GLOBAL BIG BUSINESS AND THE CHINESE BREWING INDUSTRY (Routledge Studies on the Chinese Economy)

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GLOBAL BIG BUSINESS AND THE CHINESE BREWING INDUSTRY (Routledge Studies on the Chinese Economy)

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Global Big Business and the Chinese Brewing Industry

This book considers the impact of global big business on the prospects for the development of their indigenous rivals in the developing world, with particular focus on the Chinese brewing industry. It analyses the relationship between big business, competition and state intervention in the context of developing economies, demonstrating the implications of the industrial concentration and value chain integration of the global big business revolution for catch-up by developing world industries, and considering to what extent, and in what manner, state intervention can allow them to meet the competitive challenge. It goes on to examine these themes in relation to the Chinese brewing industry, demonstrating the substantial competitive advantages possessed by the giant global brewers, and that therefore the burning issue facing their indigenous rivals is not ‘going global’ but securing their backyard in the face of aggressive foreign penetration. It includes detailed case studies of the endeavours of the Yanjing and Tsingtao Breweries to catch up and respond to the global business revolution. It is argued that a policy of continuous state intervention is necessary to promote catch-up, suggesting that if the Chinese government retracts its support then many of the achievements of industrial policy over the past few decades may go to ruin. Overall, this book addresses the challenges faced by developing world capital-intensive manufacturing industries, such as the Chinese brewing industry, discusses the implications for industrial policy, and outlines the key policy conclusions for both indigenous firms and their multinational rivals. Yuantao Guo received a PhD from Judge Business School, Cambridge University, UK. She received her MPhil in Development Studies from the Land Economy Faculty at Cambridge, an MA in Economics from Peking University, Beijing, China, and a BA in Economics from Nankai University, Tianjin, China. She has also worked as an Equity Analyst for Goldman Sachs (based in Singapore) and J & A Securities Ltd (based in China). Her research interests include business economics, development studies, industrial policy, globalisation, and the beverage and consumer industries.

Routledge Studies on the Chinese Economy Series Editor Peter Nolan, University of Cambridge

Founding Series Editors Peter Nolan, University of Cambridge and Dong Fureng, Beijing University

The aim of this series is to publish original, high-quality, research-level work by both new and established scholars in the West and the East, on all aspects of the Chinese economy, including studies of business and economic history. The Growth of Market Relations in Post-reform Rural China A micro-analysis of peasants, migrants and peasant entrepreneurs Hiroshi Sato The Chinese Coal Industry: An Economic History Elspeth Thomson Sustaining China’s Economic Growth in the Twenty-First Century Edited by Shujie Yao and Xiaming Liu China’s Poor Regions Rural-urban migration, poverty, economic reform and urbanisation Mei Zhang China’s Large Enterprises and the Challenge of Late Industrialization Dylan Sutherland China’s Economic Growth Yanrui Wu The Employment Impact of China’s World Trade Organisation Accession A.S. Bhalla and S. Qiu Catch-Up and Competitiveness in China The case of large firms in the oil industry Jin Zhang Corporate Governance in China Jian Chen The Theory of the Firm and Chinese Enterprise Reform The case of China International Trust and Investment Corporation Qin Xiao

Globalisation, Transition and Development in China The case of the coal industry Huaichuan Rui China Along the Yellow River Reflections on rural society Cao Jinqing, translated by Nicky Harman and Huang Ruhua Economic Growth, Income Distribution and Poverty Reduction in Contemporary China Shujie Yao China’s Economic Relations with the West and Japan, 1949–79 Grain, trade and diplomacy Chad J. Mitcham China’s Industrial Policy and the Global Business Revolution The case of the domestic appliance industry Ling Liu Managers and Mandarins in Contemporary China The building of an international business alliance Jie Tang The Chinese Model of Modern Development Edited by Tian Yu Cao Chinese Citizenship Views from the margins Edited by Vanessa L. Fong and Rachel Murphy Unemployment, Inequality and Poverty in Urban China Edited by Shi Li and Hiroshi Sato Globalisation, Competition and Growth in China Edited by Jian Chen and Shujie Yao The Chinese Communist Party in Reform Edited by Kjeld Erik Brodsgaard and Zheng Yongnian Poverty and Inequality among Chinese Minorites A.S. Bhalla and Shufang Qiu Economic and Social Transformation in China Challenges and opportunities Angang Hu Global Big Business and the Chinese Brewing Industry Yuantao Guo

Global Big Business and the Chinese Brewing Industry

Yuantao Guo

First published 2007 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2006. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2007 Yuantao Guo All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Guo, Yuantao, 1973– Global big business and the Chinese brewing industry / Yuantao Guo. p. cm.—(Routledge studies on the Chinese economy series ; 24) Includes bibliographical references and index. 1. Brewing industry—China. 2. International business enterprises. 3. Big business. I. Title. II. Series: Routledge studies in the Chinese economy ; 24. HD9397.C57G86 2006 338.8′8763420951—dc22 2006017520

ISBN 0-203-96786-0 Master e-book ISBN ISBN10: 0–415–39918–1 (hbk) ISBN10: 0–203–96786–0 (ebk) ISBN13: 978–0–415–39918–0 (hbk) ISBN13: 978–0–203–96786–7 (ebk)

To my father and my mother

Contents

List of figures List of tables Preface Acknowledgements Abbreviations

xi xii xiii xiv xv

Introduction

1

1

Big business and competition

7

2

The global big business challenge and catch-up

20

3

State intervention

30

4

The global brewing industry

37

5

Industrial policies on the Chinese brewing industry

51

6

The Chinese brewing industry

66

7

The catch-up of Tsingtao Brewery

86

8

The catch-up of Yanjing Brewery

136

Conclusions

174

Appendices:

181

1 Concentration in major beer markets

182

x

Contents

2 China’s beer production, 1949 to 2003 3 Geographical presence of China’s beer production, 2003 4 Historical performance of Tsingtao Brewery, 1950 to 2003 5 A snapshot of Tsingtao’s key figures, 1993 to 2003 6 Tsingtao’s acquisitions, 1999 to 2003 7 The most famous Chinese brands, 2003 Notes Bibliography Index

185 187 188 190 191 194 195 200 210

Figures

5.1 6.1 6.2 7.1 7.2 7.3 7.4 8.1 8.2 8.3 8.4

Scale vs. profitability of Chinese brewers, 1990 Growth and development of the Chinese beer industry Profitability and consolidation: a global comparison The growth of sales and total assets of Tsingtao Brewery Sales, EBIT and profits growth of Tsingtao Brewery Returns of Tsingtao Brewery Brand structure of Tsingtao’s beers Sales growth of Yanjing Brewery Sales, EBIT and profits growth of Yanjing Brewery Returns of Yanjing Brewery Brand structure of Yanjing’s beers

58 68 72 88 88 89 102 138 139 139 151

Tables

4.1

Global mergers and acquisitions in the brewing industry, 2000 to 2005 4.2 Global strategic alliances in the brewing industry, 2000 onwards 5.1 Costs comparison among Chinese brewers 6.1 Beer and other alcoholic drinks 6.2 Snapshot of the Chinese brewing industry, 1993 to 2003 6.3 The top ten brewers, 1990 6.4 The top ten brewers, 2003 6.5 Foreign brewers’ presence in China 7.1 A comparison between top global and Chinese brewers, 2004 7.2 Scale and efficiency comparison between Tsingtao and AB 7.3 Tsingtao’s cash cows, 2003 7.4 Geographical presence of Tsingtao’s sales, 2003 7.5 Advertisement expenditure, Tsingtao vs. Anheuser-Busch 7.6 Tsingtao’s investments in technological improvement 7.7 R&D endeavours of Tsingtao Brewery 7.8 Tsingtao’s ownership structure 7.9 Qingdao’s industrial structure, 2000 to 2010 7.10 Key brands and their impacts on Qingdao City 8.1 Scale and efficiency comparison between Yanjing and AB 8.2 Yanjing Brewery’s M&As, 1996 to 2003 8.3 Advertisement expenditure, Yanjing vs. Anheuser-Busch 8.4 Yanjing’s investments in technological improvement

41 43 58 67 71 74 76 80 90 92 93 101 104 112 116 119 129 130 141 146 152 157

Preface

This book is a study of the challenge of the global big business revolution and the catch-up of large firms in relation to the Chinese brewing industry. Case studies on the global and the Chinese brewing industries, as well as Tsingtao Brewery and Yanjing Brewery, are conducted to study the topic. The book finds that global giant brewers possess substantial competitive advantages. The current era has witnessed unprecedented global dominance by giant brewers from advanced economies. It is argued that, compared with global giants, large indigenous brewers in China are at a disadvantage although they have made significant efforts to catch up. They are ambitious to lead the domestic consolidation and to go global. It is argued that their burning issue is not going global, but rather securing their backyard in the face of aggressive foreign penetration. It is held that the impacts of the increasingly popular strategic alliance between large indigenous brewers and global giants are more far-reaching than at first sight may appear to be the case. The alliance may impede instead of speeding up the catch-up process in that large indigenous firms run a huge risk of becoming foreign giants’ de facto subsidiaries. The book holds that a free market approach does not benefit indigenous large brewers’ catch-up, and calls for continuous state intervention. Lessening state intervention has huge negative impacts on large indigenous brewers. The case of the brewing industry suggests that, if the Chinese government fails to continuously facilitate large indigenous firms’ catch-up, many of the endeavours that it has made through tailored industrial policies during the past few decades may go to ruin. The book contributes to understanding the challenges that a conventional capital-intensive industry in a less developed country faces, and the development implications for China’s industrial policies. It provides strategy implications for large Chinese entrepreneurs in reaction to the severe global competition and offers policy implications for large multinational firms’ cooperation and competition with large Chinese firms.

Acknowledgements

This book originated from my thesis while I was reading a PhD degree at Judge Business School, Cambridge University. It would not have been possible without the generous help and encouragement of many individuals and organisations. First and foremost my thanks go to my supervisor, Professor Peter Nolan. In the course of my study at Cambridge, I have benefited from his intellectual inspiration and unstinting support. Many lengthy discussions with Professor Nolan helped me to sharpen my arguments and inspired me to explore issues in more depth. Sincere thanks in addition go to Professor Kjeld Erik Brødsgaard at Copenhagen Business School for his comments on my writing. I also thank Dr Jin Zhang at Cambridge University for her comments and criticism. Learning from Dr Ha-Joon Chang in the Faculty of Economics and Dr Shailaja Fennell in the Faculty of Land Economy, Cambridge, has also been very important. I deeply appreciate the assistance given to me by a number of managers in Chinese and foreign brewers and senior officials in associated government organisations. I thank them for their professionalism and frankness. Many individuals from companies and organisations generously gave their time to be interviewed and provided me with valuable insights into the brewing industry and associated industries. I wish to thank a number of friends who assisted my research. These friends include Li Qifeng, Ma Jun, Dr Liu Xiaofeng, Dr Jia Min, Dr Miao Qinghong, Zou Xiaoping, Xue Xu, Liu Yong, Zhu Qingliang, Li Peisong and Ding Yong. My special and sincere thanks go to Dr Cheng Feng for his encouragement and moral support. Last but not least, I owe special thanks to my mother Yang Qiaosheng, my father Guo Ying and my brother Guo Yixiao for their persistent encouragement throughout my research, and to my uncle Yang Jian, who provided me with a comfortable place to live during my fieldwork in China. I also wish to thank the following bodies for their generosity in funding this research: the Cambridge University Overseas Trust, Churchill College, the Suzy Paine Fund, the Cambridge Political Economy Society Trust, the Universities’ China Committee in London, and the Luca d’Agliano Award.

Abbreviations

AB ABC AT&T BBH BFBE BI BOC BW BWI CAD CAGR(s) CAM CB(s) CCB CEO CICC CML CPCPR CR CRB CRE CRM CSD(s) DTI DUP EBIT EBITDA EPS ERP FDI FMCG GAAP GE

Anheuser-Busch Agricultural Bank of China American Telephone & Telegraph Baltic Beverages Holding Beijing Famous-Brand Evaluation Co., Ltd Beverage Industry Bank of China Beverage World Beverage World International computer-assisted design compound annual growth rate(s) computer-aided manufacturing convertible bond(s) China Construction Bank chief executive officer China International Capital Corporation Limited China Merchants Logistics Core Point Core Procedure Review (Tsingtao Brewery) concentration ratio China Resources Breweries China Resources Enterprises consumer relationship management carbonated soft drink(s) Department of Trade and Industry, UK directly unproductive profit-seeking earnings before interest and taxation earnings before interest, taxation, depreciation and amortisation earnings per share enterprise resource planning foreign direct investment fast-moving consumer goods Generally Accepted Accounting Principles General Electric

xvi

Abbreviations

Hansi HHI HKSCC HKSE ICBC IMF InBev IPO IT JV LDCs LNN M&As MITI MNC(s) MSDW NIEs NTA O-I PBT PCC PEN PET PRC QSAAO R&D ROA ROCE ROE RTD S&N SAB SABMiller SG&A SME SOE SOP SRBO SSE TBML TPN Tsingtao TVE(s) VAT WB

Tsingtao (Xi’an Hansi) Brewery Herfindahl-Hirschman Index Hong Kong Securities Clearance Company Hong Kong Stock Exchange Industrial and Commercial Bank of China International Monetary Fund Interbrew and AmBev (post-merger in 2004) initial public offering information technology joint venture less developed countries Lion Nathan Brewery mergers and acquisitions Ministry of International Trade and Industry of Japan multinational corporation(s) Morgan Stanley Dean Witter newly industrialised economies National Technology Advancement (Award) Owens-Illinois, Inc. profits before tax Pacific Can Company polyethylene naphthalate polyethylene terephthalate People’s Republic of China Qingdao State Assets Administration Office research and development return on assets return on capital employed return on equity ready-to-drink Scottish & Newcastle South African Breweries SAB and Miller Brewery Company (post-merger in 2002) selling, general and administrative expenses small and medium-sized enterprise state-owned enterprise Standard Operational Procedure Standards and Rules of Brewing Operations (Tsingtao Brewery) Shanghai Stock Exchange Tsingtao Brewery Merchants Logistics Co. Trading Partner Network Tsingtao Brewery township and village enterprise(s) value added tax World Bank

Abbreviations xvii WTO Yanjing YRD ZRD

World Trade Organization Beijing Yanjing Brewery Yangtze River Delta Zhujiang River Delta

Introduction

From the 1970s to the 1990s, China implemented a wide array of industrial policies to build up indigenous big business groups, the so-called ‘national team’ of enterprise groups, to lead China’s catch-up campaign (Nolan 2001; Sutherland 2001). However, with its entry into the World Trade Organization (WTO), China is under huge pressure to pursue market-friendly policies proposed by advanced economies. The big business campaign has reached a critical stage of survival or ruin. There has been a hot debate on big business and competition. The orthodox school holds that giant firms are more often than not associated with monopoly and oligopoly. They impede innovation, hinder competition and will lose their dominant positions in the long run. Hence, big businesses should be discouraged. Small and medium-sized enterprises (SMEs) instead, together with a highly competitive market, should be encouraged because they bring about allocative efficiency (Friedman 1971, quoted in Lipsey 1992). Based on this belief, the Washington Consensus has been vigorously pushing developing countries, including China, to apply market-friendly rules – the more the better, in their view (quoted in Nolan 2001; Chang 2002). In contrast, the unorthodox school suggests that monopolies or oligopolies do not necessarily cause inefficiency, but instead are conducive to innovation and facilitate economic growth in the long run (Schumpeter 1976). Some scholars, notably Amsden (1989, 1997), Schmitz (1993), Chandler et al. (1997) and Chandler (1999), argue that indigenous big businesses were the engine of the economic transformation of advanced economies throughout the nineteenth and the twentieth centuries and have played an indispensable role in the take-off process of successful recently industrialised economies. China’s reform has arrived at a crossroads: schools of thought offer contradictory advice on which direction China should take. Policy makers will have to decide whether the effort of fostering indigenous big business groups should be continued and how this can be achieved. The big business revolution since the 1990s has brought unprecedented challenges to policy makers in less developed countries (LDCs). Global capitalism has dramatically spread and deepened to become the dominant system of the globalisation of the current era (Sklair 2002). In industry after

2

Introduction

industry, global giant firms are taking dominant positions and actively penetrating developing economies. Through ferocious global concentration and strategies conducive to growth, global giant firms have gained tremendous competitive advantages (Nolan 2001). These advantages are not just bounded within their own systems or the industries in which they operate, but also extend to many surrounding industries (Ruigrok and Van Tulder 1995; Nolan 2001). As a result, the global giant firms, which are in themselves identified as ‘core systems integrators’, have gained enormous bargaining power in the value chain (Nolan 2001; Nolan et al. 2002). The catch-up gaps that LDCs face in industry after industry have become extraordinarily huge, and large Chinese indigenous firms face unprecedented challenges (Nolan 2001, 2004a, 2004b; Nolan and Zhang 2003). Closely associated with the heated discussion on big business and catch-up is the debate on state intervention. To generalise broadly, there are two schools of thought. One school argues against state intervention and enthusiastically promotes the ideology of the free market, whereas the other casts grave doubts on the power of the free market and recognises the significant role of the state, particularly in transitional developing countries. Since the collapse of communist systems in the former Soviet Union and East European communist countries, the Washington Consensus led by the United States has been broadly advocating free market thought. Developing countries are advised to encourage SMEs instead of large indigenous firms (Blanchard et al. 1993). It is recommended that state intervention should be reduced as much as possible. It is argued that the success of East Asian economies is attributable to market-friendly measures and the prosperity of SMEs (WB 1993). For China and other transitional economies, the Washington Consensus pays little attention to forming large indigenous business groups to compete in the global market (Nolan 2001). The Washington Consensus is enthusiastically echoed by many mainstream Chinese scholars. However, many studies (e.g. Chang 2002) have shown that in virtually all industrialised economies – including the UK, where the modern capitalism and orthodox free market approaches both originated – state intervention was indeed pervasive in their take-off stage. Studies (Reynolds 1985; Deyo 1987; Findlay 1988; Amsden 1989; Wade 1990; Chang 1993, 2002) have also shown that state intervention widely existed and continues to exist in recently industrialised economies, notably Japan, South Korea and Taiwan. Nolan (1990, 1995a, 1995b, 2004a, 2004b) and Chang (2002) address their deep concerns about the implications of orthodox and neo-liberal thought for the catch-up of LDCs. Nolan is sceptical of the prescription of the free market approach to the transitional developing countries. Chang raises sharp questions on why today’s developed countries advocate the ‘best practice’ institutions which are advocated by orthodox doctrine but which have not been used by the developed countries at comparable stages of their development. This research, using a conventional capital-intensive industry, brewing, as an example, systematically reveals the theories of big business, the challenge

Introduction 3 of the global big business revolution and state intervention. These interrelated areas are highly important to today’s developing countries which hope to catch up through nurturing large national champions. This research has found that the reality is that, in the case of the brewing industry, not only have global giants adopted the most advanced technologies in production, packaging and management, but they have also pushed associated suppliers to match their high standards of technological innovation. Consequently, as the systems integrators, global giant brewers push ahead the technological standards of the brewing value chain. Giant brewers have not lost vigour and dominance along the years as suggested by Marshallians, but rather gained tremendous competitive advantages and surpassed the latecomers in LDCs in a wide array of areas. The current era has witnessed unprecedented global dominance by global giant brewers. This dominance does not take the simple form of increased global market share but rather a deep integration of the value chain, which creates catch-up barriers to latecomers. Global giants’ large-scale acquisitions of and strategic alliances with large successful brewers in LDCs, notably China, drastically deepen their global dominance. From the global perspective, giant brewers compete ferociously against one another in the hope of achieving global dominance. There is a clear trend of global consolidation led by giants instead of the boom of small and mediumsized brewers. Through acquiring local brewers, global giants intensify the competition in major brewing markets. The industrial trend shows that they also have ‘cascade effects’1 of intensifying competition and facilitating concentration on associated industries. The Chinese brewing industry did achieve substantial progress in the past two decades or so and a few large emerging national giants have made huge progress. Nonetheless, Chinese brewers still have to fill large catch-up gaps in many areas. On the global playing field, Chinese brewers may not be in a position – now and in the near future – to compete with global giants. The burning issue that large Chinese brewers face at the current stage is not going global, but rather securing their backyard in the face of ambitious foreign penetration. The industry is entering a critical phase. On the one hand, a few indigenous players like Tsingtao Brewery and Yanjing Brewery are strongly determined to emerge as national giants and even to try to compete on the global playing field. On the other hand, global giant firms have actively participated in the industrial consolidation by swallowing up successful large indigenous brewers in the form of acquisitions and strategic alliances. This force may add to, instead of reducing, the catch-up difficulties of large indigenous brewers in that large indigenous brewers run a huge risk of becoming foreign giants’ de facto subsidiaries. The in-depth study of the global and Chinese brewing industry calls for continuous state intervention. A free market approach may not facilitate the emerging national giants’ national and global campaign. More precisely, it is not argued that large indigenous firms should be sheltered from competition.

4

Introduction

Instead, continuous well-tailored state intervention is desired, in order to foster large indigenous champions, to enhance their competitiveness and in the meanwhile to protect them from being swallowed up by global giants. At such a critical time, if the Chinese government fails to do so, many of the endeavours it has made during the past two decades might be ruined.

Methodological issues The research begins by discussing theoretical issues on the role of big business, the challenge of the global big business revolution, and state intervention. These three intertwined areas provide a systematic framework which is theoretically meaningful and which has strong practical implications for developing countries. The empirical study of the brewing industry follows to analyse these issues. There are several reasons for choosing this particular industry to study the ‘catch-up’ issue. Firstly, brewing is a traditional capitalintensive industry and takes a relatively neutral position in an economy, as opposed to both high-tech and labour-intensive industries. Secondly, no research thus far has discussed the brewing industry in the globalisation era from the catch-up perspective. The research examines the challenge of the global big business revolution in the brewing industry from both the global and the Chinese perspectives. A number of areas are explored at both industry and firm levels, which include core business strategy, financial performance, brand management, scale economy, industrial concentration, technologies in production and packaging, value chain integration, research and development (R&D) and information technology. The role of industrial policies since the 1980s is studied in relation to the catch-up of large Chinese brewers. Both qualitative and quantitative methodologies are used. Tsingtao Brewery and Yanjing Brewery were chosen as cases studies because they are the largest and amongst the most competitive indigenous brewers, and because both are state owned, have been making a wide array of strategic adjustments to catch up, and have been selected as ‘star firms’ by the state and local governments and granted a series of preferential industrial policies. This made them highly suitable for the purpose of the research. On the global front, the research selected leading global brewers such as Anheuser-Busch (AB), Heineken and InBev (Interbrew and AmBev) for comparison purposes. Because the competitiveness of brewers is related to brewers’ interaction with associated firms in the upstream and downstream value chain, the research also studied a number of core firms in associated industries, particularly in the fields of packaging and logistics. Relevant government organisations were visited for the purpose of understanding the role of the state. The author conducted semi-structured and open-ended interviews throughout the field study. Senior executives at corporate level and in some chosen business units were interviewed with regard to the specific research areas concerned. Senior government officials were interviewed in relation to industrial

Introduction 5 policies. The data and analytical materials were sourced from company annual reports and documents, official websites, government documents, authoritative almanacs such as the China Light Industry Almanac and the China Food Industry Almanac, newspapers and relevant journals. The reason for using such a variety of sources is to ensure the validity and objectivity of the data and materials. The case study was carried out through extensive fieldwork. From October 2003 to September 2004, many research trips were made to Tsingtao Brewery, Tsingtao Municipal Government, Yanjing Brewery, Beijing Municipal Government, State-Owned Assets Supervision and Administration Commission of Beijing Municipal Government, China Resources Breweries, Coca-Cola (China), China Light Industrial Association, China Brewing Industry Association, China Beverage Industry Association, China Packaging Technology Association, and China National Development and Reform Commission. A telephone interview with the senior management of Anheuser-Busch was conducted in February 2004. Interviews with the senior management teams of selected global giant brewers’ China operations were carried out from July to August 2004. Fieldtrips were made in March, May and July 2004 to interview senior managers of large packaging, machinery manufacturing and logistics firms, which included KHS’s China Operation, Crown’s China Operation, Shanghai Baoyi Can Making Co., Zhuhai Zhongfu Industrial Group, Shanghai Zijiang Group, Nanjing Light Industry Machinery Group, and China Merchants Logistics.

Significance of the book Although there is a great deal of literature on big business and industrial policies in general terms, limited endeavours have been made with regard to the current era’s brewing industry, especially the Chinese brewing industry. The study applies the theories of big business transformation, catch-up and state intervention to the Chinese brewing industry in the hope of filling this theoretical gap. It presents empirical evidence of the applicability of the orthodox versus the unorthodox arguments to the current stage of China’s catch-up. The study is the first theoretical work to elaborate the Chinese brewing industry in the globalisation era. It systematically analyses the revolution of the brewing industry, both globally and in China; it evaluates the catch-up potential of large Chinese brewers; and it reveals the dynamic process through which large Chinese brewers attempt to enhance their competitiveness and fight for dominance in the face of global challenge. The perspective from which the Chinese brewing industry is studied here has deep implications for other capital-intensive industries. It contributes to understanding how the global big business revolution challenges emerging indigenous giants of a developing country in a conventional capital-intensive industry. It contributes to development

6

Introduction

implications for the Chinese government in relation to industrial policies regarding the brewing industry and other capital-intensive industries. It offers strategy implications for large multinationals’ cooperation and competition with large Chinese firms. It provides Chinese entrepreneurs who are determined to compete with global giant brewers both in the domestic and in the global market with a better understanding of the global challenge and the competitiveness of their rivals. This, in turn, contributes to their strategic adjustments in reaction to the severe competition from giant rivals.

Chapter structure The book consists of eight chapters. The first three chapters present a literature review of big business, the global big business revolution and state intervention. These three areas, which have strong implications for the catchup of developing countries, are intertwined to construct a theoretical framework within which the empirical studies in the later chapters are explored. Chapters 4 analyses the revolution of the global brewing industry and the challenge imposed on large players from developing countries. Chapter 5 studies the industrial policies on the Chinese brewing industry and their impacts on large players’ catch-up. Chapter 6 discusses the revolution of the Chinese brewing industry and the challenge it faces in the current era. These three chapters present empirical evidence in response to theoretical issues discussed in Chapters 1, 2 and 3. Using an in-depth case study of the two largest Chinese brewers, namely Tsingtao Brewery and Yanjing Brewery, Chapters 7 and 8 analyse the catch-up gaps that large Chinese brewers face, discuss their catch-up strategies and study the role of state intervention. The conclusions and policy implications are drawn at the end, in ‘Conclusions’.

1

Big business and competition

A big business can be identified as follows: (1) its size, number of employees and capital assets are much larger compared with a traditional enterprise; (2) it commonly embodies horizontal or vertical integration of separate plants and differentiated product lines; (3) it usually has multi-plant operations in wide geographical areas, and therefore the multinational corporation (MNC) becomes its prominent sub-category; (4) it owns substantial market shares in particular industries and therefore monopoly or oligopoly is not uncommon; and (5) ownership and control of the firm are separated. The firm is managed by salaried professionals in a hierarchically organised structure (Schmitz 1993). There are two polarised views on the role of big businesses. The neoclassical school prefers SMEs to big businesses because the former in a perfect competition is believed to bring about allocative efficiency, whereas the latter is believed to be more often than not associated with monopoly or oligopoly, and to deviate from allocative efficiency. However, from a historical perspective, the rise and spread of big businesses is argued to be the major engine of the economic transformation of advanced economies throughout the nineteenth and twentieth centuries (Schmitz 1993; Chandler et al. 1997) and plays a critical role in the catch-up process of successful industrialised latecomers (Amsden 1989, 1997; Chang 2002).

Neo-classical view Ever since Adam Smith’s ground-breaking book The Wealth of Nations, mainstream economists have widely held the belief that an optimal allocation of resources can only be achieved under perfect competition in all sectors of the economy. The optimal allocation of resources is parallel to the optimal or Pareto efficiency whereby the sum of the surplus of consumers and producers is maximised (quoted in Lipsey 1992). Under perfect competition, firms are price takers and have little power to influence the market; industries are free to enter and exit; no monopoly or oligopoly exists; the market is made of myriads of SMEs; goods are sold at the most competitive prices at which firms’ marginal costs are equal to marginal revenues (ibid.). Of course, the

8

Big business and competition

perfect competition rarely exists in reality. In this case, mainstream economists believe that at least a competitive, if not perfectly competitive, market should be put in place. SMEs instead of monopolistic or oligopolistic giant firms should be encouraged. It is argued that some shortcomings are inbuilt in monopolistic or oligopolistic firms: (1) Monopolistic firms produce output below their real capacity but at average costs above the minimum possible level. Therefore, they have excess or unused capacity, which is wasteful. This theorem also applies to the situation in which each monopolistic firm produces differentiated products (quoted in Lipsey 1992). (2) Monopolistic and oligopolistic equilibrium deviates from Pareto efficiency because consumers have to give up part of their surplus to monopolistic producers as a result of lower output produced and higher prices charged. More importantly, the losses that consumers give up are not fully obtained by monopolies, but rather become deadweight losses. The social welfare therefore has declined (quoted in Lipsey 1992). (3) Monopolistic and oligopolistic firms are believed to inhibit innovation because they are isolated from potential competition, owing to the high entry barriers that they have created (quoted in Lipsey 1992). (4) Monopolistic and oligopolistic firms are believed to hinder free competition. According to Milton Friedman (1971: 28), these so-called ‘evils’, both in public and in private forms, create ‘the absence of alternatives’ and thereby inhibit ‘effective freedom of exchange’. And (5) big businesses will lose their dominant positions in the long run. In Marshall’s Principles of Economics (1920: 315–16), he expressed the declining process of big businesses as follows: we may read a lesson from the young trees of the forest as they struggle upwards through the benumbing shade of their older rivals. Many succumb on the way, and a few only survive; those few become stronger with every year, they get a larger share of light and air with every increase of their height, and at last in their turn they tower above their neighbours, and seem as though they would grow on for ever and for ever become stronger as they grow. But they do not. One tree will last longer in full vigour and attain a greater size than another; but sooner or later age tells on them all. Though the taller ones have a better access to light and air than their rivals, they gradually lost vitality; and one after another they give place to others, which though of less material strength, have on their side the vigour of youth . . . in almost every trade there is a constant rise and fall of large businesses, at any one moment some firm being in the ascending phase and others in the descending. Marshall (1920: 316) continued by arguing that a large firm might lose its ‘elasticity and progressive force’ and advantages would no longer be ‘on its side in its competition with younger and smaller rivals’. In short, Marshallians argue that big businesses will lose their dominance in the long run and therefore giant firms should by no means be encouraged.

Big business and competition 9

Unorthodox approach In contrast, the unorthodox approach argues that big businesses (often monopoly or oligopoly) do not necessarily create the problems that the orthodox school has claimed. They could, nonetheless, benefit the economy in the long run through the following mechanisms. First, the famous Schumpeterian theorem demonstrates that monopolies do not necessarily trigger higher prices and lower production, nor do they fail to innovate. As a matter of fact, through a process of creative destruction (Schumpeter 1976), monopolies or oligopolies are more conducive to growth than perfect competition. This process takes three steps: (1) Monopolies have superior methods which are either not available to the mass competitors or not available to them easily; they enjoy better organisational efficiency and obtain better financial resources. Therefore, this kind of large-scale unit control makes large production with lower prices possible. (2) Big concerns (businesses) are capable of production innovation through large scale R&D, which brings them higher profits and further stimulates firms to seek monopolistic profits via innovation. In contrast, small firms under perfect competition are inferior in technological efficiency. Schumpeter holds that SMEs’ endeavours to improve methods of production waste capital because they are after all unlikely to evolve. (3) An optimal efficiency is not static but rather the consequence of the long-term technological process. Therefore, even if the short-term ‘misallocation’ of resources is indeed caused by monopolies, this hindrance can be overcome in the long run when innovations led by them bring about increasing outputs and higher economic growth. Schumpeter demonstrates that: perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency. It is hence a mistake to base the theory of government regulation of industry on the principle that big business should be made to work as the respective industry would work in perfect competition. (Ibid.: 106, emphasis added) Second, some argue that monopolies or oligopolies do not necessarily impede innovation from an incentive point of view. Both monopolistic firms and firms under perfect competition are motivated to reduce costs by innovation because the lower the costs, the higher the extra profits that are enjoyed. Moreover, no monopolies or oligopolies can afford to rest on their laurels because entry barriers might be broken by newcomers. Therefore, in the long run, they are equally motivated to innovate (quoted in Lipsey 1992). Third, it is believed by some scholars that monopolistic or oligopolistic firms are in fact more conducive to innovation. In perfect competition, copying innovation is relatively easy and hence firms enjoy a shorter period of extra profits from innovation, whereas monopolistic or oligopolistic firms

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enjoy a longer period of extra profits. Consequently, the penalty for not innovating is indeed lower under perfect competition (ibid.). Fourth, some hold that, in an oligopolistic situation, competition not only exists, but also can be fierce. Game theory suggests that oligopolies are in an n-person variable sum game which means that they are strategically interdependent – everyone’s optimal action depends on the actions of rivals. Collusion among rivals is unlikely to be successful or long-lasting, implying that competition among oligopolies not only exists, but also can be severe in some circumstances (Friedman 1977). Scherer (1996) points out that monopolistic or oligopolistic competition exists in a wide array of industries in the United States. Whether or not oligopolies and monopolies cause lower welfare depends on individual industries. Nolan et al. (2002) demonstrate that, in the era of the global big business revolution, the number of players in industry after industry has fallen dramatically and global competition among oligopolistic firms has been vastly intensifying. This phenomenon precisely reflects Schumpeter’s argument that, when perfect competition is not available and when an industry is controlled by a few big concerns, they in themselves fight the process of creative destruction (Schumpeter 1976: 96). Finally, in terms of a giant firm’s limit, Alfred Marshall’s explanation mentioned previously is believed to be far from convincing (Nolan 2001). Apart from a few giants in some newly emerged sectors (e.g. the semiconductor), most of the current giant MNCs have their roots dating back to the nineteenth century. Edith Penrose (1995) even claims that a firm’s size has no theoretical limits because a firm can always expand with the aid of managerial resources and research capabilities. In conclusion, neo-classical and unorthodox schools have polarised views on the role of big business. Consequently, it has polarised implications for latecomers: if the neo-classical logic is adopted, latecomers may advocate free competition and then SMEs should play a dominant role. In contrast, if the unorthodox logic is adopted, latecomers may construct indigenous big business groups to catch up. While the debate is inconclusive and the contradictory views bring confusions, it is highly necessary and relevant to examine the role of big businesses from a historical perspective.

A historical perspective In recent decades, big businesses have drawn the serious attention of many scholars, notably Amsden (1989, 1997), Schmitz (1993), Chandler (1997, 1999), Chandler et al. (1997) and Nolan (2001, 2004a, 2004b). Based on an extensive exploration of the industrial revolution in major advanced economies and successful late-industrialised economies, Alfred Chandler et al. (1997: 24) conclude that big businesses (in most cases monopolies or oligopolies) are the engine of modern economic growth and play a ‘central role in the dynamic growth of the international economy and economic transformation of all major nations’ (emphasis added). He and others argue that:

Big business and competition 11 among the new forms of large enterprises, manufacturing firms have been at the forefront not only of capital formation and productivity growth but also of technological progress and knowledge augmentation. This is not simply because modern economic growth on a global scale has taken the general form of industrial development. It is also because manufacturing enterprises, especially those in capital-intensive and knowledge-intensive industries, have historically accounted for most of the research and development which became essential to continuing technological innovation in the twentieth century. (Ibid.: 24) In contrast, SMEs as a whole play a less significant role. However, SMEs are indispensable in facilitating growth in labour-intensive and service industries as well as in clustering networks around large firms in capital- and knowledge-intensive industries (ibid.: 56). Four points shed light on how big businesses enhance the national wealth of advanced economies. First, in order to reduce costs and improve efficiency by exploiting economies of scale in capital-intensive manufacturing industries, a firm must build up plants with a large size. This requires huge sunk costs that only large firms can afford. Meanwhile, the advantage of cost minimisation cannot be realised unless a steady flow of raw material both from suppliers and in the production process is maintained to guarantee effective capacity utilisation (Chandler 1999). This calls for a combination of large capital investment and a strong organisational capability through which each single link in the value chain can be efficiently knotted together. Small firms are less capable of doing so (ibid.). Large enterprises account for dominant shares in the capital formation of industrialised countries and in facilitating the technological process to reduce production costs. This explains why oligopolies are very common in capital- and knowledge-intensive industries (Chandler 1999). Second, a big business is the nexus of the whole value chain (Chandler et al. 1997: 26), the ‘spider of an industrial web’ (Ruigrok and Van Tulder 1995: 65) and a core systems integrator (Nolan 2001: 38). It therefore has significant spillover effects upon associated industries in the upstream and downstream value chain and hence on the whole economy. For instance, the beverage giant Coca-Cola consumes around 30 per cent of global can production and accounts for 25 per cent of the consumption of the world’s milled aluminium (Nolan 1999: 48). Coca-Cola’s influence in Europe is almost six times its own size (ibid.: 45). It is argued that MNCs create greater global welfare and better efficiency by transmitting knowledge, technology and resources efficiently across borders (Raymond Vernon, quoted in Cohen et al. 1979: 7). Third, large enterprises invest much more than SMEs in improving intangible (organisational) assets such as human capital, a primary factor in determining firms’ competitive advantages (Chandler et al. 1997).

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Fourth, big businesses have become the main force behind technological advances because of their heavy R&D investments – a crucial competitive advantage in knowledge intensive industries (ibid.). Since the second industrial revolution in the late nineteenth century, the United States has been standing at the vanguard of technological revolutions and leading the global economy. Europe has been America’s close follower. After the Second World War, Japan quickly established itself as an advanced economy. In recent decades, the global playing field has witnessed another spectacular force, South Korea, which has created a legacy of catch-up. The United States Before the First World War, capital-intensive and scale-dependent industries drove the US economy. In the late 1870s, the appearance of modern transportation and communication networks powered by steam and electricity made the exploitation of economies of scale possible. Domestic big businesses emerged in chemical processing industries (e.g. food, steel, oil) and many quickly managed to dominate the global market. In the food industry, Quaker Oats, Heinz and Coca-Cola became national giants and then quickly built factories abroad. In the steel industry, the market was in the hands of a few oligopolistic firms such as United States Steel Corporation – a combination of the Carnegie Company and Federal Steel. In the oil industry, Rockefeller’s Standard Oil Company established its monopolistic position by acquiring domestic rivals. The world oil market was dominated by two or three giant MNCs including Rockefeller. At the end of the nineteenth century, almost every chemical processing industry in the US was controlled by big businesses (Chandler 1997). Science-based industries were established and developed simultaneously with the emergence of large firms. By the mid-1890s, General Electric (GE) and Westinghouse controlled the entire US electrical industry. The world market was dominated by GE, Westinghouse and two German firms, Siemens and AEG. The telecommunications industry was dominated by Bell and, later, its successor American Telephone & Telegraph (AT&T). By 1914, AT&T had built up a solid presence in the UK, Germany, France, Italy, Russia and Canada. These science-based industries, at the mercy of large oligopolies, became a major driver of transforming the US economy and establishing the leadership of the US in the world economy. In addition, these big businesses had strong spillover effects upon the whole economy: they created thousands of jobs, provided niche firms with opportunities to supply parts, and invented new products to supply power (the replacement for steam) and light (the replacement for kerosene) that had tremendous impacts on other industries and the economy as a whole. Without big businesses, it would not have been possible for the US to emerge as a leading power of that era (Chandler 1997).

Big business and competition 13 Not only did big businesses have substantial impacts on production processes and technological enhancement, but they also impacted on organisational reforms. They were the earliest learning bases where new organisational structures came into place to embody new technologies. For example, GE built up the nation’s first private industrial research laboratory which developed a series of advanced products of that era, ranging from tungsten filaments to X-ray equipment; and these products made exploiting economies of scope possible (ibid.). The Interwar era (1914–1950) continued to witness the strength of the US economy, and big businesses continued to make significant contributions. The major innovation in this period was the internal-combustion engine, whose commercialisation led to the boom in the auto vehicle industry. By 1935, the so-called ‘big three’ – General Motors, Ford and Chrysler – dominated 90.9 per cent of the US auto market and held around 70 per cent of the world market (Chandler 1997: 78). In the petroleum industry, the global market was controlled by five American firms, one British firm and one Anglo-Dutch firm. In science-based industries such as electrical equipment, GE, Westinghouse and AT&T became the predominant power. The chemical industry witnessed the emergence of giant firms such as Du Pont, Dow and Monsanto (Chandler 1997). During this period, the giant firms heavily invested in R&D and paid serious attention to organisational reforms, which in turn made a profound contribution to the US economy. For instance, innovations in the chemical industry such as rayon, cellophane and pigments, etc. not only made the exploitation of economies of scope possible, but also laid a solid basis for the growth of the polymer and petrochemical industries in which the US took the lead after the Second World War (ibid.). After the Second World War, the global economy witnessed a boom in knowledge-based industries, of which the information technology (IT) industry stood at the forefront. Owing to the rapid growth of IBM, the US became the largest computer exporting country in the 1970s. The rapid increase in computer production triggered the boom of a much wider array of industries such as semiconductors, components and software. When microcomputers started to gain popularity in the late 1970s, three American giants – IBM, Apple and Compaq – quickly dominated the microcomputer industry in both the US and the global market. Intel became the world number one in the microprocessor industry, and Microsoft emerged as the global giant in the software industry (Chandler 1997). In Fortune’s 2002 ranking of Global 500 largest corporations, American firms dominated almost all high-tech industries (in turnover): in computer and data services, the top two were American firms; in computer software, Microsoft and Oracle were the largest; in computer office equipment, six out of the top ten were American firms; in the field of semiconductors, Intel and Solectron took the lead; and eight out of 11 giants in aerospace and the defence industry were American firms. In brief, the US companies accounted for 39 per cent of Fortune’s Global 500 and

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Big business and competition

their revenues represented 42 per cent of those generated by the Global 500 (Fortune 2002). In the polymer/petrochemical industry, with the aid of a series of initiatives such as corporate restructuring, enormous R&D spending and the introduction of advanced production lines, American firms became highly competitive in the 1970s and the 1980s. A few giants such as Du Pont and Monsanto not only dominated the US markets, but also went truly global. The polymer/petrochemical industry and the aerospace industry became the largest contributors to US export revenues of that era (Chandler 1997: 87). The American experience suggests that the emergence and evolution of big businesses played a critical role in stimulating and commercialising technological innovations, transforming the US economy and establishing America’s leadership in the world economy. Europe In the leading European economies, namely Germany, the UK and France, big businesses had a diversified national experience. SMEs were believed to be popular, but recent studies (e.g. Cassis 1997) suggest that big businesses have indeed taken leading roles in a wide range of industries in these economies since the beginning of the twentieth century. Before the First World War, big businesses developed substantially in the UK, much more so than in Germany and France. They became dominant in a diverse range of industries in the UK, such as textiles, food, drinks and tobacco, electrical engineering, chemicals, finance, trade, transport and communications, as well as heavy industries (i.e. coal, iron and steel). In the banking industry, local and provincial banks grew into City-based banks covering businesses all over the UK. Twenty private banks merged in 1896 to form Barclays Bank (Sykes 1926; Cassis 1994). The City of London became the world’s financial centre. In the consumer goods industries, Imperial Tobacco was ranked as the largest British company in 1907. Large brewers such as Guinness, Bass and Whitbread also featured amongst the largest British firms of that era. In the oil industry, the Royal Dutch Shell Group became the second powerful group globally, alongside Standard Oil (Cassis 1997). Big businesses overwhelmingly dominated the heavy industries and finance industry in Germany, and the trade and finance industries in France. Unlike British banks, which launched large-scale mergers and acquisitions (M&As), the French banks grew big by setting up nationwide branches, whilst the German banks (e.g. Deutsche Bank) increased their influence by crossholding arrangements and internal growth that was facilitated by accumulated profits. Germany was the global leader in heavy industries, where big businesses dominated. In 1913, the Ruhr alone accounted for 65.5 per cent, 42.5 per cent and 53.6 per cent respectively of Germany’s coal extraction, pig iron and steel production (ibid.: 15). Five companies – Krupp, GBAG,

Big business and competition 15 Deutsch-Luxemburg, Deutscher Kaiser and Phoenix – were the major players in the German heavy industries. Meanwhile, Schneider and de Wendel were their leading counterparts in France. In the electrical and chemical industries, three countries all had a high level of concentration. In Germany, Siemens (founded in 1847) and AEG (founded in 1883) seized 70 per cent of the electrical engineering market. The ‘big three’ – BASF, Bayer and Meister (all founded in the 1860s) – controlled about 60 per cent of the world’s organic chemistry production, such as dye products (ibid.: 25). In France, Saint-Gobain, founded in 1665, accounted for 41 per cent and 47 per cent respectively of the country’s sulphuric acid and super-phosphate production. Thomson-Houston, founded in 1893 by the American GE and French entrepreneurs, dominated the French electrical engineering industry and took a leading position in Spain, Portugal and Italy, as well as in France’s colonial territories. During the Interwar era, big businesses in the UK continued to expand and grow in the fields of coal, iron, steel, shipbuilding, textiles, chemicals, electrical engineering, automobiles, rubber and aerospace, as well as in the service industries. For instance, the ‘big three’ automobile companies – Ford Motor Company (England), Morris and Austin, accounted for over 60 per cent of the British automobile industry in the 1930s. Dunlop, founded in 1889, dominated the rubber and tyre industry in the UK, Germany and France. These large industrial groups were substantial employers and required a large variety of components in bulk from their associated industries. The banking industry entered a period of consolidation, during which the ten largest banks merged into five giant banks – Barclays Bank, Lloyds Bank, the Midland Bank, Westminster Bank and National Provincial Bank (Sykes 1926). Such a consolidation pace made British banks much larger than their European rivals. Moreover, retail industry also made rapid growth. Marks & Spencer, founded in the 1880s, developed to become one of the UK’s largest retail chains. Despite the fact that German industries underwent an overhaul after the two world wars, big businesses continued to dominate in the fields of heavy industry, chemicals, electrical engineering and automobiles. For instance, the dominance that Siemens and AEG built up before the two world wars did not diminish. Instead they controlled – both directly and indirectly – about 50 per cent of Germany’s electrical engineering industry after the war (Cassis 1997: 51). The media and publishing industry, meanwhile, was dominated by Mosse, Ullstein and Scherl. In France, big businesses grew rapidly in the fields of electrical engineering, chemicals, automobiles, oil and rubber. Peugeot, Renault and Citroën obtained substantial global market share. The boom of the automobile industry also stimulated a corresponding growth in associated industries and the emergence of big businesses in these industries. For instance, Michelin, Dunlop and Continental became the global oligopolies in the rubber industry (Cassis 1997).

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After the Second World War, particularly after the 1960s, industrial gigantism became widespread in Europe, partly due to far-reaching M&As and partly because of state-encouraged national campaigns to encourage competition with American big businesses in the global marketplace. ‘National champions’ in many industries were encouraged by the French government to form gigantic firms: in the automobile industry, Peugeot acquired Citroën in 1974; in the banking industry, two large banks merged in 1966 to form the largest domestic bank, BNP. In the UK, the two smallest banks within the aforementioned ‘big five’ merged; the aerospace industry was rationalised in the late 1970s and concentrated within the hands of British Aerospace; the automobile industry witnessed the formation of British Leyland through the merger between Leyland and British Motors. In Germany, major reorganisation took place in the iron, steel, coal and automobile industries (ibid.). In summary, the experience of the UK, Germany and France in the last century suggests the substantial role played by big businesses and a high level of consolidation in many industries, especially those strategic industries. Japan Japan successfully transferred itself from a poor agricultural country with limited natural resources to a highly industrialised economy. Its take-off can be traced back to the 1868 Meiji Restoration in which large private enterprises (zaibatsu) played a major role in industrialising labour-intensive industries such as cotton spinning, sugar refining and papermaking. By the late 1930s, Japan was already able to compete in the global market in these industries. During the Interwar time, capital-intensive industries underwent rapid growth as a result of the large amount of military orders. Consequently, the share of capital-intensive industries (in themselves dominated by zaibatsu) in total industrial outputs soared from 34.6 per cent in 1930 to 76.8 per cent in 1945 (Morikawa 1997: 311). After the Second World War, Japan quickly established itself as one of the most competitive economies. Many factors contributed to this success (e.g. the lifetime employment system, exports-led policy, etc.) but the most significant contributors lay in the role of the Ministry of International Trade and Industry (MITI) and Japanese large enterprises. In the light of a series of MITI-led policies, such as high tariff barriers to protect infant industries, export promoting subsidies, and MITI-assisted mergers aimed at enhancing the economies of scale of large firms, the competitiveness of Japanese big businesses was significantly improved and Japanese giants were capable of competing on the global playing field (Johnson 1982). Throughout the 1950s and the 1960s, large Japanese firms made huge efforts to modernise equipment and invest in R&D (Morikawa 1997), which dramatically strengthened Japan’s competitive edge from the 1960s to the 1980s. Japanese MNCs in a wide array of industries, ranging from capitalintensive industries such as steel, electronic appliances and automobiles to

Big business and competition 17 knowledge-intensive industries such as computer games and semiconductors, became highly competitive (Morikawa 1997). In the ranking of the world’s largest 500 firms, the number of Japanese firms went up from 31 in 1962 to 88 in 2002 (Chandler 1997: 53; Fortune 2002). However, Japanese firms have encountered serious challenges from rejuvenated American and European firms since the 1990s. Enormous amounts of literature have addressed the issue from various angles. For instance, some argue that public shareholding (e.g. the Anglo-Saxon model) is superior to the cross-holding, and others accuse the lifetime employee system, etc. Although these issues, which are beyond the scope of the discussion here, do exist, the significant role that Japanese big businesses have played in the trajectory of the country’s industrialisation should by no means be neglected. South Korea South Korea was a poor colony country before the Second World War. It did not start the catch-up journey through industrialisation until as late as the 1960s. From 1962 to 1989, Korea’s GNP grew at a high annual rate of over 8 per cent (Amsden 1997: 337). Within 40 years, South Korea developed into the most industrialised economy in the developing world, and Korean giant firms have gained competitive edges in many industries. Strong government intervention and the role of big industrial groups, namely chaebols, are believed to be major factors contributing to Korea’s remarkable success (Amsden 1989, 1997). These two forces go hand in hand, constituting a unique form of ‘state entrepreneurial capitalism’ (Amsden 1997: 336). The logic of constructing indigenous big businesses to catch up has both ideological and objective reasons. On the one hand, the Korean president, Park Chung Hee, firmly believed in the central role of big businesses in catching up; on the other hand, owing to limited natural resources and lack of access to the most advanced technologies, forming indigenous big businesses in labour- and capital-intensive industries perhaps became the only solution (Amsden 1997). According to Amsden (1997: 336), chaebols sit ‘at the heart of South Korea’s industrial transformation’ and play a critical role in industrialising the Korean economy. This is no exaggeration. The share of the top ten business groups in Korean GNP rose dramatically from 15.1 per cent in 1974 to 30.2 per cent in 1978 and 60.9 per cent in 1988 (ibid.: 339). By the 1990s, Korean chaebols established a solid presence in the global market in a wide array of industries ranging from steel, shipping, metallurgy and automobiles to electronic household appliances and semiconductors. In 2002, 11 Korean companies were included in Fortune’s Global 500 (Fortune 2002), which outshone the performance of all other late-industrialised countries. The mechanism of chaebols’ contribution can be summarised as follows. First, aided by the Korean government, chaebols invested heavily in physical facilities to fully exploit economies of scale. From 1973 to 1987, the ratio of

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Big business and competition

investment in machinery and equipment as a percentage of Korean GNP was much higher than the same ratio in the United States, West Germany and Japan. The figure in Korea was 10.8 per cent in 1977, 13.5 per cent in 1979 and 11.8 per cent in 1987 versus 4.7 per cent, 4.7 per cent and 6.0 per cent in Japan and 3.6 per cent, 3.9 per cent and 3.9 per cent in the US, respectively (Amsden 1997: 352). Second, whilst pursuing an export-led and import-substitution strategy, the Korean economy had to rely heavily upon chaebols to fulfil domestic demands and at the same time to compete in the global market. During the catch-up years, an average of 30 per cent of Korea’s GNP came from exports led by chaebols. For instance, in 1994 alone, the largest four chaebols, namely Hyundai, Samsung, LG and Daewoo, accounted for 57 per cent of the country’s exports (quoted in Amsden 1997: 353). Third, the performance of chaebols was under the Korean government’s close supervision. Strict discipline criteria such as performance ranking, price surveillance, credit allocation conditionality and performance-attached subsidies were set up to encourage competition among chaebols. Therefore, chaebols were not only strongly self-motivated but were also under huge exogenous pressures to improve their performance. Consequently, ‘oligopolistic sectors were supported for lengthy periods but ultimately became competitive internationally’ (Amsden 1997: 365). In addition, the state entrepreneurial capitalism system also enabled the Korean government to manoeuvre the direction and speed of the industrialisation transformation led by chaebols (Amsden 1997). Fourth, chaebols formed organisations which were in favour of technology assimilation and the increase in productivity and improvement in quality. They made serious efforts to develop plant-level human resources. For instance, the compound annual growth rate (CAGR) of the increase in engineers from 1960 to 1980 was 12.3 per cent versus a 4.1 per cent CAGR of the increase in managers (Amsden 1997: 357). Nonetheless, despite their significant contributions to the Korean economy, chaebols have serious weaknesses as well. The diversification strategy has been widely argued to be a serious competitive disadvantage in the face of competition from Anglo-Saxon MNCs which have pursued a strategy of focusing on core businesses since the 1990s. This might, to a certain extent, shed light on how other latecomers should avoid similar weaknesses while fostering their own indigenous big business groups.

Conclusions and implications The neo-classical and unorthodox schools have polarised views regarding big business and competition, which has strong implications for developing countries. Since the collapse of communist systems in the former Soviet Union and East European communist countries, the Washington Consensus has been broadly advocating the mainstream thought. Developing countries

Big business and competition 19 are advised to encourage SMEs instead of large enterprises (Blanchard et al. 1993). It is recommended that state intervention should be reduced as much as possible. It is argued that the success of East Asian economies is attributable to market-friendly measures and the prosperity of SMEs (WB 1993). For China and other transitional economies, the Washington Consensus pays little attention to forming large indigenous businesses to compete on the global playing field (Nolan 2001). Such a view is enthusiastically echoed by many mainstream Chinese scholars. According to the unorthodox view, in contrast, big businesses stand at the centre of the industrialisation process of advanced economies and are critical for the catch-up process of latecomers. Their significant role is not just confined to realising economies of scale or scope. More importantly, big businesses play a significant role in learning, R&D, technological innovation and commercialisation as well as in organisational reforms. Their substantial spillover effects upon the whole economy cannot simply be replaced by myriads of SMEs. They were, are and will continue to be the major force propelling the transformation of an economy. The debate has substantial significance for China, which is cautiously searching for its future direction, whilst at the crossroads of a critical transitional period. Clearly, one school of thought advises a mainstream-proposed path whereby SMEs are highly encouraged to dominate the economy and giant businesses are discouraged; the other school of thought proposes an unorthodox approach whereby large national champions are encouraged to compete with global giants. Which path is most relevant to China’s current economic and political situation? Which way should China go?

2

The global big business challenge and catch-up

Historically, three business revolutions have had profound impacts on the global economy. The first one took place in the late 1800s and the early 1900s; the second one appeared between the 1920s and the 1950s; and the third one covered the period from the 1960s to the 1980s (Porter 1986). Driven by trade liberalisation, capital liberalisation, privatisation and the rapid development of advanced IT, the current big business revolution since the 1990s has surpassed the previous ones in many respects. However, the most striking feature lies in the changes associated with big businesses whose competitive advantages have been enhanced so tremendously that the latecomers’ catch-up task has become unprecedentedly difficult (Nolan 2001).

