In March 2004, CRB announced a conditional agreement with the majority shareholder of Zhejiang Qianpi Group, the largest brewery in Zhejiang Province, to reorganise Qianjiang, and establish a joint venture company, in which CRB had a 70% equity interest and the shareholders of Qianjiang held the remaining 30%. CRB expected to bring its experience, capital, management expertise, technical skill and success from the north eastern part of China to the eastern China market, through close cooperation with Qianjiang, which was the single largest brewery in Zhejiang Province in terms of production capacity. With this addition, CRB’s annual production capacity increased by about 480,000 kilolitres to approximately 4.56 million kilolitres with breweries in the north eastern, south western, central and eastern regions of Mainland China.23 Qianjiang achieved sales volume of 240,000 kilolitres in 2003, and produced beer under famous brands like “Zhonghua” and “Qianjiang” in Zhejiang Province. With the acquisition of these two brands, CRB consolidated its leading position in the brewing industry in China.
Building a National Brand
“We ultimately want a nationwide penetration for Snow, to build it into a national brand to drive up profit margins!”
CRB was concerned with the lack of a national brand that could be marketed across China, and thus focused its efforts on the development of one. Developing a national brand, and building a network of suppliers, breweries, intermediaries and marketing structures would ensure that SABMiller was well positioned to exploit the exploding Chinese market in the future.
SABMiller had big plans for one of CRB’s brands, Snow (often called Snowflake). Through CRB, it increased its stake in three Chinese breweries that jointly owned the Snow beer brand, namely China Resources (Shenyang) Snowflake Brewery, Shenyang Snowflake Beer Company and Shengyang Beer Company, from 90% to 100%, thereby gaining total control of the important brand. Under the terms of the deal, CRB mopped up all the outstanding shares in these three companies from the minority shareholder, Shenyang Pi Jiu Chang, for the sum of HK$131.6 million (US$16.92 million) plus an additional consideration of up to HK$7.8 million (US$1 million).
Snow beer had been successfully marketed by CRB in China’s Sichuan province and in north eastern China. However, it was only available in second-tier cities. Its output increased by 48% to about 654,000 kiloliters, accounting for 26% of CRB’s sales in 2003, and had a market share of about 4% nationwide. The brand management team at CRB decided to develop Snow into a national brand. Market research reinforced their conviction that the brand was indeed a “sleeping giant”, with the potential to grow in Tianjin. In its 2003 Annual Report, SABMiller laid out plans to transform CRB’s flagship brand “Snow” from a local player to a national one, and to double its market share by the end of the decade. The key was the rapid investment across the board; be it in new technology to improve quality; in new packaging in terms of the bottle and can formats, to extend choice or in the distribution process to guarantee supply. At the same time, Snow was actively promoted through a range
ANHEUSER-BUSCH VERSUS SABMILLER: BIDDING WAR IN CHINA’S BEER INDUSTRY
In early 2004, Anheuser-Busch, the largest beer brewery in the world, announced acquisition of 29.1% stake in the Harbin Brewery, the fourth-largest beer brewery in China and the most dominant one in the north eastern Chinese market, at HK$3.70 (US$0.48) a share,1 a premium of 15% over its share price in the Hong Kong stock market. This guerilla tactic took SABMiller, the second largest beer brewery in the world with a 29.4% share in the Harbin Brewery, by surprise. SABMiller was utilising the Harbin Brewery to expand in the north eastern Chinese market adopting the more traditional merger and acquisition strategy. More was to follow. The battle was out in the open when Anheuser-Busch proposed a US$720 million (US$0.72 per share) takeover bid for Harbin in June 2004, 31% higher than the offer made by SABMiller (US$0.55 per share).
Anheuser-Busch’s highly surprising bid and its high stake in Harbin presented a tough challenge for SABMiller. If it withdrew from the battle, it could pocket a profit of US$124 million on its investment in the Harbin Brewery,4 but stood to lose a dominant position in the north eastern beer market. The other option it had implied a huge acquisition cost, which was already at US$0.72 (HK$5.58) a share, a hefty 51% premium since the battle began. Moreover, beneath the surface of the bidding war, there lay a tricky trade-off, often confronted by multinationals in the emerging markets, ie, whether to build one’s own facilities or to buy existing facilities to get into the fast growing market?
