BEER sales in China are booming, but domestic brewers have been left with flat profits and an uncertain future. Sales growth of 20 per cent a year for the past five years makes this one of the fastest-growing industries in China. The sector sprouted in the 1980s, with the number of establishments soaring to more than 800 last year from just half that in 1984 and output totalling 12 million tonnes. But making profits has proved an elusive goal. The fragmented domestic brewing industry has been plagued by production and distribution problems, while competition from foreign brews has forced margins down. Things are so tough in the industry that about half of China's 850 brewing companies are reckoned to be unprofitable, while the remainder are just managing to keep afloat. The pace of economic reforms in China has not spared brewers, who are finding franchises opened up not only to regional competition but to the Carlsbergs and Foster's of the world. A few years ago making beer was a localised affair, with each city producing perhaps one or two brands. A lack of transport infrastructure combined with protectionist measures ensured brewers a steady supply of captive drinkers. But improvements in transport and international competition is forcing the industry to adapt or die. The trend is clearly towards consolidation, with smaller breweries being bought by larger ones or aligning themselves with the international names. Paul Vibert, an analyst with Baring Securities in Shanghai, says: 'Anyone trying to get a head start needs to buy into something existing.' These marriages of conveniences offer mainland brewers access to capital and marketing clout while international brewers get production facilities and distribution channels. The logic is quite compelling but, even so, there are a lot of difficult teething pains. San Miguel, for example, teamed up with the Guangdong Province Shunde County Brewery to make beer in its Shunde brewery site. The ink was still wet on the paper when the two announced they were back renegotiating the financing arrangements of the deal. In another deal, a foreign brewer formed a joint venture with a mainland counterpart only to find that it did not actually make beer. Still, the foreign brewers are feeling the pressure to establish their brands in China. Not all domestic brands are capitulating to the foreign invaders. Some well-established brewers have adapted and are thriving in the new environment. Shanghai's Reeb brand has taken on the giants on its home turf and won. Its slick advertising and marketing are more than a match for the imports and beers produced under licence, and have shown just how quickly some companies can adapt. A big problem facing China's brewing industry is that it does not have enough established brands to compete. While the Carlsbergs, Heinekens and Anheuser-Busches pump millions into creating brands through advertising, China offers only Tsingtao to compete. Even Tsingtao was slow off the mark to, starting television advertising in January this year, well behind its competitors. Consumers are the real winners in the beer wars, being offered more variety at better prices. Mr Vibert says the past year has seen a proliferation of brands on offer, ranging from city brews to imports. Another sign of health in the industry is consumption figures, which are growing at 15 to 20 per cent a year. Last year the average consumption per capita was 8.4 litres, up from 6.3 litres in 1992. Considering that beer is not widely consumed in the countryside, this is an impressive figure. But what really lights the eyes of beer makers is the potential. According to Mun Chan, vice-president of Lehman Brothers, the average United States consumption is 110 litres per person. The rise in beer consumption and choice has made pricing an increasingly critical part of the equation. In Shanghai, prices for a can of beer range from 3.5 yuan for Tsingtao to 7.8 yuan for an imported Heineken. The industry is just at the beginning of a massive shake-up which will most likely leave the foreigners and a few large mainland brewers as the winners, with the majority of breweries ending up rusting, casualties of the great China beer wars.