Core business Since the 1990s, giant firms have been narrowing down the range of their businesses to a few focused activities in order to improve competitiveness. Non-core businesses have been divested industry by industry and by firm after firm. Tremendous firm-wide resources, such as R&D and marketing, have been skewed towards a few chosen business areas and core brands that account for the lion’s share of giant firms’ returns (Nolan 2001).

Industrial concentration The industrial concentration is embedded in the nature of the capital. Large firms are in general more advantaged than small firms. In the early stage of modern capitalism, Karl Marx (1961: 626–7) had noticed that capital tended to concentrate in successful industrial capitalists’ hands because the larger capitals (firms) had advantages such as larger production scales and cheaper products. Larger capitals (firms) could squeeze out smaller ones or individuals in the first place when the minimum capital requirements were beyond the means of smaller ones. Therefore, Marx pointed out that a tendency towards ‘attraction of capital by capital’ led to the centralisation of the capital (ibid.). Since the late nineteenth century, there has been a continuing process of industrial concentration, through which large firms have grown into global

Global big business challenge and catch-up 21 giants. Driven by the rising economies of scale in production, improved transportation and advanced communication facilities, the first modern industrialisation and capital concentration took place in the late 1800s and early 1900s. Many industries expanded from their local areas to become regional and then began globalising. The earliest global big businesses such as Ford, Singer and Gillette were primarily from the US and Europe. The second modern industrialisation from the 1920s to the 1950s was quite lukewarm owing to the Second World War and a corresponding nationalism campaign (Porter 1986). In the third modern industrialisation between the 1960s and the 1970s, the concentration strengthened at the global level. This was to a large extent due to American firms’ increasing global dominance and European firms’ quick recovery and catch-up. In fact, the American MNCs gained leading positions in a wide array of industries. European MNCs became close followers, and giant Japanese firms emerged as competitive challengers (Porter 1986). Looking back at the global consolidation trend, the two decades right after the Second World War witnessed a very high level of global consolidation led by American and European firms. Such a trend, according to industrial economists, occurred by and large because giants from other economies, in particular Japan and newly industrialised economies (NIEs), had not grown large and competitive enough to participate in the global consolidation. In the 1970s and the 1980s, with the catch-up of Japan and NIEs in Asia and Latin America, the global consolidation led by American and European firms dropped. In the current epoch of the global big business revolution, the worldwide concentration has become unprecedented in terms of both its magnitude and its speed. The extraordinary speed and scale of cross-border mergers and acquisitions (M&As) have significantly facilitated MNCs’ global expansion (Nolan 2001). There is an unprecedented increase in the intensity of oligopolistic global competition. The current era has witnessed a ‘full flowering of the in-built tendency of the capitalist system to concentration’ (Nolan et al. 2002: 91). For instance, the value of M&A transactions went up from USD156 billion in 1992 to USD290 billion in 1994 and then to USD1,100 billion in 1997 (MSDW 1998: 4). It reached a further peak of USD2,000 billion in 1998 and USD3,300 billion in 1999 (Nolan 2001: 38). Unlike the M&A mania in the 1980s in which financial buyers often bought companies and then sold out in exchange for short-term profits, the 1990s merger fever was mainly driven by companies in similar industries in pursuit of higher market shares, pricing power and economies of scale (Fortune 1999). The concentration takes place almost in every industry, from high-technology sectors such as aerospace, defence and pharmaceuticals to capital-intensive sectors such as automobiles, mining and beverages, and then to labour-intensive sectors (Nolan 2001). Large MNCs have become the most important and powerful globalising force and the major locus of transnational economic and political practices (Sklair 2001, 2002).

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Global big business challenge and catch-up

In addition, the concentration among giant MNCs has led to a correspondingly intensified concentration among their suppliers (Nolan 2001). In order to efficiently leverage inputs, most leading MNCs pursue the global procurement strategy. Only those suppliers that have large-scale, powerful technological potential and strong global marketing capabilities can be aligned as long-term strategic suppliers of large MNCs. The automobile industry stood at the forefront of this exercise and has been vigorously cutting first-tier suppliers (quoted in Nolan 1999: 43–6). This intense pressure has not only resulted in massive consolidation among upstream suppliers, but also caused consolidation among downstream service providers. In order to cope with a wider range of demands from the leading MNCs, the financial industry has gone through a dramatic consolidation as well (Nolan 1999, 2001). As a result, large MNCs across the board dramatically increased their market shares and strengthened their bargaining power in the value chain, which has resulted in the significant enhancement of their competitiveness (ibid.).

Value chain integration and systems integrators The theory of the value chain has been explored in a large body of business literature (e.g. Porter 1986; Gereffi 1994; Ruigrok and Van Tulder 1995; Dicken 1998; Sturgeon 2002; Gereffi and Sturgeon 2004). Since the 1960s, global outsourcing has become a significant phenomenon in labour-intensive, capital-intensive and high-tech industries. The production activities in the value chain have increasingly organised across different firms and nations (Gereffi and Sturgeon 2004). Leading global suppliers with headquarters in developed countries are extending their operations globally. Some developing countries, in particular Asian countries such as Taiwan and China, have emerged as supply bases (Sturgeon 2002; Gereffi and Sturgeon 2004; Sturgeon and Lester 2004). Large firms in the globalisation era are increasingly engaging in highly complicated cross-border activities that involve a large array of suppliers, partners and customers. This creates global value chains (Gereffi and Kaplinsky 2001; Gereffi and Sturgeon 2004) which take the form of ‘buyer-driven’ chains (Gereffi 1994) and ‘producer-driven’ chains. The complexity of transactions concerned, the ability to codify these transactions, and the firms’ capability in the supply-base are the key determinants to the power distribution in the global value chain, which can be viewed as ‘market’, ‘modular’, ‘relational’, ‘captive’ and ‘hierarchical’. For instance, in the captive value chain, lead firms exert direct power on suppliers; in the relational value chain, power distribution between the lead firms and suppliers is more balanced; in the hierarchical value chain, lead firms become the dominant party. These three determinants are dependent on the technological specifications of given products as well as on social infrastructures such as the development, dissemination and adoption of industrial standards and codification schemes. This leaves room for state intervention and corporate strategy (Sturgeon 2001).

Global big business challenge and catch-up 23 In the epoch of the global big business revolution, the competition amongst large firms is ferocious. This is not just because of the fight for survival. Pressure from shareholders who demand growing businesses and continuous returns is also extremely high. Simple comparative advantages such as factorcost differences that arise from production locations cannot be sustained for too long (Porter 1986). Nor does the advantage of the scale of economy alone guarantee a firm’s leading position. Factors such as technology, the scale of production and location planning must be closely interrelated to determine the efficiency of the production process (Smith 1981). More importantly, to maintain a sustainable leading position, a firm must coordinate within the value chain (Porter 1986). Thus the ability to manage the value chain becomes an important factor in determining competitiveness. Peter Nolan’s (2001) recognition of big businesses being the core systems integrators and external firms sheds light on the dynamics of global competition. According to him, global giant firms, as core systems integrators, stand at the centre of the value chain that is comprehensively planned and cocoordinated by these giant firms. A giant MNC becomes the ‘core of networks of supply and distribution’, or ‘a spider of an industrial web’ (Ruigrok and Van Tulder 1995: 65). The core systems integrators not only plan raw material procurement from strategic first-tier suppliers and arrange global distribution and logistics, but they also conduct R&D and develop global brands. Across all these activities, they ‘interact in the deepest, most intimate fashion with the major segments of the value chain, both upstream and downstream’ (Nolan 2001: 42). The intimate relationship between systems integrators and upstream suppliers can be summarised as follows: 1

2

3

Leading first-tier suppliers carefully plan their locations in accordance with locations of the core systems integrator (Nolan 2001). This is typically common in the automobile industry. For instance, leading component suppliers are located surrounding the assembly firms in the same industrial zone in order to deliver goods ‘just in time’ or ‘just in case’ (Ruigrok and Van Tulder 1995: 53). There is an increasing trend for aligned suppliers to provide goods and services within the premises of the core systems integrators (Nolan 2001). For example, some data providers have employees physically sitting in investment banking firms to provide in-time service. The R&D plan and product development of the leading first-tier suppliers closely correspond to, coordinate with and are supervised by the core systems integrators. For example, the beverage giant Coca-Cola works closely with core suppliers in packaging innovation. Suppliers are under consistent pressure to meet Coca-Cola’s demands for lighter, cheaper, attractive, user-friendly and environmentally friendly packaging. The benefits of this close coordination are straightforward and compelling: Coca-Cola stands at the vanguard of the beverage packaging innovation; its packaging style has evolved in a revolutionary fashion; unit

24

Global big business challenge and catch-up

4

costs are saved because of a continuous drop in the weight of cans; and packaging innovations have also helped Coca-Cola to build up a vivid and strong global brand image (Nolan 1999). Aided by advanced IT, suppliers keep up instantaneous communication with the core systems integrators regarding product specifications (e.g. arrival schedules) so that the inventory level of the core systems integrators can be kept at a minimal level (Nolan 2001).

The role of the core systems integrators also extends to the downstream distribution chain: (1) they adopt the most advanced IT to monitor the performance of goods sold through distributors; and (2) in some industries (e.g. consumer goods) core firms closely coordinate with logistics firms in order to cut transportation costs to a minimal level. They closely coordinate with distribution channels such as grocery stores, supermarkets, cinemas and fast food restaurants to ensure a better control of the end markets. The strong capability of integrating the downstream value chain significantly speeds up the selling process (Nolan 1999, 2001). Clearly, the function of global giant firms has developed from direct manufacturing towards a ‘brain’ function – systematically integrating resources in the value chain and across the world. They are actively involved in and significantly affect associated businesses in both the upstream and the downstream value chain. As a result, a much wider array of firms and sectors beyond the production domains of the core systems integrators are closely intertwined. In this sense, the boundary of the core firm is blurring. The modern global giant firms become ‘external’ firms (Nolan 2001: 39–44). In summary, the strong capability of integrating various segments in the value chain provides the global giant firms with tremendous competitive advantages: first, the operating costs are reduced as a result of in-time delivery and a lower inventory level; second, giant firms obtain a guarantee of homogenised inputs whose quality is high but price is relatively low; third, the integrated logistics and distribution channels enable giant firms to grab market share more easily and to manage cash flow more effectively; fourth, a tight control of the up- and downstream value chain also creates huge entry barriers for latecomers; and finally, giant firms are endowed with great bargaining power in the value chain, which, as Andersen and Lundvall (1988) have pointed out, reduces the prospects for new entrants and influences the creation of substitutes.

Competitive advantages The competitive advantages of large firms were noticed at the very early stage of modern capitalism. Karl Marx (1961: 626) pointed out that ‘the battle of competition is fought by cheapening of commodities’; and ‘larger capitals beat the smaller’ because the former are more likely to produce cheaper commodities. Alfred Marshall (1920: 282–3) presented a much more detailed

Global big business challenge and catch-up 25 explanation by pointing out that large firms buy materials in great quantities and therefore cheaply; pay lower transportation fees; offer convenience to customers; and have better chances to recruit exceptional human resources. A systematic illustration of the competitive advantages can be attributed to Michael Porter (1990: 35), who concludes that five factors, namely the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers and the rivalry amongst the existing competitors, determine the competitiveness of industries and firms. From the firm-level strategy point of view, a few factors, in particular the campaign for dominance, brand management and technologies, are highly important in obtaining these advantages. Market share Geographical expansion appears to be inevitable once a firm grows to a certain size. Lenin pointed out that firms overcome the conflict between the production capacity and the consumption capacity either by deepening domestic markets or by extending overseas markets. The expansion of capitalist MNCs was regarded as a characteristic of imperialism (quoted in Cohen et al. 1979: 21). Some later Marxists such as Amin regarded foreign market expansion as a means of conquering the tendency towards declining profits and as a force causing the periphery (developing countries) to be controlled by the centre (developed countries) (ibid.). Hymer (1972) argued that MNCs relied on two intertwining ways to cope with the competitive threat: one was the continuous effort in developing new products; the other was prolonging the product cycle by obtaining overseas markets. He observed (1979b) that large multinationals consciously moved towards the global playing field at a speed much faster than other corporations and even governments,1 and foresaw giant firms’ dominance and a corresponding increase of industrial concentration. Vernon (1966) provided a detailed explanation on the product life-cycle mechanism. According to him, sales of any product followed a systematic path – early development, initiation, growth, saturation and decline. Sales volume tended to be low at the development and initiation stages, and peaked at the growth stage. When it reached the saturation and decline stages, the firm had to look for other markets where the same product was still new. In reality, the fight for market share has been intensifying. The merger mania, the core business strategy, the value chain integration, the huge R&D endeavours and the adoption of advanced technologies, as well as global brand management, have dramatically assisted giant MNCs in grabbing global market shares. In fact, the increasing global dominance is not only an inevitable consequence of the global big business revolution, but also in itself a substantial competitive advantage. Giant MNCs have squeezed out SMEs and taken dominant positions in a large number of industries. For example, three aero-engine producers make up the entire global market; one company

26

Global big business challenge and catch-up

(Microsoft) accounts for 85 per cent of global PC operating system sales; two companies produce 96 per cent of electronic games; six companies capture over 70 per cent of the global automobile market; three companies produce 87 per cent of gas turbines globally; and one soft drink company (Coca-Cola) accounts for half of the carbonated soft drinks consumed globally (quoted in Nolan 2001: 40–2). Although the data are rough, they do indicate the level of global consolidation by global giants. Brand Building up brand image is nothing new. It is well recognised that giant MNCs have been paying enormous attention to brand management since the first industrial revolution. However, it is in the current epoch of the global big business revolution that the image of truly global brands has enormously improved. Giant MNCs expand their brands not only across global production locations, but also through distribution channels. Because of their strong financial strength, giant MNCs can afford to build up a global network of marketing facilities to provide goods in close proximity to customers (Nolan 1999). In many circumstances, giant MNCs nurture a homogenised global culture for their brands through huge advertising inputs, tremendous marketing efforts and various sponsorships (ibid.). For example, Coca-Cola has successfully labelled itself with an image of happiness, sports and health (ibid.: 25). Anheuser-Busch (2002 Annual Report), the global leading giant brewery, has established itself as being ‘fun, contemporary and social’. In the fast-moving consumer goods (FMCG) industry, the industrial development suggests that packaging innovation has become a very powerful means to strengthen the brand image. One typical case is Coca-Cola. Because of its huge bargaining power in the value chain, Coca-Cola is able to push the packaging suppliers to make technological innovations to meet its various requirements, such as reduced weights, enhanced degree of recyclability and distinctive imagery. As a result, Coca-Cola’s packaging style has evolved from glass bottles to aluminium cans, PET bottles, contour plastic bottles and contour metal cans. These initiatives played a critical role in enhancing Coca-Cola’s brand image (Nolan 1999). The brand image has a powerful ‘virtuous circle effect’ on firms’ competitiveness. This is because a strong brand image leads to larger market share and higher operating margins. The increased cash flow can be further used to maintain and expand market share or to develop brands in other geographical locations (MSDW 1998). Giant MNCs are at a greater advantage than SMEs because they have stronger financial resources, powerful bargaining power and better distribution channels which can be used to enhance brand image. Consequently, giant firms build up a strong sustainability, which can be measured by the number of years a competitive rival would take to catch up. The higher the sustainability, the tougher it is for latecomers to catch up. MSDW (1998: 6) estimates that global giants from advanced

Global big business challenge and catch-up 27 economies obtain a considerable level of sustainability, which is as high as 23 years for the aerospace/defence industry, 16 years for capital goods and 14 years for the consumer industry. Technology Technology is regarded as an engine for enhancing competitiveness, according to a plentiful economic and business literature. Schumpeter (1976: 83) regards it as ‘the fundamental impulse that sets and keeps the capitalist engine in motion’. Freeman (1982) argues that companies that fail to innovate will eventually have to go out of business. Brooks and Guile (1987) assert that technological changes determine the structure of industry both at the national and at the global level through their impact on the economies of production and information flow. Technological advances determine the location, the ownership and the management of productive activities. For example, the adoption of advanced IT makes it possible for MNCs headquartered in one country to efficiently control overseas branches (ibid.). Porter (1990) argues that competitive advantages such as lower costs and production differentiations cannot be sustained for too long; and only cumulative investments in R&D and constant technological upgrading can ensure the sustainable competitiveness of firms. Peter Dicken (1998: 145) makes a breakthrough in analysing the role of technology by arguing that: technology in, and of, itself does not cause particular kinds of change. In one sense, then, technology is an enabling or facilitating agent: it makes possible new structures, new organisational and geographical arrangements of economic activities, new products and new processes, while not making particular outcomes inevitable. This recognition is important, for it implies that technological innovations require carriers. Giant MNCs are the pillar carriers, enabling technological innovation to be made owing to their extraordinary amounts of investment in R&D. The Department of Trade and Industry in the UK (DTI 2002: 30) suggests a positive link between R&D intensity and companies’ performance in terms of sales growth, productivity and shareholder returns. In 2002, the total amount of R&D spending by the world’s 600 largest companies reached as high as over USD330 billion, of which the Americas accounted for 45.9 per cent, Europe 30.9 per cent and Japan 20.6 per cent, leaving a mere 2.6 per cent to LDCs. The minimum level of R&D spending required to reach the global top 12 has gone up from USD1.9 billion in 1992 to USD4.3 billion in 2002. The average R&D intensity, a most meaningful and widely used benchmark measured by the ratio of R&D to sales, was 4.3 per cent in 2002. The American firms had the highest intensity ratio of 5.1 per cent, followed by 4.1 per cent and 3.6 per cent for Japanese and

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European firms, respectively. Five high-tech sectors – IT hardware, software and IT services, pharmaceuticals and biotechnology, electronics, and health – held the heaviest weight in total R&D spending and had the highest intensity ratio (DTI 2002: 15–32). Clearly, the huge amount of R&D spending creates an extremely high entry barrier for latecomers. In addition to huge R&D spending, another technological advantage comes from giants’ close engagement in advanced IT. Owing to massive investment in IT hardware, software and services, giant MNCs are equipped with the most advanced communication systems, which not only enhance their firm-wide integration but also allow giants to integrate the up- and downstream value chain. For instance, GE’s online Trading Partner Network (TPN) enables suppliers to bid aggressively against each other in real time. The efficiency arising from TPN is expected to bring a price reduction of 5–15 per cent (quoted in Nolan 1999: 44). As far as internal integration is concerned, the deep engagement in advanced IT enables giant firms to manoeuvre overseas branches and to improve cooperation among different branches across the world. In this regard, the availability of advanced IT helps to overcome certain drawbacks of Fordism such as the loose control of overseas branches (Ruigrok and Van Tulder 1995). In conclusion, it is believed by many (e.g. Nolan 2001; Nolan et al. 2002) that giant firms in advanced economies have gained tremendous competitive advantages through huge amounts of R&D spending and deep engagement in IT. The entry barriers to the high-tech industries have become unprecedentedly high. In some capital-intensive sectors in which advanced technologies are widely involved, firms in LDCs are also extremely vulnerable in the face of the severe competition from giant MNCs.

Conclusions and implications The global big business revolution in the current era suggests that some of the orthodox school’s critiques on big businesses cannot be taken for granted without a careful check. We have seen that global giant firms have significantly intensified, not impeded, the competition both in their home markets and on the global playing field. The unorthodox scholars demonstrate from different angles that in the past few decades giant firms’ territories have expanded to an unprecedentedly wide geographical reach. This trend is counter to the claims of Marshallians that big businesses will lose their dominant positions in the long run. Global giant firms are also heavily involved in R&D and the adoption of the most advanced technologies, including IT, in their own systems. As systems integrators, they also integrate the up- and downstream value chain and consequently their boundary has become blurred (Nolan 2001). As we shall see soon, beer is no exception. Another highly significant implication of the global big business revolution for LDCs lies in the fact that global giants have gained tremendous competitive advantages over SMEs. We have seen that not only do global giants

Global big business challenge and catch-up 29 obtain traditional advantages from exploring economies of scale and scope, but they also possess more powerful advantages associated with market concentration, the core business strategy, the functions of core systems integrators, global brand management, and their huge endeavours in technological improvements and R&D. As a result, the catch-up gaps for latecomers have become unprecedentedly high and the catch-up tasks in industry after industry (especially knowledge- and capital-intensive industries) become extremely tough, if not impossible (Nolan 2001, 2004a, 2004b; Nolan et al. 2002). As far as China is concerned, Nolan’s argument (2004a: 20) is worth quoting at length: the blunt reality is that after two decades of reform China’s large firms are still far from being able to compete with the global giants. The gap is especially marked in the high-technology sectors, such as aerospace, power equipment, IT hardware and pharmaceuticals. It is marked even in ‘mid-technology’ sectors such as oil and petrochemicals, auto assembly and auto components. Even in sectors with apparently less advanced technology, such as steel, coal and consumer electrical equipment, there is a significant gap compared with the global leading companies in the high value-added segments of the market . . . China’s vanguard of leading firms that are intended to ‘compete on the global level playing field’ are still far behind the global leaders. Indeed, if we look across the whole spectrum of industries, it may even be the case that China’s leading firms are further behind the global leaders than they were when the industrial policies began almost two decades ago. Since China has entered into the WTO, the global level playing field has become increasingly established there. Large Chinese enterprises will be forced to compete with the world’s leading companies in each sector. Given this blunt reality, pushing China’s largest indigenous enterprises to compete in the global competition arena as a result of a rapid carrying out of the WTO rules could be a high-risk strategy (Nolan 2004b: 229). Even the Chinese government has noticed the severe challenges that Chinese firms as a whole face, as commented on by Wang Zhongming, Director of the Research Centre of the State Assets Supervision and Administration Commission: Chinese firms have such a long way to go . . . only a handful of Chinese companies operate globally and they are only in the initial stage . . . to say China is the workshop of the world means something different to what it was in Britain, the US and Japan . . . These countries not only had leadership in their industrial sectors but were also breeding grounds for new technologies. (Quoted in South China Morning Post 2005)

3

State intervention

The debate on market and state has been a heated issue in economics since the subject emerged as a discipline. To broadly generalise, there are two schools of thought on state intervention. One school argues against state intervention and enthusiastically promotes the ideology of a free market, whereas the other casts grave doubts on the power of the free market and recognises the significant role of the state, in particular in transitional developing countries.

Anti-state intervention Neo-classical school Adam Smith’s ground-breaking book The Wealth of Nations is widely believed to be the masterpiece behind the theory of the ‘invisible hand’ and the free market. According to Smith, the government should have little economic functions, at least in the sense that the sovereign of the state should be: discharged from . . . the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to . . . first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain. (Smith 1976, Vol. 2, Book IV: 687–8) Smith believed that there was a need to maintain a minimal level of the role of the state to provide public services. However, public services should be provided only where the market failed and by bodies which could provide

State intervention 31 such services efficiently in such a way that the self-interested nature of man should be taken into account (Smith 1976, Vol. 2, Book V: 709–31). Where taxation was required to maintain the public services for welfare reasons, it should be levied by applying the principles of equality, convenience, certainty and economy (ibid.: 825–7). In brief, Smith held that the functions of the government should be designed to ensure the freedom of the individual to fulfil his or her own socially beneficial interests, and that the government was merely required to provide public services so as to facilitate the working of the market mechanism. Smith’s doctrine has been well developed by mainstream economists. In their view, state intervention inevitably causes deadweight welfare losses. It is believed that the less state intervention there is, the better for the economy. It should be noted, however, that, although Smith argued that the free market was an immensely powerful force for economic progress, he also recognised the profound contradictions of the market mechanism and indicated that the deep ethical shortcomings like the pursuit of frivolous utility should be considered together with the dynamism of the free market economy.1 Rent-seeking school Some institutional economists argue that the state is the authority in charge of the design, monitoring and enforcement of institutional arrangements like laws and formal regulations (Gunnarsson 1991). Therefore, the state governs the allocation of property rights (ibid.). Scholars in this school commonly believe that rent-seeking groups politically related to the government usually have easier access to the rights. Those interest groups are rivals in some circumstances but in alliance in other situations. They might cooperate to lobby or exert pressure on the state to change the allocation of certain existing rights for their benefit. Skills and knowledge that organisations and individuals obtain are equally important in terms of competing for the rights (North 1995). Some scholars, notably Krueger (1974) and Bhagwati (1982), argue that state-created rent-seeking activities, in particular those directly unproductive profit-seeking (DUP) activities, could result in more losses than the traditional triangle welfare losses. Neo-liberal school The past two decades have witnessed a robust resurgence of anti-state intervention thought. The political and economic overhaul of the former socialist countries in the 1980s, notably the former Soviet Union and Eastern European countries, has buttressed such a strong resurgence of ‘transition orthodoxy’ (Nolan 1995a) or neo-liberal doctrine which is against state intervention and in favour of the free market. This school of thought was largely attributable to Blanchard et al. (1991), Kornai (1990), Prybyla (1990), Borensztein and Kumar (1991), Yavlinsky (1991) and Lipton and Sachs (1990).

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Blanchard et al. (1991) asserted that the experience of Western industrialised economies and standard stabilisation packages could work in Eastern Europe. Kornai (1990) demonstrated that any solution which combined state intervention with a free market mechanism to solve the problems of a transitional economy was doomed to fail. According to him, the basic idea of market socialism had fizzled out and the time had come to give up market socialism and move towards free market capitalism. Prybyla (1990: 194) proposed that: to address economic problems in a modern way in the context of a low calibre, inefficient, slothful and wasteful socialist system, one must go all the way to the market system, do it quickly, and not stop anywhere on the way. To go part of the way slowly, ‘crossing the river while groping for the stones’ . . . is to end up the creek to nowhere. Borensztein and Kumar (1991) argued that a partial transformation of a centrally planned economy could only bring about inferior outcomes for the whole economy. Yavlinsky (1991) held that a system sheltered from the global economy resulted in the degradation and stagnation of most indigenous industries; opening up the domestic market, in contrast, would stimulate indigenous entrepreneurs to compete with cheap imported goods so as to make the economy dynamic and flexible. Lipton and Sachs (1990) strongly proposed a quick and straightforward transformation from a planned economy to a free market economy. The transition orthodoxy/neo-liberal doctrine is deeply embedded in the Bretton Woods systems such as the International Monetary Fund (IMF) and the World Bank (WB) (IMF et al. 1990). The main elements of the structural adjustment packages recommended two decades ago by the IMF and supported by the WB to Eastern Europe included instantaneous price liberalisation, currency liberalisation, trade liberalisation, reduction of state intervention, and embracing a market economy through the privatisation of industrial enterprises and banks, etc. (quoted in Nolan 1995a, 2001). Indeed, such formulas are gaining strong momentum in pushing China to rush for a free market economy. Such a move is echoed by many mainstream Chinese scholars, as we shall soon see.

Pro-state intervention Market failure approach This approach believes that market failure takes place when the free market cannot solve all economic problems. Some Austrian economists such as Hayek (1949, 1988) suggest that conventional welfare economics is misplaced and that idealised competitive equilibrium is only a fantasy. Stiglitz (1989) categorises market failure into two groups: one is the old school of thought

State intervention 33 that argues that the failure is caused by externalities and public goods; and the other is the new school which believes that the failure is caused by incomplete and asymmetric information. Some scholars analyse market failure from both micro and macro aspects. Factors like imperfect competition, incomplete market, externalities and public goods are micro failures; whereas those related to unemployment, inflation and growth are macro failures. Regardless of how the market failures are categorised and what differences exist within each school, the common element is that there is a space for state intervention to supplement the market failure that the ‘invisible hand’ fails to solve. Developmental state approach From the developmental state approach’s point of view, the previously mentioned rent-seeking school goes to extremes. Since the state is the authority that arranges property rights by institutional change (Gunnarsson 1991), it can artificially create ‘rents’ (Krueger 1974; Bhagwati 1982). By the nature of the state, Peter Evans (1992: 144) catalogues states into two types: predatory and developmental. Predatory states’ apparatuses ‘consume the surplus they extract and encourage private actors to shift from productive activities to unproductive rent-seeking, but fail to provide collective goods. They have no more regard for their societies than a predator does for its prey.’ In contrast, those states that extract surplus but also provide collective goods are ‘developmental’ states, which ‘foster long-term entrepreneurial perspectives among private elites by increasing incentives to engage in transformative investments and lowering risks involved in such investment’ (ibid.: 148). Although developmental states are not immune to rent-seeking, the consequences of their actions, notably state intervention, are believed to promote rather than impede economic adjustment and structural transformation (ibid.). Unorthodox approach Some unorthodox scholars criticise the danger that neo-classical and neoliberal thought hold for the catch-up of LDCs. Broadly speaking, this school of thought accepts that state intervention does not necessarily bring about good economic achievements. State intervention may produce worse results than the free market in situations where the intervention is designed to promote the interests of privileged groups rather than benefiting the society overall. Similarly, it does not mean that state failure is always worse than market failure (Lal 1983). Although unorthodox scholars address their concerns from different perspectives, the generic common point is that they all cast doubts on the power of the ‘invisible hand’, as commented on by Hahn (1984: 132): the limitations on the applicability of pure market theory are numerous and many of them quite serious. The exceptions to the beneficence of the

34

State intervention invisible hand have been piling up since Adam Smith and, much later Pigou, considered them. Our knowledge of the actual movements of the hand is rudimentary and vastly incomplete . . . The Smithian vision still provides a reference point but an increasingly remote one. It can also be dangerously misleading when this limited role is not recognised.

Hahn was sceptical about the ways that the doctrine of the ‘invisible hand’ should be applied. To implement a reasonable economic policy, he called for a ‘wishy-washy, step by step, case by case approach’ (ibid.: 133). Studies done by some development economists (e.g. Chang 1993, 2002) have shown that in virtually all industrialised economies – including the UK, where the modern capitalism and orthodox free market approaches originated – state intervention was indeed very common in their take-off stage. Studies (Reynolds 1985; Deyo 1987; Findlay 1988; Amsden 1989; Wade 1990; Chang 1993, 2002; Nolan 1995a, 1995b) have also shown that state intervention widely existed and continues to exist in recently industrialised economies, notably Japan, South Korea and Taiwan. Nolan and Chang address their deep concerns about the implications of orthodox and neo-liberal thought for the catch-up of LDCs. According to Nolan (1990: 124), the key element for rapid growth is ‘devising appropriate ways in which the state can supplement for market failure so as to bring the decisions of profit-seeking enterprises in line with those that are desirable for the overall economy’. Based on a large-scale study of the reform process in the USSR and China during the transitional period, Nolan (1990, 1995a) points out that the heavy ideological influence from the free market approach has made a difference to the political and economic system of the two countries. He argues that the approach of an over-hasty embrace of the free market and free state underestimates the importance of maintaining an effective state apparatus to fulfil socially desirable goals during the transitional period. Hence, the central condition of a successful transitional economy lies in the ability of the state to guide effectively. This thought is to a certain extent in line with the developmental state approach mentioned earlier. Through a large body of studies on both developed and developing countries, Chang (2002: 59–60) points out that almost all developed economies adopted some form of state intervention strategies when they were in their catch-up stages. The UK and the US both were the aggressive users of tariff protection. The strong protection of their infant industries was not lessened until they had built up a clear industrial hegemony in the world. Even in today’s developed countries, particularly the US, the state continues to play a significant role in developing infrastructure and supporting R&D. Chang raises pertinent questions on why today’s developed countries assert ‘best practice’ institutions that are supposedly supported by orthodox doctrine but have not been used by them at comparable stages of their development. He casts serious doubts on whether the developed countries try to ‘kick away the ladder’ (Chang 2002: 139) from which they have climbed up to where

State intervention 35 they are, by insisting that LDCs adopt policies and institutions that developed countries had not adopted in their take-off stage. He points out that the ‘ladder-kicking’ activities may be performed out of genuine good will; and scholars and policy makers in LDCs may be misinformed. However, ‘this makes it no less harmful for developing countries. Indeed, it may be even more dangerous than “ladder-kicking” based on naked national interests, as selfrighteousness can be a lot more stubborn than self-interest’ (Chang 2002: 140). Nolan (2004b: 77) argues that the attitudes of Western governments may not be the same while pushing transitional economies to adopt ‘stabilisation’ and ‘liberalisation’ programmes formulated by the Bretton Woods institutions. However, in most circumstances, the Western superpowers are not interested in ‘assisting the former communist countries to turn themselves into competitor industrial powerhouses’. As far as China is concerned, Nolan (2004b) suggests that, despite numerous policy shortcomings, the state should continuously play a critical role in solving market failure, regulating wealth distribution and regulating the way in which China confronts the world economy.

Reactions inside China After over 20 years of a long journey away from the administratively planned economy, China has reached a critical stage of development. Where it is heading and what role the state should play in the next few decades have become hot topics in China. Some scholars categorise the current economic and political phase as the primitive stage of the capitalist accumulation. In order to carry on the process of accumulation, they argue that the state should ensure the stability of the society through harsh social control. Some argue that the country has made a huge mistake by integrating with and relying on the global economy. China should reduce its dependence on world trade and capital inflow (quoted in Nolan 2004a: 2–3). Many Chinese scholars who have been overwhelmingly influenced by neo-classical and neo-liberal theories and convinced by the Washington Consensus argue that China’s only solution for surviving the current severe global competition and chaotic social transformation is to choose a free market solution. China’s lack of development in the past decades was considered to have been caused by a despotic state that prevented the country from following the capitalist path that was taken by European countries. It is believed that the smaller the state’s role, the faster China will grow in the future (ibid.). This approach is gaining great popularity among the young generation of intellectuals.

Conclusions and implications The state’s role has deep implications to the catch-up of developing countries like China. The crux is whether the Chinese economy is ready for the quick

36

State intervention

transition proposed by free market approaches, and whether Chinese industries and Chinese enterprises are ready to compete with penetrating global giants. If not, would maintaining a desirable level of state intervention in the way of formulating appropriate industrial policies be necessary, given the severe global competition and enormous challenges from global giants? Do global giants’ interests, which are strongly backed up by strong international superpowers led by the US, call for a strong yet flexible intervention rather than the ‘arm’s length’ function of the state? Is the anti- or pro-state intervention approach more relevant to contemporary China? The study of state intervention in the Chinese brewing industry in the later chapters reveals how the dynamic transformation of the role of the state has altered the competitiveness of the Chinese brewing industry and the catch-up process of large Chinese enterprises.

4

The global brewing industry

The brewing industry has witnessed unprecedented global consolidation led by giant brewers from advanced economies. These giant brewers sharpen their competitive advantages through systematic strategic adjustment. As we shall see in this chapter, the ongoing big business revolution has imposed an enormous challenge on brewers from developing countries.

Core business The increasingly intensified competition has forced leading global brewers to divest non-core business and concentrate on core business. For instance, Scottish & Newcastle (S&N) strengthened its beer business by disposing of tied houses such as bars and properties; so did the Australian beverage giant Foster’s. Some brewers outsource secondary logistics services to specialist firms in order to dedicate resources to brewing activities.

Scale matters As a conventional capital-intensive industry, brewing illustrates a remarkable relation between production scale and efficiency (Hawkins and Radcliffe 1971; Prais 1981). One illustration is that production costs reduce significantly while the scale expands because materials’ costs associated with constructing a cubical container increase proportionally to the square of its length, but the production capacity of a container increases proportionally to the cube of its length. Therefore, a container’s cost is in proportion to its capacity, which goes up by the power of 2/3. Per-unit costs of capacity decline as capacity goes up with an elasticity of −1/3. In other words, doubling capacity raises the material costs of the container by approximately 1.59, instead of 2 (Prais 1981: 111). Scherer found that construction costs per barrel capacity in the early 1970s could halve for a brewing plant with an annual capacity of 4 million barrels, as opposed to a brewing plant with a 1 million capacity (1996: 405). Cockerill (1977) demonstrated that total unit production costs of a brewer declined after the minimum efficient scale of its plants was realised. Prais (1981: 114–16) argued that the US brewing industry

38

The global brewing industry

in the 1970s enjoyed higher efficiency than its German counterpart, largely because of its higher concentration and hence its scale economies. Scale economy takes place through various channels. First, scale economies in procurement, production and packaging can be realised through multi-plant operations. A plant with a huge capacity serves as a regional pivot plant by redirecting its outputs to regions where demands are increasing but new plants have not yet been completed. Breweries with multi-plants can assign one plant to produce small-volume products (e.g. specially packaged beers) and ship them to warehouses across the country. Multi-plant operations significantly save production costs, although higher transportation fees may occur (Scherer 1996). Second, the same amount of labour employed by large plants and small plants usually brings about different productivity – the former produces more products, owing to the faster speed of the production machinery; and therefore the unit costs of labour for larger plants are lower than those for small plants (Scherer 1996). Third, large brewers also enjoy scale economy in advertising because fixed advertising costs improve the awareness of a larger customer base; therefore nationwide television advertising is more meaningful for brewers with multi-plant and national distribution networks (Tremblay 1985b; Scherer 1996). In practice, industrial analysts have observed that the scale economy of advertising not only cuts down the advertising costs that large brewers bear owing to their huge bargaining power in relation to advertising agencies, but also boosts the sales volume. This increased sales volume further stimulates production and enables brewers to explore scale economy in production. Fourth, industrial analysts suggest that scale economy also takes place in brewers’ interaction with suppliers in the value chain, which ranges from procurement, production, sales and advertisement to marketing and logistics. In a nutshell, as a result of exploring the scale economy, large brewers enjoy lower costs than small players. The scale advantages that large brewers possess take place not only at individual plant level but also at firm level across the globe. In the current era, leading global brewers’ production scales have been enormously increased. The ‘state-of-the-art’ technology adopted in Anheuser-Busch’s highly modernised breweries not only dramatically increases efficiency, but also ensures that each of its beers has the same crisp and clean taste (Anheuser-Busch Annual Report 2002: 8). Scale perhaps matters today more than it has done in the past. The industrial development shows that giant brewers have even started to rationalise procurement, production, marketing and distribution on a global basis. This creates a huge entry barrier for latecomers from LDCs to enter the global playing field. The entry barrier to the low-end beer market may be relatively easy to overcome but competing in the premium market on the global playing field is extremely tough, if not impossible, for players from LDCs. In most circumstances, it is

The global brewing industry 39 rather unrealistic for brewers from LDCs to attempt to challenge the global giants’ dominance.

Industrial concentration There has been a heated debate regarding the impacts of beer concentration. One argument was that the brewing industry’s consolidation was driven by competition whereby giant brewers increased output and lowered price through exploiting scale economies, whereas the exclusion theory held that consumers’ welfare could be jeopardised since giant brewers blocked competition and raised prices (quoted in Lynk 1984). Lynk (ibid.) found that the exclusion theory was ‘unwarranted’. Tremblay (1985a: 428) criticised the fact that Lynk’s analysis omitted advertising factors and suggested that ‘the critical level of concentration has not yet been reached’. Using the UK brewing industry as an example, Slade (2004) found that the market power increase of large brewers was not caused by their coordinated effects or tacit collusion; and such a market power increase did not cause an increase in the price of beers, in particular lagers. In reality, the giant brewers’ battle for dominance has never ceased. The brewing industry in most industrialised economies underwent significant structural change between the 1950s and 1980s, resulting in enlarged brewery size, reduced number of brands (Müller and Schwalbach 1980) and a high level of concentration (Gourvish and Wilson 1994; Gourvish 1995) (see Appendix 1). Since the 1990s, leading brewers in advanced economies have launched aggressive global campaigns.1 The current era has witnessed an unprecedented global consolidation led by global giants from advanced economies. The global consolidation has become a ‘key factor shaping global development as brewing companies achieve greater scale and their beer brands grow in more international markets’ (Interbrew 2003: 2). Rationale Pursuing scale economy in procurement, production and advertising is the key driving force behind consolidation (Müller and Schwalbach 1980; Interbrew 2003). This era differs from previous decades in that leading global brewers appear to be keen on rationalising scale economy on a global basis. Importantly, the current level of global consolidation provides a ‘space’ for further consolidation. The largest brewer and the top three command about 9 per cent and 25 per cent of the global volume, respectively (Interbrew 2003: 2; BWI 2001). The global number one brand, Budweiser, has a global market share of only around 4 per cent (BWI 2001). In value terms, the top three and ten giant brewers are estimated to account for about 22 per cent and 47 per cent of global beer sales.2 When market segmentation is taken into consideration, global giants certainly take the predominant role in the highend markets, leaving the low-end markets with low margins to a myriad of

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The global brewing industry

small players. Nonetheless, beer concentration is far behind that of the soft drinks industry: three soft drinks companies account for around 80 per cent of the global carbonated soft drinks (CSDs) volume, and Coca-Cola commands nearly half of CSDs consumed globally (BWI 2001). At the macrolevel, a number of emerging markets, notably China, Brazil and Russia, are blessed with favourable demographics and have enjoyed spectacular consumption growth during the past decade. In contrast, the consumption in most advanced economies has either reached saturation point or experienced slow growth (Euromonitor 2003). These factors jointly drive giant brewers to launch aggressive expansion into the emerging markets and push the global industry towards quick consolidation. Explosive cross-border M&As Since the 1990s the industry has witnessed explosive cross-border M&As in which giant brewers act as ‘consolidators’ (see Table 4.1). A number of mega-mergers among large brewers have drastically altered the dynamic matrix of the global competition. The emergence of some giants is even caused by the desire for consolidation. The acquisition of Miller, the secondlargest American brewer, by SAB in 2002 was the first mega-merger among the global top ten and considerably deepened the global consolidation. The transaction, valued at USD5.6 billion, made SABMiller, the combined company, the third-largest brewer globally with a turnover of USD8.3 billion. SABMiller has made clear that it intends to take advantage of its increased scale and international reach, stable cash flow and a strong international brand portfolio to stay ‘at the forefront of consolidating the brewing industry’ (SABMiller 2002b: 2). Another mega-merger was the combination in March 2004 of Interbrew, the fourth-largest brewer globally by volume, and AmBev, the dominant player in Latin America and the sixth-largest brewer globally by volume. The merger has made the combined company, InBev, almost the largest player globally in volume terms (company website). As a result of the explosive global expansion led by global giant brewers, large brewers with well-established brands and strong positions in emerging markets have become desirable acquisition targets. Increasing strategic alliance Strategic partnerships have gained increasing popularity in the global consolidation (see Table 4.2). This is not only because of local heritage of beers, as we will soon see, but more importantly because strategic alliances possess certain advantages. It has been recognised both academically and practically that greenfield investments could be too costly and slow in generating revenue; and acquisitions may not be easily available. Strategic alliance, in contrast, could serve as a relatively easier ‘bridge’ to dodge obstinate entry barriers. It also helps to maintain good relationships with local heritage and may provide

Table 4.1 Global mergers and acquisitions in the brewing industry, 2000 to 2005 Year

Acquirer

Target

Ownership Comments

2005

Molson

Adolph Coors

Merger

2004

Interbrew

100%

2004

Interbrew

Lion Group * (beer business) AmBev

2003

Heineken

BBAG

100%

2003 2003 2002

60% 100% 100%

2002

SABMiller Birra Peroni SABMiller Browar Dojildy Interbrew Brauergilde Hannover Interbrew KK Group Interbrew Zhujiang Brewery South Laurentina Cervejas African Breweries S&N Hartwall

2002

S&N

United Breweries

60%

2002

SAB

Miller Brewing

100%

2002

S&N

Boutari Group

46%

2002

Heineken

Bravo

20%

2002

Molson

Kaiser Brasil

80%

2002

AmBev

Quilmes

36%

2001

Interbrew

Brauerei Beck

40%

2002 2002 2002

Merger

70% 24% N/A

100%

The combined group will become the world’s fifthlargest brewing group in volume terms. Expands position in China through Lion Group. Strengthens global dominance and creates the world’s premier brewer. Strengthens Central European markets. Enters Italian market. Improves share in Poland. Strengthens position in Germany. Expands presence in China. Enters the Chinese market. Expands position in Mozambique. Expansion into Finland and builds up a critical foothold in Baltic states through Hartwall. Builds up foothold in India. Becomes the second-largest brewer in the world (SABMiller). Stake in ownership of leading Greek beer brand, Mythos. Takes market share in Russia through acquisition of the fourth-largest Russian brewery. Becomes the second-largest brewer in Brazil. Strengthens AmBev’s presence in Latin America; enhances competitiveness of AmBev and Quinsa against international rivals. Builds scale in fragmented German market; enlarges its international brand portfolio. Continued overleaf

Table 4.1 Continued Year

Acquirer

Target

Ownership Comments

2001

Adolph Coors

Carling Brewers

100%

AnheuserBusch 2001 SAB

Compania Cervecerias Uni SA Timisoreana SA

20%

2001

Mysore Breweries and Rochees Brewery Cervesur

100%

Cass Breweries

20%

Diebels

10%

2001

SAB

2001

Backus y Johnston 2001 Oriental Breweries (50% owned by Interbrew) 2001 Interbrew

100%

10%

2000

Interbrew

Bass Brewers

100%

2000

Interbrew

Whitbread

100%

Cervejaria Brahma 2000 S&N

Antarctica Paulista

Merger

Joint venture with Central de Cervejas

N/a

2000

S&N

Kronenbourg/Alken 70% Maes

2000

Molson

Bavaria

20%

2000

Carlsberg

Feldschlösschen

10%

Carlsberg Breweries A/S

20%

Slovak Breweries Martiner and Gemer

51%

2000

2000

Carlsberg A/S and Orkla ASA merger 2000 Heineken

Provides entry into UK market and controls the leading lager brand, Carling. Consolidates presence in Latin America. Gains access to Romanian market. Strengthens position in India.

Acquires rival and becomes monopoly player in Peru Strengthens position in South Korean market.

Strong presence in the growing speciality beer market in Germany. Builds strength in UK/ Europe. Builds strength in UK/ Europe. Forms AmBev. Expansion into Portugal through share in leading national brand Develops international presence; acquires strong brands in Western Europe. Acquisition of one of the leading beer brands in Brazil. Acquires leading Swiss brewer. Strengthens its position as the leading player in the Nordic region

Consolidates presence in dynamic Eastern European beer market.

Source: Euromonitor database; company annual reports, presentations and websites. Note: * Lion Group is a Malaysian conglomerate and had beer businesses in China.

Table 4.2 Global strategic alliances in the brewing industry, 2000 onwards Year

Country/ region

Strategic alliance Comments

2003

Latin America

AmBev/Quinsa

2002

India

2002 2002

Central America China

2002

China

2002

East Africa

S&N/United Breweries AmBev/ CabCorp AnheuserBusch/Tsingtao SABMiller/Blue Sword SAB/Diageo

2001

2001 2001

2001

2000 2000

2000 2000 2000

2000

2000

Strengthens AmBev’s presence in Argentina, Bolivia, Paraguay and Uruguay; enhances competitiveness of AmBev and Quinsa against other international competitors in the region. Co-development of new brewing businesses. Gives AmBev access to Central American markets. Strengthens Anheuser-Busch’s position in China. Strengthens SABMiller’s position in China.

Improves position of both companies in Kenya and Tanzania. South Korea Asahi/Bohae Asahi will import Bohae’s new soju for sales Brewery in Japan and Bohae will sell Asahi beer in Seoul. Africa/ SAB/Castel Strong and complementary positions across Middle East Group the region through Castel’s presence. Germany Heineken/Bayer- Increases international presence of ische Brau Paulaner Weiss brand through Heineken’s sales and distribution network. US Molson/Adolph Markets and sells Molson brands in the US, Coors and produces Coors brands in Canada for distribution in the US. Uruguay AmBev/Danone/ Salus has strong beer and mineral water Salus interests in Uruguay. Bass-owned brewer to produce/sell Asahi in Czech Asahi/Bass high-consumption Czech Republic. Republic (owned by Interbrew) Singapore Carlsberg/Chang Expansion of Carlsberg’s presence in AsiaBeverage Pacific. Spain Carlsberg/ Exclusive distribution and sale of Carlsberg Mahou in Spain. Spain Coors/Thomas Distribution under contract of beer brewed Hardy and packaged in the US following closure of Spanish brewing facility. Portugal S&N/Centralcer Joint venture will allow S&N to launch number of brands into growing Portuguese market using Centralcer’s two breweries. Canada S&N/Okanagan Sells S&N brands in Canada. Spring Brewery

Source: Euromonitor database; company annual reports and company websites.

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The global brewing industry

opportunities for giant brewers to ‘piggyback’ on local partners’ wellestablished distribution channels, which eventually facilitates global giants’ long-term penetration. As a result of the increase in strategic alliances, an extremely complicated interrelationship, both competitive and cooperative, between global giant brewers and successful local brewers is established. But, in most circumstances, global giants take control in the alliance owing to their strong financial strength and rich knowledge of the industry best practice.

Brands A strong brand portfolio and sustainable sales growth constitute key competitive advantages in consumer industries (MSDW 1998: 105). Research has found that large brewers’ escalating advertising expenditures increase their market power (Tremblay and Tremblay 1995). In the current era, leading global brewers consistently build up and upgrade global images of core premium brands through intensive sales and promotion efforts, in many circumstances even through nurturing consumption culture. For instance, the success of Budweiser, the best-selling beer globally, is significantly attributed to Anheuser-Busch’s substantial advertising and promotional expenditures, which went up from USD164 in 1995 (BI 1996) to USD822 million in 2002 (Anheuser-Busch 2002: 36). Meanwhile, giant brewers have introduced tight quality control systems and built up advanced communication infrastructures within their global production networks to maintain the global image of a couple of core brands.3 Nonetheless, one unique characteristic of beer is that global brands cannot easily replace local brands because of beer’s strong local heritage. Although the industry is undergoing a rapid consolidation, as we shall see, consumers still have a strong loyalty to their homegrown brands (BWI 2001).4 The low-end markets with lower profitability are in general segmented, whilst the high-end markets are concentrated in the hands of a few global giants. This is a general phenomenon across the globe but more obvious in many LDCs like China. It has witnessed an increasing popularity of global brands such as Budweiser, Heineken and Coronas, but they only represent approximately 10 per cent of the world market (BW 2000b). In this regard, beer is a local business on the way to going global. It is worth noting that a large number of local brands sold extremely cheaply will continue to survive in the less affluent, and particularly rural, regions in developing countries, but they play little role in giant brewers’ global campaign. With a focus on high-margin products in affluent markets, global brands may achieve dominance in a few decades, as is the case in the soft drinks industry, where Coca-Cola and Pepsi dominate. Currently, however, giant brewers have to maintain a good balance between acquired local brands and their global core brands, in their fight for global dominance. The local brands with a strong local heritage and relatively high margins are

The global brewing industry 45 usually cautiously retained until the time is right for global brands to take over. Interbrew is a typical example.5 It believes that building up brands from scratch in new markets is too costly (Dezutter 1997: 140) and therefore never introduces international core premium brands (e.g. Stella Artois) before acquired local brands are strengthened and the replacement becomes ready (Interbrew website; BW 2000b). This particular feature of the beer industry has highly important implications for brewers from LDCs in that it might provide an opportunity for these brewers to speed up their growth before global brands firmly take root in their backyards. In this regard, beer’s local heritage may be an irreplaceable competitive advantage that brewers from LDCs possess. It may create a favourable platform for these brewers to enhance their competitiveness, should this form of entry barrier be strategically well managed by policy makers and entrepreneurs.

Technology and innovation Beer is traditionally regarded as a low-technology sector. However, recent decades have seen considerable production innovations, notably improved cleaning automatisation and new product development (Gourvish 1998: 81). Highly complicated technologies have been used to improve the process of ingredients selection and filling as well as speeding up the brewing process. Packaging innovation is becoming a more and more important means to enhance beers’ brand image and a brewer’s competitiveness. Beer packaging has undergone dramatic innovation, evolving from wooden kegs and glass bottles to metal cans, aluminium cans, PET (polyethylene terephthalate) and PEN (polyethylene naphthalate) bottles. Packaging has become lighter, user-friendly and environmentally friendly. These endeavours significantly reduce the unit costs of the final products. Moreover, the introduction of an innovative bottle could do as much to drive volume growth as any advertising (Nolan 1999). Leading global brewers take the lead in packaging innovations through enormous R&D endeavours. For instance, since the 1950s, adopting highquality, low-cost and innovative packaging materials has been playing a key role in Anheuser-Busch’s national and global campaign. Anheuser-Busch’s Packaging Innovation Centre adopts the most advanced technologies in the industry to produce high-quality and low-cost beverage cans (AnheuserBusch 1998). Interbrew introduced the world’s first ‘monolayer barrier enhanced PET bottle’ in 2003, which adopted a single-layer, barrierenhanced resin technology to offer outstanding protection against oxygen and light while keeping the carbonation inside the bottle. The technology significantly improved the freshness and quality of beers while keeping bottles light and unbreakable (Interbrew website). Giant brewers are also adopting advanced technologies to monitor packaging systems. For instance, Heineken’s inspection system uses spin-and-brake technology to investigate tiny particles in filled and capped glass bottles (BW 2002).

46

The global brewing industry

It is not the case, however, that all global giants have developed in-house advanced technologies in production or packaging, but rather, in most cases, that they push ahead the technological development with the aid of global leading production and packaging equipment manufacturers such as Crown,6 Ball,7 Krones8 and Owens-Illinois,9 etc. The huge bargaining power that global giant brewers possess and giants’ eagerness for reducing costs through the adoption of the latest advanced technologies induce close cooperation between giant machinery manufacturers and giant brewers. Subsequently, the introduction of the finest technology in both production and packaging not only dramatically increases giant brewers’ efficiency and enables them to lead the industrial trend, but also stimulates the technological development of associated machinery and packaging industries. In recent years, more and more leading global brewers have introduced PET beer bottles. The most advanced technologies have been introduced by the world’s leading packaging manufacturers, under pressure from the increasingly demanding standards of global giant brewers. For instance, Rexam10 has patented active barrier technology that removes any oxygen penetration in the multi-layer PET bottle (Rexam website). Leading packaging suppliers introduce in-house design, 3D CAD/CAM11 systems and mock-up facilities to make their design functions more suitable to clients. The adoption of PET beer bottles in developing countries is rather slow because most brewers could not solve the technological issues nor bear the huge sunk costs. Another recent development in beer packaging is the appearance of refillable PEN beer bottles. These bottles combine the qualities of glass and the strength of plastic (Rexam website). The first advantage lies in its excellent barrier characteristic that minimises intrusion by oxygen, carbon dioxide and UV light. This point is highly important since beer goes bad quickly when it is exposed to oxygen, carbon dioxide and UV light. Second, PEN beer bottles, like glass bottles, are pasteurisable, and the washing temperatures can go up to 85 °C. Third, compared with glass bottles, PEN is much lighter, has the safety strength of plastic and is more suitable for special consumption venues like bars. Fourth, there is no flavour carry-over, and shelf life can last as long as 12 months. Fifth, in terms of capping, PEN has little difference from glass bottles. It can be capped by crown, tear-off and screw cap. The last but not least distinguishing characteristic is that customised bottles can be refilled 20 times, which is environmentally friendly (Rexam website). Some global leading brewers such as Carlsberg have now embraced this new packaging technology. In a nutshell, the introduction and development of advanced technologies in beer production and packaging is to a large extent attributable to global giants, which aim to leverage these competitive advantages to improve efficiency and profit margins, in their fight for global dominance.