Chinese Beer Industry
The Growth of Chinese Beer Industry and the First Foray of the Multinational Enterprises (MNEs)
Although beer brewing has a long history in China, as early as 23 BC, beer production for market consumption took place only a hundred years ago. In fact, the development of the beer industry continued to lag behind the increasing market demand long after the establishment of People’s Republic of China in 1949. By the late 1970s, beer supply had become scarce, which made buying beer more difficult across China.
The central and local governments adopted a series of preferential policies to encourage the development of beer production, and listed brewage among the 100 Chinese pivot industrial goods. In the 1980s, China’s beer industry grew at an average annual rate of more than 30%. By 1988, the number of brewers in China reached 813, with an aggregate annual output of 65.6 million hectolitres. China’s global ranking moved from the 26th place in 1979, before the adoption of reform and opening up policy, to the third place in 1988, just lagging behind United States and Germany (and further improved to second place in 1993). And during that decade, the number of beer brewers in China and their combined output grew by 9 times and 17.6 times respectively.
The fast growth and the huge potential of the Chinese beer market lured foreign brewers, who arrived in droves. In the early 1990s, Heineken of the Netherlands, Interbrew of Belgium and Carlsberg of Denmark, among others, swarmed the China market, scrambling for market share, with their high quality beers. Confident of penetrating the attractive market, they set up plants and shops to produce and sell their own brands. However, in the face of the small market share of high-end beers in China, the strong local protectionism of Chinese beers and the intense price war, their products became totally uncompetitive. The cheap beers produced in China overwhelmed the foreign brands, which struggled for several years to find a foothold. Eventually, most of them died in the vicious price wars, while many realised that China’s size, fragmentation and low incomes made the beer market a fundamentally low-end, localised game.
Current Chinese beer market
From 1995 to 2005, the Chinese economy registered high growth rates, ie, GDP surged from US$54.5 billion in 1993 to US$1,410 billion in 2003.9 The rapid economic expansion in China resulted in a class of more affluent consumers. GDP per capita more than doubled from US$460 in 1993 to US$1,091 in 2003, and bank savings per capita grew from US$216 in 1993 to US$1,035 in 2003. The government-backed Chinese Academy of Social Sciences claimed that 250 million people in urban China were now in the “middle class”, defined as households with total assets of US$18,000 to US$36,000.
Closely linked to improved living conditions, beer consumption in China also maintained a high rate of growth through the mid-1990s. In the five years from 1998 to 2003, China’s beer market grew on average by 7.1% per annum in volume terms and by 6.6% per annum in value terms. In 2001, China’s beer output amounted to 227.4 million hectolitres. In 2002, China finally surpassed the US to become the world’s largest beer producing country in volume terms, with an output of over 238.6 million hectolitres. In 2003, China became the world’s largest beer consuming nation, in volume terms (though it still lagged behind the US in terms of sales value), and was expected to continue at an average volume growth of 6% over the next five years.
However, in terms of per capita consumption, China continued to trail far behind other major markets in the world. In 2004, beer consumption per head in China reached 18.5 litres, compared with the average 11 litres in Asia Pacific, 68 litres in Western Europe and 86 litres in US.This indicated that there was plenty of room for growth, especially in view of the continuous increase of household income, urbanisation and favourable demographic trends.
The Return of Foreigners and Industry Consolidation
“There is a renewed interest in China, there was that first wave, and then many international brewers went home, their fingers burned. Now there is a second wave coming in!”
Foreign brewers streamed into China once again, attracted by its foaming beer market even as they faced stagnating sales in their home markets. In the early 2000s, there was a new round of foreign investment that came in with a vigour not seen since the mid-1990s. A decade of improvement in the economic conditions of the middle-class consumers had made China even more tantalising than before. However, having learnt from past experience, the multinational breweries took a different approach this time. They chose to ally or acquire a domestic brewery instead of setting up a new company. Aware now that they could not beat domestic brewers’ vast sales networks and low production costs, they were buying into some of the largest local players.
