. (1996) Performance issues
fizz, 4-Oct-2000, www.chinaonline.com in U.S.-China joint ventures. California Management
EIU (2001) Country Forecast: China. Economist Review, 38 (2).
Intelligence Unit, April 2001. Perkins, A. and Shaw, S. (2000) What the WTO really
Everatt, D. and Nawar, N. (2000) South African means for China. McKinsey Quarterly, 2: 128-131.
Breweries International: Devising a China Market Sanyal, R. and Guvenli, T. (2001) American firms in
Strategy, Richard Ivey School of Business, Case China: Issues in managing operations, Multinational
9B00A024. Business Review, Fall, pp40-46.
Gilley, B. (2001) Pepsi gets street smart. Far Eastern Steinman, G. (1999) Trying times amid spectacular
Economic Review, June, p 37. growth, China Business Review: 26-31, Jan-Feb
Gleave, T. and Golden, P. (1998) Five star beer – Pay Tsang, E. (1998) Can guanxi be a source of sustained
for performance. Richard Ivey School of Business, competitive advantage for doing business in China?
Case 9A98C004. See also Gleave, T. and Erskine, J. Academy of Management Executive, 12 (2).
(1998) Franz Berger – Master brewer. Richard Ivey Weisert, D. (2001) Coca-Cola in China: Quenching
School of Business, Case 9A98D007. the thirst of a billion. China Business Review, July-
Goldman Sachs (2001) Beverages: Asia Pacific, August.
January Zhuang, L., Ritchie, R. and Zhang, Q. (1998)
Granitsas, A. (2001) Beer brawl, Far Eastern Managing business risks in China, Long Range
Economic Review, 10-May. Planning, 31 (4). See also Norton, P. and Huang, L.
Lawrence, S. V. (2000) Beer making: A thirst for 2001. Management fraud in China. China Business
success, Far Eastern Economic Review, Dec-28. Review, March-April.

Autumn 2001

View publication stats