The global brewing industry 47

Value chain integration and systems integrators It has been widely accepted that simple comparative advantages such as factor-cost differences arising from different production locations cannot cope with the severe global competition, and firms therefore must coordinate in the value chain (Porter 1986). The ability to manage the value chain then becomes a critical competitive advantage. Ruigrok and Van Tulder (1995: 65) argue that a global giant is the ‘core of networks of supply and distribution’, or ‘a spider of an industrial web’. Nolan’s (2001) recognition of global giants being core systems integrators and external firms reveals the dynamics of the global competition. The global giants, as systems integrators at the core of the value chain, have caused a ‘cascade effect’ on the first-tier suppliers, which has spread to the second- and the third-tier suppliers through the deepening interaction between the core firm and its suppliers (Nolan 2001; Nolan and Zhang 2003). The brewing industry is no exception. Vertical integration into the value chain has a long history in many beer markets.12 Retail tied houses served as a means of securing markets (Gourvish and Wilson 1994). However, the competition environment has changed so dramatically in the current era that tied houses are no longer critical for leading brewers because of vastly increasing free trade and the popularity of national brands (Hawkins and Radcliffe 1971). Giant brewers are indeed disposing of tied houses, as aforementioned. The industrial trend suggests that the focus of the value chain integration in this era has changed to tighter control and more efficient management of the value chain by global giant brewers, with the aid of the most advanced IT. Their enormous bargaining power plays a substantial role in integrating the value chain – both upstream and downstream. First, giant brewers have strong influence on materials suppliers, which range from barley suppliers in the upstream, to production equipment suppliers in the midstream, and then to packaging suppliers in the downstream. The fact that they purchase in bulk to explore scale economy provides them with privileged bargaining power in relation to their suppliers. Consequently, they enjoy not only lower purchase prices but also better communication with suppliers. As regards production and packaging, we have seen in previous contexts that giant brewers have been actively pushing ahead the technological improvement of associated machinery industries through close interactions with core suppliers. Moreover, giant brewers tightly control the quality of raw materials and closely monitor the execution of the procurement process by using the latest IT such as online procurement platforms. Second, giant brewers have a ‘cascade effect’ on the wholesalers in the downstream. In the United States, for example, accompanying the concentration process in the brewing industry from the 1950s to the 1990s was the concentration amongst wholesaler distributors. Wholesalers that distributed

48

The global brewing industry

giant brewers’ products benefited from scale economies in distribution. It was suggested that the revenue generated by high-share Anheuser-Busch distributors was 95 cents per case, compared with 66 cents per case for low-share Anheuser-Busch distributors. The scale economies required in the distribution value chain, as a result of the consolidation of brewers, put huge pressure on wholesalers. Consequently, distributors had to consolidate (BW 2000a). A similar consolidation took place in the upstream value chain as well. For instance, the number of beverage malt wholesalers in the US dropped from 4,699 in 1972 to 2,910 in 1992, representing a 38 per cent decline (BI 1995). The integration of the downstream value chain is facilitated by giants’ adoption of advanced IT. For instance, Anheuser-Busch (Annual Report 2002: 3) provides wholesalers with satellite-based training, and its internetbased communication systems generate sales data and customised sales tools almost instantaneously. AmBev (2002: 13) equips each of its salesmen with a hand-held computer, which enables salesmen to download sales information remotely via mobile phones and allows the company to instantaneously monitor sales performance and decide the best price and volume mix in each sales outlet. Third, according to the observation of industrial analysts, giant brewers also have huge bargaining power and substantial influence on service providers further downstream in the value chain, such as logistics firms, advertising agencies and promotional goods manufacturers, etc. In brief, giant brewers’ strong ability to integrate the value chain constitutes a tremendous competitive advantage and builds up huge entry barriers to their territories.

Conclusions and implications We have seen that in the current era giant brewers from advanced economies have gained enormous competitive advantages through core business strategy, careful brand management, the adoption of the most advanced technologies in production and packaging, and tremendous endeavours in value chain integration. Morgan Stanley estimates that the sustainability of giant players in the beverage industry could reach as high as 15 to 20 years (MSDW 1998). The pursuit and possession of these competitive advantages have resulted in giant brewers’ ambitious global expansion since the 1990s, pushing the industry towards rapid consolidation. This era has seen unprecedented global consolidation led by global giants from advanced economies. Consequently, the bulk of players in developing countries are on the verge of being swallowed up. The fight for dominance by global brewers and the fight for survival and growth by local brewers shape the dynamic competition landscape of the brewing industry. The mainstream arguments on the role of big businesses may not be sub-

The global brewing industry 49 scribed to without careful consideration. The breakthrough in technological improvements led by global giants challenges the view that giant firms bring about inefficiency. As we have seen, not only have global giants, most of whom are oligopolies or monopolies, adopted the most advanced technologies in production, packaging and management, but they have also pushed associated suppliers to match their high standards on technological innovation. The introduction and development of advanced technologies in production and packaging are significantly attributable to global giants that hope to leverage such competitive advantages to improve efficiency and profit margins in their fight for global dominance. Consequently, as the systems integrators, global giant brewers push ahead the technological standards of the brewing value chain. In addition, giant brewers, most of whom have a history dating back to the nineteenth century, have not lost vigour or dominance over the years as suggested by Marshallians, but rather have gained tremendous competitive advantages and surpassed the latecomers in LDCs in a wide array of areas. The current era has witnessed unprecedented global dominance by global giant brewers. Giant brewers’ dominance does not simply take the form of increased global market share. More importantly, their integration of the brewing value chain in both the upstream and the downstream creates huge entry and catch-up barriers to latecomers. Equally importantly, their largescale acquisitions of and strategic alliances with large successful brewers in LDCs dramatically deepens their global dominance and may deprive latecomers of catch-up opportunities because many emerging national giants in LDCs can easily be swallowed up before they actually grow strong enough to challenge global giants’ dominance. From the global perspective, large giant firms compete fiercely against one another in the hope of achieving global dominance. There is a clear trend of consolidation across the world rather than the boom of small and mediumsized brewers. Through acquiring local brewers, global giants further intensify the domestic competition in major brewing markets. To obtain dominance, global giants integrate the value chain in associated industries not only within their own home markets but also across countries. The process of value chain integration speeds up the competition among global giants, facilitates innovation and lowers the unit costs of the final products. This mechanism improves the efficiency of core firms themselves as well as that of associated industries in the value chain. In contrast to the Marshallians’ claims that big businesses’ dominance will end in the long run, the boundary of big businesses is expanding to an unprecedentedly wide geographical reach as a result of their vigorous global penetration; this is strongly backed up by global giants’ great financial strength, advanced technologies, global brand management, efficiency and huge bargaining power in the value chain. Consequently, global giant brewers possess huge competitive advantages, whereas brewers in LDCs face substantial challenges. Before the catch-up of Chinese brewers is analysed in

50

The global brewing industry

detail, let’s take a closer look at the role of the state in firms’ catch-up. What difference does government support make, if any, to the catch-up of large Chinese brewers and the Chinese brewing industry as a whole? What are the implications of the transformation of the state’s role following China’s entry into the WTO for large indigenous brewers?

5

Industrial policies on the Chinese brewing industry

The Chinese government implemented the first systematic industrial policy on the food industry, including the brewing industry, in the early 1980s. This policy emerged out of special political and economic conditions. In political terms, the Third Plenary Session of the Eleventh Party Central Committee held in December 1978 marked the end of the Cultural Revolution. Economically, China adopted the ‘open policy’ in cities and the ‘household contract responsibility system’1 (cheng bao ze ren zhi) in rural areas. Under the contract responsibility system, farmers were provided with an incentive to invest in and work on the land. Consequently, food production rose significantly (China Food Industry Almanac 1985: 26), putting an end to the massive famine that occurred in the 1960s. This sharp increase in the food supply called for a corresponding development of the food processing industry and the guidance of appropriate industrial policies. As a result, ‘The Blueprint of China’s Food Industry: 1981 to 2000’ (Ministry of Light Industry of China 1985) and the ‘Seventh Five-Year Plan of the Food Industry’, two milestones in China’s food industry, were formulated and carried out. The state regarded the food industry as one of the country’s pillar industries (China Food Industry Almanac 1985: 19),2 framing a series of preferential policies to foster its development. Within the alcoholic beverage industry, the beer industry was given priority to develop.3 Beer production was targeted to grow fifteenfold by 2000 (ibid.: 11–12). It was throughout the late 1980s and the first half of the 1990s that the beer industry, like many other food industries, achieved dramatic growth. Starting from the late 1990s, the Chinese beer industry underwent fundamental changes, rooted once more in the reorientation of industrial policies. The development of industrial policy regarding the brewing industry followed two stages. From 1980 to the late 1990s, a wide array of preferential policies were carried out, principally through direct state intervention. The focus of the policy in this era was to foster the growth of the brewing industry and facilitate the establishment of a few large indigenous brewers to take on a role of industrial leadership. Since the late 1990s, considerably fewer preferential policies have been put in place, and direct state intervention has

52

Brewing industrial policies in China

reduced substantially. The focus of the policy in this period has been to guide the industry towards a market mechanism.

Industrial policies from 1980 to the mid-1990s The policies from the 1980s to the mid-1990s had a major impact upon the brewing industry, partly because of the diverse range of measures that policies effected and partly on account of a strong interventionism. Policies included selecting pillar industries and pillar firms, fostering large indigenous brewers, ownership reform, finance and taxation on preferential or privileged terms, and building up the brewing value chain, etc. Pillar industry Beer consumption in China stayed at a low level between the 1950s and the 1970s. But, as a result of fast economic growth throughout the 1980s, people’s living standard improved and the consumption of beverages, especially of beers, rose sharply with it (see Appendix 2). The problem, however, was that beer supply grew at a much lower rate than the growth of demand, meaning that the supply shortage of beers created a ‘sellers’ market’. To solve the problem, the central and local governments decided to boost the beer industry and beer’s associated industries during the period of ‘the Seventh and Eighth Five-Year Plans’.4 According to the classification drawn up by the state, China’s light industry5 consists of 44 sub-industries further sub-divided into ‘fundamental sectors’ (ji chu), ‘pillar sectors’ (zhi zhu) and ‘ordinary sectors’ (pu tong) according to their perceived importance to the economy. Fundamental sectors include the machinery manufacturing industry and the raw materials processing industry. Such sectors are taken to lay the foundation for the development of the pillar sector and the ordinary sector. Within the category of ‘pillar sectors’, the industrial policies have given priority to different sectors in different periods of time.6 The pillar sectors’ associated industries in the value chain, both upstream and downstream, have also been given priority to develop. Brewing was designated as a pillar sector in the second half of the 1980s (Yu 1997: 3) and granted a wide array of preferential policies. These policies did not target the strengthening of brewing alone but also aimed at supporting the brewing equipment manufacturing industry, given that the quality of brewing facilities and bottling lines was taken to have a direct influence on beers’ quality and brewers’ efficiency. Therefore, industrial policies also paid special attention to developing these associated industries. In the 1980s, the government spent more than USD200 million in introducing and incorporating advanced technologies associated with brewing manufacturing equipment. The investment in this regard included importing eight sets of caramelisation facilities, 50 filter facilities, 22 canning lines and more than 200 bottling lines (China Food Industry Almanac 1990: 243–4). Owing to these

Brewing industrial policies in China 53 endeavours, by the early 1990s the Chinese brewing industry was equipped with reasonable facilities to overcome any supply bottlenecks. Pillar firms In the 1980s, large state-owned enterprises (SOEs) made up the majority of the food industry. SOEs enjoyed many more preferential industrial policies than non-state-owned enterprises. A couple of large indigenous firms were selected as ‘national champions’ or ‘pillar firms’ by the central and local governments to lead the catch-up of the food industry (China Food Industry Almanac 1985). In the field of brewing, Tsingtao Brewery, Yanjing Brewery and Zhujiang Brewery were chosen as ‘pillar firms’ by Shandong provincial government, Beijing municipal government and Guangzhou municipal government, respectively. Tsingtao Brewery was even regarded by the state as a national champion and a state-level pillar firm to lead the development of the Chinese brewing industry (China Food Industry Almanac 1985 to 1990; Qingdao Almanac 1988 to 1990). The ‘pillar firms’ received from both central and local government a wide range of support measures that were unavailable to non-pillar firms. These measures (China Food Industry Almanac 1985: 13–14) took the following forms: 1

2 3

Government investment in establishing or enlarging pillar brewers’ brewing plants, Tsingtao Brewery being the largest beneficiary of this policy. On account of the strong government support, Tsingtao was able to complete a series of technological improvement projects in the 1980s and the early 1990s. These projects improved Tsingtao’s capacity from about 50 million litres per year in 1982 to 130 million litres per year in 1992 and significantly reinforced its domestic leadership (Annals of Tsingtao Brewery 1993: 61–5). Government support for R&D. Taxation deduction.

With the aid of these measures, the government expected that, ‘by 2000, most of the pillar firms could match the competitiveness of their global competitors in the early 1980s’ (China Food Industry Almanac 1985: 11). Although most ‘pillars’ still lag behind their global competitors, as will be analysed in the later chapters, these supports did play an important role in the catch-up trajectory of large indigenous firms and laid a valuable basis for them to outstrip their domestic peers so as to build up domestic leadership. Ownership reform In order to attract capital from various channels to foster the food industry, the Chinese government started in the 1980s to encourage a diversified

54

Brewing industrial policies in China

ownership structure. In particular, collective ownership and private ownership replaced the unitary state ownership which had dominated the economy for several decades. In addition, foreign investment was encouraged (China Food Industry Almanac 1985: 10, 14). This policy had at least two direct impacts on the brewing industry. First, a large number of small and medium-sized brewers under collective ownership (especially township and village enterprises – TVEs) mushroomed nationwide. Second, foreign brewers started building up their footholds in China in the late 1980s. Finance A landmark of the implementation of the preferential policies regarding the beer industry was the ‘Special Meeting on the Financing Issues of the Brewing Industry’, which was held in Hangzhou, Zhejiang province, in 1985 jointly by the Ministry of Light Industry, the National Planning Commission and China Construction Bank (CCB). The host parties of the meeting decided to jointly support 72 brewing projects nationwide. Priority was given to new product development, the importation of foreign technologies, the expansion of ‘pillar’ brewers and the development of bottling equipment manufacturers. After the meeting, the ‘big four’ banks, i.e. Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and CCB, took immediate action to finance those projects. CCB and its local branches gave special loans worth RMB833.4 million to approved projects (China Food Industry Almanac 1986: 56). BOC allocated a large amount of foreign reserves for importing foreign technologies and advanced brewing facilities (China Food Industry Almanac 1987: 97).7 ICBC supported many renovation projects (China Food Industry Almanac 1990: 98). ABC assisted many small and medium-sized TVEs. The brewing industry not only got direct financial support, but also benefited indirectly from the financial reforms of that era. In 1985, CCB changed its financing system from ‘allocating funds’ (bo kuan), whereby the bank allocated funds to firms or projects by the order of the National Planning Commission or the Ministry of Finance, and beneficiaries did not have to repay the funds, to ‘lending funds’ (dai kuan), whereby the bank lent funds based on its valuation of the projects, and beneficiaries had to repay loans unless specially approved by the government (China Food Industry Almanac 1986: 56–7). In this way, CCB was given the flexibility to allow certain projects that could not be financed under the ‘allocation’ scheme to be financed under the ‘lending’ scheme. One of the consequences was that some brewing projects that used to face difficulties in obtaining allocated funds could instead get substantial loans. This, to a large extent, boosted the rapid growth of the brewing industry in the late 1980s and the early 1990s. The other reform was the revision of the interest rate scheme. Under the old scheme, different industries were subject to different borrowing rates. For instance, firms in light industry were subject to higher borrowing rates than

Brewing industrial policies in China 55 firms in heavy industries. The highest borrowing rates were applied to food manufacturers, including brewers. Under the new scheme, however, borrowing rates were set according to borrowing terms instead of industrial differentiation. The longer the borrowing term, the higher the borrowing rate accrued. The brewing industry was a beneficiary of the reform because most brewing projects could be completed within a relatively short period of time, compared with projects in the heavy industries (China Food Industry Almanac 1986: 56–7). Therefore, the borrowing rates applied to brewing projects dropped significantly, which further stimulated the boom of the brewing industry. In addition, selected pillar firms were allowed the privilege of being floated on the domestic and international stock exchanges. A typical example was Tsingtao Brewery, which was chosen as one of the first batch of SOEs to be listed for trial purposes (Annals of Tsingtao Brewery 1993). Tsingtao was the first Chinese SOE floated on the Hong Kong Stock Exchange (HKSE) and one of the first batch of SOEs floated on the Shanghai Stock Exchange (SSE) in 1993 (Tsingtao Brewery, Annual Report 1993: 2). Tsingtao views the flotation as ‘a major milestone’ in its course of development (ibid.: 4). A total amount of over RMB1.5 billion funds (ibid.) obtained from the open markets (including Hong Kong) laid a solid base for Tsingtao’s take-off in that they were used either in technological improvement projects or for the company’s vigorous expansion. In summary, the financial support drastically boosted the growth of the beer industry. The number of brewers mushroomed from a few dozen in the 1970s to more than 700 by the mid-1990s. Beer production increased from about 650 million litres in 1980 to 15.9 billion litres in 1996, representing approximately a twenty-fourfold increase (see Appendix 2). Taxation and tariffs In an attempt to stimulate the development of the food industry, the State Administration of Taxation issued in 1985 A Notice of Lessening Regulations on the Food Industry (China Food Industry Almanac 1986) to echo the preferential industrial policies discussed previously. According to the Notice and other regulations stipulated in the following years (China Food Industry Almanac, various years; China Light Industry Almanac 1995), many preferential taxation regulations were carried out to boost the growth of the beer industry. The policies included the following key aspects: 1

2

Start-up firms in the food industry (including brewing) did not have to pay income tax in their first fiscal year; the profits tax in the following years could be partly relieved should the firms concerned encounter operating difficulties. The tariff on imported equipment used to upgrade a food manufacturer’s existing facilities could be exempted, with the approval of associated

56

3 4

5

Brewing industrial policies in China ministries or provincial governments; and value added tax (VAT) could also be partly exempted. A brewer that bought raw materials from and sold beers to other provinces could enjoy a 10 per cent deduction of VAT. The VAT on a brewer’s by-products sold to the feeding industry in the downstream value chain could be exempted between May 1994 and December 1995. This regulation was specifically aimed at encouraging brewers to facilitate the development of associated industries in the downstream value chain and meanwhile to reduce the waste of crop raw materials such as barley and rice.8 To reduce the waste of resources, brewers that used recycled glass bottles were allowed a 10 per cent deduction of VAT.

In addition to these measures, large pillar firms enjoyed even more preferential taxation policies. For instance, the State Administration of Taxation gave Tsingtao Brewery the green light in taxation payment. Unlike most SOEs, which in general were (and are) subject to income tax of 33 per cent,9 Tsingtao paid (and pays) income tax at a rate of 15 per cent until and unless a new enterprise income tax law stipulates otherwise (Tsingtao Brewery, Annual Report 1993: 40). In summary, the preferential taxation and tariff regulations noticeably stimulated the development of the food industry as a whole. The brewers were undoubtedly amongst the largest beneficiaries. The last three regulations, in particular, brought the brewing industry over RMB100 million in savings (China Light Industry Almanac 1995: 270). Building up the value chain During 1986 and 1990, the Ministry of Light Industry mapped out a ‘Key Projects Programme’ aimed at supporting domestic players to participate in both the upstream and the downstream value chain of the brewing industry. The programme consisted of 12 individual projects and cost RMB119.2 million in total (China Food Industry Almanac 1991: 289). The projects included developing malt processing facilities that had an annual capacity of 8,000 to 12,000 tons of malt grist production; developing caramelisation facilities; developing fermentation and cooling technologies; researching and commercialising domestically manufactured bottling lines (2,000 bottles per hour and 50–60 kegs per hour). Owing to this programme, by the beginning of the 1990s, domestic brewing equipment manufacturers were able to produce 20 sets of entire brewing lines, which could brew 50 million litres of beers per year (ibid.). The striking fact is that, even today, domestic brewing equipment manufacturers are lagging far behind their global competitors such as Krones and KHS, as we shall see in the later chapters. The government also took measures to ensure a continuous supply of raw materials to the brewing industry. For instance, barley and hop farms

Brewing industrial policies in China 57 were gradually built up in Xinjiang autonomous region, and Heilongjiang, Liaoning and Shandong provinces (Deng and Ma 1986: 78–9). It was during this period that the Chinese beer industry, for the first time in history, started its catch-up journey. Even though the achievements were rather humble by global standards, the completion of these projects did at least build up an entire brewing value chain where domestic players took increasingly important roles. It also enabled the industry to add an annual capacity of 12 billion litres (China Food Industry Almanac 1991: 289) to meet the rapid increase in demand. Summary Owing to a wide array of preferential industrial policies throughout the 1980s and the 1990s, the Chinese brewing industry achieved substantial growth. Beer supply quickly caught up with beer demand and the market was no longer a ‘sellers’ market’. A couple of large indigenous groups, notably Tsingtao Brewery and Yanjing Brewery, stood out as emerging national giants. Domestic players were capable of supplying most of the brewing manufacturing equipment, even though the overall technological and technical standards of these suppliers were comparatively low by leading global standards. Nonetheless, the industrial policies at this stage brought about many negative impacts as well. First, because of the preferential policies and strong local protectionism, a vast number of small and medium-sized brewers (e.g. TVEs) flooded into the market. This, together with arrival of foreign brewers, caused serious industry-wide overcapacity in the late 1990s. The dramatic increase in output was not achieved by exploiting scale economy, but rather by a simple aggregation of the production of a vast number of brewers. The policy of fostering a few national giants to exploit scale economy was far from being successful. Second, the preferential financing and taxation policies resulted in overheated investments. When the competition became severe after the mid-1990s, most small and medium-sized brewers failed to make profits or even to break even. Consequently, the industry as a whole was saddled with an extremely high level of net debts (China Food Industry Almanac 1994: 184). Third, the existence of the vast number of small and medium-sized brewers may have distorted the allocation of social resources, impeded large brewers’ national campaigns and slowed down the catch-up process of the industry. It was difficult for small brewers to explore the benefits of scale economy. Table 5.1 shows that the operating costs of small brewers were much higher than those of large brewers. In addition, severe competition forced brewers to cut prices in exchange for market shares, which caused industry-wide loss-making in the mid-1990s. Nonetheless, large brewers made considerably less losses than small brewers. As Figure 5.1 shows, there existed a strong correlation between scale and

58

Brewing industrial policies in China

Table 5.1 Costs comparison among Chinese brewers (per ton of beer brewed, 1990) Inputs

Units

The best

The worst

The best/the worst (%)

Average

Barley/adjuncts used* Water required Coal consumed Electricity consumed

kg tons kg kWh

170 15 100 90

230 100 1,000 500

73.9 15.0 10.0 18.0

200 25–30 150 N.A.

Source: Author’s calculation based on China Food Industry Almanac 1991: 289. Note: * The basic ingredient of beer is barley. Other raw materials such as wheat, maize, rice or syrup are adjuncts which are used to replace part of the malt to provide the beer with unique characteristics of aroma, appearance or flavour.

Figure 5.1 Scale vs. profitability of Chinese brewers, 1990. Source: Author’s research based on data from China Food Industry Almanac 1991.

profitability: none of the brewers whose capacity exceeded 50 million litres made losses; of the brewers whose capacity stood between 30 and 50 million litres, 13.6 per cent made losses; of the brewers whose capacity stood between 20 and 30 million litres, 25 per cent made losses; of the brewers whose capacity stood between 10 and 20 million litres, 32.7 per cent made losses; and as many as 58 per cent of the brewers whose capacities were less than 10 million litres could not break even. Finally, the distribution of brewers was geographically unbalanced – the coastal provinces were home to more than two-thirds of all brewers, whereas less than 10 per cent were located in the northern provinces. For instance, there were over 100 brewers in Zhejiang province but no single brewer in Tibet (China Food Industry Almanac 1987: 103, 280).

Brewing industrial policies in China 59

Industrial policies since the late 1990s Large SOEs face unprecedented challenges following China’s entry into the WTO. On the one hand, it is tough for them to obtain as many preferential industrial policies as before; on the other hand, these SOEs encountered severe foreign competition in their backyards. Grasp the big, let go of the small (zhua da, fang xiao) As previously discussed, the problem with small and medium-sized brewers is that most of them make losses because of lack of scale economy amid severe competition. The average loss in light industry (including brewing) reached over 40 per cent at the end of the 1990s (Yu 1997: 3). Huge amounts of investment and social resources were wasted to excessively develop SMEs. The assets of a large number of SMEs were cheaply written off when they went bankrupt or were taken over in the late 1990s. Clearly, it is impossible to rely on SMEs to lead the catch-up of the industry. SMEs are in general not equipped with advanced production facilities and updated technologies. Upgrading their facilities requires substantial investment, which, given the limited social resources, is neither rational nor realistic. Many SMEs are not strongly motivated to enhance competitiveness by introducing advanced technologies or upgrading facilities, but instead seek local protection. Therefore, grasping the big and letting go of the small is believed to be an effective way of enhancing the overall performance of light industry (Yu 1997). The Chinese government is determined to assist large indigenous firms to consolidate the market by facilitating capital restructuring and M&As: We [the government] must remove obstacles to capital restructuring . . . The restructuring is not just firms’ decision, but also government’s responsibility. The government and associated bureaus should guide and/ or facilitate well-qualified companies to acquire or merge with other firms; and help these companies to break up regional and local barriers. (Yu 1997: 3) As far as the brewers are concerned, the government has planned to facilitate the emergence of five national giants from 2000 to 2005. Each of the giants should have an annual capacity of 1 billion litres. The government has also planned to support two pillar brewers to build up two of the largest domestic brewing plants,10 each of which will have an annual capacity of 1 billion litres. Moreover, brewers with an annual capacity of 300 million litres and 100 million litres are expected to account for at least 30 per cent and 60 per cent of the total beer production, respectively. Most small brewers whose capacities are less than 100 million litres will be encouraged to close down (China National Bureau of Light Industry 2001b: 88). However, breaking down local barriers to foster cross-region M&As is extremely tough, as

60

Brewing industrial policies in China

shown in the soft drinks industry. For instance, the state once planned to develop a few national giants in the beverage industry but failed because of strong local protection. Eventually, five out of the eight large domestic soft drinks makers of the 1980s either went out of business or were acquired by foreign rivals in the late 1990s (interview with Madam Zhao Yali, Secretary-General of China Beverage Industry Association). Whether the brewing industry follows the path of the soft drinks industry depends on how firmly the policy of ‘grasp the big, let go of the small’ (zhua da, fang xiao) is carried out. Ownership reform According to the ‘Tenth Five-Year Plan of Light Industry’ (2001 to 2005), this round of ownership reform is much bolder than the previous one. The government is strongly determined to reduce SOEs’ weight in light industry. Unlike in previous decades, SOEs are now expected to take the dominant position in only a very few limited sectors, namely, salt, newspapers and sugar. Non-state-owned enterprises (including foreign players) are allowed to play major roles in most sectors of light industry (including brewing) (China National Bureau of Light Industry 2001a: 15). This is the first time since the formation of the People’s Republic of China (PRC) that SOEs have been allowed to give up their dominant positions in light industry. In addition, the Plan points out that the ownership structure in the new era will make fundamental changes, enabling SOEs to speed up the process of transforming themselves into shareholding companies, and light industry to consist of a mixture of ownership structures in which shareholding companies and joint stock companies take the dominant position. State-owned and state holding companies, and collective, private and foreign companies then play auxiliary roles (China National Bureau of Light Industry 2001a: 13). Meanwhile, under the Plan, strategic foreign investors would be allowed to buy non-tradable shares of listed and unlisted SOEs. This reform is set to have far-reaching impacts on large SOEs. First, government support will unavoidably reduce dramatically. Second, with the change of ownership structure, direct state intervention will be voluntarily and considerably reduced. Third, foreign rivals could get plenty of opportunities to acquire large SOEs, some of which might be national champions that have been fostered by the government through many hard struggles. Openness Since China’s entry into the WTO, not only brewing but also lots of other industrial sectors are open to virtually free foreign competition. ‘In the beverage industry, firms will be competing with domestic and foreign rivals in the marketplace according to the market mechanism . . . Intervention is no longer the government’s business’ (interview, China Beverage Industry

Brewing industrial policies in China 61 Association). However, this round of opening up is fundamentally different from that of previous decades. Foreign strategic investors are allowed to buy unlisted shares in SOEs, which provides an excellent bridge for global giants to swallow up large domestic players through acquiring state-owned shares at low prices. Nonetheless, most policy makers believe that ‘mergers between foreign and Chinese firms are a bilateral exercise. Foreign firms’ acquisition of domestic firms (including large pillar firms) is a facet of China’s amalgamation into the global economy. Therefore, we [policy makers] should not feel panic about it.’ Moreover, ‘M&As are firms’ strategic choice for the purpose of enhancing their competitiveness . . . therefore, we [policy makers] should not feel regret about it’ (Pan Beilei, Vice-Chairman of China Light Industry Association, quoted in Pan 2002: 23). Regarding the trend for global giants to acquire or team up with the most successful indigenous competitors, Pan holds that this phenomenon: accords with the global trend and fits domestic firms’ needs . . . on the foreign side, teaming up with large successful Chinese partners enables them to quickly make profits without huge investments; on the Chinese side, teaming up with global leading players may be the only choice for domestic players to carry out their ambition of going global. She goes on to comment that strategic alliance with foreign rivals is even better than similar arrangements among domestic rivals because ‘teaming up with a domestic player at best enhances a firm’s reputation and enlarges its scale in the domestic market but does not help to improve its reputation in the global market’ (Pan 2002: 24). As far as brewing is concerned, it is widely believed among policy makers that large indigenous brewers are ready to compete with giant foreign rivals; it is believed that, since the beer industry has been opened for quite a long time and almost all leading global brewers have had a presence in China, further opening up of the market poses no threat; strategic alliances between foreign brewers and indigenous brewers and foreign brewers’ purchase of successful indigenous brewers are regarded as a win–win game to improve indigenous brewers’ competitiveness (interview, China Light Industry Association). Not surprisingly, the brewing industry is amongst the most unprotected industries. Foreign brewers are allowed to either set up wholly owned facilities and JVs or buy domestic private enterprises or SOEs. In fact, more and more leading global brewers have deeply penetrated the Chinese market through buying state-owned large indigenous brewers to form so-called ‘strategic alliances’. Six out of the ten largest Chinese brewers have had allied foreign partners.

62

Brewing industrial policies in China

Finance Starting from the late 1990s, Chinese industrial groups could no longer receive the preferential financing that they used to enjoy. Direct state intervention in financing has become rare. Brewers, like firms in other sectors, are encouraged to get access to public financing through various channels, which include the following: (1) attracting foreign loans and foreign direct investments; well-qualified SOEs are also encouraged to go public in overseas markets; (2) leveraging domestic capital markets to seek funding; wellqualified firms are encouraged to go public in the domestic market or issue corporate loans; and (3) seeking funds from the ‘Light Industry Development Foundation’11 (China National Bureau of Light Industry 2001a, 2001b). Strengthening the value chain The government has decided to continuously encourage the development of beer’s associated industries in the value chain, in particular the packaging industry, so as to improve the overall competitiveness of the Chinese brewing industry (China National Bureau of Light Industry 2001b: 87). Moreover, to reduce Chinese brewers’ heavy reliance on imported barley, the government is encouraging the production of domestic barley. At present, both the quality and the quantity of domestically produced barley cannot meet the demand. Through fostering domestic production of barley, imported barley was expected to reduce to around 40 per cent of all barley used by 2005 (ibid.). However, few of these intentions are backed up by specific actions. This policy is little more than a symbolic gesture. On the one hand, following China’s entry into the WTO, the resources that the government can use to carry out policies are much reduced compared with the case in previous decades. On the other hand, it is widely believed among policy makers that the market mechanism, instead of direct intervention, should take the dominant role. Upgrading product structure The government has applied ‘three transformations’ to the beer industry, namely beers should be upgraded from poor quality to high quality, from low-end to high-end, and from high to low alcoholic content (China Light Industry Association 1995: 77). At the current stage, the premium market is virtually dominated by foreign brands. Chinese brands are expected to account for at least half of the premium market in the next decade (China National Bureau of Light Industry 2001b: 87). But there are few specific measures to achieve that goal. This policy has again become a symbolic gesture.

Brewing industrial policies in China 63 Geographical adjustment With the recognition of an extremely unbalanced geographical distribution of brewers – coastal regions and southern China account for 58 per cent of beer production, whereas the south-west and north-west represent less than 12 per cent (ibid.: 82) – the government plans to encourage brewers to invest in economically disadvantaged central and western regions. The per capita beer consumption in these regions is expected to match that in coastal regions by 2015 (ibid.: 88). Again, there are few specific measures aimed at achieving this goal. Research and development endeavours The government plans to assist large brewers to establish two to three statelevel brewing research centres, in an attempt to reduce domestic brewers’ reliance on imported brewing facilities and technologies (ibid.: 87). Wellqualified large SOEs which are heavily engaged in researching and commercialising advanced technologies may obtain certain subsidies from the government (China National Bureau of Light Industry 2001a: 16). In reality, it is very difficulty for ordinary brewers to obtain such R&D assistance. Leading brewers like Tsingtao and Yanjing did benefit from government support on one occasion but such assistance was a one-off small allowance.

Conclusions and implications State intervention, in the form of preferential industrial policies, has played an indispensable role in the growth of the Chinese brewing industry. We have seen that industrial policies have experienced significant changes since the first systematic policy was implemented in 1981. From 1980 to the mid-1990s, a wide array of preferential policies, including direct state intervention, were carried out to foster the growth of the brewing industry and the establishment of a couple of large indigenous brewers to lead the brewing industry. The outcomes of such policies were fruitful but they also created problems such as industry-wide low efficiency. In the current era, however, policy principles and the way that they are carried out have changed significantly. Such changes have both deep external and internal causes. Externally, China faces tremendous pressure from the West to pursue the so-called free market mechanism approach. Internally, the Chinese government expects to leverage privatisation to solve many weaknesses associated with SOEs, such as inefficiency and non-performing loans. Moreover, it is widely believed among policy makers either that most large indigenous firms in light industry are ready for free competition or that, whatever the consequences that the industrial policies bring about in light industry, they will have little impact on national security. Consequently, the focus of the current policy is to guide the industry towards the market

64

Brewing industrial policies in China

mechanism. One of its unavoidable consequences is that state intervention loosens. Many targets set to influence the development of the brewing industry, such as adjusting the geographical distribution of brewers and upgrading the product mix, are no more than a rough guide. Although the government reiterates the principle of supporting large indigenous brewers’ national and global campaigns, compared with policies in the previous decades there are very limited specific policies to bring about such a principle. This principle, in many circumstances, becomes a hollow slogan. The current industrial policy of fostering large indigenous brewers in fact raises deep questions. Are large businesses still important to China’s catch-up? Are large businesses ready to compete with penetrating global giants? What kind of state intervention should take place in the face of the challenge of the global big business revolution? As suggested by the unorthodox school and business historians mentioned in previous chapters, big businesses stand at the centre of the industrialisation process of advanced economies and are vital to the catch-up process of latecomers. In the case of the brewing industry, as suggested in Chapter 4, the role that global giants play in both their home markets and the global competition arena is significant. Such a role is not confined just to realising economies of scale or scope but rather extends to much wider spheres such as R&D and technological innovation, etc. These substantial spillover effects upon the whole economy cannot simply be replaced by a myriad of SMEs. The key point is whether large national champions are competitive enough to defeat global giant rivals in both the domestic and the global competition arenas. The analysis in the previous chapters suggests that in the current era global giants’ penetration into developing markets has dramatically speeded up. The time and space left for latecomers to gradually grow big through the free market mechanism is limited because global giants are in general much more competitive and more likely to bear down upon emerging national champions. Therefore, large SOEs have arrived at a crossroads in the face of extremely severe competition from foreign rivals (Nolan 2001, 2004a, 2004b). The problem, however, is that in such a critical era national champions are getting considerably fewer preferential policies than before. They are forced to rely on themselves to grow quickly and stronger to compete with the highly competitive global giants; otherwise, most of them may not escape the destiny of being swallowed up by foreign rivals. The ‘loose’ industrial policies in the current era make an increasing number of strategic alliances between successful national giants and highly competitive global giants possible. The consequence is that many successful emerging national giants which in themselves were fostered by the Chinese government through hard struggles are now entirely or in part acquired by foreign rivals under the name of so-called strategic alliance, as we will see in the later chapters. There is a high possibility, at least in the brewing industry, that foreign rivals may gradually become national giants’ largest shareholders. One has to ask: what was the point of making so many efforts in the past few

Brewing industrial policies in China 65 decades to foster national champions? What defines a national champion and where is the boundary of a firm? How much does the possibility of large indigenous enterprises becoming subsidiaries of their global giant competitors matter to China’s catch-up? This is a critical era in which large indigenous firms either emerge as national giants or are instead swallowed by global giants. The role of industrial policies should not be less but rather more important than before. If the Chinese government fails to foster large indigenous firms to become highly competitive to compete with penetrating global giants, many of the endeavours it has made during the past two decades might go to ruin. Policy makers should think thoroughly about what amendments need to be put in place at such a critical time. This point not only applies to the brewing industry but may also apply to many other industries.

6

The Chinese brewing industry

We have seen from the previous chapters that the literature suggests that global giant firms have gained tremendous competitive advantages in the current era of the global big business revolution. Chinese industries and large Chinese enterprises face unprecedented challenges from global giants. This chapter explores the challenge and catch-up issues that the brewing industry will have to face.

Beer in the alcoholic beverage universe We have seen previously that the beer industry benefited from preferential industrial policies in the 1980s and the 1990s. In the alcoholic beverage universe, beer achieved the fastest rate of growth. The largest alcoholic segment of the 1950s, namely Chinese liquor, has experienced a dramatic decline over the past decade. In contrast, the beer production volume accounted for just 4.5 per cent of the production of all alcoholic drinks in 1949 but this ratio went up to 28.5 per cent in 1983, 62.2 per cent in 1993 and 84.6 per cent in 2003. The 1949 to 2003 CAGR of beer reached 16.5 per cent, compared with 14.9 per cent for grape wine, 6.7 per cent for Chinese liquor and 6.1 per cent for other wines (see Table 6.1). Despite this phenomenal growth, though, the Chinese beer industry’s profitability stands at less than 3 per cent (see Table 6.2), being the lowest amongst the alcoholic beverage industries. There are many factors for this comparatively poor return, such as the small scale of production, market fragmentation, overcapacity, price war and the penetration of foreign brewers into the domestic market. These issues are dealt with more fully later.

Growth and development of the beer industry Growth and development on the supply side China produced just 7 million litres of beer when the PRC was established in 1949. Beer production gradually increased to approximately 500 million litres by the end of the 1970s (Liu 1999: 552). The industry’s rapid growth began in

The Chinese brewing industry 67 Table 6.1 Beer and other alcoholic drinks (million litres) Segments

1949

Chinese liquor Beer

102

Grape wine Others Total

%

1983

%

1993

%

2003

%

2003/1993 CAGR (%) −5.1

2003/1949 CAGR (%)

69

2,746

51

5,621

30

3,313

11

7

4

1,546

28

11,598

62

25,400

85

8.2

16.5

0.2

0

122

2

224

1

343

1

4.4

14.9

39

26

1,015

19

1,204

6

957

3

−2.3

6.1

148

100

5,429

100

30,014 100

4.9

10.3

18,646 100

6.7

Source: Compiled from China Food Industry Almanac, various years; China Light Industry Association. Note: Numbers may not add up due to rounding.

the 1980s when the Chinese economy started taking off and a wide array of industrial policies were implemented to foster its development. Figure 6.1 delineates the growth and development of the Chinese beer industry from a historical perspective. Beer production went up from 651 million litres in 1980 to 6,545 million litres in 1990 and then to 25,400 million litres in 2003 (see Appendices 2 and 3). In value terms, beer production rose from RMB4.3 billion in the late 1980s to RMB56.1 billion in 2003. Per capita production went up from less than 1 litre in 1949 to 19.1 litres in 2003 (China Light Industry Association; Beer Science and Technology 2004c: 69). The number of brewing firms mushroomed from a handful to over 700 in the mid-1990s and then dropped to 516 in 2003 (China Food Industry Almanac, various years; China Light Industry Association). In fact, similar trends to those shown in Figure 6.1 apply to many other industrial sectors, given China’s particular political and economic transformation in the past five decades. China is now the largest beer producer (in volume) globally, accounting for approximately 17 per cent of global beer sales (Euromonitor database). In the past decade, China has become a very dynamic beer market whose growth rate has far surpassed the global average. Imports and exports China started exporting beers in 1979. Export volume and value in 1980 were just 24.5 million litres and USD8.2 million respectively. The figures went up in 1990 to 62.5 million litres and USD41.3 million respectively, and then to 151.8 million litres and USD76.2 million respectively in 2003 (China Food Industry Almanac, various years; China Light Industry Association). Tsingtao Beer represents 51.3 per cent of China’s beer exports (ibid.; Tsingtao Brewery, Annual Report 2003) and has been the only flagship Chinese brand in overseas markets. Despite this substantial growth, beer exports have never been significant.

68

The Chinese brewing industry

Figure 6.1 Growth and development of the Chinese beer industry. Source: Author’s own research based on data from China Food Industry Almanac, various years; China Light Industry Association.

The share of export volume in the total beer production declined from 3.7 per cent in 1979 to 1.6 per cent in 1989 and then down to 0.6 per cent in 2003, representing an annual decline of 7.3 per cent (China Food Industry Almanac, various years; China Light Industry Association). This was mainly because beer supply grew much faster than exports, and global recognition of Chinese beers is negligible. None of the Chinese beer brands, including Tsingtao Beer, is able to compete with global leading brands in the global competition arena. The bulk of beer exports go to Asian developing countries, and Chinese beers’ presence in developed countries is very limited. Beer imports represent just less than 1 per cent of beer consumption (in value and volume terms). Germany, Mexico, Spain, the Netherlands and Korea account for over 96 per cent of the import volume and value (Beer Science and Technology 2004a: 67). Premium price, costly transportation and the fact that most global giant brewers have operations in China restrict the market potential of imported beers. Drivers on the demand side Apart from the preferential industrial policies discussed previously, the fastgrowing Chinese economy has served as a solid base for the growth of the beer industry. China’s per capita GDP went up from RMB460 in 1980 to RMB8,184 in 2002, suggesting an almost eighteenfold increase. When the

The Chinese brewing industry 69 inflation factor is removed, the increase is still as high as around sixfold and suggests a CAGR of 8.2 per cent in the past 22 years (China Statistics Year Book 2003: 55, 58). China’s per capita disposable annual income per urban household increased from RMB477.6 in 1980 to RMB7,703 in 2002 (ibid.: 344), suggesting approximately a sixteenfold increase. The Engle Coefficient Index for the urban population decreased from 56.9 per cent in 1980 to 54.2 per cent in 1990 and then to 37.7 per cent in 2002 (ibid.: 344). However, China is in general still a poor country. When the differentiation between the urban and rural populations and between the rich and the poor is taken into consideration, the purchasing power of the mass population is not as strong as may appear to be the case at first sight. Most consumers remain highly pricesensitive and prefer to buy low-end products priced at less than RMB2 per 640-millilitre bottle (equivalent to USD0.24). Unsurprisingly, the growth of the beer industry has been mainly confined to the low-end mass market segment. In addition, favourable demographics facilitated the industry’s growth. First, the Chinese population between 15 and 64 years of age increased from 350 million in 1953 to 754 million in 1990 and then to 888 million in 2000 (China Statistics Year Book 2003: 99), suggesting a 2.5-fold increase and a CAGR of 2 per cent. Second, China’s urbanisation progress in the past decade saw an increase in the urban population from 26 per cent of the total population in 1990 to 36 per cent in 2000 (ibid.). The enlarged urban population pool, with its relatively higher purchasing power, has become a stimulus to the beer industry. Nonetheless, it should be noted that people in most rural areas, particularly in the remote western regions where the progress of urbanisation and economic development remains slow, still cannot afford to buy beers.

Market consolidation Scale and consolidation Under the planned economy, there were only a few dozen brewers. A vast number of small and medium-sized breweries, including TVEs, emerged in the 1980s. At its highest, the number of brewers once amounted to as many as 741. With the brewing industry undergoing consolidation in the second half of the 1990s, the number of brewers gradually reduced. According to the China Light Industry Association, there were 516 brewers as of 2003. Not only has the industry been overheated but it has also been saddled with many structural weaknesses. First, scale always matters in the brewing industry. As illustrated previously, brewing demonstrates a remarkable relationship between production scale and efficiency (Hawkins and Radcliffe 1971; Cockerill 1977; Prais 1981; Tremblay 1985b; Scherer 1996). In the current era, leading global brewers’ production scales have been enormously increased. Not only do giant brewers

70

The Chinese brewing industry

explore scale economy in their home markets – with the aid of the latest production, packaging and monitoring technologies – but they also start to rationalise procurement, production, marketing and distribution on a global basis. This creates a huge barrier for latecomers to compete on the global playing field. In contrast, a big issue of the Chinese brewing industry is that the bulk of brewers operate on a very small scale which bears little comparison with that of global giants. In 1999, for instance, brewers whose annual production reached over 200 million litres only accounted for 4 per cent of the total number of brewers; brewers whose annual production was between 100 and 200 million litres accounted for just 5.3 per cent of the total number of brewers; and 78 per cent of brewers operated at a scale below 50 million litres (China Light Industry Almanac 2000: 218). We have seen in Chapter 5 (Table 5.1 and Figure 5.1) that there is a positive correlation between the small scale of Chinese brewers and their high costs, and a positive correlation between the small scale and the number of loss-makers. Although China is the world’s largest beer market in volume terms, the mass production was and is not achieved through exploiting scale economy, but rather through the aggregate production of a vast number of small players. Unsurprisingly, the profitability of the industry is extremely low. Table 6.2 shows that the ratio of profits before tax (PBT) upon production dropped from 4.7 per cent in 1993 to 2.2 per cent in 2003, suggesting a 7.3 per cent annual decline. Owing to poor profitability, return on assets, measured by profits before tax over assets, declined from 3 per cent in 1993 to 1.3 per cent in 2003, representing an 8 per cent annual decline. The lossmakers accounted for 34 per cent of the total number of brewers in 2003. The ratio of loss-makers reached as high as 42.5 per cent in the peak year of 1999. Achieving a certain level of consolidation is the basic requirement for realising scale economy in the brewing industry. A comparison across countries demonstrates the relationship between scale and consolidation and sheds light on the structural weaknesses of the Chinese brewing industry as opposed to that of major developed countries. Figure 6.2 summarises the relationship between profitability, measured by EBIT (earnings before interest and taxation), and consolidation in selected major beer markets. It suggests that consolidated markets with a higher Herfindahl-Hirschman Index (HHI) generate higher profits, whereas fragmented markets suffer from lower profits. In the consolidated markets, a few giants dominate and each giant operates on a large scale. In the relatively fragmented markets, however, there are a vast number of players but the overall profitability of the industry is lower. For instance, the industrial profitability of Brazil, where AmBev dominates, reached over 20 per cent in 2004. The Australian market, where Foster’s and Lion Nathan dominate, also enjoyed a high margin for the same period of time. The profitability of the American brewing industry, where Anheuser-Busch, SABMiller and Coors (Appendix 1) take up to 79 per cent

19,808 22,108 29,044 33,991 38,142 41,459 41,649 44,732 45,372 49,169 56,161

11.0%

11,598 13,382 14,845 15,915 17,870 18,817 19,860 21,114 21,659 23,872 25,400

8.2%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2003/1993 CAGR 2.9%

936 914 1,008 897 1,141 1,045 686 820 851 1,140 1,247

PBT

11.9%

31,232 40,810 56,049 66,617 76,382 83,678 88,106 90,552 90,400 91,729 96,061

Total assets

4.7 4.1 3.5 2.6 3.0 2.5 1.6 1.8 1.9 2.3 2.2 −7.3%

−8%

PBT/ production (%)

3.0 2.2 1.8 1.3 1.5 1.2 0.8 0.9 0.9 1.2 1.3

PBT/assets (%)

−2.9%

691 705 737 741 696 576 553 539 508 501 516

No. of brewers

Note: PBT refers to profits before tax.

Source: Author’s own research based on data from China Food Industry Almanac, various years; China Light Industry Association.

(RMB mn)

Production

Production (litres mn)

Year

Table 6.2 Snapshot of the Chinese brewing industry, 1993 to 2003

−0.1%

34.0 30.8 34.3 33.5 37.1 40.5 42.5 37.8 42.1 37.7 33.7

Loss-makers/ brewers (%)

72

The Chinese brewing industry

Figure 6.2 Profitability and consolidation: a global comparison. Source: Author’s estimation based on data from Euromonitor; brewers’ annual reports and websites. Note: The Herfindahl-Hirschman Index (HHI) is a measure of the level of consolidation. It is calculated by summing the square of the market share of each company in a certain industry. A value of less than 1,000 is considered unconcentrated; 1,000 to 1,800 suggests moderate concentration; and a value of more than 1,800 means high concentration.

of the market, was also reasonably high. In contrast, the Chinese beer industry is much less consolidated and its profitability has been considerably lower. The lower profitability has become a significant competitive disadvantage when Chinese brewers compete with global giants because lower profitability results in lower capital reserves. Many endeavours aimed at improving competitiveness could be negatively impacted by this financial constraint, and so this structural weakness has become a barrier to the catch-up of indigenous brewers. Second, the growth of the Chinese brewing industry has been by and large led by volume growth instead of price mix. The majority of Chinese beers are sold as economy products. Domestic beers compete severely against one another in low-end markets. Many heavily rely on price cutting to win market share (Liu 2000: 58), which consequently further jeopardises profitability and impedes them in their accumulation of capital to make technological improvements. These factors, along with the high costs associated with lack of scale economy, explain the industry’s poor profitability and declining returns (see Table 6.2).

The Chinese brewing industry 73 Third, the Chinese beer industry consists of too many loss-makers. The existence of many loss-makers, most of which are SMEs, jeopardises the industry’s profitability and distorts the distribution of social resources. In many circumstances it even causes the waste of social resources. This particular phenomenon in the course of China’s transformation does not reflect the conventional orthodox theories which hold that a myriad of SMEs stimulate competition and optimise the distribution of social welfare. The reality is that the Chinese brewing industry faces a tough dilemma: on the one hand, it suffers from overcapacity (Wang 1999: 3; Wang 2000: 42); on the other hand, most loss-makers do not go out of business. This particular phenomenon is to a large extent caused by local protection (Li 2000: 35; Wang 2000: 42; China Brewing Industry Association 2002: 2) or, in many cases, by the conflict of interest amongst and between the central government, local governments and individual bureaucrats: Some brewers do make losses . . . but they still employ a large amount of people and sometimes could even manage to get bank loans. For local governors, any potential social turmoil caused by downsizing may damage their political careers . . . therefore, many local governments would like them [loss-makers] to exist by offering certain assistance. Some [local governments] simply wait for foreign brewers or larger domestic brewers to take them [loss-makers] over. (Interview, China Brewing Industry Association) In the future, under pressure from the market mechanism and from China’s obligation to the WTO, it will be increasingly difficult for local governments to subsidise loss-makers in one way or the other. Reallocation of social resources including downsizing is certainly inevitable when the industrial consolidation speeds up. Consolidation pace The industry began to consolidate in the mid-1990s when a few large players equipped with better facilities and supported by preferential industrial policies launched their national campaigns. Foreign brewers’ rapid penetration served as another strong stimulus. Many large regional brewers have become subsidiaries of global giants. Eight out of the ten largest brewers of the 1990s have been partly or entirely acquired by foreign rivals (see Table 6.3). As the consolidation speeded up, the number of brewers dropped from 691 in 1993 to 516 in 2003 (see Table 6.2) and the market share of the top players increased substantially. For instance, the top ten players accounted for a mere 14.2 per cent of the total volume production in 1990 but the ratio went up to 52.8 per cent in 2003. The market share of the top three rose from 5.5 per cent to 32 per cent for the same period of time (see Tables 6.3 and 6.4). Tsingtao Brewery and Yanjing Brewery have made tremendous

Production (litres mn)

133.0

126.5

100.5

95.9

94.6 88.0

76.8

Brewers

Zhujiang Brewery

Shenyang Brewery

Tsingtao Brewery

Qianjiang Brewery

Yanjing Brewery San Miguel (Guangzhou) Brewery

Beijing Brewery

Table 6.3 The top ten brewers, 1990

1.2

1.4 1.3

1.5

1.5

1.9

2.0

Market share (%)

Beijing

Beijing Guangzhou, Guangdong province

Hangzhou, Zhejiang province

Qingdao, Shandong province

Shenyang, Liaoning province

Guangzhou, Guangdong province

Headquarters

24% of Zhujiang Brewery was bought by Interbrew in 2002 for USD19.5 million. It was bought by China Resources Breweries (CRB) in 1994. CRB holds 94% of Shenyang Brewery. Anheuser-Busch bought 22.5% of Tsingtao Brewery in 2002 for approximately RMB1.5 billion (USD182 million). AB holds 27% of Tsingtao in total. It entered into a JV agreement with CRB in March 2004 to reorganise Qianjiang into a JV. CRB holds 70% of the JV and the remaining 30% is held by Qianjiang. No foreign ownership involved presently. San Miguel’s subsidiary in China. San Miguel, headquartered in the Philippines, is a beverage and food conglomerate and one of the largest brewers in Asia. It was set up in 1941 and dominated about 80% of the Beijing market in the 1980s. China Strategic Holding Ltd acquired 55% of Beijing Brewery in 1993. In 1996, Asahi, a leading Japanese brewer, bought China Strategic Holding’s shares and renamed the company Beijing Beer Asahi Co. thereafter.

Comments

71.8

69.9

929.8 6,545

Laizhou Brewery

Yantai Brewery

Top ten Chinese market

14.2 100.0

1.1

1.1

1.1

Yantai, Shandong province

Laizhou, Shandong province

Wuhan, Hubei province

It was restructured as a JV with Danone in 1997 and thereafter renamed Euro Dongxihu Brewery. CRB acquired Danone’s 60% holdings in 2001. The company plays an important role in providing CRB with access to Hubei province. Yanjing Brewery acquired 80% of the company in 2000. Asahi acquired 53% of the company in 2000.

Source: Author’s own research; Annals of Tsingtao Brewery 1993; China Food Industry Almanac 1991: 258–9; Yanjing Brewery, Annual Report 2002, 2003; company websites.

72.8

Dongxihu Brewery

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The Chinese brewing industry

Table 6.4 The top ten brewers, 2003 Brewers

Production Market Headquarters (litres mn) share (%)

Comments

Tsingtao Brewery

3,338.0

13.1

Qingdao, Shandong province

China Resources Breweries (CRB)

2,540.0

10.0

Hong Kong

Yanjing Brewery Harbin Brewery

2,230.0

8.8

Beijing

1,170.0

4.6

Henan Golden Star Brewery

938.0

3.7

Harbin, Heilongjiang province Zhengzhou, Henan province

Chongqing Brewery

910.0

3.6

Chongqing

Zhujiang Brewery

882.0

3.5

Guangzhou, Guangdong province

Sedrin Brewery

578.0

2.3

Putian, Fujian province

Lion Group *

411.3

1.6



Anheuser-Busch bought 22.5% of Tsingtao Brewery in 2002 for approximately RMB1.5 billion (USD182 million). AB holds 27% of Tsingtao. A JV between SABMiller and China Resources Enterprise. The former holds 49% of CRB and the latter holds 51%. No foreign ownership involved presently. Anheuser-Busch bought 100% of Harbin Brewery in 2004. It is a collective company with annual capacity of 1 billion litres and over 4,000 employees. 19.5% of Chongqing Brewery was acquired by S&N for about RMB525 million (USD63.5 million) in 2003. 24% of Zhujiang Brewery was bought by Interbrew in 2002 for USD19.5 million. It has a capacity of 800 million litres and employs 1,159 people. In 2002, the sales volume and evenue reached 433 million litres and RMB910 million, respectively. It has no foreign ownership thus far. It is a diversified Malaysian conglomerate. Interbrew bought Lion’s brewing operations in China for a cash consideration of over RMB2 billion (USD263 million).

The Chinese brewing industry 77 Huiquan Brewery

405.9

Top ten Chinese market

13,403.2 25,400

1.6

Huian, Fujian province

Yanjing Brewery bought 38% of the company in 2003 and became Huiquan’s largest shareholder.