Concurrently, there was a surge in M&A activities in China’s beer industry. Major domestic breweries had been aggressively expanding through acquisitions. For example, Tsingtao, the largest brewery in China, had acquired over 40 breweries since 1997, which helped drive a more than five-fold increase in annual sales since then. In 2003, the output of the three major beer groups, namely Tsingtao, Yanjing and China Resources, exceeded 60 million hectolitres, accounting for approximately 30% of total national production.
SABMiller and China Resources Brewery
SABMiller PLC
SABMiller PLC was the world’s second-largest beer brewer, with major brewing and distribution operations in America, Africa, Europe and Asia. With a brewing presence in over 40 countries across four continents, it boasted of a portfolio of strong brands and leading
market shares in many of the countries in which it had brewing operations. In 2003-04, its lager volumes stood at approximately 138 million hectolitres worldwide. In the year ended March 31st 2004, the group generated a pre-tax profit of US$1,391 million from a turnover of US$12,645 million. The company is listed on the London and Johannesburg stock exchanges.
China Resources Brewery (CRB)
SABMiller entered the Chinese market in 1994, nearly at the end of the first foray of foreign breweries. But unlike its predecessors, it set up a joint venture company, China Resources Breweries Limited (CRB), with the China Resources Enterprise (CRE), in which CRE held 51% and SABMiller held 49% of the stake. CRE is one of the biggest state owned enterprises in China, with a well-diversified portfolio of business in Hong Kong and the Chinese Mainland. Its principal activities were retail, beverage, food processing and distribution, textile and petroleum distribution. It is listed on the Hong Kong Stock Exchange and the Stock Exchange Automated Quotation (SEAQ) International of the London Stock Exchange.
SABMiller operated through CRB in the Chinese beer market. After more than a decade of development, CRB’s annual production stood at 20 million hectolitres, and it had garnered around 12% of the beer market of China.18 Its beer sales grew at an average of 38% a year, making it one of the few profitable foreign brewers and the third largest brewery in China. Besides Snow and Blue Sword, CRB sold a wide range of brands including Huadan, New Three Star, Shenyang, Lowen, K-Lion, Largo, Tianjin, Zero Clock, Sip, Xingyingge and Green Leaves.
CRB focused on acquisition and expansion strategies, and its principal business concept was to “develop local brands before becoming the strongest and the biggest”. However, unlike other players, which focused on the second-and third-line local brands, CRB often set its sights on leading local players, acquiring the first-line beer brands of over 30 regions. As a result, the company’s brand enjoyed a strong presence in some regions; for instance, Blue Sword Beer had about 85% market share in Sichuan.19 Through a series of investments, 37 beer enterprises joined China Resources Breweries as wholly owned subsidiaries or joint venture partners.
Acquiring Qianjiang
“With Qianjiang, CRB not only can strengthen its leading position in the brewing industry in China, but also be able to expand its geographical coverage to the Eastern part of China. CRB will exploit its experience, capital, management expertise and technical skill, in order to strengthen its brands, and to bring better products and services to the consumers in China.”
“Qianjiang is a leading brewing company in Zhejiang. We believe that the cooperation with CRB will increase Qianjiang’s competitiveness and advantages, and transform the company into the most successful brewing company in Zhejiang.”
of lifestyle marketing techniques; including road shows, consumer testing and other promotional events. CRB’s energy and willingness to work at a fast pace produced impressive results. In the year ended March 2004, CRB reported sales volumes of 25.8 million hectolitres, which included 7 million hectolitres of Snow.
Anheuser-Busch in China
Based in St. Louis, Missouri, USA, Anheuser-Busch was the world’s biggest brewer. Its Budweiser brand, the world’s best-selling beer, was locally brewed in 10 countries, and sold in more than 80 others worldwide.
On February 26th 1995, Anheuser-Busch entered China with Budweiser Wuhan International Brewing Co. Ltd., which was located in central China with a shareholding of 97%,26 mainly for the production of Budweiser.27 Wuhan International Brewing Company, Ltd. was one of the many international breweries that Anheuser-Busch operated outside the US. Budweiser was the leading premium international beer in China, and accounted for 50% of the high-end beer market by 2004. Along with the company’s flagship brand “Budweiser”, the brewery also brewed Bud Ice, a super-premium brand sold in unique, clear-glass “ice-chunk” bottles. Capacity had increased more than threefold since Anheuser-Busch first invested in the brewery in 1995. In addition to the Wuhan brewery, Anheuser-Busch operated regional sales offices in Shanghai, Beijing and Guangzhou, as well as 29 representative offices across the country.
