Brewers battle doubters

AS foreign brewers move into China to tap what they predict will be the biggest market by the turn of the century, there are signs that the battle for market share will be hard. The clash of the beer giants gradually is building up to a climax between 1997 and 1999, when most Sino-foreign joint ventures already underway begin large-scale production of premium beer. Analysts said it would be in the premium beer segment, which accounts for less than 10 per cent of the total market, where the clash would be toughest. Domestically brewed premium beer costs four yuan to five yuan (about HK$3.7 to $4.6) a can. Down-market beer, selling at about two yuan a can for a lower profit margin, is likely to be dominated by domestic breweries. 'Which international name emerges as the winner in the China market depends on how successful they are in penetrating the central, south-west and north-west markets,' Ha Chung-bong, research coordinator of Seema International, a consulting firm specialising in the beer industry, said. On paper, the allure of the Chinese market seems obvious. A mainland resident downs on average only 12 litres of beer a year, compared with the German average of 155 litres and the United States average of 95 litres. The growth potential for the Chinese beer market looks extremely promising in comparison with the saturated American and European markets. Mainland figures show beer output will rise to 23 million tonnes in 1999, from about 16 million tonnes this year. But a deeper look at the Chinese beer market shows growth, especially for premium beer, which foreign brewers produce, may not be as large as many have predicted. Norman Sze, Arthur Andersen's general manager (business consulting), said: 'Comparisons are often made between the Chinese beer drinker and the German or American consumer. 'I am not sure the comparison is that valid. While it was true that rising incomes of the Chinese would lead to higher beer consumption, he said, the increase might not be as sharp as foreign brewers had expected. Beijing, Shanghai, Liaoning, and Guangdong - which have the highest per-capita income - are at present home to the country's greatest beer drinkers. Protectionist barriers will not come down as fast as brewers would like, and weather, as well as traditional drinking habits, will continue to hold back beer demand in some regions. Some foreign brewers, such as Foster's and Asahi Beer, try to work around the barriers by setting up ventures in different regions. Analysts said that, because of the cold weather, northern Chinese traditionally preferred bai jiu (white spirits) to beer, although Beijing and Liaoning were exceptions. Senior consultant Audy Lu, who has done studies on the Chinese beer market, said: 'You'll find that in places where white spirits are produced, and they tend to be in the north, beer consumption is low.' This would take time to change, he believed. Guizhou produces the famous mao tai , and Sichuan the wu liang ye - two of the most powerful Chinese spirits favoured by northern Chinese. 'Beer, in comparison, lacks punch,' Mr Lu said. Still, despite tough competition and regional preferences, brewers are keen to enter the market now in case the more optimistic predictions come true. Mr Sze said: 'They would rather lose money than not come into China at all, as they will miss out on the market should the market actually grow very fast.' In any case, even if beer supply does outstrip demand in certain markets, that should not deter those looking long term. The China representative of one international brewery said: 'As with most industries in China, you have to look at the long-term picture. 'Competition is certainly hotting up in some markets such as Shanghai, but you have to remember that we are all relatively new here, and there is a learning period we are all going to have to go through. 'We are looking to work with our existing partners for at least another five years before we will feel comfortable in expanding our business into other regions.' But international brewers looking for domestic partners often face a dilemma. To set up a well-run and profitable brewery, they have to find a sound Chinese partner. Almost without exception, the largest and best-managed mainland breweries are in the south and east coastal regions, where beer supply already is at a relatively high level. The central and western regions have in theory a much greater market potential, but foreign brewery executives say just about every brewery in the hinterland is poorly managed, uses outdated and poorly maintained equipment and produces very low-quality beer. If China had an efficient transport and distribution system, this would not be a problem. But the transport system is backward, and regional economies tend to be protectionist, especially in the brewing industry, and, as such, it is difficult to sell beer across regions. This is the case even in the developed coastal areas. Reek, produced by a joint venture in which Heineken has an indirect interest, is the leading beer in Shanghai. But it does not sell well beyond the city. Mr Lu said: 'In Wuxi, which is very near to Shanghai, drinkers still prefer the locally brewed Tai Wu beer.' There are signs that the domestic trade regime is gradually liberalising. But, even if interior protectionist barriers can be broken down, it will take several years, possibly decades, before the road and rail network in China develops sufficiently to allow the nationwide distribution of beer and other consumer goods. However, the more than 40 Sino-foreign joint-venture breweries already established or due to be set up in the near future are to a large extent targeting the same regions and localities, primarily the coastal provinces of Guangdong, Fujian, Shandong and Liaoning, in addition to Beijing, Shanghai and Tianjin. The influx of overseas breweries, combined with the already high concentration of domestic breweries, has led to predictions that the market will soon be saturated. Peter Williamson, chief operation officer of Foster's Asia, disagrees. 'The overall market continues to grow at a rate that matches our expectation when we first researched the opportunities of entering into the Chinese market. 'The three locations we have chosen to execute our entry into brewing in China are all growth areas and give us confidence in the future. 'The Chinese beer market is no different to other markets. Competition is strong from foreign and local producers - I do not think we necessarily underestimate that.' He said China probably would overtake the United States as the largest market by the turn of the century. Mr Ha did not think international breweries would have an over-supply. But they needed to push their sales networks outward from their production locations. Industry analysts said overseas breweries should expect to suffer considerable losses in their first few years of operation in China, simply because of the high start-up costs. The new Foster's brewery in Tianjin, for example, cost US$30 million, part of a US$110 million overall investment by Foster's in the mainland so far. Mr Williamson expected the company to break even in a few years, as it built a distribution and sales base. The losses suffered by joint-venture breweries might be high in areas where competition is already stiff, but industry analysts said they probably would be even higher in areas where there were only a few poorly run breweries. One analysts said: 'Although competition is not a problem in these inland areas, you would be taking a greater risk going into these untried and untested areas. Personally, I would not touch any of these small inland breweries with a bargepole,' In the long term, most analysts agree, there is still a great potential in the China market, where per capita beer consumption still is only about one-tenth the figure in Western industrialised nations.