52.8 100.0

Source: Author’s own research; Beer Science and Technology 2004b: 72; Tsingtao Brewery, Annual Report 2003; company websites. Note: * Lion Group sold off its beer businesses to Interbrew in September 2003 and September 2004 for a cash consideration of USD263. InBev operates, as of November 2004, 18 breweries in China and produces about 3,000 million litres of beer per year.

efforts to lead the industrial consolidation, as we will see in Chapters 7 and 8. It is acknowledged by industrial analysts that the ongoing consolidation is still at an early stage. Virtually no single brewer accounts for more than 15 per cent of the market. But the consolidation amongst the top ten domestic players could be extremely tough in that: 1 2

3

4

Local protection presently remains a barrier. Top domestic brewers in general do not want to be taken over by domestic rivals. In many cases, they would prefer to be acquired by foreign rivals; the reasons for pro-foreign takeovers are complicated but the premium takeover price that an MNC generally pays, the prestige of being part of a global giant, and the job security, personal welfare and career development of senior management are significant factors. The fact that two out of the top three and six out of the top ten brewers have global giants as their significant shareholders (see Tables 6.3 and 6.4) is one of the greatest barriers to creating a single indigenous giant (details to be discussed in Chapter 7). As a matter of fact, when the sales value instead of volume is used to rank the top ten and when global giants’ shares in large indigenous brewers are also taken into consideration, the bulk of the top ten are indeed already in the hands of global giants. In this sense, the battle amongst indigenous brewers is becoming a battle amongst global giants. As analysed in Chapter 5, preferential industrial policies are increasingly weakening. Large indigenous brewers have to rely on themselves to compete in the marketplace. Compared with the situation in previous decades, leading indigenous brewers are now subject to more challenging threats, of which the risk of being swallowed up by global giants is the main one.

Another associated issue is how the consolidation improves the competitiveness of the industry as a whole. If the consolidation is just a simple

78

The Chinese brewing industry

integration of small brewers into large brewers, from which scale synergy and technological improvement are absent, the benefits from the consolidation can be vastly discounted. In many circumstances, acquired small brewers could even become long-term liabilities to large acquiring brewers. Integrating acquired brands is by no means an easy task, as we shall see in the chapters to follow.

The penetration of leading global brewers Leading global brewers started to build footholds in China in the early 1990s, and their penetration intensified dramatically in the late 1990s. However, neither the huge market nor the rapid penetration guarantees a successful performance. As we shall see, what counts could be the mode of entry. In the past few years, China has witnessed a great deal of foreign acquisitions and increasing strategic alliances between foreign and large indigenous brewers. Entry mode – greenfield investment Lion Nathan, the second-largest Australian brewer, was the first foreign brewer to set up a greenfield plant in China. With a strong commitment to the Yangtze River Delta (YRD) region, Lion Nathan formed a joint venture with Wuxi Taihushui Brewery in 1995 and later increased its holding to 90 per cent. In 1997, Lion Nathan invested USD150 million to set up Lion Nathan Beer & Beverages Co. in Suzhou, a highly strategic city in YRD. It was the only wholly foreign-owned brewery in China at that time (Lion Nathan annual reports and websites). The Suzhou Brewery, however, has been making losses since its completion, which was to a large extent caused by the difficulties associated with greenfield investments. Lion Nathan was unfamiliar with methods of running business in China. As the first greenfield investor in the Chinese beer market, the company had no previous experiences to draw lessons from. The company mismanaged fundamentals and brand positioning because of its lack of experience (Lion Nathan 2002). It eventually had to sell off the China brewing businesses to CRB in early 2005. Lion Nathan’s experience illustrates the enormous difficulties and huge costs of entering China without the collaboration of domestic brewers; it also sheds light on an increasing pattern of foreign acquisitions being simultaneously accompanied by strategic alliances between foreign and leading domestic brewers. Entry mode – strategic alliance The most successful foreign brewers are those that have local partnerships, among which SABMiller, Anheuser-Busch and Interbrew stand out. SABMiller, one of the most profitable foreign brewers in China, carried out its expansion through CRB, a joint venture set up in 1993 between SABMiller

The Chinese brewing industry 79 1

and China Resources Enterprises (CRE). Since its establishment, CRB has been expanding through aggressive acquisitions of successful local brewers in SABMiller’s strategic regions – the north-east, which is one of the highest per capita beer consumption regions, and Sichuan province, which is the most heavily populated. The acquisition in 2001 of Blue Sword Brewery and Leshan Brewery brought SABMiller the dominant position in Sichuan. The acquisition of New Three Star Brewery, Snow Leopard Brewery and Dalian Bangchuidao Brewery in the same year made SABMiller the largest foreign brewer in the north-east. Since the acquired brewers are leading regional players whose brands enjoy strong local loyalty, SABMiller does not replace them with its global core brands. More importantly, SABMiller’s successful entry is greatly attributable to the partnership, since tough issues can be easily solved through CRE, as commented on by Chris Barrow, the Managing Director of SABMiller Asia: Our partners are China experts. They have experience of doing business there. As a result they have amazing contracts that can cut the red tape surrounding many issues: they can bring their other commercial operations to bear in a number of areas; they have access to people, they know the market and understand the rate of change required. We have been able to harness our knowledge of the beer industry with their knowledge of China and come up with an awesome team. (Quoted in Everatt 2000: 10) Equity ownership has gained more popularity in recent years. For instance, Interbrew acquired 24 per cent of Zhujiang brewery, the seventh-largest Chinese brewer, for a cash consideration of USD19.5 million in 2002. This strategic alliance followed a Memorandum of Understanding signed in Shanghai in March 2002 by the Belgian prime minister, Guy Verhofstadt, and the Mayor of Guangzhou, Yuan He Lin, in the hope of enhancing the longterm relationship between Interbrew and Zhujiang. Interbrew takes a rather active role in the partnership not only because it is the second-largest shareholder of Zhujiang, but also because it is one of the forces behind transforming Zhujiang into a public company by sharing its experience in the capital market (Interbrew website). The partnership is rewarding to Interbrew: Zhujiang’s solid market position and the local government’s support provide Interbrew with a favourable platform for further expansion in southern China. It will be interesting to see how the Zhujiang/Interbrew alliance develops, given that Interbrew always prefers a ‘majority participation in any of its acquisitions, or at least a contractual assurance this will be the case over time’ as well as a ‘full decision control’ over its acquired companies (Dezutter 1997: 140). Similarly, AB’s acquisition of 27 per cent of Tsingtao Brewery is having far-reaching influences on both Tsingtao Brewery and the Chinese brewing industry, as we shall see soon in Chapter 7.

80

The Chinese brewing industry

Geographical presence The Chinese market has become a fierce battlefield among giant brewers, and they now have a very strong presence in almost all affluent regions. At the current stage, SABMiller holds a dominant position in the north-east and Sichuan province through its JV CRB. It is estimated to hold about 75 per cent of the Liaoning and Jilin markets as a whole (CICC 2003: 8). Anheuser-Busch holds a strong position in Hubei province. Its strategic alliance with Tsingtao Brewery may strengthen its presence wherever Tsingtao holds dominance. Anheuser-Busch controls approximately 50 per cent of Heilongjiang market (ibid.) through Harbin Brewery, which was acquired in 2004. InBev (Interbrew and AmBev) is building up a strong position in Zhujiang River Delta (ZRD) and YRD. It holds about 40 per cent of the Guangdong market (ibid.) through Zhujiang Brewery in which InBev has 24 per cent of equity interests (Interbrew website); and it has obtained 30 per cent of the Zhejiang market (ibid.) since its acquisition of Lion Group’s beer businesses. Japanese brewers converge on YRD, ZRD, Shandong and Fujian provinces. Heineken (company website) is the largest player in Hainan province and competes intensively in YRD. Carlsberg strategically targets the north-west and south-west. It holds about 41 per cent of the market share in Yunnan province, 36 per cent in Gansu province, 60 per cent in Xinjiang autonomous region and 20 per cent in Qinghai province (Carlsberg website and Annual Report 2003). Competitiveness Foreign brewers are competitive. Table 6.5 shows that the number of foreign brewers declined from 126 in 1996 to 108 in 2002, but their share in the total Table 6.5 Foreign brewers’ presence in China Year

1996 1997 1998 1999 2000 2001 2002 2002/1996 CAGR

No. of foreign brewers * 126 120 101 95 101 103 108 −2.5%

Foreign brewers/ total brewers (%)

Foreign brewers’ production/total production (%)§

Foreign brewers’ assets/ total assets (%)

17.0 17.2 17.5 17.2 18.7 20.3 21.6

35.0 37.0 37.1 37.5 36.7 25.9 38.0

35.1 38.4 38.8 38.8 37.3 37.6 37.4

4.0%

1.4%

1.0%

Source: Author’s research based on data from China Food Industry Almanac; China Light Industry Almanac, various years; China Light Industry Association. Note: * Refers to greenfield investments and JVs from foreign countries, Taiwan province, Macao and Hong Kong; § value production.

The Chinese brewing industry 81 number of brewers went up from 17 per cent to 21.6 per cent as a result of the industrial consolidation. In general, foreign brewers are equipped with better facilities and advanced technologies. By 2003, their assets accounted for 37.4 per cent of the total assets of the Chinese brewing industry, and their production (in value terms) accounted for 38 per cent of China’s total beer production. Most foreign brewers pursue a strategy of focusing on premium brands, whereas most domestic brewers produce and market low-value-added economy products. Industrial analysts estimate that about 80–90 per cent of the premium segment is controlled by foreign brands. Anheuser-Busch’s Budweiser is the number one premium brand (Anheuser-Busch 2003), holding about 50 per cent of China’s premium market (quoted from Tsingtao Brewery’s website). Its Bud Ice is competing well in the super-premium segment. Leading global giant brewers’ profit margins are much higher than those of Chinese brewers.

Brands We have seen previously that brand serves as one of the most important competitive advantages in the beverage industry. The implications for different markets, however, vary considerably. In China, the mass market is price-driven, but the emerging middle class is concerned more about brand image and beer quality (Euromonitor 2004). With the aid of brand value creation activities such as vigorous advertising, sponsorships, community schemes and packaging innovation, etc., global giant brewers concentrate on key high-end brands, targeted at consumers with higher purchasing power. It is only in recent years that domestic players have started paying attention to brand management. A few emerging national giants, particularly Tsingtao Brewery and Yanjing Brewery, have just started to build up a nationwide brand system, as we shall see in the later chapters. There is no national brand per se, but Tsingtao Beer (CICC 2002: 19) is the best-known brand in many Chinese cities. In contrast, most small and medium-sized domestic brewers have not started building up a concrete brand system. Instead, they launch a large number of brands. Once a particular brand is no longer welcome in the market, new brands are launched to replace the old ones. As opposed to global giants, domestic brewers are less competitive in terms of brand management (interview, China Brewing Industry Association).

Technology and innovation For a lengthy period from the 1950s to the 1980s, Chinese brewers’ progress in innovation and technological improvements was extremely slow. The ‘Key Projects Programme’ launched by the government in the mid-1980s, as presented in Chapter 5, improved the production standards of a couple

82

The Chinese brewing industry

of indigenous brewers and facilitated the much-needed development of the brewing machinery manufacturing industry. Nonetheless, the endeavours were far from sufficient to thoroughly improve the overall underdevelopment of the brewing industry and its associated industries in the value chain. The mid-1990s witnessed aggressive penetration from global giants. To survive and compete, large indigenous brewers have had to draw attention to innovation, technological improvements and R&D. For instance, Tsingtao Brewery and Yanjing Brewery plan to allocate roughly 2–4 per cent of their annual revenues to R&D. They have also made progress in the development of new products. Given all this progress, however, Chinese brewers still face catch-up gaps. For instance, Tsingtao (Annual Report 2002) is struggling to stabilise the taste of Tsingtao Beer brewed in different locations. This, however, is hardly an issue for global giants such as Anheuser-Busch or Heineken, whose globally brewed products retain the same clean tastes. To improve the overall technological and technical standards of the industry, all indigenous players, regardless of size, will have to make huge efforts. The problem is that the bulk of domestic brewers, in particular small and medium-sized players, are incapable of doing so: Many small and medium-sized breweries are short of capital to make innovations or introduce advanced equipment . . . These brewers can only compete in the low-end segment but foreign brewers take the risk of remaining in the high-end market even at the expense of losing money in the initial years because of their financial strengths and advanced technologies which reduce the unit costs. (Interview, China Brewing Industry Association) As far as packaging innovation – an important competitive advantage in the beverage industry – is concerned, foreign brewers take the lead both globally and in the Chinese market. For instance, Anheuser-Busch has been a consistent innovator in the Chinese market. In 1998, its brand Budweiser introduced China’s first thermographic foil label, which could indicate when the bottle’s contents reached an ideal drinking temperature. In 2001, Budweiser introduced China’s first embossed beer bottle, along with other innovations such as vertical labels, fluted beer cans and large-mouth can openings (Anheuser-Busch website). In contrast, the Chinese brewers’ response is considerably slower. At present, no Chinese brewers are using PET or PEN bottles. As the largest Chinese brewer, Tsingtao is no exception. Its main packaging system has not been altered for decades. The encouraging sign is that emerging national giants like Tsingtao Brewery and Yanjing Brewery are putting efforts into making improvements, as we shall see in the chapters to follow.

The Chinese brewing industry 83

The WTO impact The brewing industry does not belong to ‘protected industries’ following China’s entry into the WTO. The impact of revised duty has been very limited. The import duty on beers was reduced from 42 per cent in 2002 to zero per cent in 2004 (Ministry of Foreign Trade and Economic Cooperation 2001: 171), but it has not brought about a substantial increase in imports, other than a limited increase in super-premium beers, because most brewers would rather set up operations in China to avoid high transportation costs. The duty rate of imported raw barley, a major ingredient for brewing premium beers, remains at a low rate of 3 per cent (ibid.: 149). The duty on imported hops has reduced from 16 per cent to 10 per cent (ibid.: 156) but it makes little impact because the volume of imported hops is negligible. Foreign firms and Chinese firms are subject to the same government regulations (Wang 2002) following China’s entry into the WTO. Direct and indirect state intervention will have to reduce substantially. The likelihood of domestic brewers relying on government support to enhance their competitiveness is diminishing. More importantly, the property right reform, aimed at reducing government’s shareholding in SOEs, is set to have the most far-reaching impacts on large indigenous firms in that this scheme will substantially raise the likelihood of large SOEs being taken over by competitive global giants. From this point of view, it is no exaggeration to say that the Chinese government’s attempts since the 1980s to nurture a few national giants to compete with global giants in both the domestic and the global marketplace may face the challenge of crumbling. To fulfil the WTO obligations, the Chinese government plans to reform the nationwide taxation regulations. In the following few years, both indigenous firms (including brewers) and foreign firms will be subject to the same level of income tax rate (interview, China Light Industry Association). This reform will provide a fairer competition environment and benefit most domestic brewers which have been subject to the normal rate of income tax. Nonetheless, a couple of emerging national giants, in particular Tsingtao Brewery and Yanjing Brewery, which have been supported by preferential taxation regulations, will be badly hit. As we shall see in Chapters 7 and 8, such a reform could lead to a substantial drop in these brewers’ net profit margin, which would subsequently lower their capital reserve that can be used in competitivenessenhancing activities. The deteriorating profit margin makes these firms more vulnerable in the face of severe global competition.

Conclusions and implications As a result of China’s fast-growing economy and favourable demographics, as well as preferential industrial policies, the beer industry achieved remarkable progress in the past two decades. China is now the most dynamic and the largest beer market (in volume terms) globally. However, the industry is

84

The Chinese brewing industry

besieged by structural and non-structural weaknesses. In the past few years, a few large emerging national giants (e.g. Tsingtao Brewery and Yanjing Brewery) have made certain progress in technological improvements and R&D. Nonetheless, the bulk of domestic brewers, in particular small and medium players, have been incapable of and have not paid enough attention to innovations and technological improvements. Chinese brewers as a whole have to fill large catch-up gaps in a wide array of areas. It is not to say that the Chinese brewing industry bears no competitive advantages at all. In some areas, large indigenous brewers do possess competitive advantages that penetrating global giants cannot replicate, such as well-established sales networks, good relationships with local governments, successful experiences accumulated over years, and a better understanding of local demands, etc. However, these advantages are indeed weakening. The traditional sales networks are being challenged by increasingly popular modern trade such as supermarket and hypermarket chains; and global giants have also penetrated premium end-user markets such as high street restaurants, hotels and bars. The good relationships with local governments will no longer matter as much as they did following China’s entry into the WTO. The successful experiences are being passed on to global giants through so-called strategic alliances between global giants and indigenous large players. Global giants have also quickly adjusted their strategies according to past lessons learned. On the global playing field, Chinese brewers are not in a position – now or in the near future – to compete with global giants. The burning issue that large Chinese brewers face at the current stage is, however, not going global, but rather securing their backyard in the face of ambitious foreign penetration. The industry is undergoing consolidation, and a few large indigenous brewers such as Tsingtao Brewery and Yanjing Brewery are strongly determined to lead the consolidation. China has become a big attraction to leading global brewers. Foreign brewers’ ambitious penetration, in the form of explosive M&As and increasing strategic alliances, is radically altering the competition matrix and speeding up consolidation. On the one hand, large domestic brewers face tremendous challenges. In order to survive and grow, they have to promptly enhance their competitiveness in a wide array of areas. The need to catch up pushes domestic large brewers to seek foreign strategic alliance, in the hope of obtaining advanced technologies and capital. Simultaneously, they have to speed up their fight for dominance; otherwise, markets might be swallowed up by ambitious foreign rivals. On the other hand, the extremely intense competition also pushes foreign brewers to seek cooperation with leading domestic brewers. These two forces jointly result in the increasing popularity of the so-called strategic alliance. This pattern, however, may eventually increase the catch-up difficulty of Chinese brewers and increase the likelihood of large indigenous brewers being swallowed up by global giants. It is worth noting that the consolidation could be painful if appropriate

The Chinese brewing industry 85 industrial policies are not in place to guide the consolidation process and to protect the emerging indigenous large brewers from being squeezed out by global giant brewers. At the same time, however, certain social aftermaths, such as consolidation-induced downsizing, should also be taken into consideration because the consolidation of the brewing industry is, after all, happening in an era in which many industries are simultaneously going through a similar structural adjustment. So far we have seen from a generic perspective the transformation of the Chinese brewing industry and its competitiveness. Clearly, the very relevant questions that need to be asked are: how competitive are large individual indigenous brewers? What are their reactions to the global big business challenge? The following case study chapters shed light on these issues.

7

The catch-up of Tsingtao Brewery

We have seen that, in the epoch of the global big business revolution, global giant brewers gain tremendous competitive advantages in the ongoing global consolidation. The fight for dominance by global giant brewers and the fight for survival and growth by local brewers shape the dynamic competition landscape of the brewing industry. Global giant brewers’ ambitious penetration into the Chinese market is radically altering the competition matrix of the Chinese brewing industry and speeding up the consolidation process. Large Chinese brewers are facing unprecedented challenges. Their increasing strategic alliances with foreign brewers raise deep questions. This chapter examines the catch-up gaps that Tsingtao Brewery, the largest Chinese brewer, faces, and its tremendous efforts to shorten the gaps by making a range of strategic adjustments in its fight for national championship. The analysis of Tsingtao’s struggle to catch up has strong implications for other large indigenous firms.

A brief history of Tsingtao Brewery Tsingtao Brewery is one of the oldest breweries in China. Its main business is manufacturing and distributing beer in the domestic market. Tsingtao Beer is one of the oldest beer brands in China and the flagship Chinese beer in overseas markets. Headquartered in Qingdao, the company owns 47 breweries and three malting mills, and employs 28,000 people in 17 provinces (Tsingtao Brewery, Annual Report 2003). Its vigorous expansion since the mid-1990s has made Tsingtao the largest player in the domestic market. Tsingtao Brewery was originally named Germania-Brauerei Akt.-Ges, Tsingtau, and founded by German businessmen in 1903 (the twenty-ninth year of the Guangxu Emperor of the Qing Dynasty) when Qingdao City was under German occupation. The firm was established to meet the demands of German soldiers and foreign residents in Qingdao. In its early years, the production and capacity of Tsingtao Brewery stood at just less than 2 million litres per year (Annals of Tsingtao Brewery 1993: 1). Given its low production level, the costs were high, since all the production equipment and raw materials were imported directly from Germany. Its product variety consisted

The catch-up of Tsingtao Brewery 87 only of dark and light beers. Soon after its start-up, Tsingtao Beer became available in colonial cities like Shanghai, Qingdao and Tianjin (ibid.). Following the outbreak of the First World War in November 1914, Qingdao City was occupied by the Japanese and, as a result, Tsingtao Brewery was purchased in 1916 by DaiNippon Beer Company Ltd.1 During the period of Japanese occupation from 1916 to 1945, the brewery was upgraded and expanded on a large scale. Tsingtao Brewery produced many brands including Tsingtao Beer, Asahi, Sapporo, Fushou and Lion. Tsingtao’s products gradually became recognised in China and South-East Asian markets like Saigon (Vietnam) and Singapore (Annals of Tsingtao Brewery 1993: 2). In short, the German occupation and Japanese colonial rule laid a basic foundation for the development of Tsingtao Brewery. After a short period (between 1945 and 1949) of management by the KMT government, Tsingtao Brewery was handed over to the Qingdao People’s Government, following the establishment of the PRC in 1949. In the 20 years between 1959 and 1978, however, the company was a typical SOE and made slow progress. In 1950, its output was only 1.8 million litres and its productivity was a mere RMB3,223 per employee. From the 1950s to the 1970s, although the company’s absolute growth in terms of outputs, productivity and net profits increased noticeably, its long-term growth rates were rather moderate. For instance, the 1960 to 1970 CAGRs of sales, net profits and productivity were just 2.0 per cent, 4.9 per cent and 2.3 per cent, respectively. Owing to the open policy, which started in 1979, and favourable policies on the brewing industry, as analysed in previous chapters, Tsingtao’s growth throughout the 1980s significantly surpassed that of previous decades. The 1980 to 1990 CAGRs of sales, net profits and productivity stood at 21.8 per cent, 29.7 per cent and 16.7 per cent, respectively (see Appendix 4). After a long period of being state-run, the milestone of Tsingtao’s development came in 1992 when the State Planning Commission chose the company as one of the nine experimental SOEs to go public. In 1993, it was listed on the SSE and the HKSE and became the first Chinese SOE listed overseas (Annals of Tsingtao Brewery 1993: 4). Since then, the mechanism of its management and operations has undergone a thorough overhaul.

Development and financial performance Tsingtao has experienced astonishing growth since the 1980s, partly because of the dynamics of the Chinese brewing industry and partly because of a series of strategic adjustments that Tsingtao adopted. In the last decade, it has grown at an average rate of over 20 per cent; its market share in volume terms has risen from 2 per cent to 13.1 per cent; employee numbers have gone up from 3,688 to over 28,000; and the number of breweries has increased from 4 to 47 (see Appendix 5). The company’s total assets have also seen remarkable growth because of growing sales and vigorous expansion (see Figure 7.1).

88

The catch-up of Tsingtao Brewery

Figure 7.1 The growth of sales and total assets of Tsingtao Brewery. Source: Compiled from Tsingtao annual reports.

Figure 7.2 Sales, EBIT and profits growth of Tsingtao Brewery. Source: Author’s calculation based on Tsingtao annual reports, various years.

In 2003, Tsingtao generated sales, EBIT and net profits of RMB6,713 million, RMB526.4 million and RMB245 million, respectively. The 1999 to 2003 CAGR of sales and EBIT reached 31 per cent and 42 per cent, respectively. Return on equity (ROE), return on capital employed (ROCE) and return on assets (ROA) also saw steady growth (see Figures 7.2 and 7.3).

The catch-up of Tsingtao Brewery 89

Figure 7.3 Returns of Tsingtao Brewery. Source: Author’s calculation based on Tsingtao annual reports, various years. Note: ROE refers to return on equity and is calculated by net profits over equity; ROCE refers to return on capital employed and is calculated by EBITDA (earnings before interest, taxation, depreciation and amortisation) over capital employed; ROA refers to return on assets and is calculated by net profits over assets. These ratios are widely used to evaluate a firm’s capability of generating returns (White et al. 1997; Copeland et al. 2000).

Catch-up gaps Tsingtao has achieved splendid growth in the past few decades but it lags behind global giant brewers. Tsingtao is the largest indigenous brewer but it is too small to bear comparison with leading global brewers. A quick comparison illustrates this. As shown in Table 7.1, the total assets in 2004 of InBev, Anheuser-Busch and SABMiller were 21.2, 13.6 and 12.8 times, respectively, greater than Tsingtao’s. The sales revenues of these companies were 12.5, 18.4 and 13.8 times those of Tsingtao, respectively. The average EBIT and net profits of the global giants stood at USD1,417 million and USD797 million, respectively, compared with Tsingtao’s USD68 million and USD34 million. Competing in the global marketplace with such a small size can be extremely tough in a conventional capital-intensive industry in the current epoch of the global big business revolution. The beer industry does employ a vast number of labourers but it is, after all, a capital-intensive industry. As elaborated in Chapters 4 and 5, scale always matters in this industry. Global giant brewers possess the huge competitive advantage of exploiting scale economy. This advantage is seen not only at the plant but also at the firm level across the globe. It is widely believed that the vital ingredients for competitiveness in the brewing industry are capital, technology and R&D, rather than cheap labour.

12,665

159

122 92 60

50

SABMiller *

Heineken Carlsberg Molson Coors § S&N

6,589

1,187 12,182 892 13,492

43

37 26 26 105

15,228

16,173

931 14,065 565 10,503

4,019

8,490

13,557 6,553 6,174

12,901

17,160

68 986 47 1,417

1,179

870

1,691 452 685

1,749

3,361

1,775

EBIT

34 298 33 797

555

517

728 164 356

1,344

2,240

974

Net profits

7.3 7.0 8.4 13.9

29.3

10.2

12.5 6.9 11.1

13.6

19.6

15.3

EBIT margin (%)

3.7 2.1 5.8 7.5

13.8

6.1

5.4 2.5 5.8

10.4

13.1

8.4

Net margin (%)

2.9 2.4 3.7 5.8

8.4

4.1

5.2 2.0 3.2

8.8

13.9

3.9

ROA (%)

5.7 8.1 5.3 10.7

17.9

6.9

12.0 5.6 6.1

11.5

20.8

7.0

EBIT/ assets (%)

33,111 893,092 53,077 376,291

90,135

540,275

219,609 207,793 417,162

317,227

545,895

155,431

Productivity (USD)

Stella Artois, Skol, Brahma, Antarctica Budweiser, Bud Light, Michelob Miller, Castle Lager, Pilsner Urquell Heineken Carlsberg Canadian, Coors Newcastle, John Smith’s, Kronenbourg Corona, Modelo Tsingtao Asahi Yanjing

Global brands

Note: hl: hectolitres; productivity: sales per employee; EBIT margin: operating profits/net sales; net margin: net profits/net sales; ROA: net profits/total assets. * March 2004 to March 2005 data used for SABMiller and the rest for fiscal year ended in December; § Coors and Molson merged in February 2005 and 2004 pro forma data used; ± Anheuser-Busch holds a 50% equity ownership in Grupo Modelo; *± 2003 productivity figure used for Yanjing; ** excludes Tsingtao and Yanjing.

Source: Author’s calculation based on data from companies’ annual reports and presentations, and senior management interviews.

Grupo Modelo ± Tsingtao Asahi Yanjing *± Average **

14,117 8,104 11,175

160

AnheuserBusch

11,610

234

InBev

25,198

Beer Total Net sales assets sales (hl mn) (USD mn)

Companies

Table 7.1 A comparison between top global and Chinese brewers, 2004

The catch-up of Tsingtao Brewery 91 Owing to the lower efficiency, lack of scale economy and other factors, Tsingtao’s profitability is considerably lower than that of the global giants. Table 7.1 suggests that the EBIT margin of Tsingtao, which stood at 7.3 per cent, was lower than the average EBIT margin of the global giants, which stood at 13.9 per cent.2 The same ratio for Anheuser-Busch (AB) even reached as high as 20 per cent. In terms of ROA, the capability of assets to generate profits, Tsingtao’s figure of 2.9 per cent was dwarfed by the global giants’ ROA of 5.8 per cent and AB’s ROA of 13.9 per cent. As regards productivity, which is measured by sales value per employee, Tsingtao also lags behind. For instance, the average productivity in 2004 of the global giants was USD376,291 and that of AB was USD545,895. In contrast, the same figure for Tsingtao was approximately USD33,111. Tsingtao’s production capacity did increase substantially following vigorous acquisitions. However, the increased capacity is the sum of the capacities of many acquired small and medium-sized brewers. Tsingtao does not enjoy a satisfactory level of scale economy at the firm level, as we shall see in the later chapters. Lack of scale economy and high efficiency at both the firm level and the individual plant level has resulted in relatively lower productivity. Table 7.2 demonstrates the gaps between Tsingtao and AB and explains how that happens. For instance, AB’s 12 breweries generated a sales volume of over 15 billion litres and a sales value of USD14,147 million in 2003, whereas Tsingtao’s 47 breweries produced a sales volume of just 3.4 billion litres and a sales value of USD819 million, suggesting that a single plant of AB on average could be 18 times more efficient than Tsingtao’s. Because of the scale economy exploited and advanced technologies adopted, AB’s overall profitability was 69 times that of Tsingtao’s and per employee productivity and profitability of AB were 21 times and 84 times those of Tsingtao, respectively. Clearly, to fill the gaps, Tsingtao must persistently put tremendous efforts into ensuring that each individual plant operates at a desirable capacity at which economies of scale and scope can be fully exploited. This means that Tsingtao must either increase its market share aggressively or close down inefficient small breweries, or both. Neither of these approaches, however, can be an easy task. In addition, Tsingtao has lagged behind in terms of adopting ‘state-ofthe-art’ technologies and the most advanced information technologies to improve efficiency. It has also been slow to incorporate innovations in packaging. Tsingtao has made tremendous efforts to integrate the value chain but there is still a long way to go before the firm becomes a real ‘core systems integrator’. Given all these gaps, Tsingtao has adopted a wide array of strategic adjustments since the 1990s in order to speed up its catch-up process. The following section elaborates on Tsingtao’s strategic adjustments and their implications for Tsingtao and other large indigenous firms.

92

The catch-up of Tsingtao Brewery

Table 7.2 Scale and efficiency comparison between Tsingtao and AB 2000

2001

2002

2003

AB Total assets (USD mn) Sales value (USD mn) Sales volume (litres mn) Profits (USD mn) No. of breweries Productivity/employee (USD) Profitability/employee (USD)

13,148 12,499 14,462 1,552 12 526,845 65,399

13,945 12,912 14,832 1,705 12 551,020 72,742

14,120 13,566 15,249 1,934 12 585,364 83,440

14,690 14,147 15,476 2,076 12 606,738 89,033

Tsingtao Total assets (USD mn) Sales value (USD mn) Sales volume (litres mn) Profits (USD mn) No. of breweries Productivity/employee (USD) Profitability/employee (USD)

854 421 1,828 8 40 21,852 393

1,002 572 2,467 10 46 21,605 384

1,070 746 2,987 27 47 26,533 965

1,088 819 3,338 30 47 29,105 1,062

15 30 8 205 166 26

14 23 6 167 189 23

13 18 5 71 86 20

13 17 5 69 84 18

24

26

22

21

AB vs. Tsingtao (times) Total assets Sales value Sales volume Profitability (absolute size) Profitability/employee Productivity (sales volume/plant) Productivity (sales value/employee)

Source: Author’s own research based on Tsingtao annual reports and Anheuser-Busch annual reports, various years.

Catch-up endeavours Core business Like most global giant brewers, Tsingtao focuses on its core business. It firmly believes that ‘only by concentrating on core competitive advantages can a firm stand out. For Tsingtao, this competitive advantage is embedded in brewing, not anything else’ (interview). Brewing consists of over 90 per cent of Tsingtao’s sales revenue, whilst ready-to-drink (RTD) teas and mineral waters play negligible roles. In addition, Tsingtao has disposed of

The catch-up of Tsingtao Brewery 93 auxiliary operations such as logistics, packaging and real estate to concentrate on brewing. Amongst its 47 breweries, Shenzhen Tsingtao Beer Asahi, a JV between Tsingtao and Japanese player Asahi Breweries, and Tsingtao Brewery Xi’an Co. stand out as cash cows (see Table 7.3). Their aggregated assets accounted for 15 per cent of Tsingtao’s total assets but generated 52 per cent of Tsingtao’s profits in 2003. Their aggregated ROA reached 8.2 per cent and 11.3 per cent, respectively, far surpassing the company’s overall level of 2.7 per cent. Vigorous expansion Tsingtao is strongly determined to lead the Chinese brewing industry and to become one of the world’s top ten brewers. It is the first indigenous brewer to implement a consolidation strategy. This provides Tsingtao with the firstmover advantages of not only getting experience in M&As but also establishing industrial leadership (Tsingtao Brewery, Annual Report 2000). Tsingtao’s domestic expansion followed two stages – from 1996 to 2000 the company adopted a strategy of large-scale domestic expansion; but a cautious approach has been taken since 2001. Large-scale expansion Tsingtao has been dominating the Chinese beer industry for decades but its leadership ended when the Chinese brewing industry experienced fundamental changes. Tsingtao’s market share dropped sharply from 13.6 per cent in 1980 to less than 2 per cent by the mid-1990s (China Securities News 2003) and its market position dropped to number five or six (China Securities News 2000). Tsingtao started losing its years of leadership. Meanwhile, after its listing on the SSE and the HKSE in 1993, Tsingtao increasingly faced pressure to generate shareholders’ value. All these factors forced Tsingtao to pursue a strategy of vigorous expansion through M&As. Its expansion principle at this stage was to grab brewers in strategic Table 7.3 Tsingtao’s cash cows, 2003 Subsidiaries

Shenzhen Tsingtao Beer Asahi Co. Tsingtao Brewery Xi’an Co. Sum

Tsingtao’s ownership (%)

Asset as % of Tsingtao

Sales as % of Tsingtao

Profit as % of Tsingtao

EBIT/ assets (%)

71

8.2

6.0

24.6

8.2

100 —

6.7 14.9

17.0 23.0

27.6 52.2

11.3 9.6

Source: Author’s calculation based on data from Tsingtao Brewery, Annual Report 2003.

94

The catch-up of Tsingtao Brewery

locations, increase production and improve market shares. Growing big and seizing as many geographical locations as possible became the first priority. Between 1996 and 2001, more than 30 domestic acquisitions were made (see Appendix 6). None of the Chinese brewers had ever taken such aggressive action, and Tsingtao quickly stood out as a vanguard market consolidator. Tsingtao’s expansion started in Shandong province, which accounts for about 15 per cent of the domestic beer consumption and which is where Tsingtao is headquartered. The consolidation of the backyard market laid a solid basis for Tsingtao’s further expansion in other regions. By 2000, Tsingtao had successfully acquired 13 brewers in Shandong province for more than RMB400 million (Tsingtao annual reports). Encouraged by the smooth campaign in Shandong, Tsingtao started largescale expansion in other regions in 1998. By the beginning of 2000, more than 20 domestic brewers were acquired and 26 domestic production bases in strategic locations were built up (Tsingtao Beer 1999). As a result of this vigorous expansion, Tsingtao’s annual production increased significantly from 393 million litres in 1997 to 1,827 million litres in 2000. Its market share increased to around 9 per cent, establishing it as market leader once more (see Appendices 4 and 5). This vigorous expansion, nonetheless, created many problems. To begin with, some small brewers whose annual capacities were below 50 million litres were acquired either because Tsingtao was too anxious to grow bigger or because large players were not available for acquisition in Tsingtao’s preferred regions. The drawback was that enormous effort and a huge amount of capital had to be spent on improving the technology at these small brewers. In addition, a couple of seriously indebted brewers were acquired without careful consideration, which consequently dragged down the company’s overall profitability. The rapid acquisitions in themselves did not bring about firm-wide synergy because a ‘systems integrator’ was not in place to consolidate the production and marketing resources of the newly acquired subsidiaries so as to explore a satisfactory level of scale economy. A clear brand strategy was not in place to manage the vast number of acquired brands. In the meanwhile, Tsingtao’s vigorous expansion triggered other players to take similar actions and, subsequently, acquisition prices went up dramatically. Continuous large-scale acquisition was gradually beyond the company’s financial capability. As a result, Tsingtao’s expansion moved on to the next stage. In fact, Tsingtao did to a certain extent realise that its expansion policy would have some adverse effects, as stated by Peng Zuoyi, former CEO of the firm: Logically speaking, we [Tsingtao] should have fully integrated the acquired brewers before buying more. This [strategy] could provide Tsingtao with sufficient time to solve many issues. Nonetheless, in the face of the rapid industrial consolidation, Tsingtao had to leverage its

The catch-up of Tsingtao Brewery 95 [Tsingtao Beer’s] brand image to launch quick and vigorous expansion . . . We [Tsingtao] had to make adjustment while moving forward. (Financial Daily 2000) The negative impacts may well have been the price that Tsingtao had to pay for winning back its market leadership in a short period of time. After all, the company had to make huge efforts in the later years to reshuffle its acquired brewers. Cautious expansion By the end of 2001, Tsingtao had acquired about 40 brewers and spent over RMB2 billion on acquisitions (Tsingtao annual reports) as well as penetrating its strategic locations in China. It even ambitiously planned to gain a market share of about 30 per cent by 2008 (ibid.) through both vigorous acquisitions and indigenous growth. At this stage of expansion, Tsingtao’s principles turned into more cautious strategies and system integration: • • • • • • •

Growing big should be replaced by growing stronger. Acquisitions can only be made when necessary instead of acquiring for the sake of acquiring. Acquisition activities must be much more cautious than before (Tsingtao Brewery, Annual Report 2000). Launch a systems integration scheme to reform the brand structure and consolidate nationwide production, procurement and sales (Tsingtao Brewery, Annual Report 2000, 2001). Introduce advanced IT to facilitate the systems integration scheme (Shanghai Securities News 2002). Set up and carry out strict technological standards for all subsidiaries and invest heavily in technological improvement projects. Improve core competitiveness in the value chain. Gradually build up an overseas presence.

Tsingtao’s expansion pace has significantly slowed down since 2001. It expects to strengthen its market leadership through value chain integration, instead of relying solely on augmenting its capacity. In April 2002, Tsingtao’s export market further extended to Taiwan and quickly took over 8 per cent of the Taiwanese market. Taiwan has become Tsingtao’s largest overseas market, accounting for half of Tsingtao’s 2003 export revenues. Tsingtao has also agreed with Sanyo Whisbih,3 its local distributor, to set up a JV in Gaoxiong City, Taiwan. The JV is Tsingtao’s first manufacturing facility outside Mainland China. As a regional production centre and depot serving Taiwan and South-East Asia, the JV is strategically important for Tsingtao’s global campaign in that it lays a strong base for Tsingtao to establish global

96

The catch-up of Tsingtao Brewery

production footholds and develop overseas markets. Globally, Tsingtao has not set up plants in Europe and the Americas. Enterprise Division Scheme and systems integrator Systems integration along the value chain under the Enterprise Division Scheme has become Tsingtao’s strategic focus in recent years. This scheme aims at the following: (1) a better control of its nationwide subsidiaries; (2) rationalising the firm-wide production resources to quickly respond to market opportunities; (3) enhancing Tsingtao’s bargaining power in the value chain (e.g. procurements, marketing and logistics); (4) improving managerial efficiency; and (5) stimulating acquired subsidiaries to adopt Tsingtao’s managerial style, technological standards and production experience (Tsingtao annual reports; Financial Daily 2000; interviews). According to its market power in different regions, Tsingtao formed ten business development divisions in western China, southern China, northern China, Huaihai region, eastern China and Central Shandong province, respectively. These divisions manage the breweries within their respective regions, and Tsingtao’s headquarters becomes a decision-making and capital employment centre. On the technological and managerial fronts, Tsingtao sends experienced technical personnel and management expertise from its headquarters to business divisions on a regular basis to give guidance (Tsingtao annual reports). Tsingtao’s organisational structure has changed dramatically since the adoption of the Enterprise Division Scheme. Previously, Tsingtao’s headquarters directly managed all the acquired brewers, but the brewers enjoyed a great level of autonomy – they decided and executed their own procurement plans, owned their own marketing forces and had their own sales networks and distribution systems. It was possible for one brewer to manage the value chain in a vastly different manner to another brewer, even if they were in the same region. The problem was that this kind of horizontal organisational structure extended the value chain. The longer the value chain, the less profits that Tsingtao enjoyed at the end. More importantly, the strong bargaining power of Tsingtao, as an integrated entity, was not realised under this horizontal structure. According to the new scheme, each business division centralises the procurements, production, inventory, marketing and logistics of the breweries in its region. Each individual brewery becomes a production base, whereas the division functions as a ‘brain’. Collaboration among divisions is facilitated by Tsingtao’s headquarters. Thanks to the Enterprise Division Scheme, the bargaining power of the company as a whole is significantly improved along the value chain; and the consolidation of procurements has cut down raw material costs. The value chain is shortened to improve the company’s profitability. The rationalisation of production within each division and among divisions becomes possible. Moreover, it has become possible for inventory rationalisation and logistics

The catch-up of Tsingtao Brewery 97 management to be achieved at the firm level instead of at the individual brewery level, which speeds up the turnover of products and reduces inventory space. Such rationalisation shortens the cycle of production and distribution, saves sales and administration costs, and improves the efficiency of capital utilisation. The Enterprise Division Scheme to a large extent overcomes the drawbacks of the large-scale expansion of the late 1990s. This scheme, however, cannot fundamentally solve all the issues, especially the issue of achieving a satisfactory level of scale economy in individual plants. Local protection has become a barrier to closing down small underperformers in that shutting down plants involves aggressive downsizing. What happened was that in the past Tsingtao, like many other indigenous brewers, often had a mutual understanding with local governments to keep employees of acquired breweries in exchange for a smooth takeover or preferential local policies. It is tough to simply close down plants without taking good care of the workforce. Another problem is that not all of the principles mentioned earlier are being carried out by all the divisions. Some managers either do not fully understand the restructuring scheme or do not cooperate enthusiastically when their personal interests conflict with the firm’s (interview), which therefore impairs the effectiveness of the Enterprise Division Scheme. Summary The Chinese beer industry has undergone fundamental changes since the 1990s. Large brewers ambitiously fight for dominance. The small scale puts brewers in a vulnerable situation in the face of severe competition among domestic rivals and aggressive foreign penetration. In this regard, there lies a strong ‘internal desire’ for brewers to expand. The aggressive penetration of global giants serves as an imminent ‘external’ threat to indigenous brewers. Growing bigger through vigorous M&As, therefore, has become an unavoidable choice for large Chinese brewers. Tsingtao was the first domestic brewer to adopt a strategy of vigorous expansion. However, vigorous expansion has its own weakness. Tsingtao has to either spend a huge amount of capital on improving the technological standards of unsuccessful players or sell or close them down. In a certain sense, some acquired brewers become long-term liabilities, so Tsingtao’s short-term gain from the vigorous expansion may have caused long-term loss. Tsingtao has also made efforts to build up a manufacturing foothold outside Mainland China. While slowing down the expansion pace in recent years, Tsingtao launched the Enterprise Division Scheme to strengthen its role as a systems integrator within the firm itself and in the value chain. Such an initiative is highly important to Tsingtao’s domestic and global campaigns. A consistent and thorough implementation of the Enterprise Division Scheme depends not only on Tsingtao’s endeavours but also on external

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The catch-up of Tsingtao Brewery

factors. There are internal obstacles that slow down the progress of the scheme. Externally, local protection and the lack of a reasonable social welfare system in China have become serious barriers to closing down inefficient brewers, which consequently impedes the firm in enjoying the benefit of scale economy. The key thing, however, is that, as discussed previously, scale economy has always been a highly important competitive advantage in the brewing industry. Brand strategy Tsingtao’s brand strategy followed three phases. Strictly speaking, the company lacked a lucid brand strategy prior to the mid-1990s. Between 1996 and 2001, Tsingtao pursued a ‘Big Famous Brand Strategy’. The ‘Brands Integration Plan’ has been followed since 2001. Prior to the mid-1990s Tsingtao Beer is one of the oldest domestic beer brands and the flagship Chinese beer in the global market. In this respect, other domestic brewers cannot compete with Tsingtao. It was ranked in 2003 as the tenth most famous Chinese brand and the second most valued beverage brand (see Appendix 7). Since Tsingtao started operations in 1903, Tsingtao Beer has concentrated on the top-end market. Mass markets had little access to Tsingtao Beer even in the early 1990s. Tsingtao Beer was regarded as ‘highbrow art’ (Tsingtao Beer 1998). Narrowed market positioning and the ‘superior’ brand image, however, did not prevent the company from securing its monopoly in the high-end market. Beer demand exceeded supply before the mid-1990s. As the best domestic brand and the only flagship Chinese beer overseas, Tsingtao Beer was overwhelmingly undersupplied. Moreover, the neglect of brand strategy did not harm its sales because Tsingtao Beer was sold directly through the powerful sales networks of the Ministry of Light Industry. It was the only Chinese beer brand serving limited top-end markets, namely state banquets, top domestic hotels and overseas markets. These markets accounted for 80 per cent of Tsingtao Beer’s sales (ibid.). People ironically depicted Tsingtao Beer as ‘the king’s daughter never worrying about a good marriage’ (ibid.). This situation, however, changed quickly after the mid-1990s when China’s beer industry went through fundamental changes: new domestic players mushroomed and foreign brewers flooded in. Beer demand outstripped supply by the end of the 1990s. Tsingtao was no longer the leading brewer. Following its listing in 1993, Tsingtao faced increasing pressure to generate values for shareholders. Under both external and internal pressure, the company decided to overhaul its brand strategy: In the future, the company [Tsingtao] should not excessively stress

The catch-up of Tsingtao Brewery 99 production. The core [competitiveness] of Tsingtao Beer shall be [realised through] marketing. We will brew whatever beers the market demands; and sell beers at prices acceptable to the market . . . to keep our number one position, we have to be down to the earth – improve the market share by enlarging production. This requires us [Tsingtao] to not only brew top-end beers but also produce low-end beers suitable for the mass market. (Tsingtao Beer 1998) Peng Zuoyi, the former CEO of Tsingtao Brewery, believed that ‘Tsingtao Beer is qualified for the best Chinese beer only when it can be afforded and consumed by all social classes’ (ibid.). His comment marked a starting point at which Tsingtao started its challenging journey of searching for a balance between ‘highbrow’ and ‘popular’ positioning. Big Famous Brand Strategy In 1998, Tsingtao carried out a ‘Big Famous Brand Strategy’, which consisted of the following key aspects: 1

2

The formation of a ‘pyramid’ structure. Tsingtao Beer was at the top of the pyramid and targeted high- and middle-end markets. ‘Popular Tsingtao Beer’, a sub-category of Tsingtao Beer that used the same logo as the traditional Tsingtao Beer but was sold at lower prices, targeted the lower middle-end markets (interview). The base of the pyramid was mostly made up of acquired brands and served the mass market that had been previously neglected by the company (Tsingtao Brewery, Annual Report 1998: 9–14; Yin and Ji 2003: 66–7). The gradual incorporation of acquired local brands. To avoid Tsingtao Beer turning into a local brand, the company did not want acquired brands to use Tsingtao Beer’s brand image and logo (Tsingtao Brewery, Annual Report 1998: 15). Instead, it planned to launch the Zhan Qiao brand, a product of the Tsingtao Beer Family, as the second-tier brand. This brand, however, was never widely developed as planned.

Tsingtao’s brand structure had become disorganised by the end of the 1990s. Tsingtao Beer’s logo was misused by a number of acquired brewers, some of whom simply imitated Tsingtao Beer’s logo. Some that did not qualify to brew Tsingtao Beer even used Tsingtao Beer’s logo for their products. This exploitation of Tsingtao Beer’s brand image without a careful and strict review system in place tremendously damaged Tsingtao Beer’s brand image (Tsingtao Beer 2001a). Such an issue was recognised by the management: The Big Famous Brand Strategy does not come up with good substrategies. Tsingtao Beer’s positioning is far from being lucid . . . the

100

The catch-up of Tsingtao Brewery brand image of Tsingtao Beer faces the challenge of weakening. This is the fundamental difference between Tsingtao Brewery and other global leading players, as far as the brand strategy is concerned. (Tsingtao Brewery 2003b: 8)

Meanwhile, the company’s brand portfolio expanded too quickly as a result of its vigorous expansion in the late 1990s. The acquired brands, which differed widely in both quality and image, once amounted to no less than hundreds (Tsingtao Beer 2003d). To solve all these problems, the company carried out the Brands Integration Plan in 2001. Brands integration plan The plan consists of five aspects. First, the brand portfolio is categorised within two groups – Tsingtao Beer and Tsingtao Beer Family. Tsingtao Beer uses the traditional Tsingtao Beer logo and can be brewed either in Qingdao or in qualified breweries in other regions. The acquired brands keep their original logos and identities but are allowed to add the label of ‘Tsingtao Beer Family’ (Tsingtao Beer 2001a, 2001b; interview). The Tsingtao Beer Family comprises both regional and local brands. Licence agreements have been set up between Tsingtao and its acquired breweries as regards how to use the logos of ‘Tsingtao Beer’ and the ‘Tsingtao Beer Family’. According to the ‘Requirements for Brewing Tsingtao Beer’, ten qualified plants so far have been authorised to brew Tsingtao Beer and use Tsingtao Beer’s logo (Tsingtao Beer 2001a). Similarly, qualified breweries are allowed to use the logo of the Tsingtao Beer Family in accordance with the ‘Requirements for Brewing Tsingtao Beer Family Products’. These agreements are subject to annual review (Tsingtao Beer 2001a). The main aim of launching the Tsingtao Beer Family is to fully leverage Tsingtao Beer’s brand image to stimulate acquired brewers’ sales while minimising any potential damage to Tsingtao Beer’s brand image. However, this strategy does not appear to be well appreciated by the market. ‘Tsingtao Beer Family’ indicates that the brands within the ‘family’ possess a similar quality to Tsingtao Beer. It may also suggest that these brands could be as premium as Tsingtao Beer. The fundamental problem of Tsingtao Beer’s ambiguous positioning remains unsolved. The fact that the Tsingtao Beer Family is composed of top-, middle- and low-end products could dim Tsingtao Beer’s premium image. Tsingtao Beer’s positioning, as a premium brand, therefore, has become confused at best and weakened at worst. Second, the company has made efforts to adjust its product mix. With the injection of acquired brands, Tsingtao Beer brand’s contribution to sales revenue declined from 80 per cent in the early 1990s to less than 20 per cent by the end of the 1990s (Tsingtao annual reports). The company’s product mix is heavily skewed towards low-end products. Medium-priced and high-end products represented only 39 per cent and 9 per cent of sales respectively, in

The catch-up of Tsingtao Brewery 101 2002 (Tsingtao Brewery, Annual Report 2002: 35). In the domestic premium market, indigenous brewers have lost the battle with foreign brewers.4 The key thing is that premium brands generate higher margins (see Table 7.4). Tsingtao expects to upgrade the current product mix by improving Tsingtao Beer brand’s contribution. In 2003, Tsingtao Beer brand generated a sales volume of 106 million litres, accounting for 32 per cent of the total sales volume. The top four brands, i.e. Tsingtao, Laoshan, Hansi and Shanshui, represented 53 per cent of the sales volume (Tsingtao Brewery, Annual Report 2003: 11). By 2010, Tsingtao Beer brand is expected to account for at least 50 per cent of the company’s sales volume. The third aspect of the Brand Integration Plan is to redefine the ‘pyramid structure’. Tsingtao Beer remains the first-tier brand. The second-tier brands include Shanshui, Hansi and Laoshan. Shanshui was a local brand in Guangdong province and is being developed as a regional brand in southern China. Hansi originated in Shaanxi province and is being developed as a regional brand in western and central China. Laoshan was a local brand in Qingdao and was acquired in 1999. It will be targeted at low-end markets in nearby Shandong province. The company has about one hundred brands at present (Tsingtao Beer 2003d). The unsuccessful local brands are expected to be gradually replaced by the regional brands.

Table 7.4 Geographical presence of Tsingtao’s sales, 2003 Location

Sales (litres mn)

Sales *

Gross profits

As % of sales value

As % of profits

Gross margin (%)

Price (RMB/ litre)

(RMB mn) Qingdao ± Shandong province (excl. Qingdao) Northern China Southern China Total domestic Exports Total

590

2,162

820

27

34

37.9

3.66

680 840

1,105 1,727

180 393

14 22

8 16

16.3 22.7

1.63 2.06

1,150

2,656

867

33

36

32.6

2.31

3,260

7,650

2,259

95

95

29.5

2.35

77.8

380

129

5

5

33.9

4.88

3,337.8

8,030

2,388

100

100

29.7

2.41

Source: Author’s calculation based on Tsingtao Brewery, Annual Report 2003. Note: * Sales revenue is larger than that shown in the company’s profit and loss statement because inter-segmental transactions are included; ± Tsingtao Beer brand dominates the Qingdao market.

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The catch-up of Tsingtao Brewery

As suggested in Figure 7.4, the major problem for the current pyramid structure is that Tsingtao Beer’s positioning is too broad, ranging from lowand middle-end to high- and premium-end. This broad definition challenges Tsingtao Beer’s image as a premium brand. Moreover, Table 7.4 shows that the average price of Tsingtao Beer stands at less than RMB4 per litre, suggesting that the bulk of Tsingtao Beer is sold as a middle- and lower-middle-end product instead of a premium product. Refurbishing Tsingtao Beer’s brand image has become another focus of the brand strategy. ‘Brand is the key ingredient of success in the consumer goods sector’ (MSDW 1998; Nolan 1999: 24). A sustainable unit volume growth accompanied by market share increase is regarded by Morgan Stanley as the best benchmark of global competitive advantage in the FMCG industries (MSDW 1998). It explains why global giant firms have been creating extremely powerful brand images for a few core brands across countries through intensive sales and promotion efforts and, in many cases, even through nurturing the consumption culture. In the current era, it is extraordinarily difficult for latecomers to challenge the global brand success of giant FMCG companies that have successfully penetrated developing markets (Nolan 1999). With the recognition (no matter to what degree) of the significance of a successful brand image to a firm’s competitiveness, Tsingtao has made efforts to refurbish Tsingtao Beer’s brand image. A brand planning team has been set up to deal with brand-related activities such as advertising. To ensure the unification of brand images, all media advertisements of Tsingtao Beer and other brands, no matter where they are brewed and broadcasted, must go through this team. Tsingtao Beer is endowed with an image of ‘the symbol of

Figure 7.4 Brand structure of Tsingtao’s beers. Source: Author’s research based on company annual reports and interviews.