Alliance with Tsingtao Brewery
“In Tsingtao, we have found a partner that shares our heritage in brewing excellence, and our vision of the future in China. China holds tremendous potential in the global beer industry. This alliance gives Tsingtao the support it needs to strengthen its leadership in China beer market, and increase its exports while giving Anheuser-Busch a greater role in a critical international market.”
On July 30th 2002, Anheuser-Busch announced plans to form a strategic alliance with Tsingtao Brewery, the largest brewer in China. The two companies also initiated a best practices exchange program, among other management initiatives. On October 21st 2002, Anheuser-Busch and Tsingtao Brewery signed an agreement that increased Anheuser-Busch’s stake in the company from 9.9% to 27% by 2010.29 By 2004, Tsingtao held a market share of 12.8%, and its flagship brand, Tsingtao, was not only the number-one beer brand in China, but also the most famous Chinese brand in the international market. It boosted its market share to above 13% in 2003 from just 2% in 1996 by acquiring more than 40 breweries across the country.
As part of the agreement, Anheuser-Busch brought in its capital, technology and corporate governance in order to help Tsingtao maintain its existing market share, and expand into new markets around the world. Tsingtao Brewery would help to inform and educate Anheuser- Busch about the growing Chinese economy and beer industry. In addition, Anheuser-Busch would also make use of Tsingtao’s distribution network to sell its own brands of beer.
Anheuser-Busch also signed an agreement with Golden Star Beer Group to acquire 30% in the group for US$50 million in late 2003.30 Golden Star Beer Group, located in the Henan province in western China, had a production of over 10 million hectolitres a year, and was already ranked among the top beer groups in China. In the last two decades, Golden Star had expanded through establishing plants in the second-tier cities in the western China. In 2003, it held a large market share in Henan, Shanxi, Guizhou, Anhui, Hebei and Jiangsu, among other cities.31 In 2004, Anheuser-Busch announced that Golden Star would invest US$400 million to set up a beer production base in Sichuan that would produce 3 million hectolitres of beer per annum.
Meanwhile, Anheuser-Busch’s brewery in Wuhan completed another expansion drive, increasing its annual production from 2.5 million hectolitres to 3.2 million hectolitres.33 It immediately embarked on further expansion, and expected its annual production volume to reach 4 million hectolitres by late 2005.
Flanked by Budweiser, Tsingtao and Gold Star, Anheuser-Busch had formed a market landscape that targeted the premium segment with Budweiser, while Tsingtao and Golden Star targeted the middle and low-end markets. It had a strong presence in central China, Shandong and north western China.
The Bidding War
Harbin Brewery
Harbin Brewery, the predecessor of Harbin Brewery Group, had a history of more than a hundred years, and ranked fourth in China in terms of volumes. Based in Harbin city, Harbin Brewery operated eight production plants, with six in the Heilongjiang province and two in the Jilin province, and had an aggregate capacity over 10 million hectolitres per annum.34 Harbin Brewery dominated the market in north eastern China with its famous brand, Hapi.
In 2003, Harbin Brewery reported a 4% year-on-year increase in net profit to US$14.66 million (HK$114 million), while the sales volume rose 27% year-on-year to 110 million hectolitres. Mass products accounted for more than 82% of sales with a 32% year-on-year increase; while the classic and premium products contributed the remaining 18%, but recorded a much slower growth over the year at 1.9% year-on-year.
The Bidding Game
In June 2003, SABMiller paid HK$675 million (US$86.77 million) for the 29.4% stake in Harbin Brewery.36 To execute the transaction, SABMiller created a new subsidiary, Gardwell; and gave certain members of the existing Harbin management team a 5% stake in it.