The catch-up of Tsingtao Brewery 103 enthusiasm and representation of prestige’ (Tsingtao Beer 2003d). This image is believed to be able to attract young people’s attention and fit the trend for modernisation (ibid.; interviews). However, even from a simple logical standpoint, the two parts of the image, namely enthusiasm and prestige, appear contradictory. As far as young people are concerned, enthusiasm is unquestionably a reasonable image. However, it is too much to expect a young person to possess both enthusiasm and prestige, not counting the handful of lucky high-flyers. Besides, it lacks a distinctive classification of young people, who could range from 18 to 40 years of age. Looked at from this perspective, the diffusion of Tsingtao Beer’s brand image could have negative effects. In contrast, Bud Light, the best-selling beer in the United States, has a very distinctive consumer target and a highly matching brand image. The brand has an image of ‘fun, contemporary and social’ and is aimed at 21- to-27-year-old young adults. This is believed to be the major reason for Bud Light’s success (Anheuser-Busch 2002: 11). The fifth aspect of the brand strategy is to enforce the brand image through aggressive marketing. Tsingtao did not make marketing endeavours till the late 1990s. Up to 1995, the company had just two salesmen: one in charge of writing receipts and the other responsible for collecting money (Yin and Ji 2003: 47). As late as 1996, Tsingtao was still debating whether it was necessary to market Tsingtao Beer through advertising, and then how to go about doing so. One argument held that, ‘in the past, Tsingtao Beer never advertised itself. Would consumers suspect that the company does not function properly if we advertise intensively all a sudden?’ (Tsingtao Beer 1996). Unsurprisingly, at the early stage of Tsingtao’s marketing campaign, the design of Tsingtao Beer’s advertisements was very basic. ‘Many of the media advertisements simply broadcast the name of Tsingtao Beer without cohesively attaching Tsingtao Beer’s brand image’ (ibid.). In fact, Tsingtao Beer did not have a clear and consistent brand image at that time. In recent years, however, Tsingtao has been putting tremendous efforts into marketing in order to improve its brand image and to compete with foreign brands. Its sales force has expanded to over 6,000 people. Annual advertising expenditure went up dramatically from around RMB50 million in the late 1990s to approximately RMB264 million in 2003, representing a fivefold increase (Tsingtao annual reports). Tsingtao’s marketing initiatives are, however, dwarfed by those of the global giants. Table 7.5 suggests that Anheuser-Busch spent USD642.1 million on advertising in 1998 and USD806.7 million in 2003. The same figures for Tsingtao were USD6.3 million and USD31.9 million, respectively. Moreover, the ratios of advertisement expenditure over both sales and selling, general and administrative expenses (SG&A) also suggest that AB pays more attention to advertising than Tsingtao does. Advertising plays a huge role in creating and maintaining brand image in consumer goods industries. However, in the era of globalisation, building up a successful global brand image in the FMCG industries cannot solely rely

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The catch-up of Tsingtao Brewery

Table 7.5 Advertisement expenditure, Tsingtao vs. Anheuser-Busch Companies Tsingtao Advertisement (USD mn) Advertisement/ SG&A Advertisement/sales Anheuser-Busch Advertisement (USD mn) Advertisement/ SG&A Advertisement/sales

1998

1999

2000

2001

2002

2003

6.3

16.2

29.2

34.7

45.5

31.9

8.3%

30.9%

35.8%

20.8%

22.0%

14.0%

3.0%

5.5%

6.4%

5.4%

5.4%

3.5%

642.1

721.8

728.3

722.3

821.7

806.7

32.8%

33.6%

24.5%

23.5%

24.9%

23.9%

5.7%

6.2%

5.8%

5.6%

6.1%

5.7%

Source: Author’s calculation based on Tsingtao annual reports and Anheuser-Busch annual reports, various years. Note: SG&A refers to selling, general and administrative expenses. Advertising and promotion expenses are included in SG&A.

on traditional marketing activities such as advertising. Douglas Ivester, the CEO of Coca-Cola, once pointed out that ‘advertising is a very small part of a big marketing picture, which includes signs at the ballpark, the Spencerian script, billboards, contour bottles, philanthropic efforts’ (quoted in Nolan 1999: 26). Similarly, Anheuser-Busch attributes the success of Bud Light to its total marketing strategy, which consists of careful brand positioning, clear brand image and focused consumer groups, along with the aid of the industry’s finest advertising and promotional agencies (Anheuser-Busch 2002: 11). Clearly, to excel themselves in the intensive global competition, successful brewers or players in the FMCG industry have to differentiate themselves through a wide array of ‘brand value creation’ activities,5 which include the following: (1) building up a clear brand image with precise, corresponding messages; (2) exploiting the latest communication technologies to broadcast the image or message; (3) targeting specific consumer groups (e.g. categorising consumers by age, salary or region); (4) participating in well-tailored sponsorships, political events and special events; (5) differentiating products; (6) using innovative packaging materials and styles; and (7) nurturing the consumption culture and consumer loyalty. Tsingtao has tried to exploit ‘brand value creation’ activities. Compared with global giants such as Coca-Cola and Anheuser-Busch, however, it relies more on ‘narrowed’ brand creation endeavours. Media advertising takes the predominant role. Packaging innovation is rather slow, but an encouraging sign is that the company has made efforts to strengthen its competitiveness in packaging, as will be described next.

The catch-up of Tsingtao Brewery 105 Summary Tsingtao Beer is one of the oldest beer brands in China and is the flagship Chinese beer overseas, which is Tsingtao’s precious competitive advantage as far as brand strategy is concerned. Brand strategy plays a substantial role in fulfilling Tsingtao’s national and global campaigns. The ‘trial and error’ approach that the firm has taken in the past two decades or so had its own strengths and weaknesses. The firm has made some achievements under the current brand strategy but there are hurdles to overcome. For instance, a continuous removal of local brands can be a challenge. Tsingtao Beer’s positioning, as a premium brand, is ambiguous, because it is composed of top-, middle- and low-end products. Adopting a clear and appropriate brand image targeted at clearly defined consumer groups plays an important role in a brewer’s success. Compared with global giant brewers, however, Tsingtao Beer has a brand image that appears flawed in the sense that the two parts of the image message are contradictory. It may have to strengthen ‘brand value creation’ activities such as classifying precise target groups, marketing initiatives and packaging innovation, etc. Packaging innovation Packaging at Tsingtao Brewery Tsingtao has no separate packaging division. A small team in Tsingtao’s R&D Centre is responsible for the firm’s packaging-related issues such as quality control, selection of packaging suppliers and the introduction of packaging innovation in collaboration with packaging suppliers, etc. All the packaging materials are outsourced. Tsingtao believes that focusing on brewing improves its competitive advantages more than vertical integration does. Glass bottles are the most popular packaging type in the global and the Chinese beer industry because beer drinkers prefer glass bottles to cans; and glass bottles are much cheaper than other primary packaging means such as cans or PET/PEN bottles. Tsingtao’s primary packaging mainly consists of glass bottles and aluminium cans. Glass bottles account for just below 80 per cent of the total primary packaging, the remaining percentage being made up of other packaging types. The percentage share of stainless steel kegs and cans is insignificant. The bulk of Tsingtao’s volume is sold to mass markets or lower high-end markets in 640-millilitre and 633-millilitre glass bottles. The 330-millilitre glass bottles and aluminium cans are normally sold in bars, restaurants and supermarkets or hypermarkets as premium products. Tsingtao hopes to become the first Chinese brewer to introduce PET bottles. It is uneconomic to source beer bottles from a few suppliers and then transport them to some 47 brewing plants located all over the country. Tsingtao buys glass bottles manufactured locally to its brewing facilities. Its main lid supplier is Shanghai Zijiang Group. The bottles of Tsingtao Beer

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The catch-up of Tsingtao Brewery

brand use products from one of the largest domestic labelling firms, whereas many acquired brewers still use labels produced by small local manufacturers, some of which are TVEs. The can-making industry in China is concentrated in the hands of a few players, namely Ball (Asia),6 Crown (Asia), and the Pacific Can Company.7 All these firms have direct or indirect ties with leading global beverage can manufacturers. Chinese manufacturers are unable to make high-quality aluminium cans without foreign partners. Most Chinese brewers including Tsingtao use aluminium cans provided by these leading global firms. Ball accounts for the bulk of cans required by Tsingtao. Glass bottles Glass bottles are highly important to Tsingtao and directly impact Tsingtao’s competitiveness and its position in the supply value chain. First, glass bottles are heavy and bulky and therefore require a huge amount of transportation fees if brewing facilities are located far from bottle manufacturers. While the average profit out of a 640-millilitre bottle is as poor as less than RMB0.1, a single cent increase in the transportation fees per bottle could dramatically bring down a brewer’s profit margin. It is estimated that the transportation of beer bottles beyond a geographical radius of 200 kilometres will create losses. Second, one major difference between beer and other drinks such as wines and soft drinks lies in beer’s special requirements for packaging. To keep beer fresh and make it generate rich foam and beads,8 a sealed beer bottle should consist only of beer liquid and carbon dioxide. This process, unavoidably, creates certain pressure. When the glass bottle is violently shaken, the pressure inside and outside the bottle will become unbalanced. The longer the transportation distance, the more likely that bottles will be shaken and then get damaged. Under certain circumstances, the glass bottles, particularly those of poor quality, may blow up when opened. After a few times of recycling, the glass bottle becomes less durable and even more likely to blow up when violently shaken. Therefore, large brewers including Tsingtao tend to buy glass bottles near to their brewing facilities to avoid blow-up accidents. Third, China’s glass bottle manufacturing industry is considerably underdeveloped. Producing high-quality glass beer bottles is beyond the capability of most domestic glass bottle makers. A substantial number of them do not even possess automation technologies and the industry may not catch up with the 1970s standard of the developed countries (Sun and Gong 2002: 7). A survey conducted in 2002 showed that about 30 per cent and 67 per cent of the beer bottles9 used by large and medium-sized domestic brewers, respectively, were not up to standard; and the same figure for small domestic brewers reached as high as 93 per cent (Beer Science and Technology 2003: 3). The glass beer bottles made by domestic players are on average twice as heavy as those made in the US but withstand much less pressure (interview). The problem is that China’s legal system and local protection make it possible for

The catch-up of Tsingtao Brewery 107 a vast number of unqualified glass bottle makers to survive. Although large Chinese brewers buy bottles from qualified large glass bottle makers, the danger of blow-up accidents remains a concern that prevents brewers from transporting bottles over long distances. The best way to prevent brewers themselves from being negatively affected by this ‘weak link’ in the value chain is to buy glass bottles near to their brewing facilities. These three aspects affect the competitiveness of large Chinese brewers. The necessity of reducing transportation fees and avoiding blow-up accidents to a certain extent makes brewers operate many plants all over the country because of China’s large size. Meanwhile, vertical integration into the bottle manufacturing industry is beyond most brewers’ technological and financial means. This, among other things, makes it tough for brewers including Tsingtao to exploit scale economy out of a small number of large brewing plants. In this regard, brewers’ exploration of scale economy to a certain extent relies upon associated industries in the value chain, especially the glass bottle manufacturing industry. Bargaining power and packaging innovation The process of packaging innovation at Tsingtao has been slow in that there was limited innovation achieved from the 1950s to the 1990s. Only in the twenty-first century has Tsingtao started to pay attention to the importance of packaging innovation. Most of Tsingtao’s brewing plants have their own glass bottle suppliers. For instance, Qingdao City where Tsingtao is headquartered has about ten glass bottle makers. Nonetheless, only the three largest players, namely Jinghua Glass Bottle Corporation, Laoshan Glass Bottle Corporation and Jiaozhou Glass Bottle Corporation, are Tsingtao’s longterm suppliers. As the largest customer, Tsingtao has substantial bargaining power. It adopts a score system to evaluate the performance of glass bottle suppliers. Those that get higher marks are rewarded by being given more business. Tsingtao has strong bargaining power and takes the lead in facilitating the innovation of glass bottles. Usually, Tsingtao comes up with ideas for changes to a bottle’s appearance (e.g. colour, size and shape) and then discusses with bottle suppliers the feasibility of the innovation and the costs involved. The bottle manufacturers are guided by Tsingtao and work closely with Tsingtao. It is the bottle suppliers who bear the innovation costs. Under pressure from Tsingtao, a handful of its key bottle suppliers have started to draw attention to quality control and packaging innovation. For instance, one of Tsingtao’s largest bottle suppliers, Jinghua Glass Bottle Corporation, has been continually strengthening its research capability. From 1990 to 2001, Jinghua’s research personnel increased from just eight people to 138 people; and R&D expenditure went up from virtually zero to RMB2.3 million (Qingdao Statistics Year Book, various years; Qingtao Almanac, various years).

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The catch-up of Tsingtao Brewery

Other than pushing ahead with bottle innovations such as reducing the weight and increasing bottle varieties and colours, etc., Tsingtao has also improved its secondary packaging to meet the demands of growing takeaway home consumption and to fight for higher market shares in supermarket and hypermarket channels. For instance, small-scale cardboard packaging containing 12 bottles per case was launched in 2001, and mini-sized cardboard packaging containing only six bottles per case was put on the market in 2003. Moreover, Tsingtao expects to use more plastic film than paper in its secondary packaging to cut down packaging weight and lower costs. The company is making progress in introducing PET bottles (interview). Summary In the epoch of the global big business revolution, global giant brewers take the lead in pushing ahead with packaging innovation and in leveraging packaging innovation to enhance their competitiveness. In the Chinese market, foreign brewers take the lead and indigenous brewers including Tsingtao are lagging behind. The underdevelopment of the domestic glass bottle manufacturing industry negatively impacts on the attempts by indigenous brewers to catch up. China’s beverage can manufacturing industry is almost entirely dominated by global giants. Tsingtao has started to pay enough attention to packaging in recent years. The company has substantial bargaining power in relation to domestic glass bottle suppliers. A number of key bottle suppliers have made efforts in quality control and innovation to meet Tsingtao’s tighter technical requirements. In this regard, leading brewers like Tsingtao play an important role in stimulating the development of beer’s associated industries. Value chain integration Raw materials supply and production Tsingtao’s nationwide production is integrated into an Enterprise Division Scheme, in which, as discussed earlier in the chapter, its subsidiaries are divided into ten business divisions, each division being responsible for centralising procurements, production, inventory, marketing and the logistics of the breweries in its division. Each individual brewery becomes a production base, whilst headquarters and the divisions play the role of ‘brains’. The consolidation of procurements has cut down raw material costs as a result of the significantly improved bargaining power of the company. The Enterprise Division Scheme also makes production rationalisation within each division and amongst divisions possible. Moreover, the rationalisation of inventory and distribution can be achieved at the firm level instead of at the subsidiary level, which speeds up the turnover of products and reduces inventory costs. However, the extent to which these endeavours may make up for the long-term losses caused by small and unsuccessful acquisitions is unclear.

The catch-up of Tsingtao Brewery 109 Packaging As discussed earlier in the chapter, Tsingtao focuses on brewing and outsources all the primary and secondary packaging materials. It possesses enormous bargaining power in driving domestic packaging suppliers to meet its technical standards. Distribution Tsingtao has made huge efforts to manage its distribution channels, both globally and domestically. On the global front, Tsingtao has reached agreements with leading global brewers and distributors to market Tsingtao products in more than 30 countries. Domestically, Tsingtao introduced a consumer relationship management (CRM) system in 2001 in an attempt to keep its operations in line with market demands. A marketing team was also set up to market premium products directly to large supermarkets and hypermarkets. The bulk of Tsingtao’s products are sold through wholesaling channels. The problem with its current wholesaling system is that wholesalers distribute many companies’ products and usually develop tiers of intermediate wholesalers and retailers. There is a long distribution chain between the core firm (in this case, Tsingtao) and the end users. Within a key partner system, in contrast, the core firm closely interacts with and directly monitors wholesaler partners. These partners have no intermediate second-tier wholesalers and sell products directly to the end markets. Hence, the key partner system significantly cuts down the distribution value chain, improves the core firm’s margins and creates closer ties between the core firm and the wholesale partners, as well as erecting a barrier to the penetration of competitors’ products (interview, Coca-Cola (China)). Tsingtao realises the necessity of shifting from wholesalers to key partners but its current bargaining power in the distribution value chain and the firm-wide resources prevent it from doing so. Tsingtao has gone for the ‘second-best solution’ by shortening the traditional wholesaling value chain. Previously, it heavily relied on numerous wholesalers scattered in a large number of cities. Each wholesaler controlled many second- and third-tier retailers. Under the new scheme, Tsingtao’s Enterprise Divisions take measures to monitor wholesalers within their territories and encourage mergers among wholesalers. Presently, the distribution channels are expected to be limited to two tiers only. Each wholesaler is expected to distribute at least 30 per cent of Tsingtao’s products directly to the end customers, and the remaining 70 per cent may be distributed through the second-tier retailers (interview). This reform does help to manage the distribution channels better, but the nature of the relationship between Tsingtao and its distributors has not been fundamentally changed. The introduction of such a reform has encountered obstacles, and the firm’s bargaining power in relation to wholesalers has not been fundamentally changed.

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One significant weakness of the current distribution system is that the means of communication between the firm and its wholesalers and retailers is at a primary level. There is no online database on the wholesaler and retailer sides to allow Tsingtao to grab the latest sales data. There is no satelliteor internet-based training programme targeting wholesalers or retailers. The feedback from wholesalers is far from adequate. These aspects are different from the situation in many multinational beverage giants such as Anheuser-Busch and Coca-Cola. Logistics vs. core business Tsingtao’s vigorous expansion in the 1990s was accompanied by the expansion of the Tsingtao Beer brand. Amongst many marketing strategies, the Freshness Control Scheme in particular performed a key role in the marketing of the Tsingtao Beer brand. The core element of this strategy was once in-house logistics. In the mid-1990s, the logistics industry in China was highly fragmented and there was no domestic giant capable of providing a highquality logistics service all over the country. Therefore, from 1997 to 2001, Tsingtao bought more than 100 refrigerated cars for RMB20 million (Yin and Ji 2003: 68) and 40 imported tow trucks for RMB40 million (Tsingtao Beer 2002) to distribute Tsingtao Beer through its 28 regional depots and many direct sales offices. This strategy was carried out in the critical period of the company’s aggressive expansion and considerably facilitated Tsingtao’s consolidation progress. However, logistics management is not Tsingtao’s area of expertise. Its transportation was inefficient because cars were often unloaded on their return trips. The in-house logistics operation generated high distribution costs and gradually became a heavy burden upon the company, to the point where outsourcing it became an inevitable consequence, as commented on by Zhang Xueju, Vice-President of Tsingtao Brewery: It is impossible for a firm to be specialised in any business. The best way to strengthen its competitiveness is to focus on its core business. Forming a strategic relationship with firms in associated industries and allowing them to share certain businesses is extremely important. Only by efficiently integrating the value chain can a firm reduce production costs, improve product quality and eventually enhance competitiveness. (Tsingtao Beer 2003b) In the past few years, a few logistics service companies have rapidly emerged as national giants, amongst which China Merchants Logistics (CML) stands out.10 In 2002, Tsingtao and CML formed a JV, Tsingtao Brewery Merchants Logistics Co. (TBML), to manage Tsingtao’s logistics operations.11 Divesting itself of its logistics operation freed Tsingtao from the non-core logistics business. TBML notably improved distribution efficiency,

The catch-up of Tsingtao Brewery 111 saved costs and enforced the Freshness Control Scheme, owing to CML’s nationwide distribution networks and expertise in logistics management. It is estimated that this new arrangement saves RMB1 million in transportation fees and management costs per month. Products can reach end customers within a geographical radius of 300 kilometres in 24 hours, and customers beyond 300 kilometres in 48 hours (Dazhong Daily 2002b; People’s Daily 2002). Summary As we have seen in Chapters 2 and 4, global giants are becoming the core systems integrators and external firms (Nolan 2001; Nolan et al. 2002). Their competitive advantages are not merely confined to their own systems or the industries in which they operate, but rather extend to many surrounding industries (e.g. Porter 1986, 1990; Ruigrok and Van Tulder 1995; Chandler et al. 1997; Nolan 2001). While realising the importance of the value chain to the competitiveness of the core firm, Tsingtao has made tremendous efforts to integrate the value chain. In the upstream, Tsingtao possesses substantial bargaining power in relation to raw materials suppliers. In the downstream Tsingtao has made serious efforts but its bargaining power is limited. This is an industry issue that many domestic players face. More importantly, the means of communication between Tsingtao and its distributors appears primary. The failure to adopt the latest information technology at this particular link in the value chain may have prevented Tsingtao from effectively managing its distributors. Tsingtao faces challenges in integrating the value chain on the sales side. However, its strategy of divesting itself of its logistics operation to focus on brewing has achieved remarkable results. In a nutshell, Tsingtao is making serious efforts to integrate the value chain but compared with global giants the firm may have a long way to go before truly becoming a core systems integrator (Nolan 2001) or ‘a spider of an industrial web’ (Ruigrok and Van Tulder 1995: 65) in both the domestic and the global competition arena. Technological improvement It was recorded in the Annals of Tsingtao Brewery (1993: 89) that, ‘from 1903, the founding year of the [Tsingtao] Brewery, to 1979, the technical equipment in the [Tsingtao] Brewery had remained at the original standard’. It was, however, during this lengthy period that global giants consolidated their home markets and then emerged as global giants. Persistent technological improvement and innovations have played an indispensable role in the trajectory of global giants’ national and global campaigns. After a long period of inactivity which lasted over half a century, Tsingtao eventually realised that its ‘antique’ facilities were not able to cope with the new competitive environment, and the company faced a huge technological

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gap. During the late 1980s and the early 1990s, Tsingtao completed three major technological improvement projects, aiming to upgrade the facilities of its earliest brewing plants located in Qingdao City. These projects enlarged Tsingtao’s annual capacity from less than 50 million litres in 1982 to over 300 million litres in 1995, as we shall see later in the chapter. Tsingtao pursued a strategy of vigorous expansion. The fact that the production facilities of many acquired brewers were not in a good condition forced Tsingtao to invest heavily to improve the technological standards of these subsidiaries. From 1997 to 2003, an accumulated capital of about RMB2.6 billion (see Table 7.6) was invested in Tsingtao’s nationwide technological improvement projects. The ratio of technological expenditures to total assets went up from 1.5 per cent in 1997 to 9 per cent in 2000 and then stabilised at around 4 per cent in 2002 and 2003. The 1997 to 2003 CAGR of such investments reached 37 per cent, much higher than the growth of Tsingtao’s sales or total assets. Summary Tsingtao had made do with outdated facilities for a lengthy period of time and did not make enough efforts in technological innovation till the most recent two decades. It lagged behind global giants in terms of adopting ‘state-of-the-art’ technologies. The firm has paid attention to upgrading the facilities of acquired brewers but this requires a huge amount of capital investment, as a result of its vigorous acquisitions. Information technology As previously mentioned, Tsingtao has implemented a wide range of strategies to enhance its competitiveness, in which value chain integration plays an Table 7.6 Tsingtao’s investments in technological improvement (headquarters’ plants and subsidiaries) Year

Investments

Sales

Total assets

Investments/total Investments/ assets (%) sales (%)

(RMB mn) 1997 1998 1999 2000 2001 2002 2003 2003/1997 CAGR

57 103 520 629 607 364 377

1,444 1,598 2,253 3,448 4,693 6,195 6,714

3,929 4,070 5,264 7,000 8,213 8,883 8,924

1.5 2.5 9.9 9.0 7.4 4.1 4.2

3.9 6.4 23.1 18.2 12.9 5.9 5.6

37.0%

29.2%

14.7%

19.5%

6.0%

Source: Author’s calculation based on Tsingtao annual reports, various years.

The catch-up of Tsingtao Brewery 113 extremely important role. The key point is that, in the current era, the integration of the value chain heavily relies on the assistance of advanced IT. Amongst the indigenous brewers, Tsingtao stands at the forefront of the introduction of advanced IT. It has tried to build up a firm-wide intranet and television networks. The firm-wide television system, which covers most of Tsingtao’s nationwide production facilities and direct sales offices, is currently being installed, but wholesalers and logistics are not incorporated into the system. Meanwhile, the setting up of the intranet is rather slow. The headquarters and breweries located in Qingdao City are connected, but many breweries in other regions have not been connected. The absence of a firmwide intranet prevents timely communication between and among Tsingtao’s headquarters, breweries and sales offices. Starting in 2001, Tsingtao has invested over RMB15 million to build up an enterprise resource planning (ERP) platform (Yin and Ji 2003: 209), whose major functions include the following (Tsingtao Brewery 2003a): (1) introducing an internet-based communication system between Tsingtao’s headquarters and its nationwide breweries and sales offices; (2) setting up an internet-based data centre in Tsingtao’s headquarters to process procurement, production and sales data collected from all brewing subsidiaries and sales offices; (3) establishing an intelligent information platform which allows the management to make decisions based on statistical analysis; and (4) facilitating communication among key divisions such as procurement, finance, quality control, sales and human resources. The key divisions at headquarters and a few large breweries are equipped with the ERP system. Most breweries and sales offices are expected to be integrated into the system in the future (Tsingtao Brewery 2003a). It is believed that the institutional complexity of the subsidiaries and the narrowed horizons of some small subsidiaries are the major barriers to the progress of the project (interview). Tsingtao also faces obstacles in integrating logistics and wholesalers into the system, which reduces the value of ERP. Given all of these factors, final completion and utilisation of the ERP system will require a considerable amount of time, effort and further investment. Even upon completion of the system, it still may not be possible to take full advantage of it to manage the whole value chain, especially in the downstream. Summary Tsingtao expects to move towards e-commerce in the near future through adopting advanced IT. It has made great efforts and is in the vanguard in comparison with domestic rivals. Its current endeavours, however, appear to be far from sufficient. For instance, the intranet covers limited regions, and a timely information flow within the group is expected in the future; the progress of the ERP project is rather slow and does not cover logistics and wholesalers; only very limited information can be obtained from Tsingtao’s

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The catch-up of Tsingtao Brewery

corporate website (e.g. the annual report released in April 2003 was still not uploaded in May 2004); there is no online procurement execution platform for suppliers or online purchase execution platform for customers, etc. Tsingtao may have a long way to go before matching the global practice of leveraging advanced IT to improve firm-wide efficiency and to integrate the value chain. Research and development The brewing industry is traditionally regarded as a mature industry which requires less research input than high-tech industries. In fact, intensive competition has penetrated each link in the brewing value chain, of which R&D plays an increasingly important role in the global competition arena. Chinese brewers on average do not pay as much attention to R&D as their foreign rivals. Tsingtao was the first Chinese brewer to make an effort to enhance productivity and improve the quality of products with the aid of R&D. Some of Tsingtao’s achievements from the 1960s to the 1980s were even used as industrial standards and widely adopted by domestic rivals. In each particular historical period, Tsingtao’s research focus was different. In the mid-1960s, the company successfully developed methods to stabilise enzymatic agents for the secondary saccharification, and improved antioxidant techniques so as to prolong Tsingtao Beer’s shelf life from 90 days to 150 days (Annals of Tsingtao Brewery 1993: 89). In the 1980s, the company managed to reduce the fermentation period from 90 days to 50 days, which significantly speeded up the brewing process and raised productivity (ibid.: 89). Today, the average fermentation period of Tsingtao Beer is stable at about 40 days. In terms of new product development, strictly speaking only one kind of beer, which had an alcoholic content of 12 per cent and was packed in 640-millilitre bottles, was produced from the 1910s to the late 1970s (ibid.: 90). In the early 1980s, a research team was formed to conduct scientific experiments involving increasing the varieties of beer yeast and stabilisers and introducing fragrant hops. These experiments brought about the introduction of new products like black beer, low-calorie beer and light beer (ibid.). The hallmark of the R&D progress came in the 1990s when the company encountered fierce competition from both domestic rivals and foreign giants. The establishment in 1995 of the Scientific Research Centre for RMB40 million signalled Tsingtao’s strong commitment to enhancing its competitiveness through R&D endeavours. The state-level R&D Centre is equipped with advanced imported equipment (Yin and Ji 2003: 130). Few domestic brewers other than Yanjing Brewery are able to challenge the Centre’s industrial leadership. The Centre even aims to become one of the world’s best research centres by 2010 (interview). Its functions include the following aspects: 1

Carry out projects that solve the industry-wide issues. This category of research may not bring about immediate commercial benefits but

The catch-up of Tsingtao Brewery 115

2

3

will hopefully improve the overall standard of the Chinese brewing industry. The main aim here is to establish Tsingtao’s industrial leadership in research and to explore potential commercial benefits in the future. Tsingtao has completed six state-level technological innovation projects (Tsingtao Brewery, Annual Report 2000: 9). The research on the development of ingredients’ spectrum technology for the purpose of enhancing Tsingtao Beer’s taste was one of the key technological innovation projects in the brewing industry and was honoured with the secondclass National Technology Advancement (NTA) Award in 2002. This was the first time that the NTA had been awarded to a brewer (Tsingtao Brewery, Annual Report 2002: 10). Solve existing problems in production so as to improve productivity and the quality of the products. For instance, a number of projects on ‘the taste stability of draught beer’ are being undertaken to preserve the original unique taste of Tsingtao Beer produced in different regions (ibid.). Develop new products to meet ever-changing consumer tastes. Since its establishment, the Centre has introduced more than four different product categories, namely fruit-flavoured beers, low-alcohol beers, diet beers and special beers. It has also developed about 50 new products.

The Centre’s R&D endeavours are firmly supported by the company. Tsingtao’s R&D expenditure increased from nil in the early 1990s to more than RMB39 million in 2001. Tsingtao has raised R&D expenditure to about 3 per cent of its annual sales revenue (Yin and Ji 2003: 130). The CAGR of R&D expenditure from 1990 to 2003 was as high as 34 per cent. Research personnel increased from 16 in 1993 to over 300 in 2003. The number of research projects also increased substantially (see Table 7.7). Summary Tsingtao pays serious attention to R&D. The establishment of the R&D Centre and increasing R&D expenditure, together with many other initiatives, have dramatically improved Tsingtao’s research capability. In R&D areas, Tsingtao is one of the most competitive Chinese brewers. Nevertheless, there are many areas where the firm needs to catch up. For instance, the problem posed by the inconsistency of the taste of Tsingtao Beer brewed in different regions has become the Centre’s top priority as the company ambitiously expands. This, nonetheless, is not an issue for the global giants. Leading global brands like Budweiser, Heineken and Carlsberg retain the same clean taste globally, as a result of their ‘state-of-the-art’ facilities, strong R&D capabilities and operational and managerial efficiency. Indigenous brewers including Tsingtao have to catch up in the fields of selecting beer yeasts, developing enzymatic agents, developing filtering technologies and reducing the pollution of the environment, etc. Another generic issue that

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The catch-up of Tsingtao Brewery

Table 7.7 R&D endeavours of Tsingtao Brewery Year

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2003/1990 CAGR 2003/1990 growth (times)

Research projects (numbers)

Research institute (numbers)

Research personnel (persons)

R&D expenditure (RMB mn)

2 1 0 0 N.A. 5 7 7 8 19 25 27 N.A. N.A.

0 0 0 0 0 1 1 1 1 1 1 1 1 1

44 43 0 16 N.A. 86 82 60 141 137 308 308E 308E 308E

4.6 0.4 0.0 0.4 N.A. 16.7 13.5 25.2 7.3 14.7 33.1 39.2 185.9 201.4

26.7% §

N

16.1%

33.9%

12.5

N

6.0

43.3

Source: Author’s research based on data from Qingdao Statistics Year Book 1991 to 2002; Yin and Ji 2003: 130; interview. Note: E stands for estimates; R&D figures of 2002 and 2003 were estimated based on 3% of sales revenue; § 2001/1990 CAGR used. Numbers may not add up due to rounding.

Tsingtao and other indigenous brewers face is how to make the best use of discarded materials, in particular yeasts, to develop associated industries. Strategic alliance In the face of foreign brewers’ vigorous penetration, Tsingtao’s perspective on the competitive environment has changed drastically – from fear of being squeezed out by foreign rivals to the pursuit of strategic partnerships with them (Peng Zuoyi, former CEO of Tsingtao Brewery, BWI 2000). Tsingtao’s strategic alliance with Anheuser-Busch (AB), the world’s leading brewer, is a milestone in Tsingtao’s history and has a far-reaching impact on Tsingtao and the Chinese brewing industry as a whole. Rationale for Tsingtao As discussed in Chapter 6, the Chinese brewing industry has undergone a tremendous change since the late 1990s. Almost all top global giant brewers have established footholds in China. A significant trend in the current era is

The catch-up of Tsingtao Brewery 117 that global giant brewers, one after another, are taking full advantage of successful domestic brewers to achieve their ambitions in China. Of the top ten brewers, six have teamed up with global giants. In the face of such a trend, Tsingtao felt vastly disadvantaged and was under huge pressure to pursue a similar strategy. Tsingtao is extremely determined to grow big – both domestically and internationally (Tsingtao Brewery, Annual Report 2001, 2002). The firm hopes to gain assistance from AB in its attempt to enter into the global top ten. Meanwhile, in order to enhance competitiveness, improve profitability and maintain its market leadership, Tsingtao desperately needs to upgrade the existing brewing technology and make further domestic acquisitions. It believes that bank loans cost more than issuing shares or selling convertible bonds (CBs) (interview). The strategic alliance with AB is believed to satisfy these requirements. Tsingtao has high expectations of AB, as commented on by Li Guirong, the Chairman of Tsingtao: It was a good alliance and the combination of two best breweries [Tsingtao and AB] would improve both sides’ strength. On the one hand, Tsingtao had chosen a competitive partner who can bring us [Tsingtao] new resources, advanced technology, management, and capital that can impel the domestic beer industry and help us improve our competitiveness and make more profits. On the other hand, AB Company can participate in the rapid growth of the Chinese economy and the rapid development of the beer industry through Tsingtao Brewery’s nationwide production bases, sales network and its successful operational experience. In the future, we can see that this powerful group will lead the development of China[’s] domestic beer industry. AB Company will give Tsingtao Brewery the necessary support and help it to become the top ten in worldwide beer industry. (Tsingtao’s English website) Tsingtao views the alliance as a win–win situation in which Tsingtao obtains a great deal of the resources needed for its domestic expansion and internationalisation, which includes learning technologies and management skills from AB, optimising Tsingtao’s corporate governance following AB’s participation in Tsingtao’s board, and obtaining capital following the CB transaction (Jin Zhiguo, CEO of Tsingtao Brewery, Tsingtao Beer 2003a). Rationale for Anheuser-Busch China is strategically important for AB’s global expansion. Prior to the Tsingtao alliance, AB had one brewing operation in China, which is located in Wuhan and produces about 2.5 million litres of premium beer per year (Anheuser-Busch 2002). AB’s flagship brand Budweiser ‘is the No. 1 brand in the premium category in China, and Bud Ice competes well in the

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The catch-up of Tsingtao Brewery

super-premium segment’ (ibid.: 17). Industrial analysts estimate that, after a few years of reconstruction, AB’s Wuhan operation has started to generate very encouraging net returns, far ahead of the industrial average of 2–3 per cent. The transportation fees are extremely high when beers are brewed in only one location and distributed all over the country. This has become an increasingly significant hurdle for AB’s expansion in China. Therefore, having Tsingtao as a strategic partner is certainly a critical step to participation in the consolidation process of the Chinese brewing industry, since AB can ‘piggyback’ on Tsingtao’s nationwide production bases, sales network and successful operational experience, which has been accumulated over the years but has not been easily obtainable by foreign brewers. Patrick Stokes, President and CEO of AB, suggests that, ‘among the global beer industry, China has the most potential . . . and the alliance help[s] AB take a more important role in the international market’ (Tsingtao’s English website). AB expects Tsingtao to help it to play a greater role in the Chinese market (Tsingtao Investment Agreement 2002: 32). AB sees Tsingtao as ‘parallel with Anheuser-Busch when it [AB] faced similar US industry challenges in the 1960s’ and believes that AB’s experience in the consolidation process of the US market could well serve Tsingtao’s current strategy (Anheuser-Busch 2002: 4). In terms of assisting Tsingtao in marching into the global top ten, AB has tactically defined its role within the Chinese market instead of the global market. AB suggests that ‘the alliance may support Tsingtao in maintaining its industry lead, expanding the Tsingtao brand and obtaining materials needed in exporting’ (Tsingtao’s English website). What is worth emphasising is that, in Tsingtao’s Investment Agreement (2002: 27) with AB, it is clearly stated that ‘there is no intention for Anheuser-Busch to expand Tsingtao’s business in the United States brewery market’, one of the most profitable beer markets globally. Transaction details Under the agreement, Tsingtao sold CBs valued at USD182 million to AB. The CBs could be converted into Tsingtao’s ordinary shares over seven years, with Tsingtao issuing 308 million new shares in three tranches to AB. AB converted all three tranches of CBs, and its economic interest in Tsingtao increased from 4.5 per cent, which was acquired through the HKSE in 1993, to 27 per cent in April 2005. In fact, AB’s gain may go far beyond economic interests, as it became Tsingtao’s second-largest shareholder with a holding of 27 per cent, whereas Tsingtao’s largest shareholder, Qingdao State Assets Administration Office (QSAAO), holds just 3.6 per cent more (see Table 7.8). The transaction provides AB with opportunities to take part in Tsingtao’s operational decision-making because AB will have representatives on Tsingtao’s board, supervisory board and key board committees which involve strategy and investment, audit and finance, human resources and corporate governance. AB sent one non-executive director to Tsingtao’s board and

The catch-up of Tsingtao Brewery 119 Table 7.8 Tsingtao’s ownership structure Shareholders

2002 (%)

Post convertible bonds’ conversion (%)

QSAAO PRC legal persons Total unlisted shares

40.0 5.3 45.3

30.6 4.0 34.6

A shares H shares of which, HKSCC Nominees Limited of which, AB Total listed shares

20.0 34.7 29.1 4.5 54.7

15.3 50.1 22.3 27.0 65.4

100.0

100.0

Total shares

Source: Tsingtao Brewery, Annual Report 2002, 2003. Note: HKSCC refers to Hong Kong Securities Clearance Company.

one supervisor to Tsingtao’s supervisory committee following the firsttranche conversion of CBs, and one additional non-executive director to Tsingtao’s board following the second-tranche conversion of CBs (Tsingtao Investment Agreement 2002: 19). Consequently, AB gets direct access to Tsingtao’s operational decision-making through its voting rights on the board.12 AB’s representative is involved in all the important decision-making, including acquisition plans. The participation of AB’s representatives, who are specialists in both the global and the Chinese brewing industry, could bring about a considerable change in the power distribution of Tsingtao’s board. Tsingtao’s board consists of ten directors, of which half or more than half are external directors (non-Tsingtao employees). Thus, AB’s two seats on Tsingtao’s board could carry material weight. AB may play a key role in guiding the future of China’s largest brewer. Such a potential challenge, however, attracts little attention. Its participation in Tsingtao’s board is overwhelmingly welcome and regarded as a catalyst to speed up Tsingtao’s internationalisation process (Tsingtao Beer 2003c). AB is obligated to send a team to Tsingtao, aimed at the ‘exchange of best practice’, to share AB’s expertise in these areas: (1) financial and business planning; (2) production, inventory planning and logistics; (3) product quality control; (4) beers’ taste consistency; (5) accounting; and (6) managerial skills and investor relations (Tsingtao Investment Agreement 2002: 32). The ‘best practice’ programme started in 2003 and has been carried out through seminar discussions and company visits. AB has supervisors located at Tsingtao’s headquarters. Tsingtao expects to selectively adopt AB’s mature management models and experience to enhance Tsingtao’s competitive advantages (Tsingtao Brewery, Annual Report 2002). The latest progress of the exchange programme is as follows:

120 1 2

3

The catch-up of Tsingtao Brewery The exchange programme in HR management (e.g. employee training) has made progress. The exchange in financial and business planning is at its initial stage. There has been so far no material exchange such as disclosing a full picture of the financial systems to each other. The exchange is confined within peripheral areas like financial evaluation of acquisition targets. The exchange in production and quality control has made some progress. It is unanimously believed by Tsingtao’s management teams and workshops that the most valuable knowledge learned from AB is how to revise Tsingtao’s Standards and Rules of Brewing Operations (SRBO) (interviews). To produce high-quality beers with a consistent taste, brewers must set up and strictly carry out a series of well-designed procedures to monitor the entire brewing process. The selection of these procedures is closely associated with the quality of the brewing facilities. When the same series of procedures is adopted by two breweries whose facilities are different, the quality and taste of beers brewed in these breweries can be significantly different. Therefore, each brewery must have a series of procedures best suited to its own facilities. Following Tsingtao’s large-scale acquisitions, some of its breweries are equipped with imported advanced facilities but some have outdated domestically manufactured facilities. Consequently, the introduction of a series of well-designed procedures suited to each brewery plays an indispensable role in improving product quality and optimising Tsingtao’s nationwide brand portfolio. Another closely related factor is that these procedures should be designed in great detail and carried out strictly to enable brewing plants to produce better products. In other words, the procedures should be as detailed and precise as possible. This rule applies to any kind of breweries, including ‘state-of-the-art’ facilities. The weaknesses of Tsingtao’s SRBO are that the procedures are too rough; the SRBO system is not strictly carried out; and some acquired breweries have not found the most suitable SRBO. By learning AB’s operational standards, Tsingtao has introduced Standard Operational Procedure (SOP) and Core Point Core Procedure Review (CPCPR) systems to supplement the SRBO system (Tsingtao Beer 2003d, 2003e; interviews). SOP and CPCPR systems are believed to be able to solve the issue of taste inconsistency in Tsingtao Beer brewed in different locations. It is believed that, as long as the quality of raw materials remains the same and each brewery carries out detailed operational standards precisely, the taste inconsistency of Tsingtao Beer can consequently be solved. In terms of using an R&D approach to solve the problem, there has been no material assistance from AB. In fact, there is, so far, no material exchange in R&D between Tsingtao and its global partner (interview).

The catch-up of Tsingtao Brewery 121 Implications In the light of the agreement with Tsingtao, AB has strategically secured its position as the largest non-government shareholder of Tsingtao. AB may also have a fair chance of further increasing its shareholding or even becoming the largest shareholder of Tsingtao in the future. This is the most challenging scenario that Tsingtao and the Chinese brewing industry may have to face. First, AB has secured its position as Tsingtao’s largest non-government shareholder in that AB is entitled to anti-dilution rights if Tsingtao issues or offers the purchase of new shares (Tsingtao Investment Agreement 2002: 17–18): 1

2

3

Where Tsingtao issues new H shares,13 including securities convertible or exchangeable into H shares, AB is entitled to subscribe for or purchase such H shares at the same time as and on the same terms and prices offered to other investors so as to maintain AB’s pre-offering shareholding interest in Tsingtao. Where Tsingtao issues new A shares,14 including securities convertible or exchangeable into A shares that AB is not eligible to subscribe for or purchase,15 ‘AB is entitled to purchase from Tsingtao at the same time as the offering and at the average closing price of H shares for the last 20 business days . . . to maintain its pre-offering percentage shareholding in Tsingtao’. Tsingtao is obligated to consider all the implications for AB’s antidilution rights when designing its future fund-raising exercises related to issuing shares.

Clearly, the anti-dilution terms are powerful enough to fulfil AB’s strong determination to remain as Tsingtao’s largest non-government shareholder. AB’s gain could even go beyond this. Tsingtao’s H shares generally trade at a discount to its A shares. Should this trend continue, any shareholding increase of AB in Tsingtao following an issue of A shares (point 2 above) would also bring AB substantial economic gains in addition to its increased shareholding. Second, the agreement leaves room for AB to become Tsingtao’s largest shareholder. It is stipulated that: Anheuser-Busch further undertakes to Tsingtao that upon its shareholding in Tsingtao . . . reaching 27 per cent of the total number of issued Shares of Tsingtao, it will not acquire any additional shares such that its aggregate shareholding immediately following such acquisition would exceed 27 per cent of the total number of issued Shares in Tsingtao. However, such undertaking shall remain effective only for so long as Parent [QSAAO] owns in the aggregate at least 27 per cent of the total number of issued Shares of Tsingtao. (Ibid.: 17)

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This term clearly indicates that, if the shareholding of QSAAO drops below 27 per cent of the total issued shares of Tsingtao, AB is entitled to increase its shareholding and consequently may outstrip QSAAO’s interests in Tsingtao. If such an increase were to take place, AB could replace QSAAO to become Tsingtao’s largest shareholder. Hence, the crux is whether QSAAO is firmly determined to keep and capable of keeping its shareholding above 27 per cent when Tsingtao issues new shares in the future. Past experience has shown that it was not an easy task for QSAAO to keep injecting funds into companies under its supervision. After all, QSAAO manages a large number of SOEs in Qingdao and the amount of investments needed is enormous if all the SOEs under its supervision are taken into account. As far as Tsingtao is concerned, QSAAO failed to inject capital when Tsingtao issued 100 million A shares in 2001, which resulted in QSAAO’s shareholding in Tsingtao dropping from 44.42 per cent to 39.98 per cent (Tsingtao Brewery, Annual Report 2001: 21–3). In fact, QSAAO is more likely to reduce than increase its shareholding in Tsingtao, since the Chinese government enthusiastically encourages the sell-down of state-owned shares. The State-Owned Assets Supervision and Administration Commission is in charge of a timetable regarding the state shares’ sell-down. In contrast, there is a high likelihood that AB would increase its shareholding should QSAAO’s holding in Tsingtao drop below 27 per cent. Third, AB becomes Tsingtao’s exclusive foreign strategic partner. In order to strengthen the strategic alliance, Tsingtao and AB agree that each of them: shall not directly or indirectly or solely or jointly enter into or otherwise have an interest in any strategic investment agreement, joint venture or other similar arrangements involving strategic cooperation or investment in connection with the operations of any brewery business in the PRC without the prior written consent of the other party. (Tsingtao Investment Agreement 2002: 18) This covenant will cease to take effect if (1) AB’s shareholding in Tsingtao drops below 20 per cent of Tsingtao’s total shares or (2) QSAAO’s holding in Tsingtao drops below 20 per cent of Tsingtao’s total shares (ibid.). For Tsingtao, the aim of this covenant was to prevent AB from allying with other domestic players to compete with Tsingtao and to prevent Tsingtao’s domestic competitors from increasing their competitive advantages with the aid of AB. For AB, such an exclusive strategic partnership precludes its competitive foreign rivals from partnering with Tsingtao in the future but facilitates its own expansion in China. AB’s ambition in China is not confined to Tsingtao or its Wuhan operation. It is making a number of efforts to expand. There were plans to increase the capacity of the Wuhan operation to 2.7 million barrels by late 2004 to meet the strong growth momentum of Budweiser and Bud Ice

The catch-up of Tsingtao Brewery 123 (Anheuser-Busch 2003: 18). Most importantly, AB’s acquisition in 2004 of Harbin Brewery, one of the oldest brewers (Harbin website) and the fourthlargest brewer in China (see Table 6.4), suggests AB’s strong determination to expand. Patrick Stokes, President and CEO of AB, views the Harbin deal as follows: Along with our [AB’s] alliance with Tsingtao . . . and our successful Budweiser Wuhan International Brewing Corporation, this investment in Harbin Brewery reinforces our [AB’s] commitment to China, provides future benefits to all three companies [AB, Tsingtao and Harbin], and is consistent with our stated strategy of investing in leading brewers in growth countries . . . Tsingtao is supportive of Anheuser-Busch’s investment in Harbin and agrees it will be beneficial for all parties. (AB website) The Harbin deal and possible similar deals in the future raise deep questions of the strategic alliance between Tsingtao and AB. According to their agreement analysed previously, without Tsingtao’s consent AB cannot cooperate with or buy other Chinese brewers. The key thing is that Tsingtao agreed to and supported the deal. Many things associated with the deal are unclear: why Tsingtao agreed and how it would benefit Tsingtao; why Tsingtao did not buy Harbin; how AB’s expansion in north-east China affects Tsingtao’s expansion in that region; how Tsingtao prevents AB from allying with Harbin to compete with Tsingtao; and how AB’s future expansion in China affects Tsingtao’s domestic expansion. Fourth, QSAAO’s interest in Tsingtao is tied up with AB. The agreement also requires that QSAAO shall not, directly or indirectly, sell or dispose of its interest in Tsingtao to any person or company involving brewing or other beverage industries ‘except to a PRC state-owned entity acceptable to Anheuser-Busch which is a wholly owned subsidiary of Parent [QSAAO]’ (Tsingtao Investment Agreement 2002: 20). This covenant deprives QSAAO of a great deal of flexibility in dealing with Tsingtao. The obligation of QSAAO to AB blocks the possibility of any Chinese brewer teaming up with Tsingtao through the acquisition of QSAAO’s holding in Tsingtao. Consequently, the likelihood of forming a gigantic indigenous brewer through mergers between Tsingtao and other large domestic brewers becomes very remote. This phenomenon could negatively affect the national champions but brings far-reaching benefits to AB. That QSAAO can only sell its shares in Tsingtao to one of its SOE subsidiaries acceptable to AB prevents AB’s foreign and Chinese competitors from acquiring Tsingtao from QSAAO. This paves the way for AB’s further expansion in the Chinese market, since the largest Chinese brewer has been tightly and exclusively tied up with AB.

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Summary The occurrence of Tsingtao’s alliance with AB has its particular external and internal grounds. Externally, global giant brewers have been vigorously penetrating the Chinese market. Their expansion increasingly takes the form of M&As and strategic alliance. The challenges that national champions currently face are much more severe than during previous decades. Internally, China is open to foreign competition owing to its obligations to the WTO. Almost all the leading global brewers have built up their footholds in China. Many leading Chinese brewers have teamed up with foreign rivals, in the hope of obtaining capital and other competitive advantages. This pressure, along with Tsingtao’s strong national and global ambitions, forced Tsingtao to pursue foreign strategic alliance. China is strategically important for AB’s global expansion. The strategic partnership with Tsingtao is certainly a critical step to enable AB to participate in the consolidation process of the Chinese brewing industry. The Tsingtao alliance and Harbin acquisition have far-reaching implications and raise many deep questions. Why have the first-tier indigenous brewers, in particular the top five, so rarely, if ever, merged? Would not it be natural to consider a merger between Tsingtao and Harbin? After all, the combination of Tsingtao and Harbin creates synergies and brings about competitive advantages beneficial to these two indigenous giants. For whatever reasons, such a merger was not feasible. The reality is that two of the oldest indigenous brewers, Tsingtao and Harbin, are both, partially or predominantly, in the hands of a global giant. It is too early to conclude what Tsingtao’s final gains from AB will be. It is worth noting that ‘sharing’ can sometimes be a double-edged sword for both parties in a strategic alliance relationship. As far as indigenous leading brewers (e.g. Tsingtao) are concerned, the trade-off between the gains from global giants and the compensation that they offer to global giants requires careful weighing up. It is, after all, very tough to create a win–win situation when there is a large gap between the competitiveness of the two rivals. As the largest Chinese brewer, Tsingtao possesses considerable competitive advantages that other domestic rivals lack. However, compared with AB, Tsingtao is lagging behind. Therefore, keeping itself in a comfortable position in the alliance relationship becomes Tsingtao’s most important and imminent task. Nonetheless, many key issues have gone beyond and will continue to go beyond Tsingtao’s control. The alliance provides AB with opportunities to take part in Tsingtao’s operational decision-making. AB has strategically secured its position as Tsingtao’s largest non-government shareholder. More importantly, the agreement leaves room for AB to become Tsingtao’s largest shareholder, and this is the most challenging scenario that Tsingtao will have to face. That AB becomes Tsingtao’s exclusive foreign strategic partner provides AB with dramatic competitive advantages in the face of other foreign brewers’ ferocious

The catch-up of Tsingtao Brewery 125 competition in China. In addition, QSAAO’s obligation to AB blocks the possibility of any Chinese brewer teaming up with Tsingtao through the acquisition of QSAAO’s holding in Tsingtao. Consequently, the likelihood of forming a gigantic indigenous Chinese brewer through mergers between Tsingtao and other large domestic brewers becomes very remote, if not impossible. This does no good to indigenous champions. In a nutshell, this strategic alliance is bound to have a huge influence on the Chinese brewing industry. The competition among and between foreign and domestic brewers will significantly tighten up. The alliance will result in more and more similar arrangements between domestic and foreign brewers. Consequently, extremely complicated competitive and cooperative relationships among all associated parties, foreign and domestic, are being developed. To a certain extent, it could be just a matter of time before large indigenous brewers, even including Tsingtao, become subsidiaries of global giants. This view can be supported by the Chinese government’s intention of reducing its shareholdings in large SOEs. With the deepening of the property right reform, there is a high likelihood that the government will reduce its shareholdings or not be able to increase its shareholdings in large SOEs like Tsingtao when these large SOEs frequently issue new shares in the open market. Consequently, whoever is willing to purchase and capable of purchasing these large firms will take the helm. In this regard, should a large national champion which is indeed predominantly owned or managed by its foreign rival(s) still be regarded as an indigenous firm? Is the effort to catch up meaningful if a firm eventually catches up at the expense of losing its original identity?

The role of industrial policies A big business is the nexus of the whole value chain (Chandler et al. 1997: 26), a ‘spider of an industrial web’ (Ruigrok and Van Tulder 1995: 65) and a core systems integrator (Nolan 2001). We have seen in previous chapters that, in the current era, the function of global giant firms has developed from direct manufacturing towards a ‘brain’ function – systematically integrating resources in the value chain and across the world. They are actively involved in and have significant spillover effects upon associated businesses in both the upstream and the downstream value chain. As a result, a much wider array of firms and sectors beyond the production domain of the core systems integrators are closely integrated. In this sense, the boundary of the core firm is blurring. The modern global giant firms become ‘external’ firms (Nolan 2001: 39–45). Many developing countries expect to catch up through fostering large indigenous firms. China is no exception. It has implemented a series of industrial policies since the late 1970s to stimulate the catch-up of a number of pillar SOEs in selected sectors (Nolan 2001; Sutherland 2001). As far as Tsingtao Brewery is concerned, preferential industrial policies have made a substantial contribution to the company’s catch-up and national campaign.

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Industrial policies at the state level Starting from the 1980s, the Chinese government has been determined to foster a few national champions to consolidate the Chinese brewing industry and to compete with foreign brewers. Tsingtao Brewery,16 as one of the largest and oldest indigenous brewers, was chosen as a pillar firm to fulfil that goal and consequently benefited from a large array of preferential policies. To begin with, owing to the strong government support, Tsingtao was able to complete a series of technological improvement projects in the 1980s and early 1990s. These projects significantly improved Tsingtao’s capacity and reinforced its domestic leadership: 1

2

3

The project to increase the capacity of Tsingtao Brewery from less than 50 million litres per year to 100 million litres per year began in 1982 and was completed in 1986. A total amount of RMB50.8 million was invested in over 30 sub-projects, which included upgrading existing facilities and the build-up of new saccharification plants, barley storehouses and outdoor tanks. This project was conducted under the direction of Documentation No. 533, ‘The Plan of Developing the Capacity of Tsingtao Brewery’, and Documentation No. 85, ‘Ratification of the Tentative Programme for Developing the Capacity of Tsingtao Brewery’, jointly issued by the State Economic Commission, Ministry of Finance, State Import and Export Commission and State Construction Commission (Annals of Tsingtao Brewery 1993: 61). The project to increase the capacity of Tsingtao Brewery from 100 million litres per year to 130 million litres per year began in 1986 and was completed in 1992. A total amount of RMB50 million (including USD4.6 million) was invested in 15 sub-projects, including upgrading operational facilities (e.g. fermentation and packaging workshops) and auxiliary facilities (e.g. water supply and drainage systems). This project was financed by the government and supported by the State Planning Commission (Annals of Tsingtao Brewery 1993: 62–3, 260). The projects to increase the capacity of Tsingtao Brewery from 130 million litres per year to 200 million litres per year and then from 200 million litres per year to 300 million litres per year began in 1986 and 1988, respectively, and were completed in 1992 and 1995, respectively. Qingdao Municipal Government initiated the projects, in an attempt to accelerate Qingdao’s economy by supporting a number of key manufacturers. It even chaired a detailed seminar discussion about the future development of Tsingtao Brewery with more than 30 officials from a wide array of government bureaus (Annals of Tsingtao Brewery 1993: 63, 66, 260).17 It is worth highlighting that, without strong support from both the state and the local governments, the successful completion of these projects would not have been possible. As a result of many preferential arrangements, Tsingtao gained whatever resources it needed for these

The catch-up of Tsingtao Brewery 127 projects, including a substantial amount of foreign currency18 to import advanced production equipment. Tsingtao was given the decision-making right for importation and exportation as early as the 1980s (Annals of Tsingtao Brewery 1993: 2). It was the first brewer to enjoy such a special right. In contrast, most individual enterprises of that era were not allowed to directly import raw materials or export products. Any import and export activity had to go through state-owned trading companies. Therefore, autonomy of importation and exportation provided Tsingtao with a good platform from which to enter the global market, which is one of the reasons why Tsingtao Beer has been surpassing other Chinese beer brands in the global market. Once it became recognised overseas, Tsingtao Beer possessed the first-mover advantage and other domestic competitors had to struggle hard to catch up. Tsingtao was chosen as one of the first batch of SOEs to go public for trial purposes (Annals of Tsingtao Brewery 1993). It became the first Chinese SOE listed on the HKSE in July 1993 and one of the first batch of SOEs listed on the SSE in August 1993 (Tsingtao Brewery, Annual Report 1993). It was also the first listed Chinese brewer. Tsingtao views the listing as ‘a major milestone’ in the course of its development (ibid.: 4). The capital of over RMB1.5 billion (ibid.) obtained from the open markets (including Hong Kong) laid a solid base for Tsingtao’s take-off through its use either in technological improvement projects or for domestic expansion. Meanwhile, the pressure of generating shareholder value served as a strong impetus that pushed Tsingtao to conduct a wide array of reforms. Even though the quick expansion damaged shareholders’ value to a certain extent, Tsingtao secured its domestic leadership and made substantial progress in various areas, as discussed in previous sections. The State Administration of Taxation gave Tsingtao the green light on taxation payment. Unlike other SOEs, which in general were (and are) subject to an income tax of 33 per cent, Tsingtao19 paid (and pays) an income tax rate of 15 per cent until and unless a new enterprise income tax law stipulated otherwise (Tsingtao Brewery, Annual Report 1993: 40). In addition, many local governments return a certain amount of taxation that Tsingtao has paid to them, in order to encourage Tsingtao’s continuous investments in their territories. These preferential taxation regulations have brought about a substantial amount of accumulated capital savings, which could be used for many other purposes in the course of Tsingtao’s national campaign. Tsingtao’s domestic expansion was greatly attributable to strong government support. Not only did state intervention make many deals possible, but it also significantly reduced Tsingtao’s acquisition costs. For instance, Xi’an Hansi Brewery, one of Tsingtao’s acquired brewers in western China, was once debt-ridden, with the debt-to-equity ratio reaching a high level of 97 per cent (Yin and Ji 2003: 102). Following Tsingtao’s takeover of Hansi, solving the debt issue became Tsingtao’s first but extremely difficult task. But, at that

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time, the State Planning Commission and People’s Bank of China were cooperating to solve the issue of bad debts that most Chinese commercial banks painfully encountered. Certain SOEs, in particular large indigenous ‘pillar’ enterprises, were chosen as ‘trial companies’ whose bank loans were partly written off by the central government as bad debts. It was one of the measures in the late 1990s to foster pillar SOEs. As the largest state-owned brewer, Tsingtao was included amongst the ‘trial companies’. Subsequently, Xi’an Hansi’s RMB45 million of debt was written off in 1999. On top of that, Tsingtao was exempt from paying annual interest for the remaining RMB120 million of debt as long as the debt itself could be repaid within the following five years (Yin and Ji 2003: 114). This measure provided Hansi with timely support. Last but not least, Tsingtao’s R&D endeavours were and are supported by the state. A research grant of about RMB1 million was granted to Tsingtao’s R&D Centre. The subsidy was not substantial but became a gesture of state support because it was very rare, if not impossible, for firms in the beverage industry to win state R&D subsidies. The following section analyses how Shandong province and Qingdao City, where Tsingtao is headquartered, foster Tsingtao’s development and national campaign through preferential industrial policies. Industrial policies in Shandong province and Qingdao City Large companies such as Haier, Aucma, Hisence and Tsingtao have become the engine of the economic development of Shandong province and Qingdao City. For example, Tsingtao Beer brewed in Qingdao City is estimated to stimulate an approximate annual production of over 400 million glass bottles, 200 million cans and 46 million cardboard cases. If transportation and other services are counted, Tsingtao contributes at least an industrial output of between RMB2.5 billion and RMB3 billion to associated industries in Qingdao, in addition to the thousands of jobs it creates (New Economy 2001). Unsurprisingly, Tsingtao is amongst the major contributors to Qingdao’s local economy. With the recognition of the significant role that large firms play, both Shandong province and Qingdao City have pursued a strategy of fostering pillar sectors and pillar brands. In each period of the economic development of Qingdao City, preferential industrial policies were granted to a couple of key sectors and enterprises (Qingdao Almanac, various years). On account of the preferential industrial policies, along with many other factors, Qingdao has made itself one of the most important industrial centres in China and possesses strong competitive advantages in a wide array of sectors ranging from household electronic goods to beverages and textiles. Among the most valuable Chinese brands, Haier and Tsingtao Beer were ranked in 2003 as number one and number ten, respectively. Qingdao City in total accounted for 14 per cent of the 50 best-known Chinese brands (Zhou 2003: 158), but

The catch-up of Tsingtao Brewery 129 Qingdao’s population accounts for only 0.56 per cent and 1.42 per cent of China’s total and urban population, respectively (China Statistics Year Book 2003). Currently, a couple of industries have been selected as Qingdao’s pillar industries, of which beverages and electronic goods are given priority to develop because of their existing leadership positions in the domestic market and huge spillover effects upon associated industries. Within the prioritised sectors, six brands are further selected to take the lead, of which Tsingtao Beer and Haier are ranked as ‘the key of the key’ (see Tables 7.9 and 7.10). In terms of the specific preferential industrial policies on Tsingtao Brewery, both Shandong Provincial Government and Qingdao Municipal Government have made significant contributions. In 1996, the Light Industry Association of Shandong province and the Shandong Provincial Planning Commission jointly named eight firms, including Tsingtao Brewery, as Shandong’s pillar firms and implemented more than ten preferential policies for them. Qingdao City (Qingdao Municipal Government 2001) adopted detailed measures to carry out these policies, which can be summarised as follows: 1 2

Support technological improvement of the pillar firms. Promote pillar firms and non-pillar firms in associated industries to establish R&D centres and urge them to allocate R&D expenditure on an annual basis (ibid.). This measure not only directly benefits the pillar firms themselves, but also improves the overall technological and technical standards of associated industries in the value chain, which in turn benefits the pillar firms. For instance, the increasing R&D endeavours

Table 7.9 Qingdao’s industrial structure, 2000 to 2010 Pillar industries

Household electronic goods Beverages Latex Transportation vehicles Machinery Textiles Tobacco Electronic communication products Leather and pelage

Industrial output (RMB bn)

Position in China Current

Future estimates

31.7

Excellent

Excellent

Priority

12.0 11.9 7.9 9.2 12.3 2.1 11.8

Excellent Good Good Satisfactory Good Good Good

Excellent Good Good Good Good Good Good

Priority Remain as it is Remain as it is Remain as it is Remain as it is Remain as it is Remain as it is

Good

Good

Remain as it is

6.8

Source: Compiled from Xu 2003: 16.

Qingdao’s choice

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Table 7.10 Key brands and their impacts on Qingdao City Key brands

Associated industries

Impact on Qingdao

Haier Tsingtao Beer Hisence Aucma Double Stars Jifa Others

Strong spillover effects on associated industries; strong impacts on the economic development of Qingdao City.

Very high Very high High High High High High to medium

Source: Compiled from Xu 2003: 18.

3

4

of Qingdao Jinghua Glass Bottle Corporation have contributed to Tsingtao Brewery’s competitive advantages. Build up 20 industrial zones to provide pillar firms with better operational environments. The successful establishment of Tsingtao Brewery Industrial Zone in 2001 was amongst the first batch of the industrial zone project (Qingdao Daily 2002). Support key firms’ national campaign by facilitating M&As, capital restructuring and strategic alliance. Tsingtao is a big beneficiary of this policy. As mentioned in previous sections, Tsingtao’s national campaign started with vigorous acquisitions in Shandong province. Without strong support from Shandong Provincial Government and Qingdao Municipal Government, the starting point of Tsingtao’s national campaign would have been very difficult, if not impossible. For instance, to reduce the financial costs that Tsingtao had to bear in acquisitions, the provincial and municipal governments even managed to liquidate a few brewers before Tsingtao’s takeover. Four local governments even sent five of their state-owned brewers to Tsingtao free (Dazhong Daily 2002a; Yin and Ji 2003: 93). However, the process of consolidating the Shandong market did not always run smoothly. Tsingtao once faced considerable obstacles when some of its bids were regarded as hostile takeovers and strongly rejected. One example was Tsingtao’s takeover of Laoshan Brewery, a close rival in Qingdao City that once held up to 80 per cent of the local market. The two brewers competed in hostile fashion after Tsingtao’s attempts to acquire Laoshan failed in 1998. It was the direct intervention of Qingdao Municipal Government that eventually facilitated the takeover. The Laoshan District Government,20 Laoshan Brewery’s largest shareholder, named Tsingtao Brewery in 1999 as the trustee of Laoshan Brewery and took the management role. The intervention removed the power of Laoshan’s management team, the major obstacle to Tsingtao’s takeover

The catch-up of Tsingtao Brewery 131 of Laoshan, and paved the way for Tsingtao’s acquisition, which took place in early 2000 (Yin and Ji 2003: 98–100). It is worth highlighting that this acquisition was strategically important for Tsingtao because it firmly secured Tsingtao Brewery’s monopoly in its own backyard. Summary China has implemented a series of preferential industrial policies since the late 1970s to stimulate the catch-up of a number of pillar SOEs in selected sectors. As the largest indigenous brewer, which owns the flagship Chinese beer brand, Tsingtao Brewery is amongst the privileged pillar firms. The strong support that Tsingtao has obtained from the state, Shandong province and Qingdao City has ranged from an arm’s length approach to direct intervention; and it involves almost all the important aspects of Tsingtao’s daily operation, such as financing, taxation, R&D, technological improvement and M&As. It is fair to say that, in the absence of the support, Tsingtao would not have grown as rapidly. In this regard, preferential industrial policies have played an indispensable role in the course of Tsingtao’s catch-up and its national campaign. Nonetheless, the Chinese government has made clear its wish to gradually reduce state ownership in large SOEs and lessen state intervention. The implication is far-reaching – building up the so-called national champion will be much tougher than it has been in any previous decades. The catch-up policy of fostering national champions faces unprecedented challenges. Following China’s entry into the WTO, direct state intervention will become extremely difficult. The national champions, including Tsingtao, will undoubtedly benefit from fewer preferential policies than before. They are being forced to rely on themselves to grow more quickly and stronger to compete with highly competitive global giants. Otherwise, most national champions may not escape the destiny of being swallowed up by foreign rivals. The question is: are they really ready to compete or simply ready to be allied?

Conclusions and implications Tsingtao is one of the oldest and largest brewers in China. After a long period of being a typical SOE between the 1950s and the 1980s, Tsingtao made slow progress and lagged behind global giants. It has achieved substantial progress since the 1990s but still faces large catch-up gaps. Among a wide range of strategies that Tsingtao has adopted, the sell-off of 27 per cent of the company to AB in the hope of leveraging AB’s strength to develop Tsingtao is set to have very deep implications for Tsingtao and the Chinese brewing industry as a whole, as well as for China’s entire industrial policy after the country’s entry into the WTO.

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Competitive advantages Tsingtao has made remarkable progress in the past few decades with the aid of a wide array of strategic adjustments, ranging from vigorous domestic expansion, brand restructuring and value chain integration, to technological improvement, R&D endeavours and strategic alliance, etc. Amongst the expanding brewers, Tsingtao clearly stands out. Owing to vigorous acquisitions since the late 1990s, Tsingtao has firmly established its domestic leadership and made tentative efforts to build a manufacturing foothold outside Mainland China. While slowing down the expansion pace in recent years, Tsingtao launched an Enterprise Division Scheme to strengthen its role as a systems integrator along the value chain. All these initiatives are highly important in Tsingtao’s domestic and global campaign. Moreover, Tsingtao has grown at a much faster rate than the global giant brewers. Tsingtao Beer is the most well-known brand in most Chinese cities and China’s flagship brand in the global market. This is one of the most valuable advantages that Tsingtao possesses. Moreover, Tsingtao owns the largest domestic beer distribution network and has taken initiatives to improve the network by adopting advanced IT such as an ERP platform. Tsingtao has a strong management team which is ambitious and determined to expand the company nationally and globally. Tsingtao is one of the most competitive Chinese brewers and has the potential to lead the catch-up of the Chinese brewing industry. On top of this, as the ‘star’ firm in the brewing industry and the pillar firm in Shandong province and Qingdao City, Tsingtao has benefited from a wide array of preferential industrial policies from the state and provincial and municipal governments, many of which have been unavailable to other domestic and foreign rivals. These policies have played an extremely important role in the course of Tsingtao’s catch-up. Competitive disadvantages and catch-up gaps To begin with, leading global brewers’ production scales have been increased enormously in the current era. Scale matters today more than it has done in the past. Not only have giant brewers adopted ‘state-of-the-art’ technology, but they have also started to rationalise their procurement, production, marketing and distribution on a global basis, which has created a huge entry barrier to the global playing field. In contrast, Tsingtao does not enjoy desirable scale economies and is still too small to bear comparison with leading global brewers. It is extremely tough for a firm with such a small size to fight in the global competition arena. The brewing industry does employ a vast number of labourers but it is, after all, a conventional capital-intensive industry where the most important competitiveness is capital and technology instead of cheap labour. Tsingtao has acquired a large number of local brewers and the company’s

The catch-up of Tsingtao Brewery 133 total capacity has increased significantly. But this does not mean that it enjoys a satisfactory level of scale economy at the firm level. The rapid acquisition in the 1990s has created a fundamental structural weakness. The scale-related productivity, efficiency and profitability of Tsingtao’s individual breweries are on average considerably lower than those of the global giants (see Tables 7.1 and 7.2). In this regard, Tsingtao has to continuously make a tremendous effort to ensure that each individual plant operates at a desirable capacity at which economies of scale and scope can be fully exploited. This means that Tsingtao has to either increase its market share aggressively or close down inefficient small breweries, or both. Nevertheless, none of these approaches is easy to implement. For instance, closing down brewers has unavoidable social consequences, whilst many other industries also undergo large-scale downsizing. In addition, the firm’s profitability is considerably lower than that of the global giants, which can be a significant financial constraint upon its attempts to catch up. The lack of a well-structured brand image makes Tsingtao Beer’s positioning as a premium brand highly confused. How to strengthen Tsingtao Beer’s brand image and consolidate a vast number of acquired local brands with the aid of ‘brand value creation’ activities remains a huge challenge. In terms of packaging innovation, foreign brewers take the lead in both the global and the Chinese market. Tsingtao did not pay enough attention to packaging until recent years. The firm will constantly have to make enormous efforts in order to catch up with global standards, It was discussed previously that global giant firms, which are in themselves identified as ‘core systems integrators’, have gained enormous competitive advantages in the value chain. Tsingtao has also made tremendous efforts to integrate the value chain – both upstream and downstream. It appears that it has substantial bargaining power in relation to raw materials suppliers but does not possess much power on the sales side in the downstream. Compared with the global giants, the firm has a long way to go before becoming a true ‘core systems integrator’ (Nolan 2001: 42) or ‘a spider of an industrial web’ (Ruigrok and Van Tulder 1995: 65) in both the domestic and the global competition arena. Tsingtao has made great efforts in adopting advanced IT to enhance its competitiveness, but more endeavours will have to be made to catch up with the global practice of leveraging the latest IT to improve firmwide efficiency and to integrate the value chain. There are also catch-up hurdles in the field of R&D that Tsingtao and its domestic peers need to overcome. Strategic alliance The Chinese brewing industry has witnessed an increasing number of strategic alliances in recent years. However, the trade-off between the gains from foreign brewers and the compensation that indigenous brewers offer demands

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The catch-up of Tsingtao Brewery

careful weighing up. It is, after all, tough to create a win–win situation when the power struggle of two parties in the alliance is unbalanced. The stability of the Tsingtao and AB alliance is dubious. China is strategically important for AB’s global expansion, but it is too early to conclude on Tsingtao’s final gains from the alliance. The alliance provides AB with opportunities to take part in Tsingtao’s operational decision-making. It also secures AB’s position as Tsingtao’s largest non-government shareholder, with a great potential, theoretically and practically, to become the largest shareholder. QSAAO’s obligations pave the way for AB’s further acquisition of Tsingtao but almost shatter the potential for forming a gigantic indigenous brewer through the combination of Tsingtao and other top-tier domestic brewers. The Chinese government’s determination to sell down shareholdings in large SOEs could result in a situation where whoever is willing and able to purchase will take the helm of these large SOEs. To a certain extent, it could be just a matter of time before large indigenous brewers become subsidiaries of global giants. From this point of view, today’s strategic alliance could be a ‘takeover in progress’ for the future. The strategic alliance raises deep questions. Who is and will be taking control in the alliance? Where is the dividing line between an alliance and a potential de facto takeover? There is a high possibility that the Chinese side’s power will run down as time goes on. In this case, one may wonder, why did the deal go through? Does the pressure of generating shareholders’ value explain the rationale? How do the opportunities provided for the management by introducing such an alliance affect their decision-making? After all, there are other successful indigenous firms which have achieved remarkable growth but which do not pursue so-called strategic alliance or go public. All these questions apply not only to the brewing industry but also to other sectors which are struggling to survive and catch up after China’s entry into the WTO. The difficult situation that the Chinese brewing industry faces is also a dilemma that other developing countries have to deal with in the era of the global big business revolution. Implications for large indigenous firms’ catch-up and industrial policies In the epoch of the global big business revolution, giant brewers from advanced economies have gained enormous competitive advantages. The pursuit and possession of these advantages have resulted in their ambitious global expansion, pushing the industry towards rapid consolidation. The global business transformation has posed tremendous challenges for large Chinese brewers. The burning issue that large Chinese brewers now face is, however, not going global, but rather securing their backyard in the face of ambitious foreign penetration. Brand loyalty, well-established distribution channels and strong government support are all competitive advantages that they possess but that foreign brewers can hardly replicate.

The catch-up of Tsingtao Brewery 135 Large indigenous pillar firms, as systems integrators and core firms, have significant spillover effects on associated industries in the upstream and downstream value chain, and hence on the whole economy (e.g. Porter 1986, 1990; Ruigrok and Van Tulder 1995; Chandler et al. 1997; Nolan 2001). Big businesses are as important to the economic transformation of major advanced and newly industrialised economies (Amsden 1997; Chandler et al. 1997; Chang 2002) as they are to today’s China. Only national giants can bargain with foreign giants, as Hymer pointed out decades ago (Hymer 1979a). This point is particularly important for today’s Chinese brewing industry. We have seen that preferential industrial policies have played an indispensable role in Tsingtao’s catch-up and national campaign. In the future, the nationwide property rights reform will undoubtedly have a larger influence on Tsingtao Brewery and other large SOEs than any other kinds of state intervention. The Chinese government has made clear its wish to gradually reduce state ownership in large SOEs and lessen state intervention. The implication is far-reaching – building up national champions will be much tougher than before. The national champions, including Tsingtao, will get considerably fewer preferential policies than they used to get. Therefore indigenous firms, including Tsingtao, are forced to rely on themselves to grow stronger and more quickly to compete with the highly competitive global giants. The question, however, is: are they ready to compete? If they should go for strategic alliance in the hope of leveraging foreign rivals to grow faster and larger, they run a huge risk of being swallowed up. The future landscape of the Chinese brewing industry and the catch-up trajectory of Chinese brewers are dependent on how industrial policies and Chinese large brewers react to the highly intricate, almost labyrinthine interrelationships that giant brewers have developed in their fight for global dominance. The catch-up policy of fostering national champions faces an unprecedented challenge. This challenge deserves careful thought: what does a national champion mean? Where is the boundary of a firm? How much does the possibility of large indigenous enterprises becoming subsidiaries of their global rivals matter to China’s catch-up? What industrial policies should be put in place in reaction to the global big business revolution? Not only is Tsingtao Brewery standing at the crossroads, but so are other large indigenous firms (Nolan 2001; Nolan 2004a, 2004b) in a wide array of industries.

8

The catch-up of Yanjing Brewery

This chapter discusses how Yanjing Brewery, the third-largest domestic brewer, reacts to the challenge of the global big business revolution by adopting a wide array of strategic adjustments.

A brief history of Yanjing Brewery Yanjing Brewery is one of the newest breweries and the third-largest brewer in China. Its main business is manufacturing and distributing beer in the domestic market. The company is headquartered in Beijing and owns 16 breweries nationwide. Yanjing employs about 8,000 people. Yanjing Beer is not the flagship Chinese beer in either the domestic or the global market, but it holds a predominant position in the middle- and low-end markets in northern China (Yanjing Brewery, Annual Report 2003). Owing to preferential industrial policies and the company’s strategic adjustments, Yanjing has evolved from a small SOE to an emerging national giant within the short period of 20 years. Yanjing was founded in 1980 in Shunyi County (now Shunyi District of Beijing), Beijing, and started operations in 1982. In its early years, the production and capacity of Yanjing Brewery stood at less than 10 million litres per year (interview). Yanjing Beer was once regarded as ‘peasant beer’ because of its poor quality and brand image (China Food Industry News 1995). Its market was confined to Shunyi County. Owing to a wide array of strategic reforms, as we shall shortly see, Yanjing quickly developed to become the largest player in Beijing by the mid–1990s and even once replaced Tsingtao’s domestic leadership in the late 1990s, performing a miracle in the history of the Chinese brewing industry. The milestone of Yanjing’s development came in 1997 when the company went public. The listing provided Yanjing with the necessary capital to launch a national campaign and to conduct a series of reforms in the face of global giants’ ambitious penetration. Yanjing is one of the very few top ten domestic brewers that stick to growing self-sufficiently instead of seeking a foreign alliance. This approach has been kept to firmly since its establishment. As we have seen in the previous

The catch-up of Yanjing Brewery 137 chapters, starting from the 1990s foreign giant brewers vigorously penetrated the Chinese market. So-called strategic alliance led by global giants has gained tremendous popularity in recent years. The bulk of the top ten indigenous brewers have lost or are losing independence. There is a considerable likelihood of them turning into de facto subsidiaries of global giants. Where Yanjing differs from them is that it has made a success of being self-sufficient and has stuck to this approach. Yanjing has rejected proposals of acquisitions or alliance from global giants. It firmly believes that, as long as the firm manages to solve technological issues through sufficient R&D endeavours and to overcome capital shortage, there is no necessity for the involvement of either global giants or domestic rivals. Foreign rivals’ participation does bring about capital and technology that [indigenous] firms desperately need. Nonetheless, the negative aspects [of foreign rivals’ involvement] should not be ignored. Many foreign rivals do not care about the [indigenous] firms themselves, but rather their [indigenous firms’] market shares. More importantly, [foreign rivals] always replace [indigenous firms’] brands with theirs in the process of cooperation. Some [foreign rivals] even reap lucrative profits by selling the [indigenous] firms. Based on our [Yanjing’s] research on the [domestic] market, we believe that foreign rivals’ involvement can be a choice but is not essential. Some [indigenous] brewers did make progress after foreign rivals’ participation, but most of these [indigenous] brewers were lossmakers in the first place . . . Some [indigenous] brewers were too eager to rely on foreign rivals’ participation to bail them out of difficult situations. [Under such circumstances] foreign rivals take control . . . Our most important principles are (1) we never allow foreign rivals to take over 30 per cent of the ownership for any potential projects in which their participation is unavoidably needed; (2) we decline [negotiation with] foreign rivals as long as they demand a controlling role . . . In fact, we have declined the intentions of global giant rivals to buy us [Yanjing]. (Li Fucheng, Chairman and General Manager of Yanjing Brewery, quoted in Li 2004: 124) On the one hand, Yanjing wants to grow self-sufficiently so as to retain its independence and the achievements that were made by the firm through 20 years of hard struggle. On the other hand, this principle puts huge pressure on Yanjing in that it has to seek capital from other sources and in the meantime consistently generate good profits. In recent years, in particular after Tsingtao teamed up with AB, Yanjing has faced unprecedented challenges from foreign giants and from emerging domestic giants that have foreign strategic partners. The cooperation between foreign and domestic rivals in domestic expansion has increasingly become a challenge for the firm. To avoid hostile acquisitions, Yanjing strictly keeps the debt ratio at a healthy level. It remains one of the most profitable domestic brewers. The company

138

The catch-up of Yanjing Brewery

has managed to grow big through a wide array of strategic adjustments, many of which have substantially improved its competitiveness, as we shall see in the sections that follow.

Development and financial performance Yanjing’s rapid growth was miraculous in the history of the Chinese brewing industry, and was partly attributable to the industrial dynamics and partly to a series of strategic adjustments that Yanjing adopted. In 1982, Yanjing was just a small township enterprise owned by Shunyi County Government, producing 10 million litres of beer per year. The company developed as a large SOE over the years. By 1994, its sales volume had increased to 221 million litres, representing a twenty-twofold increase. In the past decade or so, its sales volume and value went up from 221 million litres and RMB347 million to 2 billion litres and RMB3.4 billion, respectively, suggesting a CAGR of over 27 per cent (see Figure 8.1). Its domestic market share in volume terms rose from nil to around 9 per cent (see Table 6.4). In 2003, Yanjing generated sales, EBIT and net profits of RMB3,427.7 million, RMB343.3 million and RMB242 million, respectively. The 1998 to 2003 CAGR of sales was as high as 21 per cent. Although the recent expansion has dragged down net profit margins from 12 per cent in 2001 to 7.1 per cent in 2003, Yanjing remains one of the most profitable domestic brewers, far surpassing the industrial average of about 3 per cent and almost doubling Tsingtao’s. The ROE, ROCE and ROA of Yanjing are also higher than those of its domestic rivals (see Figures 8.2 and 8.3).

Figure 8.1 Sales growth of Yanjing Brewery. Source: Compiled from Yanjing annual reports, various years; China Food Industry Almanac, various years.

The catch-up of Yanjing Brewery 139

Figure 8.2 Sales, EBIT and profits growth of Yanjing Brewery. Source: Author’s calculation based on Yanjing annual reports, various years.

Figure 8.3 Returns of Yanjing Brewery. Source: Author’s calculation based on Yanjing annual reports, various years. Note: The definition and calculation of all figures are in line with those in Chapter 7 (Figures 7.2 and 7.3).

140

The catch-up of Yanjing Brewery

Catch-up gaps We have seen that Yanjing has made remarkable progress during the past two decades but the company lags behind global giant brewers in several aspects. To begin with, the firm is too small to bear comparison with leading global brewers. A quick comparison with the global leading giants sheds light on this point. As suggested in Table 7.1, the total assets in 2004 of InBev, Anheuser-Busch and SABMiller were 28, 18 and 17 times, respectively, greater than Yanjing’s. The sales revenues of these companies were 20, 30 and 23 times those of Yanjing, respectively. The average EBIT and net profits of the global giants stood at USD1,417 million and USD797 million, respectively, compared with Yanjing’s USD47 million and USD33 million. Surviving in the global marketplace as a small firm can be tough in a conventional capital-intensive industry in the current epoch of the global big business revolution. As elaborated in Chapters 4 to 6, scale always matters in this industry. Global giant brewers possess the huge competitive advantage of being able to exploit scale economy. This scale advantage occurs not only at the plant level but also at the firm level across the globe. It is believed among industrial economists that the important keys to competitiveness in brewing are capital, technologies, R&D and managerial efficiency rather than cheap labour. Yanjing is amongst the most profitable large Chinese brewers, but its efficiency, measured by productivity and returns, is dwarfed by that of global giants. Table 7.1 suggests that Yanjing’s 2004 EBIT margin stood at 8.4 per cent, but the average EBIT margin of global giants was 13.9 per cent. The same ratio for Anheuser-Busch even reached as high as 19.6 per cent. In terms of the capability of assets to generate profits, which is measured by return on assets (ROA), Yanjing’s ratio of 3.7 per cent was lower than the global average of 5.8 per cent and AB’s 13.9 per cent. As far as productivity, which is measured by sales value per employee, is concerned, Yanjing is relatively less competitive. For instance, the per employee productivity of Anheuser-Busch stayed at USD606,738 in 2003, and the same figure for Yanjing was USD53,077. The per employee profitability of Anheuser-Busch was about USD89,033, whereas that of Yanjing was USD3,746 (see Table 8.1). Yanjing owns the largest domestic individual brewing plant – South Brewery, which has an annual capability of 1 billion litres. For a long period of time, the company has pursued a strategy of exploiting the benefits of scale economy by enlarging the scale of South Brewery. It is only in recent years that Yanjing has acquired over ten small and medium-sized brewers. The average capacity of the firm’s individual brewing plants is dwarfed by that of the global giants. Table 8.1 demonstrates the gaps between Yanjing and AB and explains how they occur. For instance, AB’s 12 breweries generated a sales volume of over 15 billion litres and a value of USD14,147 million in 2003, whereas Yanjing’s 16 breweries produced a sales volume of just 2 billion litres and a sales value

The catch-up of Yanjing Brewery 141 Table 8.1 Scale and efficiency comparison between Yanjing and AB 2000

2001

2002

2003

Total assets (USD mn) Sales value (USD mn) Sales volume (litres mn) Profits (USD mn) No. of breweries Productivity/employee (USD) Profitability/employee (USD)

13,148 12,499 14,462 1,552 12 526,845 65,399

13,945 12,912 14,832 1,705 12 551,020 72,742

14,120 13,566 15,249 1,934 12 585,364 83,440

14,690 14,147 15,476 2,076 12 606,738 89,033

Yanjing Total assets (USD mn) Sales value (USD mn) Sales volume (litres mn) Profits (USD mn) No. of breweries Productivity/employee (USD) Profitability/employee (USD)

488 211 1,050 32 10 30,585 4,611

532 277 1,249 34 12 37,114 4,611

664 333 1,665 24 14 43,016 3,106

727 414 1,918 29 16 53,077 3,746

27 59 14 49 14 11

26 47 12 50 16 12

21 41 9 80 27 11

20 34 8 71 24 11

17

15

14

11

AB

AB vs. Yanjing (times) Total assets Sales value Sales volume Profitability (absolute size) Profitability/employee Productivity (sales volume/ plant) Productivity (sales value/ employee)

Source: Author’s research based on data from Yanjing annual reports and Anheuser-Busch annual reports.

of USD414 million, suggesting that a single plant of AB could on average be over 10 times more efficient than Yanjing’s. AB’s total assets of USD14,690 million were almost 20 times those of Yanjing’s, but AB’s sale value was 34 times Yanjing’s, which suggests that AB’s operations as a whole were more productive than Yanjing’s. As a result of the scale economy exploited and advanced technologies adopted at the individual plant level and the firm level, AB’s overall profitability was 71 times greater than Yanjing’s. AB’s per employee productivity and profitability were 24 times and 11 times, respectively, those of Yanjing. To fill these gaps, Yanjing will have to persistently make tremendous efforts to ensure that each individual plant operates at a desirable capacity at which economies of scale and scope can be fully exploited. On the balance sheet front, the ROE and ROA of Anheuser-Busch were as high as 76.6 per cent and 14.1 per cent in 2003, compared with 5.4 per cent and 3.6 per cent for Yanjing (company annual reports).

142

The catch-up of Yanjing Brewery

In addition to the areas suggested by the figures, there are other areas where the firm has to catch up. Yanjing has made strategic adjustments since the 1990s to speed up its development, as we shall see in the next section.

Catch-up endeavours Core business Yanjing pursues a strategy of core business, namely brewing. In recent years, however, the firm’s strategy has changed slightly, based on the principle of ‘continuously focusing on brewing and cautiously diversifying in related industries’ (Economic Daily 2001). Apart from beers, Yanjing is engaged in the production and sales of beverages like mineral water and RTD teas as well as flavouring businesses like vinegar and soy sauce. The company does food processing business through its subsidiary Yanjing Zhongfa Biological Technology Co., a JV set up in 2001 with China National Academy of Food and Fermentation Industries (Yanjing Brewery 2003a). Yanjing is conducting serious research, through Yanjing Zhongke Biological Technology Co., into extracting nucleic acid from used beer yeasts to make medicines (interview; Yanjing Brewery, Annual Report 2003). Given all these diversifications, beer still takes a predominant role and accounts for over 95 per cent of the company’s annual sales revenue (Yanjing Brewery, Annual Report 2003). The company has made clear its intention of continuously focusing on brewing, and non-core businesses play a complementary role. It is too early to evaluate the long-term impacts of all these diversifications. Nonetheless, what is clear is that, compared with many global giants and domestic rivals like Tsingtao, Yanjing’s businesses are less ‘focused’. It is unknown why Yanjing has chosen such a strategy, but the non-core businesses to an extent squeeze valuable resources out of the core business. In this regard, Yanjing should think carefully about its strategy of core business versus diversification. Cautious expansion Yanjing started operations as a small SOE. In the early years of development, it faced fierce competition in the Beijing market from large brewers (e.g. Beijing Three Ring Brewery and Beijing Shuanghesheng Five Star Brewery1), some of which had been in the market for almost 80 years. Throughout the 1980s and the first half of the 1990s, given its limited firm-wide resources and poor brand recognition, Yanjing was incapable of launching any domestic campaign. Its first priority was to grow bigger and stronger by upgrading the existing plant – South Brewery. After a series of technological improvement endeavours, South Brewery’s sales volume went up all the way from 10 million litres in 1982 (interview) to 94.6 million litres in 1990 (China Food Industry

The catch-up of Yanjing Brewery 143 Almanac 1991: 258–9) and then to over 650 million litres in 1997 (Yanjing Brewery, Annual Report 1997). By 1990, the expansion of South Brewery had made Yanjing the fifth-largest domestic brewer (in volume terms), holding about 1.4 per cent of the domestic market (China Food Industry Almanac 1991: 258–9). Yanjing even replaced Tsingtao as number one in the late 1990s. In its own backyard, Beijing, the company has been taking the lion’s share of the market (over 85 per cent) since the mid-1990s (Yanjing annual reports, various years). Yanjing’s rapid growth was accompanied by the industrial consolidation presented in Chapters 4 and 6. Large domestic brewers, especially Tsingtao Brewery, launched national campaigns; and ambitious foreign brewers aggressively penetrated the Chinese market. In such a highly competitive environment, Yanjing was forced to participate actively in this ongoing consolidation. The company is determined to become one of the top three domestic brewers, and even ambitiously aims to enter the global top ten in the near future (Yanjing Brewery, Annual Report 2000). With the aid of the Beijing Municipal Government, Yanjing successfully went public in 1997, which provided the firm with good access to a huge capital pool at the right time and made its national campaign financially feasible. The firm’s expansion principles have been as follows: 1

2

3

Before launching any domestic acquisitions, South Brewery, located at headquarters, should be fully expanded to exploit scale economy so as to reduce unit costs as much as possible. The firm has always adhered to this principle. The capacity of South Brewery reached 1 billion litres in 2003 (Yanjing annual reports, various years), making it the largest individual brewing plant in China (Yanjing Brewery, Annual Report 2003). This strategy successfully facilitated Yanjing’s expansion in the Beijing market throughout the 1990s in that Yanjing Beer’s price was much lower than that of its local rivals, whilst the quality was better. By the late 1990s, Yanjing had successfully dominated its backyard market, paving the way for its expansion into other regions. Growing big should be accompanied by growing stronger. Acquisitions should be made when necessary instead of acquiring for the sake of acquisition. Acquisitions in other regions should not be made until the firm’s dominance is secured in the Beijing market and in Beijing’s neighbourhood markets such as Hebei province and Tianjin. When principles (1) and (2) are satisfied, domestic acquisitions in other regions may be considered. Acquisition targets should fit the following criteria: first, the market reach of a target should be larger than a radius of 500 kilometres. Otherwise, there exists a high likelihood that two neighbourhood targets may fight for an overlapping region, causing a potential ‘internal war’; second, the annual production capacity of a target should be larger than 50 million litres; third, a target should be well recognised locally; fourth,

144

The catch-up of Yanjing Brewery the local government where a target is located should be supportive so that a smooth takeover is possible; fifth, a target should have good water resources, which would enable Yanjing Beer to be brewed locally. This point is regarded as essential, bearing in mind that Yanjing Beer produced in headquarters is brewed using high-quality water sourced locally from Chaobai River in Shunyi District, Beijing (interview; Beijing Youth Daily 1999).

Yanjing is firmly positioned as a ‘national champion’ and is strongly determined to lead the Chinese brewing industry without teaming up with foreign giants. It has grown according to the principle of cautious expansion, as commented on by Li Fucheng, Chairman and General Manager of Yanjing Brewery (interview): We are not afraid of being slow in acquisitions . . . but we must make sure that there are good reasons for each acquisition . . . Acquisition targets have to be compatible with our principles. Being relatively slow in acquisitions does not mean becoming a loser; on the contrary, getting fast (in expansion) but grabbing many unworthy targets can be worse than doing nothing. That is why we take a cautious approach. A total number of 14 brewers were acquired from 1999 to 2003, compared with Tsingtao’s vigorous expansion of acquiring over 40 brewers. Since 1999, Yanjing has spent about RMB2 billion in domestic M&As (Yanjing annual reports). In terms of locations, the company secured the Beijing market first, moved to Beijing’s neighbourhood provinces such as the Inner Mongolia autonomous region, Hebei province and Tianjin Autonomous City and then entered central China and the east coastal regions (see Table 8.2). Yanjing prefers large players because of their larger scales. Its aim was to combine scale economy and efficiency with expansion, as commented on by Li Fucheng, Chairman and General Manager of Yanjing Brewery: ‘Neither are we [Yanjing] greedy in terms of swallowing up a lot [of brewers]; nor are we eager for moving fast. Instead, we pay more attention to the quality and economic benefits [of the acquisitions]’ (quoted in Hua Xia Drinks 2000). The average scale of brewers Yanjing acquired was over 150 million litres before technological improvement was made following the acquisitions. Most of the acquired brewers made profits in the acquisition year. Out of the 14 acquired brewers, only two are loss-making. Some even hold the provincial number one position. For instance, the acquisition in 2002 of Guilin Liquan Brewery makes Yanjing the largest player in Guangxi province because Guilin Liquan Brewery holds about 65 per cent of the Guangxi market and owns Guangxi’s best-recognised brand – Liquan Beer (Yanjing Beer 2003a). Another significant acquisition was Yanjing’s purchase in 2003 of

The catch-up of Yanjing Brewery 145 38 per cent of Huiquan Brewery for RMB362 million. Huiquan is the tenthlargest domestic brewer in volume terms and holds the dominant position in Fujian province (Yanjing Beer 2003b), a strategic location next to Taiwan and Guangdong province. The fact that Yanjing is Huiquan’s largest shareholder provides Yanjing with an excellent bridge to penetrate the Taiwanese and Guangdong markets, where Yanjing has no production facilities. More importantly, this acquisition kills two birds with one stone in that not only has Yanjing obtained a cash cow, enhanced its competitiveness and strengthened its national presence, but it has also precluded foreign giants’ purchase of Huiquan. Yanjing’s global presence is extremely weak. It has no brewing operations outside Mainland China. Exports account for less than 0.5 per cent of its sales revenue (Yanjing Brewery, Annual Report 2003). Yanjing Beer is sold to about 20 Asian countries. It did not make a debut in the US until as late as 2002. In contrast, the truly global giant brands such as Carlsberg can be found in almost every civilised country. Such a limited geographical reach is a fatal competitive disadvantage in the firm’s global campaign. Its brand can compete neither with global giant brands nor with Tsingtao Beer in the global competition arena. Without global recognition, a firm can hardly become a real global giant, regardless of how big it is in the domestic market. In this regard, the firm’s ambition of becoming one of the global top ten in the near future appears too ambitious. An Enterprise Division Scheme targeted at systems integration has been the current focus of the firm’s expansion strategy. Yanjing has 16 brewing plants nationwide. Effectively integrating its scattered facilities has been Yanjing’s priority in the last three years. The company sends two to three senior persons (e.g. financial managers and engineers) from its headquarters to take up key positions in acquired breweries, in the hope of ‘introducing Yanjing’s brewing technologies, management and culture’ (Yanjing Brewery, Annual Report 2001: 21). Each brewery is financially independent, but the auditing office at headquarters is authorised to supervise its performance and be involved in its key decision-making. Yanjing is also trying to centralise nationwide procurement, production, marketing and brand management. A logistics management centre, in charge of logistics in Beijing and the surrounding regions, is under construction (Yanjing Brewery, Annual Report 2000, 2003). A significant move towards integrating the firm-wide operations came in 2002 when Southern China Enterprise Division was established to manage acquired breweries located in Hubei, Hunan and Guangdong provinces. This scheme aims at helping acquired subsidiaries to adopt the managerial style, technological standards and production experiences of Yanjing Brewery; rationalising the firm-wide production resources; enhancing Yanjing’s bargaining power in the value chain; improving managerial efficiency; and centralising brand management (interviews; Yanjing Brewery, Annual Report 2003).

Fujian province

Guangxi province

2003

2002

2002

Xiandu Brewery

Fujian Yanjing Brewery Guilin Liquan Brewery

18.6 52.5

Hebei province

Jiangxi province

Chengde Sihai 2001 Brewery Ganzhou Brewery 2001

92.6

Hubei province

488.6

45.0

50.0

362.4

Investments (RMB mn)

Xiangfan Brewery 2002

Zhejiang province

Fujian province

2003

Huiquan Brewery

Region

Date

Acquired brewers

Table 8.2 Yanjing Brewery’s M&As, 1996 to 2003

60

67

95

68

90

60

38

Ownership (%)

100

100

160

300

N.A.

150

550

Capacity at acquisition (litres mn)

Manufactures and sells beers and mineral water. Manufactures and sells beers. Manufactures and sells beers and mineral water.

Manufactures and sells beers and yellow wine. Manufactures and sells beers. Manufactures and sells beers.

Manufactures and sells beers.

Main activities

Consolidates Beijing’s surrounding provinces. Strengthens presence in Jiangxi province.

Liquan Brewery has a market share of about 65% in Guangxi province; controls the market by acquiring Liquan. Enters Hubei province.

Start-up.

Enters Fujian province by becoming Huiquan’s largest shareholder. Huiquan is the tenth-largest brewer in China and the largest brewer in Fujian province. Enters Zhejiang province.

Comments

2000

2000

2000

2000

1999

1999

1996

Wuming Brewery

Laizhou Brewery

Hengyang Brewery

Baotou Snow Deer Brewery

Chifeng Brewery

Jiangxi Yanjing Brewery

Huasi Brewery (North Brewery)

80.0

95.6

119.4

55.0

70.0

Beijing

N.A.

Jiangxi province 212.3

Inner Mongolia

Inner Mongolia

Hunan province 169.4

Shandong province

Shandong province Shandong province

100

76

60

52

94

80

56

52

>50

N.A.

150

100

120

150

30

300

Manufactures and sells beers. Manufactures and sells beers and mineral water. Manufactures and sells beers.

Manufactures and sells beers and mineral water. Manufactures and sells beers.

Manufactures and sells beers. Manufactures and sells beers and mineral water. Manufactures and sells beers.

Captures Inner Mongolia market. Sets up JV with Ji’an Brewery to enter Jiangxi province. Secures its backyard and consolidates the Beijing market.

Captures Inner Mongolia market.

Enters Hunan province.

Challenges Tsingtao’s backyard.

Challenges Tsingtao’s backyard. Challenges Tsingtao’s backyard.

Source: Author’s research based on information from Yanjing annual reports; Yanjing Beer 2003b; Beer Science and Technology 2004b: 72; and China Economic News 2001.

2001

Sankong Brewery

148

The catch-up of Yanjing Brewery

Summary In the short period of 20 years, Yanjing has rapidly ascended from the status of an unknown small SOE to that of the third-largest brewer in China. Yanjing Beer has become the best-selling brand in volume terms (Yanjing Brewery, Annual Report 2003). From this point of view, Yanjing has made remarkable progress in leading the consolidation of the Chinese brewing industry. Unlike its close rival Tsingtao Brewery, Yanjing takes an approach of cautious expansion. It has learned lessons from Tsingtao’s vigorous expansion. Yanjing firmly applies the rule that acquisitions should not be made for the sake of acquiring and that growth should not be achieved at the expense of grabbing small players. By following these principles, most acquired brewers make profits. Yanjing is amongst the most profitable domestic brewers, ahead of Tsingtao whose profitability has been impaired by some unsuccessful acquisitions. But it should be noted that Yanjing also has to make huge efforts to upgrade acquired brewers’ facilities and increase their efficiency, since its overall productivity and profitability have also experienced a decline following acquisitions. A systematic integration of its nationwide operations remains a challenge. Yanjing is attempting to integrate operations, but it will take a long time to rationalise nationwide procurement, production, sales and logistics. The progress of Yanjing’s Enterprise Division Scheme is slow compared with Tsingtao’s similar scheme, which was launched two years earlier than Yanjing’s and with encouraging results. A lot of efforts are required to improve production technologies and the managerial efficiency of acquired brewers. Its ambition to become one of the global top ten in the near future is too ambitious when global recognition is taken into account. Brand strategy Yanjing Beer is one of the newest domestic beer brands and the largest brand sold by volume (Yanjing annual reports). It holds a dominant position in the lower-end market in northern China. Yanjing Beer was ranked in 2003 as the eleventh most famous Chinese brand and the third highest-valued beverage brand, right next to its close rival Tsingtao Beer (see Appendix 7). Yanjing Beer brand has made remarkable progress given the fact that it was built up from scratch in a relatively short period of time, compared with many of its rivals, such as Tsingtao Beer, whose history goes back a century. Yanjing Beer’s brand strategy followed two phases. From 1982 to the mid-1990s, it was established as a mass market brand. Since the late 1990s, the firm has been upgrading Yanjing Beer to a high-end brand.

The catch-up of Yanjing Brewery 149 Building up a mass market brand Yanjing Brewery started operations in 1982 in a village of Shunyi County (now Shunyi District) in Beijing. Yanjing Beer was originally regarded as ‘peasant beer’ of poor quality (China Food Industry News 1995). In its very early years of development, the company encountered various technical hurdles. Yanjing Beer’s quality was poor and consequently was rejected by sales outlets in Beijing. The firm had no choice but to target the very low-end mass market. To survive, the company sought help from an outsourced research institute to improve the quality of beers and in the meanwhile launched vigorous marketing programmes. A dedicated sales force was hired to market Yanjing Beer street by street. By offering good service and sales discounts, the company also attracted a large number of wholesalers and retailers. Yanjing became the first state-owned brewer that initiated aggressive marketing instead of relying on the sales networks of the Ministry of Light Industry, which tightly controlled the nationwide sales channels in the 1980s. In contrast, Yanjing’s close rivals heavily depended on these state-run sales channels and paid little attention to the initiatives of such a humble player. For instance, up to 1995, Tsingtao Brewery had just two salesmen: one in charge of writing receipts and the other collecting the proceeds (Yin and Ji 2003: 47). As described previously, the Chinese industry underwent structural changes throughout the 1990s. New breweries mushroomed as a result of preferential industrial policies, and foreign brewers flooded in. The imminent consequence was that demand for beer quickly outstripped supply. Correspondingly, Yanjing’s rivals were no longer in a comfortable position. Because of the vigorous marketing initiatives, in contrast, Yanjing established a large sales network in Beijing, which consisted of tiers of wholesalers and retailers, some of whom have become established and exclusively market Yanjing’s products. Thus Yanjing’s active marketing initiatives successfully turned the latecomer’s competitive disadvantages into a first-mover’s competitive advantage in terms of controlling the end market. Yanjing’s brand strategy was highly focused. All products were sold under the Yanjing Beer brand prior to the mid-1990s (senior management interview). It was not until the very late 1990s that other brands were incorporated as a result of the company’s domestic acquisitions. Transforming to a high-end brand Yanjing launched a series of new products such as low-alcohol beers and flavoured beers in the mid-1990s to upgrade its product mix. The point at which Yanjing Beer was transformed to a high-end brand was upon the completion of the ‘premium beer project’, which cost RMB207 million and was designed for the brewing of draught beers (Yanjing Brewery, Annual Report 1999, 2001). All key equipment used in the project, ranging from raw materials processing machines to bottling lines, was imported to ensure the

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The catch-up of Yanjing Brewery

high quality of the final products. As a result of this project, the sales of middle- and high-end beers increased from 73.7 million litres in 1998 to 430 million litres in 2003. Their contribution to sales revenue rose from 9.7 per cent in 1998 to 22.4 per cent in 2003 and contributions to net profits reached 60 per cent in 2002 (Yanjing annual reports). Yanjing has made huge progress in upgrading a mass market ‘peasant beer’. Nonetheless, Yanjing Beer has not been widely recognised as a premium beer. The average price per bottle of Yanjing’s middle- and high-end products is much less than that of the global brands. Strictly speaking, the company has not yet built up Yanjing Beer’s high-end brand image in the domestic market. Globally, there is little visibility of the product or likelihood of its being able to compete with global giant brands in the near future. Brand integration plan The plan consists of four main aspects. The first aspect is to define the nationwide brand structure. Following 14 domestic acquisitions, Yanjing owns some dozen brands. Of these, Yanjing Beer is being developed as a national brand targeting middle- and high-end segments; selected brands with substantial local recognition will be developed as regional brands targeting the middle- and low-end markets; and brands with limited market potential will gradually die out (interview). With the injection of acquired brands, Yanjing Beer’s contribution to the sales volume declined sharply from 80 per cent in 2000 to 63.6 per cent in 2002 and 58 per cent in 2003 (Yanjing annual reports). The company has been upgrading acquired brewers’ facilities to brew Yanjing Beer locally. There are now seven acquired brewers qualified to brew Yanjing Beer. Another problem with the current brand system is that Yanjing Beer’s positioning, like that of Tsingtao Beer, is too broad, ranging from low- and middle-end to high-end and premium. Such a blurred positioning challenges Yanjing Beer’s premium image. The second aspect is to categorise the brand portfolio into two groups – Yanjing Beer and local beers (see Figure 8.4). Yanjing Beer uses the traditional Yanjing Beer logo. The acquired brands keep their original logos and identities but are allowed to attach Yanjing Beer’s logo to stimulate sales. This arrangement is called ‘parents-and-son labelling’ (Li 2004: 931). The weaknesses of this brand portfolio are that, first of all, Yanjing Beer in itself has not developed as a flagship domestic brand and therefore the sales of acquired brands cannot necessarily be stimulated by adopting Yanjing Beer’s logo and, secondly, Yanjing Beer’s premium image is still in the process of being established and could be easily damaged by low-end brands. The company has been reviewing better solutions to these problems. The third aspect is to strengthen Yanjing Beer’s brand image. The company is eager to establish Yanjing Beer’s premium image but sufficient efforts have not been made. For instance, the firm has no separate brand planning team to

The catch-up of Yanjing Brewery 151

Figure 8.4 Brand structure of Yanjing’s beers. Source: Author’s research based on interviews and company annual reports.

conduct serious brand research. The decision-making is mainly determined by a couple of key managers. There is a lack of clear and unified messages to characterise Yanjing Beer’s image. This is different from the brand image of global leading brands, which precisely target well-classified consumer groups with vivid, lucid and unified messages across the globe. Yanjing Beer does not have highly focused consumer targets, although the company, like many other domestic brewers, claims to target young people. In reality, all categories of adults can be consumers, given the fact that Yanjing Beer is sold at prices ranging from RMB2 per bottle to RMB10 per bottle or can. This weakness is embedded in the brand structure itself and may not be easily solved by simply strengthening the brand image. The fourth aspect is to strengthen marketing efforts. Yanjing has put serious marketing efforts in recent years into enhancing Yanjing Beer’s recognition. Its advertising expenditure went up from RMB45.9 million in 1999 to RMB64.7 million in 2003, representing a 41 per cent increase (Yanjing annual reports). Such initiatives outstrip those of domestic rivals but are dwarfed by those of global giants. Table 8.3 shows that Anheuser-Busch spent USD721.8 million on advertising in 1999 and USD806.7 million in 2003, whereas the same figures for Yanjing were just USD5.5 million and USD7.8 million. Moreover, the ratios of advertisement over sales and SG&A suggest that AB pays more attention to advertising than Yanjing does. It is undeniable that advertising plays a huge role in creating and maintaining brand image. To stand out in the intensive global competition in the FMCG industry, successful players have to differentiate themselves through a wide array of ‘brand value creation’ activities, as we have seen in Chapter 7. Yanjing exploits some kinds of ‘brand value creation’ activities such as

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The catch-up of Yanjing Brewery

Table 8.3 Advertisement expenditure, Yanjing vs. Anheuser-Busch Companies

1999

2000

2001

2002

2003

Yanjing Advertisement (USD mn) Advertisement/SG&A Advertisement/sales

5.5 54.8% 3.0%

5.9 42.0% 2.8%

5.6 21.8% 2.0%

6.7 21.5% 2.0%

7.8 19.8% 1.9%

Anheuser-Busch Advertisement (USD mn) Advertisement/SG&A Advertisement/sales

721.8 33.6% 6.2%

728.3 24.5% 5.8%

722.3 23.5% 5.6%

821.7 24.9% 6.1%

806.7 23.9% 5.7%

Source: Author’s calculation based on Yanjing annual reports and Anheuser-Busch annual reports, various years.

media advertising, sponsorships and special events (e.g. beer festivals) but compared with global giants it relies on relatively narrow brand creation endeavours. Summary Yanjing Beer is a latecomer in the Chinese market but has made enormous progress within 20 years. The firm has put serious efforts into turning Yanjing Beer into a premium brand through its systematic Brand Integration Plan in response to the changing nature of the competition and its national expansion. Nevertheless, its current brand portfolio is besieged by structural weaknesses. The fact that Yanjing Beer is composed of high-, middle- and low-end products dims the premium image that the company is eager to establish. Yanjing Beer’s positioning does not appear to be lucid. It neither targets highly focused consumer targets nor attaches lucid and unified messages to its images. The company’s marketing initiatives are dwarfed by those of global giants. Yanjing Beer and other domestic beers face a huge challenge to overthrow leading global brands’ dominance in the Chinese premium market. Moreover, Yanjing Beer’s global recognition is trivial, which renders the company much less competitive in the face of the competition from leading global brands in the global marketplace. Packaging innovation Yanjing has a packaging department to deal with issues related to packaging suppliers. A small team in its R&D Centre is responsible for packaging innovations. The manufacture of glass bottles and cans is outsourced to professional manufacturers since the company believes that integrating into the primary packaging manufacturing business is too costly. It has in-house

The catch-up of Yanjing Brewery 153 crown cap and label manufacturing plants in its headquarters. The former serves breweries in Beijing and the latter serves breweries in Beijing and other regions. Most secondary packaging materials, other than plastic cases that are produced in an in-house small-scale workshop, are outsourced locally. The partial vertical integration into the packaging business brings certain advantages such as prompt interdepartmental communication and a better understanding of the firm’s requirements, etc. Nonetheless, from the longterm perspective, the partial integration, for reasons that are unknown, is becoming a competitive disadvantage. The in-house packaging divisions are not equipped with sufficient technical specialists and research funding. They are protected from market competition in that their products have a guaranteed buyer, which is Yanjing Brewery itself. The fact that these in-house packaging subsidiaries seldom supply other beverage companies confines the production capacity to a small scale, which in turn adds to the production costs. Moreover, they do not communicate sufficiently with outside customers as regards global trends, advanced technological standards and practical approaches to meet these standards. These weaknesses are drastically different from those of the leading professional packaging manufacturers, which frequently leverage the competitive advantages of large customers, in particular MNCs, to speed up their catchup process. Take Shanghai Ziquan Label Corporation as an example. The quality improvements of Ziquan’s products have been greatly attributable to its close interaction with Coca-Cola (China), one of Shanghai Ziquan’s largest customers, as commented on by Madam Zhou Jiebi, General Manager of Shanghai Ziquan Label Corporation: To meet Coca-Cola (China)’s high standards and under Coca-Coca (China)’s guidance, we [Ziquan] have to work hard to make consistent innovations. Meanwhile, we [Ziquan] benefit a lot because, through the communication with them, we [Ziquan] understand the global standards and take actions to meet these standards. (Interview) In contrast, Yanjing’s packaging subsidiaries do not possess such privileges. Recyclable 640-millilitre glass bottles have always been the predominant packaging style, accounting for about 80 per cent of Yanjing’s packaging varieties. The bulk of 640-millilitre bottles are used for low-end mass market beers. Small-scale glass bottles such as 550-milllilitre and 330-millilitre bottles were introduced in the late 1990s for high-end products and account for a small portion of the sales volume. In its largest brewing plant, South Brewery, approximately 45 to 60 per cent of the beer volume is packed in new glass bottles and the rest in recyclable glass bottles. Although the recyclable beer bottles are much cheaper than the new ones, their quality deteriorates substantially after a few rounds of recycling, given the underdevelopment of the domestic glass manufacturing industry, as discussed in Chapter 7. To balance