In March 2004, the Harbin Government-owned Kwok Nea, the parent company of Harbin Brewery, announced that it would off-load its stake of 29.1% to Global Conduit, which is owned by a group of independent investors. This liquidated the state-owned shares in Harbin Brewery, making it an entirely independent player in the market, held by three parties, namely, Global Conduit, Gardwell (SABMiller) and public shareholders.
In early May 2004, Anheuser-Busch issued a deal to buy 29.1% of the firm from Global Conduit Holdings for US$139 million or HK$3.70 (US$0.48) a share.38 This placed Harbin Brewery at the brink of a war between Anheuser-Busch and SABMiller. The two global majors, Anheuser-Busch and SABMiller, had equally significant stakes in Harbin Brewery. Neither brewer would want a situation where the other owned a similar significant stake in Harbin; given their differing vested interests and the possibility of a split board, this was very clearly a sub-optimal and unsustainable situation. It seemed more likely that a battle for a controlling stake in Harbin would be fought.
SABMiller also owned 49% of CRB, which competed with Harbin in the north eastern Chinese beer market. Together, CRB and Harbin controlled 60%-65% of the regional market. If SABMiller owned Harbin, it would gain a pricing advantage in a sector notorious for competition and thin margins. On May 24th, SABMiller responded with a hostile US$553 million bid for Harbin.39 It already owned 29.4% of Harbin Brewery, and was offering to buy all of the remaining shares at HK$4.30 (US$0.55) a share in the Hong-Kong listed firm.40 This included buying a 29% stake in Harbin, which was recently acquired by Anheuser-Busch. The offer price represented a 65% premium to the average price of Harbin Brewery since it went public in June 2002, about 38 times Harbin’s 2003 earnings and more than four times its net asset value. The company attached great importance to the deal, and stepped up its takeover battle with Anheuser-Busch.
However, Anheuser-Busch, further boosted its holding in Harbin, as it believed the acquisition of Harbin lay at the core of its strategy in the Chinese beer market.
“Our initial investment in Harbin and this general offer reflect the strategic value Anheuser-Busch places on the company. Harbin brewery has a leading brand, an experienced and capable management team and a strong position in the Chinese beer industry. Along with our alliance with Tsingtao, China’s largest brewer, and our successful Budweiser Wuhan International Brewing Co. operation, this investment in Harbin brewery reinforces our commitment to China, provides future benefits to all three companies and is consistent with our stated strategy of investing in leading brewers in growth countries.”
“The general offer should be very attractive and compelling to all existing shareholders. Our general offer, combined with our record of successfully building the Budweiser and Bud Ice brands in China, working effectively with local management and contributing to the communities in which we do business, establish our company as the most attractive buyer for Harbin
Brewery. Harbin management supports this offer and prefers Anheuser- Busch as their long-term strategic partner.”
On May 31st 2004, Anheuser-Busch purchased an additional 6.9% in Harbin Brewery from funds managed by Capital International Inc., the third-largest US mutual fund, for a price of HK$5.58 (US$0.72) per share. Together with the 29.1% purchased earlier in the month, Anheuser-Busch owned a total of 36% of Harbin Brewery. The following day, Anheuser- Busch offered a surprising US$720 million or HK$5.58 a share for the full stake of Harbin, trumping a HK$4.30 per share hostile bid from SABMiller. This price was 48 times the company’s 2003 price-earnings-ratio, and represented a premium of nearly 30% over the competing offer made by SABMiller. The surprisingly high bid and Anheuser-Busch’s raised stake in Harbin made it tougher for SABMiller to make a counter bid.
Harbin’s managers, meanwhile, made it clear that they preferred a partnership with Anheuser- Busch, and asked its shareholders to reject SABMiller’s offer. Expressing dissatisfaction with the alliance, they said that the 10-month co-operative relationship with SAB had failed.
“We had hoped SABMiller would offer marketing and technology support, but nothing has happened. The management team is doing everything possible to derail SABMiller’s attempts to control the Brewery.”
From the following
1) Harvard Business Review Article 2001, “Distance Still Matters, The Hard Reality of Global Expansion by Pankaj Ghemawat
Answer this question:
Using the CAGE distance framework, explain why the second foray of entrants to China’s beer market has been more successful than the first foray of firms.
CAGE being (cultural, administrative/political, geographical, economics).