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The catch-up of Yanjing Brewery

quality and costs, Yanjing has to calculate carefully when planning the use of new or recyclable bottles. The largest glass bottle supplier to Yanjing’s headquarters plants is Qinhuangdao Glass Bottle Company, located in Beijing’s nearby neighbourhood province, Hebei. It is one of the largest domestic beverage glass bottle manufacturers. Yanjing’s operations in other regions source glass bottles from local manufacturers. The competitiveness of Yanjing is to a certain extent negatively affected, in the same way as Tsingtao’s, by the underdevelopment of the domestic glass bottle manufacturing industry. Cans and kegs used for premium products represent approximately 10 per cent of sales volume. The increasing usage of cans is playing an important role in establishing Yanjing Beer’s premium image. The largest can suppliers to Yanjing Brewery are global giants such as Ball (China) and Crown (China).2 There were few packaging innovations from 1982 to the mid–1990s. In its early years as a small township SOE producing low-end products, the company did not realise the importance of packaging innovation to its competitiveness, as commented on by the management: As long as beers were sold out in glass bottles, we finished our jobs. With foreign brewers’ entry [in the early 1990s], consumers got access to more and more packaging style, and we [Yanjing] started to add packaging varieties in the late 1990s. The neglect of packaging innovation was indeed an industry-wide phenomenon for other domestic players as well. To compete with penetrating global giants and competitive domestic rivals, Yanjing had to pay attention to packaging innovations in the late 1990s. It has substantial bargaining power in relation to domestic glass bottle suppliers. In recent years, it increased packaging varieties, including smaller-sized glass bottles used by high-end products and premium products packed in aluminium cans. The variety and quality of the secondary packaging have also been improved. For instance, smaller cardboard cases carrying 6 or 12 bottles were introduced to meet the needs of modern trade and increasing home consumption. Plastic film was introduced in 2000 to wrap canned beers. In spite of all these initiatives, however, there have been few breakthrough changes to match the global standards. The unit pressure that the glass bottles withstand has not increased significantly, and the thickness of the bottles has not reduced substantially. Yanjing once tried to launch PET beer bottles but the plan failed because its domestic supplier was incapable of solving key technical issues. Summary Yanjing did not consider the importance of packaging until the late 1990s when the firm encountered fierce competition from foreign and domestic

The catch-up of Yanjing Brewery 155 rivals. It has introduced moderate packaging innovations but there is a lack of breakthrough changes. While most global giants are divesting themselves of non-core business to focus on brewing, Yanjing is partially integrated into the packaging value chain. Its packaging operations may have benefited the firm at a particular period of time, but from a long-term perspective they are less competitive and costly. Value chain integration Raw materials supply and production Value chain integration has been given priority in the past three to four years as Yanjing speeded up its domestic expansion. The consolidation of procurement works as follows: the headquarters gives subsidiaries guidance on the standards and prices of raw materials and equipment, whilst subsidiaries comply with these standards but maintain a certain flexibility. This reform has cut down raw material costs as a result of the firm’s collectively improved bargaining power. With regard to the consolidation of production, individual brewing plants located in different provinces have not engaged in full cooperation to explore the scale economy in nearby regions. The recently established Enterprise Division Scheme is aimed at solving such a problem, but it is still at the experimental stage. The scheme has not yet covered all the regions where Yanjing has a presence. The rationalisation of nationwide production and inventory management cannot be accomplished in one move. Packaging This issue has been explored earlier in the chapter. Distribution There are two types of distribution channels. For premium products, the company deals directly with large supermarkets and hypermarkets. The bulk of Yanjing’s products are sold through wholesale distribution networks consisting of a vast number of small and medium-sized local wholesalers. Yanjing’s fast growth in its backyard market, Beijing, has been greatly attributable to these wholesalers. Most of the wholesalers develop second- or even third-tier wholesalers or retailers. Such a long distribution chain dilutes profitability. The company does recognise the necessity of moving towards other marketing schemes, such as a key accounts partner system, as we have briefly seen in Chapter 7, but, given its limited bargaining power in the distribution value chain and its limited firm-wide resources, adopting a similar scheme to that of many global giants appears unfeasible at the current time. Another weakness of the distribution system is that the means of communication between the company and its wholesalers and retailers appears

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The catch-up of Yanjing Brewery

primary. There is no online database on the wholesaler and retailer sides to allow Yanjing to grab the latest sales data. There is no satellite or internetbased training programme targeting wholesalers or retailers. The feedback from wholesalers is far from adequate. All this is a far cry from the set-up of the global giants. For instance, Anheuser-Busch (2002) has a satellite-based training system for its retailers. Coca-Cola (China) is able to train and visit on a regular basis its nationwide key account distribution partners and collect a great deal of feedback. How to effectively integrate the distribution value chain is a challenging task for Yanjing. Summary As we have seen in Chapters 2 and 4, in the era of the global big business revolution, global giant firms, which are themselves identified as ‘core systems integrators’, have gained enormous bargaining power in the value chain (Nolan 2001). The competitive advantages that these giant firms possess are not merely confined to their own systems or the industries in which they operate, but rather extend to many surrounding industries (Ruigrok and Van Tulder 1995; Nolan 2001; Nolan et al. 2002; Nolan and Zhang 2003). With the recognition of the significance of associated firms to the competitiveness of the core firm, Yanjing has started to integrate the value chain – in both the upstream and the downstream – but it will take a considerable amount of time to effectively consolidate the firm-wide production, inventory management and distribution systems. Yanjing has so far not fully and effectively consolidated the value chain within its own system. There is no doubt that the firm’s bargaining power in relation to raw materials suppliers has notably improved. In the downstream, wholesalers are extremely important in that, to a large extent, they impact Yanjing’s profit margins and market share. Reshuffling the nationwide distribution system is a tough but immediate task. Yanjing has taken measures to cut down the layers of distributors, but moving towards a direct sales scheme seems unfeasible at the current stage. It has also tried to promote better communication with wholesalers, but the slow reaction to the adoption of the latest IT at this particular link in the value chain prevents it from effectively managing its wholesalers and retailers. Given the strong bargaining power that wholesalers and retailers possess, Yanjing faces a huge challenge to integrate the value chain on the sales side. It has a long way to go to become a ‘core systems integrator’ (Nolan 2001) or ‘a spider of an industrial web’ (Ruigrok and Van Tulder 1995) in the domestic and global competition arenas. Technological improvement Since the very beginning of Yanjing’s establishment, the company’s leadership took technological improvement seriously. This mentality was drastically different from that of many large SOEs of the 1980s, which rested on their

The catch-up of Yanjing Brewery 157 laurels. Yanjing owned only one brewing plant, South Brewery, from 1982 to 1996. It allocated all its resources to this plant. In the light of technological improvement projects which were conducted on an annual basis, South Brewery’s capacity increased from 10 million litres in 1982 to about 350 million litres by 1993 (interview). Yanjing has never hesitated to introduce advanced equipment – even at huge costs. It was one of the earliest domestic brewers to introduce computers as early as 1985 to control the production procedure (China Food Industry News 2000). In 2000, the company invested about RMB207 million in a premium beer project to brew draught beers (Yanjing Brewery, Annual Report 2001), which required a very strict sanitary environment and high-quality brewing and bottling equipment. Domestic machinery manufacturers were incapable of meeting such high standards,3 and Yanjing eventually imported the entire production and bottling line from global leading brewing equipment manufacturers, turning itself into the first brewer in northern China equipped with such advanced facilities. Throughout the 1990s, Yanjing invested more than RMB1.7 billion in technological improvement projects (China Food Industry News 2000; Annals of Beijing’s Primary and Secondary Light Industry 2003: 107). Table 8.4 shows that Yanjing’s investment in technological improvement increased from RMB213 million in 2000 to RMB327 in 2003. The CAGR of technological improvement investment was 15.4 per cent, compared with sales CAGR of 25.2 per cent and assets CAGR of 14.2 per cent. The mean of investments in technological improvement over total assets stood at 4.4 per cent. That the ratio of technological investments over sales dropped from 12.2 per cent in 2000 to 9.5 per cent in 2003 implies that the previous investments had brought about higher productivity. As a result of these substantial investments, not only has South Brewery become the largest domestic brewing plant (Yanjing Brewery, Annual Report 2000, 2001), but most acquired brewers’ facilities have also been upgraded. Yanjing is highly competitive amongst domestic rivals in terms of exploiting scale economy. Table 8.4 Yanjing’s investments in technological improvement (headquarters’ plants and subsidiaries) Year

Investments

Sales

Total assets

(RMB mn) 2000 2001 2002 2003 2003/2000 CAGR

Improvement/ total assets (%)

Investments/ sales (%)

213 187 143 327

1,745 2,288 2,767 3,428

4,034 4,397 5,513 6,010

5.3 4.3 2.6 5.4

12.2 8.2 5.2 9.5

15.4%

25.2%

14.2%

1.0%

−7.9%

Source: Author’s calculation based on Yanjing annual reports, various years.

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The catch-up of Yanjing Brewery

Summary Yanjing Brewery has been taking technological improvement seriously since its establishment. Amongst the indigenous brewers, Yanjing stands at the forefront of adopting advanced technologies and facilities. Importantly, Yanjing strategically allocates a substantial amount of resources to upgrading South Brewery, making it the largest domestic brewing plant. Although Yanjing’s scale and efficiency lag behind those of global giants, it has made remarkable progress in recent years. Global giants take the lead in the brewing machinery manufacturing industry and the packaging industry. We saw in Chapter 5 that the Chinese government put efforts into building up national brewing champions. It is the case nonetheless that, for whatever reasons, national champions in these associated industries were not established to create a close link with the emerging brewing national champions. Information technology Yanjing has implemented a wide array of strategic adjustments to enhance its competitiveness and establish industrial leadership, among which adopting advanced IT to manage its nationwide subsidiaries is the most imminent project (Yanjing Beer 2003d). Starting from 1999, the company has been working with the largest domestic management software provider UFSOFT4 to develop an enterprise resource planning (ERP) system. The ultimate goal of the ERP system is to ‘make Yanjing Brewery a digital firm’. The ERP system is expected to cover major operational areas, including procurement, production, bottling, sales and finance, etc., and produce statistical analysis on finance, sales, inventory and procurement management to assist managers in decision-making (ibid.). An intranet system at Yanjing’s headquarters and a sales management system were introduced by September 2000 (Yanjing Beer 2003c; Yanjing Brewery 2003b). The intranet connects the firm’s computer centre with the departments of finance, sales, packaging and spare parts supply at the headquarters. It does not cover all the subsidiaries and offices in other regions. The intranet and sales management systems have delivered positive outcomes. For instance, in the past when such systems were unavailable, reissuing a lost receipt could take as long as six months. With the aid of these digital systems, such a request can be executed within a single day, which brings wholesalers enormous convenience and optimises the management of returned products (Yanjing Brewery 2003b). In the next few years, the firm hopes to introduce an internet-based communication system between Yanjing’s headquarters and its nationwide breweries and sales offices. Should the ERP system be completed and fully utilised, it will certainly enhance operational and managerial efficiency. To make that happen, however, the company has to overcome a number of weaknesses associated with

The catch-up of Yanjing Brewery 159 the current ERP system. First, the current utilisation rate of the ERP system is low. Many employees, including managers, do not make good use of the system. In packaging workshops, workers still manually record faulty products, which considerably slows down the flow of information. Second, there are technical pitfalls that disrupt the sustainability and reliability of the ERP system. Third, only the headquarters and selected breweries are connected by the intranet. The absence of a firm-wide intranet prevents a timely communication between the headquarters and subsidiaries. Fourth, Yanjing faces huge barriers to incorporating logistics and wholesalers into the system, and this reduces the value of the digital system. It relies on more traditional approaches than advanced cyber-technologies to interact with wholesalers and logistics providers. Summary Yanjing is strongly determined to play a vanguard role in terms of adopting advanced IT. Since 1999, it has been consistently putting huge efforts into building up an ERP platform. Compared with global giants, which make the best use of the most advanced IT to improve efficiency and integrate the value chain, the firm’s endeavours appear to be late and insufficient. Research and development The brewing industry is traditionally regarded as a mature industry which requires less research input than high-tech industries. As a matter of fact, R&D in each link in the brewing value chain plays a more and more important role. In general, Chinese brewers do not pay as much attention to R&D as do foreign rivals. Tsingtao Brewery was the first domestic brewer that made efforts in R&D, as discussed in Chapter 7. Yanjing is Tsingtao’s close follower and rival. Yanjing’s ownership of a state-level R&D Centre was made possible through years of hard struggle. As a small township SOE in the 1980s, the company found that brewing specialists, not to mention research personnel, were extremely scarce. For many years, Yanjing had to produce only one type of beer, and developing new products was beyond its capability. With the recognition of such a fatal competitive disadvantage, Yanjing’s leadership decided to seek help from outsourced research institutions. From 1982 to 1989, Yanjing sent 171 workers to domestic brewing institutions for training. Although the money spent on the project was just RMB140,000 (Li 2004: 33), it was an indication of the firm’s serious attention towards R&D. The starting point of Yanjing’s R&D efforts came in 1985, when it established a long-term strategic relationship with the Brewing Research Institute of Light Industry – an authoritative domestic brewing institute consisting of the best brewing scientists. In the 1980s, this state-run research institute lacked sufficient funds to conduct serious research; and transforming research

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The catch-up of Yanjing Brewery

know-how into workable commercial projects was extremely tough. Furthermore, the Institute’s research personnel were poorly paid. All these hardships encouraged the Institute to cooperate with Yanjing. According to their agreement, Yanjing provided the Institute’s leading scientists with whatever research equipment they needed; Yanjing provided laboratories and research equipment at its headquarters; the Institute’s research personnel could choose to work in either their own or Yanjing’s laboratories; associated research personnel were rewarded with annual subsidies, which have increased from less than RMB20,000 at the beginning to the current figure of approximately RMB800,000 (Li 2004: 728). Yanjing did not request the ownership of any research achievements from the Institute. Its only request was to have the priority to use the Institute’s research for free. Yanjing seemed to have paid a lot but requested little. In fact, its gains were far beyond what they initially appeared to be. As commented on by Li Fucheng, Chairman and General Manager of Yanjing Brewery: Setting up our own [Yanjing’s] research institutes and training in-house research personnel were beyond our [Yanjing’s] means at that time. By subsidising the Brewing Research Institute of Light Industry, we [Yanjing] gained access to such a state-level research institute with limited costs and successfully converted their academic research projects into commercially valuable projects. (Interview) With the aid of the Institute, Yanjing’s product variety increased from one to six by the end of the 1980s (Science Daily 1990). The progress in new product development, by the global standards of that era, was slow but highly meaningful for Yanjing, in that the Institute provided Yanjing with a basic R&D platform. Moreover, Yanjing’s saccharification and brewing techniques were improved; Yanjing Beer’s shelf life was prolonged from 40 days to 180 days; and its taste and appearance (e.g. transparency) experienced a considerable improvement (Beijing Evening Post 1995). All these R&D-related achievements promptly facilitated the firm’s expansion in the Beijing market. With the support of local government, as we shall see in the section to follow, Yanjing is building up a state-level R&D Centre with a total investment of RMB60 million (Yanjing Brewery, Annual Report 2003: 50). The Centre’s functions include: 1

2 3

Carrying out research projects to solve industrial problems. They may not bring about immediate commercial returns but will improve the overall standard of the Chinese brewing industry and strengthen Yanjing’s industrial leadership. Solving production-related issues. Developing new products to meet ever-changing consumer tastes. Yanjing

The catch-up of Yanjing Brewery 161

4 5

has developed ten series of product varieties and over 50 individual products (Beijing Morning Post 2002), including alcohol-free beers, light beers, flavoured beers and fruit beers, etc. (Yanjing Brewery 2003a). Conducting packaging research in association with suppliers. Conducting biochemical research. Yanjing is carrying out laboratory experiments through its subsidiary Yanjing Zhongke Biological Technology Co. to extract nucleic acid from used beer yeasts to make biological medicines. A research group consisting of in-house research personnel and specialists from the Physical Institute of China Science Academy is making a certain amount of progress on the project, but the completion of the experiments and the commercialisation of the final products can be time-consuming.

In the past decade or so, Yanjing has invested approximately RMB10 million to 20 million on R&D (Workers’ Daily 2001). Research expenditure in 2003 alone reached RMB1.63 million (Yanjing Brewery, Annual Report 2003: 61). In the future, it expects to allocate approximately 2–3 per cent of its annual sales revenue to R&D. By global standards, the amount of R&D investment is negligible, but by domestic standards such endeavours have been sufficient to secure Yanjing’s industrial leadership in R&D. Summary Yanjing has made tremendous efforts to enhance its R&D capability. Because of its limited firm-wide resources in the early years of its development, Yanjing sought help from an outsourced research institute. Strictly speaking, the firm did not have its own in-house R&D capability till as late as 2002, when the R&D Centre started to be established. In this regard, its R&D endeavours were late and slow by global standards. Yanjing now owns a state-level R&D Centre. Few domestic rivals other than Tsingtao could challenge the Centre’s industrial leadership. Yanjing Beer’s varieties and quality have been significantly improved over the years but, compared with the global giants, there are still many areas, such as taste consistency and research on enzymatic agents and filtering technologies, in which it faces catch-up gaps. The firm is actively involved in the biochemical industry in the downstream value chain. Such a partial vertical integration carries substantial uncertainty. It is a new business area for Yanjing where the firm has little experience and it takes a long time to research and commercialise the final medical products. More importantly, such activities unavoidably squeeze out valuable resources from the core business.

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The role of industrial policies Industrial policies at the state level Starting from the 1980s, the Chinese government has been fostering a few national champions to consolidate the brewing industry and to compete with foreign brewers. Yanjing was chosen as one of the three ‘national champions’ by the Ministry of Light Industry and the National Economic and Trade Commission to fulfil such a goal5 and benefited from a number of preferential policies. To begin with, on account of the strong government support, Yanjing was able to complete a series of technological improvement projects at the South Brewery. The preferential industrial policies made the implementation of these projects possible: 1

2

3

Bank loans: Yanjing spent RMB200 million on technological improvement projects from 1984 to 1994, which increased South Brewery’s annual capacity from just 10 million litres to over 300 million litres. Apart from limited internally generated revenues, the bulk of the investments came from bank loans. The beer industry belonged to a ‘pillar industry’ at state level in the 1980s, as we have seen in Chapter 5. It was also one of the highly encouraged industries in Beijing. Pillar firms in pillar industries were encouraged by both central government and the Beijing government to ‘strengthen technological improvement’ and to ‘import advanced equipment and technologies to upgrade the existing facilities’ (Beijing Social and Economic Statistics Almanac 1986: 26). Banks were asked to lend sufficient funds to the pillar firms’ technological improvement projects. Yanjing Brewery was certainly a beneficiary of this scheme. Owing to assistance from the National Economic and Trade Commission and the National Finance Bureau, Yanjing obtained loans to complete technological improvement projects in the late 1980s and the early 1990s. Ratification: Large projects conducted by any firm have to be granted permission by the State Planning and Reform Commission. Such ratification has been an important lever used by the state to carry out industrial policies. The State Planning and Reform Commission was asked to give the green light to the technological improvement projects of chosen pillar firms (interview, State Planning and Reform Commission). Therefore, the status of ‘pillar firm’ plays a huge role in the catch-up process of an indigenous firm. Importation: Yanjing Brewery was one of the earliest domestic brewers equipped with entire sets of imported advanced brewing and bottling equipment. As early as 1985, Yanjing introduced German bottling and labelling lines, which substantially speeded up the production process (Beijing Daily 1992b). Another big movement took place in the early 1990s when Yanjing imported a large number of production parts,

The catch-up of Yanjing Brewery 163 including the Siemens computer control system which was used to monitor the brewing temperature, diatomaceous earth filters from the US which were used to improve beer transparency and prolong its shelf life, and bottling, labelling and pasteurising equipment from Krones and KHS which were used to speed up the bottling process. Not only did these projects have to be approved by the government, but they also required a substantial amount of foreign currency, which was scarce at that time and tightly controlled by the state. On account of strong government support, Yanjing successfully obtained sufficient foreign currency to import the equipment. In summary, these technological projects significantly improved the company’s capacity, lowered Yanjing’s unit costs and improved Yanjing Beer’s quality. By the beginning of the 1990s, Yanjing had gained dominance within the Beijing market, holding a market share of around 85 per cent, and become one of the top five domestic brewers. By the late 1990s, it even replaced Tsingtao at number one (China Food Industry Almanac, various years). Without the strong government support, such a remarkable achievement would have been extremely difficult, if not impossible. Moreover, Yanjing was given decision-making rights for importation and exportation in the mid-1990s (China Securities News 1997). Although it received this right almost ten years later than Tsingtao, it was still significant for Yanjing in that it made the company’s global campaign possible. Nonetheless, the global recognition of Yanjing Beer remains negligible. According to the principle of ‘grasp the big, let go of the small’ (zhua da fang xiao), the National Economic and Trade Commission included Yanjing in the first batch of 300 large SOEs that the government specially supported in 1996 (ibid.). It was also one of the three pillar brewers supported by the Ministry of Light Industry. Yanjing’s financial needs were supported by ICBC (ibid.). Moreover, the State Administration of Taxation and Beijing Administration of Taxation jointly gave Yanjing the green light with regard to taxation payment. Unlike other SOEs, which in general pay a profits tax rate of 33 per cent, Yanjing has been subject to a rate of 15 per cent6 since it was listed on the Shenzhen Stock Exchange in 1997 (Yanjing annual reports, various years). Apart from this, Yanjing, on one occasion, benefited from special taxation policies enacted by the Shunyi District Government.7 For instance, it returned to Yanjing an accumulated taxation of as much as RMB20 million (Beijing Daily 1992a). In brief, these preferential taxation regulations have brought about a substantial amount of accumulated capital savings, which have been used by Yanjing for many purposes, in particular in technological improvement and its national campaign. Last but not least, Yanjing’s R&D endeavours have to a certain extent been supported by the state. In 2001, Yanjing’s R&D Centre benefited from the eighth batch of support jointly granted by the National Economic and Trade Commission, the Ministry of Finance, the Customs General Administration

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and the State Administration of Taxation. Direct and indirect state subsidies have been granted to Yanjing’s R&D Centre, which includes (1) a lump sum subsidy of approximately RMB2 million; (2) the importing of equipment for the purpose of research being allowed duty-free; (3) advanced research projects such as the ongoing biochemical research aimed at converting used beer yeasts into medicines being supported by the state. The following section sets out how the Beijing Municipal Government and the Shunyi District Government assisted Yanjing’s catch-up and national campaign. Industrial policies in Beijing Beijing has implemented preferential industrial policies since the 1980s to guide the capital’s economic and social development. In each particular period of time, different industries were chosen as pillar industries. In the ‘Seventh Five-Year Plan’ (1986 to 1990), Beijing’s prioritised industries (you xian) were the food, electronics, automobile, household electronics and printing industries. Within the food industry, particular attention was paid to beer, other beverages and food processing (Beijing Social and Economic Statistics Almanac 1986: 25). In the ‘Eighth Five-Year Plan’ (1991 to 1995), electronics was chosen as the ‘leading industry’ (zhu dao); the automobile and food industries were ‘continuously encouraged’; and the pharmaceutical industry was added as another ‘prioritised industry’ (you xian) (Beijing Social and Economic Statistics Almanac 1991: 36). In the ‘Ninth Five-Year Plan’ (1996 to 2000) and ‘Tenth Five-Year Plan’ (2001 to 2005), Beijing’s leading industries became information technology, biochemistry and new materials. Automobiles, electronics and machinery were three pillar (zhi zhu) industries. Owing to the fact that Beijing is populated with over 10 million people, the food processing industry, including brewing, continued to be ‘highly supported’ (Beijing Municipal Government 2003).8 This quick review of Beijing’s industrial policies suggests that the food industry, including brewing, has been either a ‘prioritised industry’ (you xian) or an ‘encouraged industry’ (gu li) in Beijing, depending on the particular period concerned. In the current era, although high-tech industries are largely highlighted, the important status of the food and beverages industries has hardly changed. In fact, the food industry in general ‘has become a significant part of Beijing’s industrial structure’ (Yuan and Shen 2001: 323). The share of profits before tax from the food industry in Beijing’s industrial profits increased from 4.6 per cent in 1995 to 13.3 per cent in 1998 (ibid.: 324). This industry absorbs almost one-fifth of Beijing’s labour force and ‘makes a remarkable contribution to optimising Beijing’s industrial structure’ (ibid.: 323). In addition to the sector ranking mentioned above, Beijing Municipal Government recognises the significant role that large companies play and makes efforts to foster the growth of their well-known brands. By integrating

The catch-up of Yanjing Brewery 165 the upstream and downstream value chain, large firms have huge spillover effects upon associated industries and become the strong engine of Beijing’s economic growth. Take Yanjing Brewery as an example. The taxation that Yanjing paid to the Shunyi District Government once accounted for almost 10 per cent of Shunyi’s annual fiscal income (Beijing Daily 1992a). Guided by the principles of ‘prioritise pillar industries’, ‘grasp the big, let go of the small’ (zhua da fang xiao) and ‘encourage famous brands’ (gu li ming pai), the Beijing government mapped out different preferential policies in different periods of time to foster the growth of prioritised firms. These policies have far-reaching impacts on Yanjing Brewery, as will be discussed in the next section. Preferential policies in the 1980s and the 1990s Beijing Municipal Government in association with the Planning Commission of Beijing government gave 127 ‘pillar firms’ from ‘prioritised sectors’ special support, amongst which Yanjing Brewery was ranked number 79. The preferential policies included a wide array of areas. To begin with, the government ensured the supply of raw materials used by pillar firms. In the cases of undersupply, the government assisted pillar firms to overcome shortages. This policy had important implications for Yanjing, whose operations involve the consumption of a large amount of barley. The government also facilitated pillar firms’ technological improvement projects by providing financial and other assistance. As seen previously, this policy enabled Yanjing to obtain sufficient bank loans to complete a series of technological improvement projects. The government guaranteed a water supply for pillar firms. As China’s economic, political and cultural centre with a huge population pool, Beijing has been short of water. A continuous supply of water, in particular in peak seasons, has been highly important for the daily operation of firms located in the capital. It is even more important for the brewing industry, which has been a heavy water consumer because water in itself is an indispensable ingredient of beer. In addition, the government guaranteed a sufficient supply of cheap electricity, gas and coal to pillar firms. For the reasons mentioned above, Beijing has been one of the heaviest electricity, gas and coal consumers. Therefore, a continuous supply of these essential utilities at relatively cheap prices played an important role in supporting pillar firms like Yanjing. The government prioritised the transportation needs of pillar firms. This point has been significant for Yanjing Brewery. There were many reasons for Yanjing’s success, but the ‘green light’ on transportation was one worth addressing. For a branded consumer product, reaching retail distribution networks is no less important than building up the networks themselves. However, it is not possible for any firm’s products to easily and economically reach the distribution networks in Beijing. According to Beijing Municipal Government and Beijing Traffic Management Bureau, trucks carrying over

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1 ton of cargo load were (and are) banned from entering Beijing’s third ring road9 in the daytime, expect for ‘exceptional cases’. Yanjing Beer, approved by the Beijing government as people’s ‘daily necessity’, belongs to the ‘exceptional cases’. With a special pass, Yanjing Beer can be transported at any time to the distribution networks within the third ring road. In contrast, beers from other cities do not have similar privileges. The government coordinated with banks to provide pillar firms with sufficient funds so as to facilitate these firms’ technological improvement projects and other major construction works. Meanwhile, the Planning Commission of Beijing government gave approval priority to these projects and shortened the approval processing time. The government also satisfied pillar firms’ reasonable requests for foreign currency, in particular for the purpose of importing advanced equipment and technologies. Without such a policy, Yanjing would not have been able to complete more than 15 large technological improvement projects, nor import a wide range of advanced facilities. Preferential policies since the late 1990s In the late 1990s, Beijing Municipal Government adjusted industrial policies to cope with the fast-changing nature of domestic and global competition. In 1996, it mapped out an abridged list of 71 ‘pillar firms’, in which Yanjing was included. The preferential policies for pillar firms in this period of time can be summarised as follows (Beijing Municipal Government 1997: 59–60). First, the government tracked the growth record of pillar firms and gave specific guidance when they encountered difficulties. Second, the government pushed district and county governments to implement specific measures to assist pillar firms. Third, pillar firms’ technological improvement projects were continuously supported. Fourth, the government encouraged large SOEs to transform into shareholding companies (Beijing Almanac 1997–2000). Yanjing Brewery was a large beneficiary of this policy. The Beijing Municipal Government selected seven large SOEs in 1997 to form a conglomerate called Beijing Enterprises, to be listed on the HKSE.10 Yanjing Brewery, 54 per cent of which is held by Beijing Enterprises, was amongst the seven selected. Importantly, Beijing Enterprises’ holding did (and does) not alter the power struggle between Yanjing and Beijing Enterprises. The senior management of Yanjing, under the leadership of General Manager Li Fucheng, has been highly stable since its listing. Yanjing’s indirect listing on the HKSE enabled it to take advantage of a huge capital pool through Beijing Enterprises. Yanjing’s interaction with international investors through Beijing Enterprises assisted its progress in professionalism and management. This point is significant for Yanjing, which started as a small township SOE and emerged as a national giant within

The catch-up of Yanjing Brewery 167 just 20 years. In addition, with the aid of the Beijing government, Yanjing Brewery went public in 1997, as an independent entity, on the Shenzhen Stock Exchange. The direct listing generated capital of RMB570 million (Yanjing Brewery, Annual Report 1997, 1998). The bulk of the capital obtained from the open markets was used to upgrade Yanjing’s operating facilities and launch domestic M&As. According to China Securities Regulatory Commission Documentation (1998) No. 117 and Beijing Securities Regulatory Commission Documentation (1998) No. 36, Yanjing was given special permission in September 1998 to obtain further capital of RMB819 million from the open market (Yanjing Brewery, Annual Report 1999: 15). In fact, a listed firm was not allowed to issue new shares until the end of a full financial year after the initial public offering (IPO). Under the terms of this regulation, Yanjing’s deal should not have gone through until the beginning of 1999. ‘As a pillar firm with a good brand, the Beijing government decided to support Yanjing’s request as a special case’ (interview, Beijing Municipal Government). The capital obtained from issuing new shares provided Yanjing with timely help in that the R&D Centre, which cost about RMB60 million, could be built up (Yanjing Brewery, Annual Report 2003: 50); the costly ‘premium product project’ could be carried out; and a significant amount of funds could be allocated to new product development. All these projects performed an important role in upgrading Yanjing’s product mix and establishing Yanjing Beer’s premium brand image. In a nutshell, because of preferential policies Yanjing Brewery gained access to a huge capital pool in both the domestic and the international market. The pressure of generating shareholder value served as an impetus to make the company conduct strategic adjustments. Fifth, the Beijing government supported pillar firms’ national campaign by facilitating M&As, capital restructuring and strategic alliance; again, Yanjing benefited from the policy. As discussed in previous sections, Yanjing’s national campaign started with the consolidation of the Beijing market. Without the strong support of the Shunyi District Government and the Beijing Municipal Government, this would have been impossible. With the direct intervention of the Shunyi District Government in 1996, Yanjing smoothly took over Huasi, a close rival located just a few miles away from Yanjing’s South Brewery. The Shunyi government also helped Yanjing to sort out Huasi’s heavy debts and removed the power of Huasi’s management team so as to pave the way for Yanjing’s takeover (Finance Year Book of Beijing 1996: 376). The close proximity of South Brewery to Huasi Brewery (renamed North Brewery) meant that Yanjing was able to explore the economies of scale and scope by allocating the production of low-end products to Huasi Brewery so that South Brewery could focus on middle- and high-end products. The two breweries could easily coordinate in peak seasons. This acquisition firmly secured Yanjing’s backyard and immediately made Yanjing the largest player in the Beijing market.

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Summary As China’s political, economic and cultural centre, Beijing closely follows the central government’s policy of fostering pillar industries and pillar firms. The brewing industry has received a great deal of support from the Beijing Municipal Government. Yanjing Brewery has obviously been one of the biggest beneficiaries. Compared with many other municipal governments, the Beijing government has the advantage of being more exposed to and familiar with various global standards in a wide range of fields, and this in turn could improve the professionalism, efficiency and advancement of the Beijing government. The strong support of the central government, the Beijing Municipal Government and the Shunyi District Government covers important areas of Yanjing’s daily operation and takes a variety of forms. Without such a preferential policy, it would have been very difficult for Yanjing to emerge as a national giant from a small township SOE over the course of just 20 years; and it would have been impossible for Yanjing Beer to develop from a ‘peasant beer’ to a well-known brand. In this regard, preferential industrial policies have played an indispensable role in the course of Yanjing’s catch-up and its national campaign. Compared with Tsingtao, Yanjing may have benefited from fewer preferential policies at the state level. For instance, Tsingtao was chosen from amongst the first batch of companies to be listed as early as 1993, whereas Yanjing did not go public until 1997. An earlier listing brought a firm many advantages, such as getting sufficient funds to lead a national campaign, upgrading existing facilities and building up brand images, etc. Tsingtao was given decision-making rights for importation and exportation as early as the 1980s, whereas Yanjing obtained the same rights only in the late 1990s. This provided Tsingtao with a better platform to gain international recognition ahead of other domestic rivals. Tsingtao received more preferential policies in the course of its national campaign, in particular in M&As. Nonetheless, at the municipal or provincial level, Yanjing was no worse off than Tsingtao. Shandong province and Tsingtao City, where Tsingtao Brewery is headquartered, and Beijing, where Yanjing Brewery is headquartered, both give their pillar firms strong support. With China’s entry into the WTO, however, direct and indirect intervention by the state and local governments will become much more difficult. Some preferential policies are set to come to an end soon, beginning with the differentiated taxation scheme. Once all firms are subject to the same income tax rate, the net profits of Yanjing Brewery could be badly hit, which would undoubtedly jeopardise the firm’s growth. Other kinds of direct and indirect governmental subsidies will also have to cease in the near future. Therefore Yanjing and other firms that benefit from preferential industrial policies will have to compete in a tougher and more transparent competition arena. Pillar firms are being forced to rely on themselves to grow quickly and stronger to compete with the highly competitive global giants.

The catch-up of Yanjing Brewery 169

Conclusions and implications Yanjing performed a miracle in the history of the Chinese brewing industry. It has conducted a wide array of strategic adjustments to speed up its catch-up process, some of which have brought about encouraging results. The company adheres to the principle of growing self-sufficiently instead of relying on global giant rivals’ assistance. It is one of the very few first-tier indigenous giants that have not been acquired or partnered by penetrating global giants. Competitive advantages The Chinese beer industry has undergone fundamental changes since the 1990s. Large brewers ambitiously fight for dominance, sending the industry into a rapid consolidation phase. Yanjing learned lessons from Tsingtao’s vigorous expansion and took a more cautious approach. The company firmly applies the rules that acquisitions should not be made for the sake of acquiring and that growth should not be achieved at the expense of grabbing small players. Owing to these principles, most of Yanjing’s acquired brewers are profitable and relatively large in scale. This is different from Tsingtao, which faces the huge challenge of bailing out loss-making small players. In the hope of exploring economies of scale and scope, Yanjing concentrates valuable resources on South Brewery to make it the largest individual brewing plant in China. A relatively large scale, together with a cautious approach to expansion, has made Yanjing one of the most profitable domestic brewers. These are highly important competitive advantages held by Yanjing but not by its close domestic competitors. Yanjing has been taking technological improvement seriously since its establishment. Such a mentality has brought Yanjing enormous competitive advantages, compared with its domestic rivals in the 1980s and the early 1990s, most of which stayed with their existing backward facilities. Although Yanjing’s scale and efficiency lag behind those of the global giants, it has made remarkable progress in terms of exploiting the benefits of scale and scope. Yanjing is growing at a much faster rate than its global or close domestic rivals. Few domestic rivals, including Tsingtao, can challenge the overall efficiency of Yanjing’s brewing plants. As far as unit productivity and efficiency are concerned, Yanjing’s catch-up gaps are smaller than Tsingtao’s (see Tables 7.2 and 8.1). The company has conducted a wide array of strategic adjustments, ranging from cautious domestic expansion and a brand restructuring scheme to technological improvement, R&D endeavours and value chain integration, etc. All these initiatives are highly important for its domestic and global campaign. Yanjing vigorously built up a large sales network in Beijing as early as the 1980s when most large SOEs heavily relied upon state-run distribution channels. This provided Yanjing, although it was a latecomer, with the first-mover

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advantage in terms of gaining valuable experience in marketing. The company has made serious efforts to upgrade its product mix. Yanjing Beer has been successfully transformed from a ‘peasant beer’ to China’s largest beer brand sold in volume terms. The company has a strong and cohesive management team whose approach is ambitious, determined and strategic. They have been under the leadership of General Manager Li Fucheng for almost two decades. Such a cohesive management team, and the entrepreneurship of Li Fucheng, a thoughtful and determined entrepreneur who always takes a carefully calculated approach to the fulfilment of the firm’s ambition, explain to a certain extent why Yanjing has made strategic adjustments which distinguish it from many of its rivals. Yanjing is one of the most competitive indigenous brewers and has a strong potential to lead industrial consolidation in China. As a ‘star’ firm in the brewing industry and a pillar firm in Beijing, Yanjing has benefited from a wide array of preferential industrial policies by the state and local governments, many of which were unavailable to other domestic and foreign rivals. These policies have played an indispensable role in the course of Yanjing’s catch-up and its fight for dominance. Importantly, compared with many other municipal governments, the Beijing government is more advanced in terms of professionalism and efficiency, which promotes better communication between the government and Yanjing Brewery. Competitive disadvantages and catch-up gaps We have seen in Chapter 4 that leading global brewers’ production scales have increased enormously. Scale matters today more than it has done in the past. Not only have giant brewers adopted ‘state-of-the-art’ technology, but they have also started to rationalise procurement, production and marketing on a global basis, which creates a barrier for latecomers entering the global playing field. Yanjing owns the largest domestic brewing plant, but the firm is still a small player in the global competition arena (see Tables 7.1 and 8.1). In the epoch of the global big business revolution, competing in the global marketplace with such a small size can be extremely tough. It is undeniable that Yanjing’s domestic expansion was carried out more carefully than Tsingtao’s. The average size of the brewers acquired by Yanjing is larger than that of those acquired by Tsingtao. Over 85 per cent of Yanjing’s acquired brewers make profits (Yanjing annual reports), whereas the same ratio for Tsingtao is much lower. However, Yanjing has to make huge efforts to upgrade acquired brewers’ facilities and improve their efficiency. Yanjing’s productivity and profitability have also been dragged down by acquisitions. A systematic integration of acquired operations remains a challenge. Yanjing has started to integrate its value chain by launching an Enterprise Division Scheme and other schemes, but the efforts appear to be slow and insufficient. It will require a considerable amount of time to effectively consolidate Yanjing’s own system. The slow reaction to the adoption of

The catch-up of Yanjing Brewery 171 advanced IT at this particular link in the value chain has impeded the company in effectively managing its distributors. Given the strong bargaining power that wholesalers possess, Yanjing faces a huge challenge to integrate the value chain on the sales side. It is no exaggeration to say that Yanjing has not fully and effectively consolidated the value chain within its own system. This is drastically different from the global giants, which are in themselves identified as ‘core systems integrators’ and possess competitive advantages that are not just bounded within their own systems or the industries in which they operate, but also extend to many surrounding industries (Nolan 2001). It will take time for Yanjing to become a true core systems integrator (Nolan 2001) or ‘a spider of an industrial web’ (Ruigrok and Van Tulder 1995: 65), in the domestic as well as the global competition arena. It is widely recognised (e.g. MSDW 1998; Nolan 1999) that adopting a clear and appropriate brand image to target well-classified consumer groups has become an indispensable aspect of competitiveness in the FMCG industry. Yanjing vigorously markets Yanjing Beer and struggles hard to establish Yanjing Beer’s premium image. But Yanjing Beer has not been recognised nationally as a premium brand. Its Brand Integration Plan was launched to consolidate acquired brands but the plan has been besieged by many structural weaknesses. The fact that Yanjing Beer is composed of high-, middle- and low-end products dims its premium image. Yanjing Beer’s positioning is not lucid. The continuous removal of local brands remains another huge challenge. More significantly, the company’s global recognition is trivial. Its marketing initiatives are dwarfed by those of the global giants. The company can hardly compete with global giants in the global competition arena. Even in the Chinese premium market where foreign brands dominate, Yanjing Beer is less competitive. Without wide global recognition, a brewer or an FMCG firm can hardly become a global giant, regardless of how large it is in the home market. Hence, Yanjing’s ambition of becoming one of the global top ten in the near future may not be feasible when global recognition is taken into account. As discussed in Chapters 4 and 6, global giants take the lead in packaging innovation in the global and the Chinese markets. In contrast, Yanjing did not draw attention to packaging until the late 1990s when the firm encountered fierce competition from foreign and domestic rivals. While most global giants are divesting themselves of their non-core business to focus on brewing, Yanjing has partially integrated into packaging. It is unclear about the reasons for such a strategy, but the partial integration adds to the unit costs of its packaging materials. Its in-house packaging operations do not have a good R&D capability and are not exposed to global best practice. This has increasingly become a negative factor. By global standards, Yanjing’s adoption of the latest IT is relatively slow and insufficient. It has a long way to go before matching the global best practice of leveraging advanced IT to improve efficiency and integrate the value chain. In terms of R&D, there are areas where it needs to catch up with

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the leading global standards. The vertical integration into the biochemical industry carries huge uncertainty and squeezes out valuable resources from the core business. Implications for large indigenous firms’ catch-up and industrial policies Yanjing is very determined to grow self-sufficiently instead of rushing into a foreign coalition as many other large domestic players have done. The company’s remarkable progress and unique experience shed light on the likelihood that large indigenous enterprises could survive and grow stronger without being aided by or entering into partnership with global rivals. Nonetheless, Yanjing is running a huge risk. Global giants have been taking over successful large indigenous players in LDCs, notably China, as we have seen in Chapters 4, 6 and 7. Even AmBev, the most successful giant originating in Brazil, could not escape the fate of being acquired by the global giant Interbrew. The implication for Yanjing is that, should Yanjing’s profits continue to decline for whatever reasons, the risk of being acquired will increase. The next question will then be: at what point might this risk turn into reality and at what point could Yanjing be sold at the best price? The strategies of ‘being less focused’ and ‘partial vertical integration’ may increase such a risk. Not only does Yanjing have to compete with global giants but it also has to compete with large domestic rivals that coordinate with global giants to lead their national campaigns. In many circumstances, the latter could be more challenging than the former in that domestic rivals possess many competitive advantages that Yanjing also has but that foreign rivals do not. Once these large indigenous players team up with global giants, their combined competitive advantages could become an extremely powerful weapon with which to defeat Yanjing. To survive, catch up and dominate, Yanjing has to struggle very hard – with the aid of the state and local governments. The critical question is for how long it can maintain its independence, given the rapidly changing nature of the global and domestic competition and the weakening government support. Therefore, one may wonder: what are the choices of national champions? Catch up under the brand name of ‘truly national’ or fail as a result of being ‘truly national’ or, eventually, surrender to global rivals? Nothing is definite in such an era other than the fact that large indigenous firms face unprecedented challenges. This is the price that Yanjing has to pay for defending its independence; and this is the price that all large indigenous firms that make the same choices have to pay. We have seen that preferential industrial policies have played an indispensable role in the course of Yanjing’s catch-up and its national campaign. Following China’s entry into the WTO, however, direct and indirect state intervention will become much more difficult. The Chinese government has made clear its intention to gradually reduce state ownership in large SOEs

The catch-up of Yanjing Brewery 173 and lessen state intervention. In the future, national champions like Yanjing will undoubtedly get much less preferential treatment than they used to. Without strong government support, Yanjing’s attempts to catch up could be very difficult. For the Chinese government, building up so-called national champions will also be much tougher than before.

Conclusions

Big businesses and competition The mainstream and unorthodox schools have polarised views on big business and competition and this has strong implications for developing countries. This research on the transformation of the global brewing industry suggests that giant firms do not necessarily bring about inefficiency and deter competition. The reality is that not only have global giants adopted the most advanced technologies in production, packaging and management but they have also pushed associated suppliers to match their high standards on technological innovations. Consequently, as the systems integrators, global giant brewers push ahead the technological standards of the brewing value chain. Giant brewers, most of which have a history dating back to the nineteenth century, have not lost vigour along the years, as Marshallians have suggested, but rather have gained tremendous competitive advantages and surpassed the latecomers in LDCs in a wide array of areas. Contrary to Marshallians’ claims that big businesses will lose their dominance in the long run, giant brewers are expanding their boundaries to an unprecedentedly wide geographical reach as a result of their vigorous global penetration, backed up by their strong competitiveness, which includes financial strength, advanced technologies, global brand management, operational and managerial efficiency, and enormous power in the value chain. The current era has witnessed unprecedented global dominance by giant brewers. Their dominance has gone far beyond the simple form of increased global market share, but is also enforced by a deep integration of the value chain in both the upstream and the downstream. This force creates catch-up barriers for latecomers. Equally importantly, giant brewers’ large-scale acquisitions of, and strategic alliances with, large successful brewers in LDCs dramatically deepen their global dominance and may even deprive latecomers of catch-up opportunities. Such a situation is attributable to the fact that many emerging national giants in LDCs could easily be swallowed up before they actually grow strong enough to challenge the global giants’ dominance. From the global perspective, giant brewers compete ferociously against one another in the hope of achieving global dominance. There is a clear trend

Conclusions 175 towards global consolidation led by giants as opposed to a boom of small and medium-sized brewers. Through the acquisition of local brewers, global giants further intensify the competition in major brewing markets. To maintain their dominance, global giants integrate the value chain in associated industries not only in their own home markets but also across the globe, with the aid of the latest IT, ‘state-of-the-art’ manufacturing technologies and huge R&D endeavours. The process of value chain integration significantly intensifies the competition amongst giants, speeds up the innovation process and eventually lowers the unit costs of giant brewers. This mechanism improves the efficiency of core firms themselves, in this case the global leading brewers, as well as the efficiency of associated industries in the value chain.

The challenge of the global big business revolution A significant implication of the global big business revolution for developing countries lies in the fact that giant MNCs have gained tremendous competitive advantages over SMEs. Not only do global giants possess traditional advantages like economies of scale and scope, but they also obtain more powerful advantages associated with market concentration, core business strategy, value chain integration, global brand management and advanced technologies. As a result, latecomers’ catch-up gaps have become unprecedentedly big. The catch-up task for latecomers in industry after industry has become extremely tough. Firms in developing countries in a wide array of industries have become global giants’ subcontractors or subsidiaries (e.g. Nolan 2001, 2004a, 2004b; Nolan et al. 2002). Although the Chinese brewing industry has achieved substantial progress in the past two decades and a few large emerging national giants (notably Tsingtao and Yanjing) have made huge progress in upgrading facilities, introducing advanced technologies, R&D, etc., Chinese brewers, in general, have to fill large catch-up gaps in many areas. Large indigenous brewers do possess certain competitive advantages that penetrating global giants cannot simply replicate, such as large sales networks, good relationships with local governments, successful experiences accumulated over years, and a better understanding of the demands of local people, etc. It must be recognised, however, that these advantages are indeed weakening following China’s entry into the WTO. On the global playing field, Chinese brewers are unlikely – now or in the near future – to compete with global giants. Without wide global recognition, a brewer will find it difficult to become a global giant, regardless of how large it is in the home market. The burning issue that large Chinese brewers face at the current stage is not going global, but rather securing their backyard in the face of global giants’ ambitious penetration. Almost all leading global brewers now have a strong presence in China. They are actively participating in or rather leading the consolidation pace of the Chinese brewing industry.

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Conclusions

Amongst the top ten largest brewers in China, only a few have not been acquired by, or become allied to, global giants.

State intervention Two schools of thought have drastically different views on state intervention. One school argues against state intervention and enthusiastically promotes the ideology of a free market, whereas the other school casts grave doubts on the power of the free market and recognises the significant role of the state, particularly in transitional developing countries. This research has suggested that a certain level and desirable form of state intervention is highly necessary in the current era and even in the future – as long as Chinese firms face huge challenges from global giants. In fact, state intervention from 1980 to the mid–1990s in the form of preferential industrial policies played an indispensable role in the growth of the Chinese brewing industry. The policies drastically boosted the growth of Tsingtao, Yanjing and other selected large indigenous brewers and facilitated their national campaigns. To be precise, without such strong government support there would have been no emerging large national brewers at all in China. In the current era, however, there are significant changes in the approach of industrial policies and these changes have deep external and internal roots. Externally, China faces tremendous pressure from the US-led Washington Consensus to pursue the so-called free market approach. Internally, the Chinese government expects to leverage privatisation to resolve many weaknesses associated with SOEs. As far as the brewing industry, or light industry as a whole, is concerned, it is widely believed among policy makers either that most large indigenous firms in these industries are ready for free competition or that, whatever the consequences industrial policies bring about in light industry, they will have little impact on national security. As such, the focus of the policy in the current era is to guide the industry towards the free market mechanism. State intervention is voluntarily being reduced. Many targets set to influence the development of the brewing industry are no more than a rough guide. Although the government still insists on the principle of supporting large indigenous brewers’ national and global campaigns, compared with industrial policies in previous decades very limited specific measures are in place to support large indigenous brewers. The government’s principle of continuously fostering national brewing champions has become a hollow slogan in many cases. More importantly, the nationwide property rights reform may have a larger influence on Tsingtao, Yanjing and other large SOEs than any other kind of reform. The Chinese government’s control over SOEs generally takes one of two forms, the first being the acquisition of majority shareholdings in SOEs and the second being domination of the decision-making processes within SOEs by appointing Party members to take leadership roles in such companies. The crux is that, once the government loses its dominant shareholding

Conclusions 177 in a particular SOE, its power to influence the decision-making process within that SOE could be weakened, since whoever holds the company takes charge. One could also query how well an appointed politician manages an SOE when he or she is not a specialist in the particular field in which the SOE operates, and how strongly an appointed politician is motivated to perform well on behalf of the government. The Chinese government has made clear its intention to gradually reduce state ownership in large SOEs as well as lessening state intervention. The implications are far-reaching: building up the so-called national champions will be much tougher than ever before because many large indigenous enterprises are partly or predominantly being acquired by foreign rivals as a result of the state’s reduction of its shareholdings in SOEs. In the future, national champions such as Tsingtao and Yanjing will enjoy considerably fewer privileges than they used to be able to. On the one hand, they will be forced to rely on themselves to grow more quickly and stronger to compete with the highly competitive global giants. The question, however, is: are they ready to compete? On the other hand, if they go for strategic alliance with global giants in the hope of leveraging foreign rivals to grow faster and bigger, the trade-off between the gains from foreign rivals and the compensations that they offer is dubious. As suggested by the big business revolution literature, the current era differs from the previous ones in that the rapidly spreading global business revolution has dramatically speeded up global giants’ penetration into developing markets. The time and space left for latecomers to gradually grow big through the free market mechanism is limited, because global giants are in general much more competitive and hence more likely to defeat emerging national champions. The study of Tsingtao and Yanjing suggests that large national brewing champions are not yet competitive enough to defeat global giants. Another blunt reality is that many successful emerging national giants which in themselves were fostered by the Chinese government through many hard struggles are being acquired by foreign rivals in the form of so-called strategic alliances, as shown in the case of the brewing industry. Should this trend continue, which is very likely, there will exist a fairly high possibility that foreign rivals will gradually become national giants’ de facto owners. The striking thing is that this is not only a particular phenomenon in the brewing industry, but also a challenging phenomenon in many other industries. It is also a challenge posed to other developing countries which hope to catch up by leveraging indigenous big business groups. In a nutshell, the case of the brewing industry suggests that the current competition matrix calls for continuous state intervention. The free market approach, which may be based on the foundation of idealised neo-classical theories, or due to the huge pressure brought to bear from Western powerhouses, or derived from an overestimation of the competitiveness of large indigenous firms, may not be good for the emerging national giants’ national and global campaigns. It is not to suggest that large indigenous firms should

178

Conclusions

be sheltered from competition. Instead, a continuous and desirable level of well-tailored state intervention should be taking effect to foster large indigenous champions’ catch-up and in the meantime to protect them from being swallowed up by global giants. At such a critical time, if the Chinese government fails to do so, many of the endeavours it has made during the past two decades will go to ruin.

The catch-up of large Chinese brewers and the implications Big businesses are as important to the economic transformation of major advanced and newly industrialised economies (Amsden 1997; Chandler et al. 1997) as they are to today’s China. Only national giants can bargain with foreign giants, as Hymer pointed out decades ago (Hymer 1979a). This point is particularly important to today’s Chinese brewing industry. Amongst the large indigenous brewers, Tsingtao and Yanjing clearly stand out. The two firms vary in many respects but they do share many similarities in the course of their catch-up and their fight for domestic dominance. For instance, (1) both have made remarkable progress with the aid of a wide array of strategic adjustments, ranging from domestic expansion, brand restructuring and value chain integration, to technological improvement and R&D endeavours, etc.; (2) both are strongly determined to lead industrial consolidation and ambitiously aim at going global; (3) both have been fostered by preferential industrial policies; (4) both have become significant domestic players; (5) both possess some competitive advantages, such as having nationwide production, sales and distribution networks and owning some nationally well-recognised brands, etc; and (6) both have strongly determined and ambitious management teams. Even though these two firms have taken tremendous initiatives to enhance competitiveness, they still face catch-up gaps in the face of the challenge of global giants. They are too small to bear comparison with global giants. Competing in the global marketplace of the current era as a small firm is extremely difficult in the brewing industry. It has been well recognised, both academically and practically, that the most important competitiveness in this conventional capital-intensive industry is capital and technologies instead of cheap labour. Owing to the lower efficiency, lack of scale economy and other factors, Chinese brewers’ profitability is lower than that of global giants. This has in turn become a financial constraint to many competitiveness-enhancing activities. In the current era, brand has become a key ingredient of success in the FMCG industry (MSDW 1998; Nolan 1999). The adoption of very clear and appropriate brand images to target well-classified consumer groups plays an important role in a brewer’s success. The problem with both Tsingtao and Yanjing is that, although these two firms have learned lessons from their past experiences, they have not established well-structured brand systems that can systematically consolidate the large number of acquired brands whilst strategically adjusting the brand and price mix.

Conclusions 179 As far as packaging innovation, another important area of competitiveness in the global brewing industry, is concerned, foreign brewers take the lead in both the global and the Chinese market. In contrast, large indigenous brewers did not pay enough attention to this highly important aspect until recent years. In order to meet the latest global standards, Chinese brewers will have to continuously put enormous efforts into catching up in packaging innovation and commercialisation. For whatever reason, the national champions in the packaging and beverage machinery manufacturing industries have not been sufficiently well developed to create a close linkage with the emerging brewing national champions. The catch-up of brewers calls for the catch-up of these associated industries. Global giant firms, which are in themselves identified as ‘core systems integrators’, have gained enormous bargaining power along the value chain (Nolan 2001). The competitive advantages that these giant firms possess are not just confined to their own systems or the industries in which they operate, but also extend to many surrounding industries (e.g. Ruigrok and Van Tulder 1995; Nolan 2001). While realising the importance of the value chain to the competitiveness of the core firm, large Chinese brewers, notably Tsingtao and Yanjing, have made tremendous efforts to integrate the value chain – both the upstream and the downstream. Compared with their global giant rivals, Chinese brewers have a long way to go before truly becoming ‘core systems integrators’ or ‘spiders of an industrial web’ in both the domestic and the global competition arena. In addition, Tsingtao and Yanjing are making huge efforts to adopt advanced IT to enhance competitiveness. Their current endeavours, however, appear to be slow and insufficient. In terms of R&D, there are many areas where large Chinese brewers need to catch up. The largest and the most competitive indigenous brewers have not become competitive enough to defeat global giants. The likelihood of the vast number of small and medium-sized players being able to do so is even more remote. This vulnerability, amongst many other things, has provided global giants with plenty of opportunities to vigorously penetrate the Chinese market.

Strategic alliance vs. the future of the Chinese brewing industry China has become a big battlefield for leading global brewers. Foreign brewers’ ambitious penetration, in the form of explosive M&As and increasing strategic alliances, is radically altering the competition matrix of the Chinese brewing industry and speeding up the consolidation process. On the one hand, large domestic brewers face tremendous challenges. In order to survive and grow, they have to promptly enhance their competitiveness in a wide array of areas. The urgent need to catch up is forcing large indigenous brewers to seek foreign strategic alliance, in the hope of obtaining advanced technologies and financial support. More importantly, they have to simultaneously speed up their fight for dominance; otherwise, markets might be swallowed up by foreign brewers. On the other hand, the extremely intense

180

Conclusions

domestic competition also pushes foreign brewers to seek cooperation with leading domestic brewers. These two factors have jointly resulted in an increasing popularity of the so-called strategic alliance. However, this pattern may eventually increase the catch-up difficulty of Chinese brewers as well as the likelihood of large indigenous brewers being swallowed up by global giants. With China’s entry into the WTO, domestic players and global giants will soon compete under the same institutional arrangements. State intervention will become much weaker, and harder to obtain. This institutional change, together with the current competition situation, indicates the high likelihood of the Chinese brewing industry being dominated by global giants in the next few decades. Global giants’ dominance could take subtle forms which may not be easily seen through at first sight. The strategic alliance is certainly one of such far-reaching forms. My research casts doubts on the long-term benefits that large Chinese brewers will gain out of an alliance. To what extent does the alliance reflect foreign partners’ interests? How does the alliance create a win–win situation when there is a large gap between the competitiveness of two rivals and the power distribution among the two is unbalanced? What is the significance of catch-up if a large domestic brewer catches up at the expense of losing its identity (e.g. becoming an affiliate of a global giant)? In this regard, the strategic alliance could be a double-edged sword, should it not be wisely sharpened. The trade-off between gains from foreign brewers and compensations that indigenous brewers offer demands very careful weighing up. The future landscape of the Chinese brewing industry and the catch-up trajectory of Chinese brewers are both dependent on how the Chinese government and large indigenous brewers react to the highly intricate interrelationships that giant brewers have built up in their fight for global dominance. Not only are large indigenous brewers standing at the crossroads, as suggested by this research, but so are other large indigenous firms in a wide array of industries, as suggested by Nolan (2001, 2004a, 2004b). This is a confused era, but policy makers and individual firms have to make a choice which unfortunately precludes certain answers. What is clear is that the trajectory of large firms’ catch-up directly determines the progress and success of China’s catch-up. Any failure to form highly competitive national champions could mean that a series of industrial policies implemented over the past few decades would become a de facto failure.

Appendices

Quinsa Foster’s Lion Nathan CR2 Interbrew Alken Maes CR2 AmBev Molson Schincariol CR3 Molson Labatt CR2 Tsingtao CRB Yanjing CR3 Carlsberg Bryggerigruppen CR2 Brasseries Kronenbourg Sogebra InBev CR3

Argentina Australia

France

Denmark

China

Canada

Brazil

Belgium

Market leader§

Brewers

S&N (100%) Heineken (100%)

AB (27%) SABMiller (49%)

Molson Coors InBev (100%)

InBev Molson Coors

InBev S&N (100%)

Kirin (45%)

AmBev (36%)

Ownership*

Appendix 1 Concentration in major beer markets

70 55 42 97 53 16 69 68 17 9 94 44 43 87 13 11 7 31 61 14 75 35 30 11 76

Market share (%)

Stable oligopolistic competition; may see more foreign entry post-S&N’s acquisition of Brasseries in 2000.

Carlsberg dominates.

Intensive competition amongst emerging national brewers; vigorous penetration from global giants.

Stable duopolistic competition.

AmBev holds the predominant position; other players compete intensively for the remaining market share.

Interbrew holds the predominant position.

Monopolistic market. Stable duopolistic competition.

Competition status

South Africa UK

Russia

Netherlands

Mexico

Japan

Italy

Germany

InBev Carlsberg CR3 SABMiller S&N InBev

Bitburger CR6 Birra Dreher Birra Peroni Carlsberg CR3 Asahi Kirin Sapporo CR3 Grupo Modelo FEMSA CR2 Heineken InBev Grolsch CR3 BBH±

InBev Holsten Group Radeberger Heineken Brau und Brunnen

Carlsberg (50%); S&N (50%)

AB (50%)

Heineken (100%) SABMiller (60%)

Oetker Group (62%)

Carlsberg (92%)

14 7 44 98 27 17

6 54 35 25 8 68 38 36 14 89 57 42 99 29 19 14 62 23

12 11 10 8 8

Monopolistic market. Market is undergoing concentration; S&N and global leading brewers dominate. Continued overleaf

Market is undergoing concentration; foreign brewers’ penetration has speeded up since the late 1990s.

Stable oligopolistic competition.

Stable duopolistic competition.

Stable oligopolistic competition.

Virtually intensive competition amongst global leading brewers.

Intensive competition amongst large domestic brewers; market is undergoing concentration; global giants are keen to build up foothold.

AB Miller Coors CR3 SABMiller (100%) Molson Coors

Molson Coors (100%)

Carling

Carlsberg Foster’s CR5

Ownership*

Market leader§

49 19 11 79

10 9 79

16

Market share (%)

Anheuser-Busch holds the predominant position.

Competition status

16

12 13 14 15

1 2 3 4 5 6 7 8 9 10 11

Miller was acquired by SAB in 2002 and the combined company was renamed SABMiller thereafter. Coors and Molson announced a merger in July 2004 and the deal was completed in February 2005. AmBev acquired 36% of Quinsa in January 2003. Kirin acquired 45% interest in Lion Nathan Brewery (LNN) in August 1995. Interbrew and Ambev merged as InBev in March 2004. Alken Maes was acquired by S&N in 2000. Labatt was wholly acquired by Interbrew in 1995. Anheuser-Busch bought Tsingtao’s convertible bonds valued at USD182 million in 2002 and its holding in Tsingtao went up to 27% in April 2005. CRB was set up as a joint venture in 1993 by SABMiller and China Resources Enterprises. Brasseries Kronenbourg was acquired by S&N in 2000. Hypo Bank sold in February 2004 its 56% shareholding in Brau und Brunnen to Oetker Group for Euro 220 million. Oetker Group is one of the largest family-owned firms in Germany. Its businesses involve diversified areas such as food, beer and non-alcohol beverages, wines and spirits, shipping and financial services, etc. Oetker Group expects to strengthen its alcoholic drinks businesses through the acquisition of Brau und Brunnen. Birra Dreher was acquired by Heineken in 1974. SABMiller bought 60% of Birra Peroni in May 2003. Anheuser-Busch accumulated a 50.2% holding of Grupo Modelo from 1993 to 1995. BBH was set up as a joint venture in 1991 by Finnish Oyj Hartwall Abp (Hartwall) and Norwegian industrial group Orkla’s Pripps. As a 40% owner of Carlsberg, Orkla later injected its beer businesses into Carlsberg Breweries A/S, which gave Carlsberg 50% ownership of BBH. S&N acquired 100% of Hartwall in 2002 and consequently owned 50% of BBH. Carling was bought by Coors in 2001 from Interbrew, which divested Carling in order to secure its acquisition of Bass in 2000.

Notes: § 2002 market share is used; CR refers to concentration ratio; ± Baltic Beverages Holding; ownership *:

Source: Author’s research based on data and information from company annual reports and presentations; company websites; Euromonitor database; www.just-drinks.com.

US

Brewers

Appendix 2 185

Appendix 2 China’s beer production, 1949 to 2003 Year

Beer production (million litres)

1949 1950–1956 1957 1958 1959 1960 1949 to 1960 CAGR 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1961 to 1970 CAGR 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971 to 1980 CAGR 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1981 to 1990 CAGR 1991 1992 1993 1994 1995 1996 1997

7 N.A. 43 57 104 142 32% 114 99 81 76 81 90 104 114 142 154 3.5% 170 189 218 218 260 287 331 382 488 651 16.1% 861 1,110 1,546 2,119 2,938 3,908 5,110 6,271 6,088 6,545 25.3% 7,933 9,658 11,598 13,382 14,845 15,915 17,870 Continued overleaf

186

Appendix 2

Year

Beer production (million litres)

1998 1999 2000 1991 to 2000 CAGR 2001 2002 2003 1949 to 2003 CAGR

18,817 19,860 21,114 11.5% 21,659 23,872 25,400 16.5%

Source: Compiled from China Food Industry Almanac, various years; China Light Industry Association.

Appendix 3 187

Appendix 3 Geographical presence of China’s beer production, 2003 Provinces

Ranked by production (litres mn)

Provinces

Ranked by per capita consumption (litres/head)

Shandong Zhejiang Guangdong Henan Fujian Liaoning Helongjiang Beijing Jiangsu Hebei Hubei Anhui Sichuan Jilin Shaanxi Jiangxi Chongqing Hunan Shanghai Guangxi Inner Mongolia Xinjiang Gansu Shanxi Yunnan Guizhou Tianjing Ningxia Hainan Tibet Qinghai

3,217.0 2,016.8 2,137.9 1,125.5 1,372.7 1,493.8 2,023.3 1,235.1 1,159.0 1,147.9 1,133.3 1,220.2 901.2 815.4 537.2 453.1 451.0 422.1 434.0 403.3 435.4 223.8 238.5 171.4 186.7 120.0 173.3 62.9 58.2 32.9 1.9

Beijing Zhejiang Fujian Helongjiang Liaoning Shandong Shanghai Jilin Guangdong Hubei Anhui Inner Mongolia Tianjing Hebei Jiangsu Henan Shaanxi Ningxia Chongqing Xinjiang Tibet Sichuan Gansu Guangxi Shanxi Hainan Hunan Jiangxi Guizhou Yunnan Qinghai

85.1 47.7 44.4 37.6 34.6 32.1 31.6 31.5 24.5 19.2 17.9 17.5 17.2 17.2 16.4 16.4 14.9 14.8 13.7 13.5 12.0 10.3 9.5 8.6 7.4 7.1 6.4 5.2 5.1 4.8 0.4

Total

25,400

Average

19.1

Source: Compiled from Beer Science and Technology 2004c: 89–90.

188

Appendix 4

Appendix 4 Historical performance of Tsingtao Brewery, 1950 to 2003 Year

Sales (litres mn)

Sales

Net profits

(RMB mn)

Profit margin (%)

Employees (persons)

Sales per employee (RMB)

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960

1.8 3.9 1.8 3.8 2.7 2.5 3.5 5.5 5.7 10.6 15.3

0.8 1.7 0.8 1.7 1.2 1.3 2.0 3.0 3.5 7.3 8.9

0.1 0.3 −0.1 0.4 0.3 0.2 0.3 0.8 0.7 1.6 1.5

8.0 16.4 – 23.1 22.8 17.2 12.6 25.1 19.3 21.3 17.5

255 272 274 271 273 273 307 367 392 611 725

3,223 6,322 2,881 6,327 4,522 4,609 6,589 8,294 9,049 11,981 12,231

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

11.0 7.5 8.6 10.3 12.7 16.0 17.7 19.5 18.5 24.2

7.2 4.3 4.2 4.7 5.8 7.3 8.0 8.9 8.4 11.0

1.7 0.6 0.7 0.6 1.3 1.9 2.0 2.0 1.9 2.6

23.4 13.3 16.1 12.9 21.6 25.9 25.7 22.9 23.0 23.8

730 658 550 491 475 457 457 477 576 704

9,849 6,598 7,702 9,633 12,225 15,855 17,432 18,610 14,566 15,640

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

24.8 25.1 27.3 24.8 28.2 28.5 33.4 35.5 39.3 45.8

11.5 11.8 12.3 11.1 12.9 12.7 14.7 15.8 17.5 21.3

2.7 2.3 2.7 1.5 1.7 1.2 1.1 2.0 1.4 1.6

23.4 19.1 21.8 13.4 13.4 9.6 7.6 12.8 7.9 7.4

795 940 946 970 961 1,146 1,203 1,377 1,445 1,550

14,502 12,600 12,969 11,430 13,408 11,093 12,237 11,453 12,095 13,721

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

47.6 49.3 59.7 68.1 80.5 95.0 98.1 99.4 100.4 100.5

22.0 23.2 27.2 30.8 37.3 45.3 49.0 101.3 95.9 186.8

4.1 10.7 14.0 17.2 21.5 26.3 30.3 27.3 30.1 27.6

18.5 46.2 51.5 55.8 57.5 58.0 61.8 26.9 31.4 14.8

1,613 1,639 1,778 1,828 2,176 2,325 2,365 2,376 2,417 2,487

13,626 14,129 15,311 16,860 17,160 19,492 20,715 42,652 39,657 75,115 Continued overleaf

Appendix 4 189 Year

Sales (litres mn)

Sales

Net profits

Employees (persons)

(RMB mn)

Profit margin (%)

Sales per employee (RMB)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

104.2 113.9 225.6 293.6 331.2 331.2 393.3 527.1 946.3 1,827.6

195.0 218.8 999.8 1,044.0 1,383.7 1,431.9 1,443.7 1,597.8 2,253.2 3,448.3

28.4 47.6 187.8 108.2 97.8 25.7 28.4 39.5 40.7 62.0

14.6 21.7 18.8 10.4 7.1 1.8 2.0 2.5 1.8 1.8

2,575 2,585 3,688 3,920 5,221 5,229 5,049 8,661 13,028 19,244

75,728 84,650 271,099 266,337 265,028 273,841 285,937 184,481 172,947 179,186

2001 2002 2003

2,467.3 2,987.3 3,338.0

4,692.6 6,195.2 6,713.8

83.5 222.5 245.0

1.8 3.6 3.6

26,488 28,131 28,131

177,160 220,227 238,661

Source: Compiled from Annals of Tsingtao Brewery 1993; Tsingtao annual reports, various years; author’s own research. Note: Numbers may not add up due to rounding.

32.1 29.7 28.7 27.5 29.1 29.4 28.1 30.0 30.1 64.3 77.8

9.3%

21.1%

Export (litres mn)

1.9 2.2 2.2 2.1 2.2 2.8 4.8 8.7 11.4 12.5 13.1

Market share (%)

8.0%

175.7 167.0 168.0 170.5 183.9 190.0 184.5 192.7 209.2 413.8 379.7

Export (RMB mn)

22.5%

3,688 3,920 5,221 5,229 5,049 8,661 13,028 19,244 26,488 28,131 28,131

Employees (persons)

27.9%

4 5 6 7 9 14 25 40 46 47 47

No. of breweries

34.1%

237 379 520 710 852 1,136 1,798 3,075 3,596 3,738 4,447

Capacity (litres mn)

15 20 25 25 30 30 30 35 35 35 35 N

−2.4%

Note: * Estimated figures.

Largest brewery’s capacity * (litres mn)

95 78 64 47 46 46 53 59 69 80 75

Capacity utilisation ratio * (%)

Source: Author’s calculation based on China Food Industry Almanac; Tsingtao annual reports, various years; interview.

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2003/1993 CAGR

Year

Appendix 5 A snapshot of Tsingtao’s key figures, 1993 to 2003

Beijing Jiangsu Guangdong Sichuan

Mar. 2001 Feb. 2001 Feb. 2001

Zhejiang Guangxi Hubei Hubei Fujian

Jan. 2002 Nov. 2001 Nov. 2001 Nov. 2001 June 2001 Mar. 2001

Shandong

Mar. 2002

Beijing Asia Shuang He Sheng Five Star Beer Co. Tsingtao Brewery Nanjing Co. Tsingtao Brewery Doumen Co. Tsingtao Brewery Luzhou Co.

Shandong Fujian Hunan Shandong Shandong

Jan. 2003 Apr. 2002 Apr. 2002 Mar. 2002 Mar. 2002

Tsingtao Beer Haifeng Warehouse Tsingtao Brewery Xiamen Co. Tsingtao Brewery Chenzhou Sales Tsingtao Changhong Shangwu Co. Tsingtao Brewery Merchants Logistics Co. Tsingtao Brewery Luzhong (Weifang) Sales Co. Tsingtao Brewery Taizou Sales Co. Guangxi Nanning Wantai Brewery Tsingtao Brewery Suizhou Co. Tsingtao Brewery Tianmen Co. Tsingtao Brewery Fuzhou Co.

Province

Date

Acquired companies *

Appendix 6 Tsingtao’s acquisitions, 1999 to 2003

42 10 111

33

7 96 24 18 220

2

1 10 1 1 2

Investment § (RMB mn)

75 90 55

49 30 86 86 51, up to 75 later 63

90

54 80 95 95 51

Ownership (%)

Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Continued overleaf

Beer manufacturing/trading

Beer trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading

Beer trading

Warehousing and logistics Beer manufacturing/trading Beer trading Logistics services Logistics services

Principal activities

Shaanxi Liaoning Shandong Shandong Hebei Shandong Zhejiang Hunan

June 2000 June 2000 June 2000 May 2000 Apr. 2000 Jan. 2000 Dec. 1999 Dec. 1999 Nov. 1999 Nov. 1999 Nov. 1999 Oct. 1999

Tsingtao Brewery Tengzhou Co. Tsingtao Brewery Sanshui Co. Tsingtao Brewery Xuzhou Co.

Tsingtao Brewery Penglai Co.

Shandong

Shandong Guangdong Jiangsu

Zhejiang Heilongjiang Heilongjiang Sichuan Shandong Beijing Shanghai

Dec. 2000 Dec. 2000 Sept. 2000 Sept. 2000 Sept. 2000 Aug. 2000 Aug. 2000

Tsingtao Brewery Taizhou Co. Tsingtao Brewery Harbin Co. Tsingtao Brewery Mishan Co. Tsingtao Brewery Chongqing Co. Tsingtao Brewery Shouguang Co. Beijing Three Ring Asia Pacific Beer Co. Tsingtao Brewery Shanghai Songjiang Co. Tsingtao Brewery Weinan Co. Tsingtao Brewery Anshan Co. Tsingtao Brewery No. 5 Co. (Laoshan) Taierzhuang Malt Co. Tsingtao Brewery Langfang Co. Tsingtao Brewery Weifang Co. Tsingtao Brewery Wuhu Co. Tsingtao Brewery Chenzhou Co.

Province

Date

Acquired companies *

38

15 41 39

50 50 34 5 10 5 20 70

10 22 20 7 60 237 300

Investment § (RMB mn)

55 60 94 86 95 70 86 70, up to 84 later 95 71 60, up to 66 later 80

95 95 95 95 99 54 75

Ownership (%)

Beer manufacturing/trading

Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading

Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading

Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading

Principal activities

Sept. 1999 Sept. 1999 Sept. 1999 Mar. 1999 Feb. 1999 Nov. 1998 July 1998 Apr. 1998 Dec. 1997 Nov. 1997 Nov. 1997 Dec. 1995

Guangdong Hubei Shanghai Shandong Shandong Liaoning Shandong Shandong Guangdong Shandong Shandong Shaanxi

Source: Compiled from Tsingtao annual reports.

Note: * Renamed post Tsingtao’s acquisition; § registered & paid-in capital.

Tsingtao Brewery Huangmei Co. Tsingtao Brewery Yingcheng Co. Tsingtao Brewery Shanghai Co. Tsingtao Brewery Xuecheng Co. Tsingtao Brewery Rongcheng Co. Tsingtao Brewery Xingkaihu Co. Tsingtao Brewery Pingyuan Co. Tsingtao Brewery Heze Co. Shenzhen Tsingtao Beer Asahi Co. Tsingtao Brewery Rizhao Co. Tsingtao Brewery Pingdu Co. Tsingtao Brewery Xi’an Co.

30 5 38 45 20 20 5 10 250 10 10 222

60 90 90 85 70 95 90 90 71 95 95 76

Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading Beer manufacturing/trading

194

Appendix 7

Appendix 7 The most famous Chinese brands, 2003 Brands *

Value (RMB bn)

Industry

Haier Hongtashan Wuliangye Legend FAW § TCL Changhong Midea Jiefang Tsingtao Yanjing 999 Littleswan Shuanghui Hongqi

53.0 46.0 26.9 26.8 26.8 26.7 26.7 12.2 10.8 10.1 9.0 8.3 6.9 6.2 5.2

White goods Tobacco Chinese liquor Computer Automobile TV, mobile phones TV Electronic goods Automobile Brewing Brewing Medicine White goods Food Automobile

Source: BFBE website. Note: * The rank was provided by Beijing Famous-Brand Evaluation Co., Ltd (BFBE). Founded in 1995, BFBE is a professional assessment organisation controlled by Assets Assessment Association of China. It has been releasing a ‘Report on Values of Chinese Brands’ according to international practice since its establishment; § FAW refers to China First Automobile Group Corporation, which owns domestically well-known brands like Jiefang, Hongqi, Xiali and Audi.

Notes

Introduction 1

Refer to Nolan et al. (2002) for a generic understanding of global giants’ ‘cascade effects’ on associated industries in the value chain.

2 The global big business challenge and catch-up 1

Hymer argued that neither domestic antitrust law nor international law could easily block large multinationals’ global expansion. In many cases, one of a domestic firm’s major competitors might be its sister affiliate of the same multinational group. He pointed out that ‘we leave the conditions of perfect competition’ and ‘lose the assumption of the invisible hand’ (Hymer 1979a: 45). The bigness of large multinationals is paid for in part by their fewness (ibid.: 46).

3 State intervention 1

For a detailed critique of the contradictions of Adam Smith’s free market theory, refer to Nolan (2004b: 325–32).

4 The global brewing industry 1

2 3

4 5 6

The exception may be South African Breweries (SAB), which originated in South Africa. Strictly speaking, however, it may not be appropriate to categorise it as a giant from a developing country following its acquisition in 2002 of Miller, the second-largest American brewer. Miller almost doubled SAB’s operations (SABMiller 2002a, 2002b). Calculations are based on global giants’ annual reports and Euromonitor database. For example, Carlsberg Technical Services carry out a comprehensive quality control system to monitor Carlsberg beers produced worldwide. Quality specification manuals and frequent visits to the international production operations perform key roles in maintaining the uniform taste and quality of its beers (Carlsberg Annual Report 1996/1997). This feature is drastically different from beer’s close peer, soft drinks manufacturers such as Coca-Cola. For a thorough understanding of Coca-Cola’s global brand management, refer to Nolan (1999: 24–7). Interbrew and AmBev merged in March 2004. The company was renamed InBev thereafter. Crown is a global leader in the design, manufacture and sale of packaging

196

Notes

products for consumer goods. Its primary products are aluminium cans for food, beverage, household and other consumer goods and a wide range of metal and plastic caps, closures and dispensing systems (Crown website). Crown holds 20 per cent of the North American metal beverage containers market, 17 per cent of the North American metal food containers market and 20 per cent of the European packaging containers market (Ball 2004). 7 Ball Corporation is one of the global leaders to supply metal and plastic packaging to the beverage and food industries. The company manufactures two-piece and three-piece beverage cans and easy-open beverage can-ends (Ball annual reports and website). Its North American operations produced approximately 31 per cent of metal beverage containers, 17 per cent of metal food containers and 8 per cent of plastic containers in the total US and Canadian markets in 2003 (Ball 2003: 16–17). 8 Krones, headquartered in Germany, is amongst the global leading players in developing and manufacturing machines and complete lines for all categories of filling and packaging technology. It is the largest player in Europe, representing about 50 per cent of the market (Krones website and annual reports). 9 Owens-Illinois (O-I) is the largest glass bottle maker globally and takes the lead in technological innovation. It produces 50 per cent of glass containers made worldwide per year (O-I 2003). O-I, Saint-Gobain and Anchor jointly hold as high as 93 per cent of the glass container market in North America (O-I 2004). O-I/ BSN, Saint-Gobain, Rexam and Ardagh jointly hold approximately 95 per cent of the European market (Rexam 2003). 10 Rexam supplies packaging to consumer sectors like beverages, food, beauty and healthcare. It is amongst the world’s top five consumer packaging groups (Rexam website). 11 Computer-assisted design/computer-aided manufacturing. 12 Typical examples are the UK and Australia. For more understanding of vertical integration, refer to Gourvish and Wilson (1994: 266–313); Dean (1997: 579–92); and Merrett (1998: 229–46). 5 Industrial policies on the Chinese brewing industry 1

2 3 4 5 6

7

China adopted the contract responsibility system in rural areas in 1978 to replace the unitary collective economic ownership which had dominated the rural economy since the 1950s. Under the new system, farming households signed contracts with the government as regards the usage of land for their own benefit. In 1993, the Chinese government lengthened the terms of these contracts by 30 years. The law on rural land contracts was further amended in 2003, which for the first time provided farmers with long-term rights to use contracted lands (Xinhua News Agency 2003). The importance of the food industry in the 1980s was equal to or more important than that of many other pillar industries. Since the 1990s, the industrial policy has given more attention to heavy industries and high-tech industries. It was followed by grape wines, fruit wines and traditional Chinese liquors. This period refers to the late 1980s and the first half of the 1990s. The brewing industry belongs to light industry. For instance, watch and bicycle manufacturing industries were ‘pillars’ in the early 1980s; beer, soft drinks and interior decoration industries were ‘pillars’ in the second half of the 1980s (Yu 1997: 3); electronics and household chemicals industries were ‘pillars’ in the 1990s; and paper production and food manufacturing industries became ‘pillars’ between 2001 and 2005 (China National Bureau of Light Industry 2001a: 24). In the 1980s foreign currencies were very strictly controlled by the government

Notes 197 and hard to obtain for individual projects unless they were amongst the projects highly supported by the government. 8 For instance, wheat starch slurry or yeast by-products from the brewing process can be good raw materials for the feeding industry. 9 The taxation regulations in China are complicated. To put it simplistically, the profits tax rates involve three categories: a rate of 27 per cent is applicable to foreign direct investment (FDI) and a rate of 15 per cent to companies located in approved industrial zones or to companies engaged in high-tech activities with a registered capitalisation of no less than USD30 million; companies that do not fall into the first two categories are subject to a rate of 33 per cent (State Administration of Taxation website; Yue 2003: 115–25). 10 Each brewer may have many brewing plants. 11 The foundation is being set up to invest in projects in light industry. Its funding source is domestic private capital and foreign capital that flows into China to seek investment opportunities. 6 The Chinese brewing industry 1

CRE is a red chip conglomerate listed on the HKSE. China Resources National Corporation, an SOE under the Ministry of Foreign Trade and Economic Cooperation, holds 56 per cent of CRE (CRE website).

7 The catch-up of Tsingtao Brewery 1

The predecessor of Asahi Breweries Ltd and Sapporo Breweries Ltd, the largest and the third-largest Japanese brewers, respectively (Asahi and Sapporo corporate websites). 2 EBIT margin instead of net profit margin is used to make the comparison so as to exclude any one-off extraordinary items below the operating line that may distort the net profits. 3 Sanyo Whisbih runs a chain of convenience stores in Taiwan. 4 The premium sector accounts for approximately 10 per cent of the total market (Kong 2002: 30), and industrial analysts estimate that foreign brands capture about 80 to 90 per cent of this sector. 5 From the observation of industrial trends and of the practice of leading global players as well as interviews with brewers and industrial analysts. 6 Ball is one of the world’s leading suppliers of metal and plastic packaging. Its main customers in China range from soft drinks and beer manufacturers to energy drinks and juice manufacturers (Ball 2003). Ball (Asia) owns the fastest single-line production equipment for two-piece aluminium cans in China and holds about 45 per cent of the two-piece metal beverage container market in Mainland China and Hong Kong (company annual reports and website). 7 Pacific Can Company (PCC) was founded in 1984 in Hong Kong. Its largest shareholder was Schmalbach-Lubeca, a German packaging group with more than one hundred years of history. After being acquired by Ball in 2002, SchmalbachLubeca decided to concentrate on its core market, Europe, and sold out its 51 per cent shareholding in PCC to PCC’s minority shareholders (SchmalbachLubeca website). PCC is now a privatised company and operates plants in Beijing and Dalian. 8 The bubbles that fizzle within the beer liquid when a beer bottle is unsealed. 9 Including both new and recycled bottles. 10 CML is a subsidiary of China Merchants. Founded in 1872, China Merchants was the first truly commercial Chinese company. It is now a diversified conglomerate listed on the HKSE. CML operates land-based transport, shipping

198

11 12

13 14 15 16 17

18 19

20

Notes and warehousing businesses in China (company website). It has a wide distribution network covering more than 640 Chinese cities (People’s Daily 2002). CML aims to become one of the top three logistics firms in China (interview, CML). TBML is 51 per cent owned by Tsingtao and 49 per cent by CML. It is managed by CML and focuses on logistics service businesses. AB has held 27 per cent of Tsingtao since the conversion of the last tranche of CBs in April 2005. But its voting power is restricted to 20 per cent as long as QSAAO remains as the largest shareholder that holds no less than 27 per cent of Tsingtao (Tsingtao Investment Agreement 2002). Shares traded on the HKSE. Shares traded on stock exchanges in Mainland China whose subscribers are Chinese nationals or Chinese companies. Foreign persons and companies are presently not allowed to buy A shares. Together with Yanjing Brewery and Zhujiang Brewery. Including the State Planning Commission, Foreign Economic Relations and Trade Commission, Foreign Exchange Regulation Bureau, State Treasury Bureau, banks, and key bureaus of Shandong Provincial and Qingdao Municipal Governments (Annals of Tsingtao Brewery 1993: 63, 66, 260). Foreign currencies were very strictly controlled by the government and hard to obtain for individual companies unless they were amongst the companies highly supported by the government. The 15 per cent income tax applies to Tsingtao Brewery No. 1, No. 2., No. 3 and No. 4 according to the preferential regulation issued by the State Administration of Taxation in 1992 (Tsingtao Brewery, Annual Report 1993: 40), and to Tsingtao Brewery (Hansi) for the period 1996 to 2002 according to preferential policies granted by Shaanxi province and Xi’an City (Tsingtao Brewery, Annual Report 2001: 81). Tsingtao Brewery (Zhuhai) Co. and Shenzhen Tsingtao Sales Co. operate in Special Economic Zones in Zhuhai and Shenzhen, respectively, and therefore are subject to income tax of 15 per cent. All other subsidiaries are subject to income tax of 33 per cent (Tsingtao Brewery, Annual Reports 2001, 2002, 2003). Laoshan is a district of Qingdao City.

8 The catch-up of Yanjing Brewery 1 2 3

4 5 6

Both acquired by Tsingtao Brewery. The total firm-wide supply of Ball and Crown cans to Yanjing is unknown but these two global giants are estimated to account for the bulk of the cans used in Yanjing’s headquarters plants. A few large domestic players are able to produce equipment used for brewing and bottling draught beers, but the quality of their products is not comparable with that of equipment made by global giants such as KHS or Krones, which is why large indigenous brewers would prefer imported equipment, even at much higher cost (interviews, KHS (China), Yanjing Brewery). UFSOFT Co. Ltd was established in 1988 and listed in May 2001 on the SSE. It is the largest supplier of ERP software, management software and financial software in China. The other two were Tsingtao Brewery and Zhujiang Brewery. The way that Yanjing was (and is) specially treated was (and is) slightly different from the treatment received by Tsingtao Brewery. Tsingtao was (and is) subject to a profit taxation of 15 per cent unless and until new tax regulations come into place. Yanjing was (and is) subject to a 33 per cent profits tax like other SOEs. However, the amount of taxation paid above a 15 per cent taxation rate was

Notes 199 (and is) returned to Yanjing (Yanjing Brewery, Annual Report 2001, 2003). Ultimately, there is not much difference between Yanjing and Tsingtao. 7 Shunyi was a county but is now a district of Beijing. It was ranked number 18 in 1991 amongst the 100 most competitive counties in China (Li 1997: 77). Shunyi is one of Beijing’s important industrial centres, and its pillar industries include brewing, soft drinks, food processing, electronics and automobiles. Large companies located in Shunyi include Yanjing Brewery, Beijing Hyundai and Huiyuan Fruit Juice Group, etc. (Beijing Almanac, various years). 8 Refer to Ouyang (1997, Vol. 2) for a better understanding of Beijing’s industrial policies. 9 Beijing has five primary ring roads. Major political, economic and cultural facilities and many residential buildings, major shopping malls and retail outlets are located within and around the third ring road. 10 Beijing Enterprises is Beijing government’s largest red chip company listed on the HKSE. The other six SOEs included in Beijing Enterprises were Capital Airport Expressway, Wangfujing Department Store, Jianguo Hotel, Sanyuan Foods, Badaling (Great Wall) Tourism and Beijing International Switching System (Beijing Enterprises, Annual Report 1997).

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Company websites Adolph Coors, www.coors.com Anheuser-Busch, www.anheuser-busch.com Asahi Breweries, www.asahibeer.co.jp Ball, www.ball.com Beijing Enterprises, www.behl.com.hk Beijing Traffic Management Bureau, www.bjjtgl.gov.cn BFBE, www.mps.com.cn Carlsberg, www.carlsberg.com China Merchants Logistics, www.chinamerchants-logistics.com China Resources Enterprises, www.cre.com.hk China Sedrin Brewery, www.chinasedrin.com Crown, www.crowncork.com Danone, www.danone.com Euromonitor Database, www.euromonitor.com Foster’s Group, www.fosters.com.au Golden Star Beer Group, www.jinxing-beer.com Grupo Modelo, www.gmodelo.com Harbin Brewery, www.hapi.com.cn Heineken, www.heineken.com InBev, www.interbrew.com Just Drinks Online News, www.just-drinks.com Kind Spring Brewery [Huiquan Pi Jiu], www.kindspring.com Kirin, www.kirin.co.jp Krones, www.krones.de Labatt, www.labatt.ca Lion Nathan, www.lion-nathan.com.au Molson, www.molson.com Oetker Group, www.oetker-group.de Orkla Group, www.orkla.com Owens-Illinois, www.o-i.com Quinsa, www.quinsa.com Rexam, www.rexam.com SABMiller, www.sabmiller.com San Miguel, www.sanmiguel.com.ph Sapporo Breweries, www.sapporobeer.jp Schmalbach (Ball Packaging Europe), www.schmalbach.com Scottish and Newcastle, www.scottish-newcastle.com State Administration and Taxation of China, www.chinatax.gov.cn Tsingtao Brewery, www.tsingtaobeer.com.cn UF Soft, www.ufsoft.com.cn Yanjing Brewery, www.yanjing.com.cn Zhujiang Brewery, www.zhujiangbeer.com

Index

Note: page numbers in italics denote references to figures/tables. acquisitions see mergers and acquisitions Adolph Coors 41, 42, see also Coors advertising 38, 44, 102–4, 151, 152, see also marketing AmBev 40, 41, 43, 48, 70, 172, 182 Amsden, A. H. 17, 18 Andersen, E. 24 Anheuser-Busch (AB) 26, 38, 70, 81, 82, 182–4; acquisitions 42; advertising 44, 103, 104, 104, 151, 152; distributors 48; geographical presence in China 80; packaging innovations 45, 82; satellitebased training 48, 156; strategic alliance with Tsingtao Brewery 43, 74, 79, 116–25, 131, 134, 198n12; Tsingtao Brewery comparison 89–91, 90, 92; Yanjing Brewery comparison 140–1, 141 Asahi 43, 74–5, 90, 93, 93, 183 Australia 70, 72 automobile industry 13, 15, 16, 22, 23, 26 Ball Corporation 46, 106, 154, 196n7, 197n6, 198n2 bargaining power 2, 25, 26, 46, 135, 179; advertising costs 38; Tsingtao Brewery 96, 107–8, 109, 111, 133; value chain integration 22, 24, 47, 48, 156, 171; Yanjing Brewery 145, 154, 155, 156 barley 62, 83 Bass 43 Bayerische Brau 43 Beijing Brewery 74 Beijing Enterprises 166, 199n10 Beijing Municipal Government 53, 164–8, 170 Belgium 72 Blanchard, O. 32

Blue Sword 43 brand 26–7, 44–5, 81, 134, 194; Tsingtao Brewery 98–105, 132, 133, 178; Yanjing Brewery 145, 148–52, 171, 178 Brazil 40, 70, 72 brewing industry 37–50; brands 44–5, 81; China 5–6, 51–65, 66–85, 179–80; consolidation 69–78; economies of scale 37–9; global brewers’ penetration in China 78–81, 84, 175, 177, 179; industrial concentration 39–44; technology and innovation 45–6, 49, 81–2; value chain integration 47–8, 49 Brewing Research Institute of Light Industry 159–60 Brooks, H. E. 27 Bud Ice 81, 117–18, 122–3 Bud Light 103, 104 Budweiser 39, 44, 81, 82; Chinese market 117, 122–3; standardised taste 115 Canada 72 capital restructuring 59, 167 capitalism 17, 18, 20, 21, 32, 35 carbonated soft drinks (CSDs) 40 Carlsberg 90, 115, 145, 182–4, 195n3; acquisitions 42; geographical presence 80; packaging technology 46; strategic alliances 43 cascade effects 3, 47 cash cows 93, 93, 145 catch-up gaps 2, 3, 29, 84, 175, 179; Tsingtao Brewery 89–91, 132–3, 178; Yanjing Brewery 140–2, 169, 170–2, 178 chaebols 17–18 Chandler, Alfred 10–11 Chang Beverage 43

Index 211 Chang, H. J. 2, 34–5 China 1, 2, 22, 29, 175–6, 178–80; beer production 185–6, 187; brewing industry 5–6, 51–65, 66–85, 179–80; consumption 40, 52, 187; free market ideology 32; industrial policies 51–65, 176; reform process 34; state role 35–6, 176–8 China Merchants Logistics (CML) 110–11, 197n10 China Resources Breweries (CRB) 74, 75, 76, 78–9, 182 Chongqing Brewery 76 Coca-Cola 11, 12, 26, 40, 104; packaging 23–4, 153; training 156 Cockerill, A. 37 competition 1, 3, 23, 28, 39, 174–5; China 57, 84, 124–5, 172, 179–80; global 29, 49, 152, 170, 171; neo-classical view 7–8; oligopolistic 21; openness 60; packaging innovation 154–5; R&D 114; unorthodox approach 9, 10, see also competitiveness competitive advantage 2, 3, 84, 156, 179; big business revolution 20, 24–9, 134, 175; brand image 102; human capital 11; local brands 45; R&D 12; scale economies 89, 98, 140; technological innovation 49; Tsingtao Brewery 92, 105, 124, 130, 132; value chain integration 24, 47, 48, 171; Yanjing Brewery 149, 169–70 competitiveness 6, 25, 89, 110, 174, 178; consolidation 22, 77–8; foreign brewers 80–1; Japan 16, see also competition compound annual growth rate (CAGR) 67, 69, 185–6; chaebols 18; Tsingtao Brewery 87, 88, 115; Yanjing Brewery 138, 138, 157 consolidation 22, 73–8, 84–5, 124, 175; global 3, 21, 39, 48, 49, 86, 174–5; profitability 69–73; Yanjing Brewery 143, 155, 167, see also mergers and acquisitions consumer targeting 99, 103, 105, 150, 151, 152 consumption 40, 52, 68, 187 convertible bonds (CBs) 117, 118, 119 Coors 41, 42, 43, 70, 90, 182, 184 core business 20, 37, 92–3, 110, 142 core systems integrators 2, 3, 11, 23–4, 47; competitive advantage 156, 171, 179; Tsingtao Brewery 111, 125, 133

Coronas 44 costs 11, 24, 37–8, 57, 58, 70 Crown 46, 106, 154, 195n6, 198n2 Danone 43, 75 demand 68–9, 149 developmental state 33, 34 Diageo 43 Dicken, Peter 27 distribution 24, 26, 44, 47–8, 70; Tsingtao Brewery 96, 108, 109–10, 111, 134; Yanjing Brewery 155–6, 165–6, 169–70 diversification 18, 142 Dongxihu Brewery 75 downsizing 73, 85, 97, 133 East Asia 2, 19 Eastern Europe 18, 31, 32 economic growth 9, 10–11, 68–9 economies of scale 11, 21, 23, 37–9, 48; competitive advantage 25, 89, 140; consolidation 39, 69–70; Japan 16; Korea 17–18; Tsingtao Brewery 91, 97, 98, 107, 132, 133; Yanjing Brewery 140, 144, 167, 169, 170 efficiency 7, 8, 9, 49; global giants 174, 175; Tsingtao Brewery 133; Yanjing Brewery 169, 170 Enterprise Division Schemes: Tsingtao Brewery 96–8, 108, 109, 132; Yanjing Brewery 145, 148, 155, 170 enterprise resource planning (ERP) 113, 132, 158–9 entry barriers 8, 9, 24, 28, 38, 132 Europe 12, 14–16, 21, 27–8 Evans, Peter 33 exports 67–8, 127, 145, 190 finance 54–5, 62, 162, 165, 166 financial planning 119, 120 foreign direct investment 54, 62, 197n9 Fortune Global 500 companies 13–14, 17 Foster’s 37, 70, 182, 184 France 14–15, 16, 72 free market ideology 2, 3, 34, 176; China 35, 36, 63–4, 177; neo-classical school 30–1; neo-liberal school 31–2 Freeman, C. 27 Freshness Control Scheme 110, 111 Friedman, Milton 8 game theory 10 Germany 14–15, 16

212

Index

glass bottles 105, 106–7, 108, 128, 152, 153–4 globalisation 1–2, 21, 103–4 greenfield investments 78 Grupo Modelo 90, 183 Guile, B. R. 27 Guilin Liquan Brewery 144, 146

inventory management 96–7, 108, 119, 155, 158 investment 11, 17–18, 52–3; Tsingtao Brewery 112, 112, 126; Yanjing Brewery 157, 157, 161, see also foreign direct investment ‘invisible hand’ 30, 33–4 IT see information technology

Hahn, F. 33–4 Haier 128, 129, 130 Hansi 101, 127–8 Harbin Brewery 76, 80, 123, 124 Hayek, F. 32 Heineken 43, 44, 90, 182–3; acquisitions 41, 42; geographical presence in China 80; packaging innovations 45; standardised product 82, 115 Henan Golden Star Brewery 76 Herfindahl-Hirschman Index (HHI) 70, 72 Huasi Brewery 147, 167 Huiquan Brewery 77, 144–5, 146 human capital 11 Hymer, S. H. 25, 135, 178, 195n1

‘Key Projects Programme’ 81–2 KHS 56, 163, 198n3 Kirin 182, 183 Kornai, J. 32 Krones 46, 56, 163, 196n8, 198n3 Kumar, M. 32

imports 68, 83, 127, 162–3 InBev 40, 80, 89, 90, 140, 182–3 industrial concentration 20–2, 39–44, 182–4 industrial policies 51–65, 176; Tsingtao Brewery 125–31, 132, 135, 168; Yanjing Brewery 162–8, 170, 172–3, see also state intervention industrial zones 130 industrialisation 21, 64 information technology (IT) 13, 20, 27, 28; Tsingtao Brewery 91, 95, 111, 112–14, 133; value chain integration 24, 47, 48, 175; Yanjing Brewery 158–9, 170–1, see also technology innovation 11, 81–2, 115, 174, 175; neoclassical view 8; packaging 45–6, 49, 82, 104, 105–8, 133, 152–5, 179; unorthodox approach 9–10, see also technology integration: IT systems 28; Tsingtao Brewery 94, 95, 96; vertical 7, 47, 105, 107, 153, 161, 172; Yanjing Brewery 145, 148, 153, see also core systems integrators; value chain Interbrew 40, 41–2, 45, 76, 79, 172, 182 International Monetary Fund (IMF) 32 internet 113, 158 intranets 113, 158, 159

Laizhou Brewery 75, 147 Laoshan 101, 130–1 Lenin, V. I. 25 less developed countries (LDCs) 1–2, 28, 34–5, 49, 174; dangers of neoliberalism 33, 34; entry barriers 38–9; local brands 45; R&D spending 27 liberalisation 20, 32, 35 Lion Group 41, 76, 80 Lion Nathan 70, 78, 182 Lipton, D. 32 Liquan Beer 144 liquor 66, 67 loans 54–5, 62, 162, 165 local brands 44–5, 99, 101, 105, 150, 171 local governments 73, 84, 97, 128–31, 132, 164–8 local protection 60, 73, 77, 97 logistics 24, 96–7, 110–11, 113, 145, 159 logos 99, 100, 150 loss-makers 71, 73 low-end market 44, 72, 81, 82, 153; Tsingtao Brewery 99, 100, 102; Yanjing Brewery 136, 148, 149, 150, 152 Lundvall, B. 24 Lynk, W. 39

Japan 2, 12, 16–17, 21, 72; investment 18; R&D 27–8; state intervention 34 Jinghua Glass Bottle Corporation 107, 129–30 joint ventures (JVs) 61, 74, 75, 76, 78; Tsingtao Brewery 93, 95–6, 110; Yanjing Brewery 142, see also strategic alliances

Index 213 management 96, 119, 170 manufacturing equipment 52–3, 56, 57; Tsingtao Brewery 126–7; Yanjing Brewery 149–50, 157, 162–3 market failure 32–3 market segmentation 39–40, 44 market share 3, 7, 22, 25–6, 73; Tsingtao Brewery 87, 93, 94, 95, 190; Yanjing Brewery 138, 143, 163 marketing 26, 70, 104; Tsingtao Brewery 96, 99, 103, 109; Yanjing Brewery 145, 149, 151, 170, see also advertising Marshall, Alfred 8, 10, 24–5 Marx, Karl 20, 24 mergers and acquisitions (M&As) 3, 21, 40, 41–2, 49, 174; China 59, 61, 73–9, 76, 84, 176, 179; Europe 14, 16; Tsingtao Brewery 93–5, 97, 117, 124, 130–1, 132–3, 191–3; Yanjing Brewery 137, 140, 143–8, 150, 167, 169–70, see also consolidation; strategic alliances Mexico 72 Miller 40 Molson 41, 42, 43, 90, 182, 184 monopoly 1, 7, 8, 9–10 multi-plant operations 7, 38 multinational corporations (MNCs) 7, 10, 18, 23, 25–6, 175; brand management 26; industrial concentration 21–2; Japan 16–17; spillover effects 11; technological innovation 27, 28 national champions 3–4, 19, 125, 144, 177–8, 180; associated industries 158, 179; bargaining power 135; challenges faced by 124, 131, 135, 173, 177; Chinese industrial policies 53, 59–60, 64–5, 83, 126, 162; Europe 16, see also pillar firms National Technology Advancement (NTA) Award 115 neo-classical view 7–8, 10, 18–19, 30–1, 33, 35, 177 neo-liberalism 2, 31–2, 33, 35 new product development 114, 115, 160–1, 167 newly industrialised economies (NIEs) 21 Nolan, Peter 2, 10, 21, 23, 29, 34–5, 47 Oetker Group 183 Okanagan Spring Brewery 43

oligopoly 1, 7, 11, 21; Korea 18; neo-classical view 8; unorthodox approach 9–10 openness 60–1 Oriental Breweries 42 Orkla ASA 42 outsourcing 22 Owens-Illinois (O-I) 46, 196n9 ownership reforms 53–4, 60, 176–7 Pacific Can Company (PCC) 106, 197n7 packaging 23–4, 45–6, 49, 82, 179; brand image 26, 104; Tsingtao Brewery 104, 105–8, 109, 133; Yanjing Brewery 152–5, 159, 171 Pan, B. L. 61 Park Chung Hee 17 PEN bottles 45, 46, 82 Penrose, Edith 10 perfect competition 7–8, 9 PET bottles 45, 46, 82, 105, 108, 154 pillar firms 53, 55, 59, 135, 168; Tsingtao Brewery 125, 126, 128–31; Yanjing Brewery 162, 165, 166, see also national champions pillar industries 52–3, 129, 129, 162, 164, 168 population growth 69 Porter, Michael 25, 27 Prais, S. J. 37–8 premium (high-end) market 38, 62, 81, 84, 197n4; AB 117–18; bottle size 153, 154; Tsingtao Brewery 98, 100, 101, 102, 105; Yanjing Brewery 148, 149–150, 152, 155, 167, 171 privatisation 20, 32, 63, 176 procurement 22, 23, 47, 70; Tsingtao Brewery 96, 108, 114; Yanjing Brewery 145, 155, 158 product life-cycle 25 production: China 185–6, 187; foreign brewers 80, 81; increases in 55, 66–7; profitability 71; scale economies 70; Tsingtao Brewery 87, 94, 96, 126–7, see also manufacturing equipment productivity: scale economies 38; Tsingtao Brewery 87, 90, 91, 92, 114, 115, 133; Yanjing Brewery 140–1, 141, 148, 157, 169, 170 profitability 57–8, 58, 81, 83, 178; consolidation 70–3, 71, 72; Tsingtao Brewery 88–91, 88, 89, 92, 96, 133, 188–9; Yanjing Brewery 137, 138, 139, 140–1, 141, 148

214

Index

protectionism 34 Prybyla, J. 32 pyramid brand structure 99, 101, 102, 102, 151 Qianjiang Brewery 74 Qingdao City 128–31, 132 Qingdao State Assets Administration Office (QSAAO) 118, 121–2, 123, 125, 134 Qinhuangdao Glass Bottle Company 154 quality control 44, 119, 120, 195n3 Quinsa 43 rent-seeking 31, 33 research and development (R&D) 9, 11, 12, 19, 27–8, 64; catch-up gaps 179; core business 20; core systems integrators 23; government support for 53, 63, 128, 129–30, 163–4; Japan 16; packaging innovation 45; Tsingtao Brewery 82, 114–16, 116, 120, 128, 133, 163–4; US firms 13, 14; value chain integration 175; Yanjing Brewery 82, 137, 159–61, 171–2 retailers 109, 110, 155–6 Rexam 196n9, n10 Ruigrok, W. 47 rural areas 69 Russia 40, 72 SABMiller 43, 70, 76, 90, 182–4; acquisitions 40, 41; assets 89, 140; CRB joint venture 78–9; geographical presence 80 Sachs, J. 32 sales 48, 90; Tsingtao Brewery 87–8, 88, 91, 92, 101, 112, 188–9; Yanjing Brewery 138–41, 138, 139, 141, 142–3, 150, 157 San Miguel (Guangzhou) Brewery 74 scale 37–9, 57–8, 69–73, 132, 170, see also economies of scale Scherer, F. M. 10, 37 Schumpeter, J. A. 9 Scientific Research Centre (Tsingtao) 114–15 Scottish & Newcastle (S&N) 37, 41, 42, 76, 90, 182–3 Sedrin Brewery 76 Shandong province 53, 94, 128–31, 132 Shanghai Ziquan Label Corporation 153 Shanshui 101 Shenyang Brewery 74

Shenzhen Tsingtao Beer Asahi 93, 93 Shunyi District Government 138, 164, 165, 167, 168, 199n7 Slade, M. 39 small and medium-sized enterprises (SMEs) 1, 2, 9, 11, 18–19; China 57, 59, 73, 82; neo-classical view 7, 8, 10 Smith, Adam 7, 30–1, 34 soft drinks 26, 40, 60 South African Breweries (SAB) 40, 41, 42, 43, 195n1 South Brewery 140, 142–3, 153, 157–8, 162, 167, 169 South Korea 2, 12, 17–18, 34, 72 Soviet Union, former 18, 31, 34 spillover effects 12, 19, 64, 165; core systems integrators 11, 125; pillar firms 129, 135 Standards and Rules of Brewing Operations (SRBO) 120 state intervention 2, 3–4, 30–6, 51–2, 63–4, 176–8; China’s WTO accession 83, 131, 168, 172–3, 180; Korea 17; Tsingtao Brewery 127; value chains 22; Washington consensus 19, see also industrial policies state-owned enterprises (SOEs) 53, 56, 59, 64, 156–7, 163; debt write-offs 128; foreign acquisition of 60, 61, 83; R&D 63; reduction in government shareholdings 60, 83, 125, 131, 134, 135, 172–3, 176–7; stock exchange flotation 55, 127, 166 Stiglitz, J. 32–3 stock exchange flotation 55, 127, 166, 167 Stokes, Patrick 118, 123 strategic alliances 3, 40–4, 43, 49, 174, 177; China 61, 64, 78–9, 84, 137, 179–80; Tsingtao Brewery/AB 116–25, 131, 133–4, see also joint ventures; mergers and acquisitions subsidiaries 3, 73; Tsingtao Brewery 94, 95, 96, 108, 112, 113; Yanjing Brewery 145, 153, 155, 159 subsidies 73, 128, 164, 168 suppliers 38, 49; Tsingtao Brewery 105–6, 107, 108; value chain integration 22, 23, 47, 174 sustainability 26–7 Taiwan 2, 22, 34, 95 tariffs 34, 55–6 taste inconsistency 82, 115, 120, 161

Index 215 taxation 53, 55–6, 57, 197n9; Tsingtao Brewery 83, 127, 198n19; Yanjing Brewery 163, 165, 168, 198n6 technology 27–8, 29, 45–6, 49, 81–2, 175; Tsingtao Brewery 111–14, 115, 126; Yanjing Brewery 156–9, 162, 165, 166, 169, see also information technology township and village enterprises (TVEs) 54, 57, 69, 106 training 156, 159, 160 transportation 24, 106, 110, 111, 118, 165–6 Tremblay, V. J. 39 Tsingtao Beer 98–105, 110, 114–15, 127, 132, 133, 148 Tsingtao Brewery 3, 4, 57, 74, 76, 86–135; acquisitions 93–5, 97, 117, 124, 130–1, 132–3, 191–3; brand strategy 81, 98–105, 133, 178; catch-up gaps 89–91, 132–3, 178; consolidation 73–7, 84; core business 92–3, 110; Enterprise Division Scheme 96–8, 108, 109; exports 67; financial performance 87–9, 188–9; future challenges 135, 177; global comparisons 90; history of 86–7; industrial policies 125–31, 168; information technology 112–14; logistics 110–11; packaging 82, 105–8, 133; as pillar firm 53, 126; R&D 63, 82, 114–16, 116; stock exchange flotation 55, 127; strategic alliance with AB 43, 79, 116–25, 131, 133–4; taxation 56, 83, 127; technological improvement 111–12, 126; value chain integration 108–10, 133, 179; Yanjing Brewery comparison 178 United Breweries 41, 43 United Kingdom (UK) 2, 14–15, 16, 34, 39, 72 United States (US) 2, 12–14, 21, 34, 37–8; investment 18; profitability 70–2, 72; R&D 27; wholesalers 47–8 unorthodox approach 9–10, 19, 28, 33–5, 64 urbanisation 69

value added tax (VAT) 56 value chain 22–4, 125, 179; Chinese policies 56–7, 62; global giants 2, 3, 28, 38, 47–8, 49, 174–5; Tsingtao Brewery 91, 95–6, 108–10, 111, 112–14, 132, 133; Yanjing Brewery 155–6, 170–1, see also integration Van Tulder, R. 47 Vernon, A. 25 vertical integration 7, 47, 105, 107, 153, 161, 172 Wang Zhongming 29 Washington Consensus 1, 2, 18–19, 35, 176 wholesalers 47–8, 109–10, 113, 155–6, 159, 171 wine 66, 67 World Bank (WB) 32 World Trade Organization (WTO) 1, 29, 62, 83, 168, 172; challenges for national champions 59, 131; institutional changes 180 Yanjing Beer 136, 144, 145, 148–52, 171 Yanjing Brewery 3, 4, 57, 74, 76, 136–73; acquisitions 75, 77, 143–8, 147–8, 150, 167; brand strategy 81, 148–52, 171, 178; catch-up gaps 140–2, 169, 170–2, 178; consolidation 73–7, 84; core business 142; financial performance 138–9; future challenges 172–3, 177; global comparisons 90; history of 136–8; industrial policies 162–8, 170, 172–3; information technology 158–9, 170–1; packaging innovation 152–5, 171; as pillar firm 53; R&D 63, 82, 114, 159–61, 171–2; taxation 83; technological improvement 156–8, 162, 165, 166, 169; Tsingtao Brewery comparison 178; value chain integration 155–6, 170–1, 179 Yantai Brewery 75 Yavlinsky, G. 32 zhua da, fang xiao 59–60, 163, 165 Zhujiang Brewery 41, 53, 74, 76, 79, 80