Ted Kunkel, chief executive of the Australian-owned Foster's Brewing Group, believes that in ten years China could be the world's biggest beer market.
In May, the company signed its first two joint venture agreements with the Chinese government, which will involve an investment of up to $A250 million over the next five years. They will be the first of many in a critical strategic move for the company's long-term growth.
Kunkel wants China to emerge as Foster's fourth international brewing arm, joining its Carlton Unite Breweries in Australasia, Courage in the UK and Molson Breweries in North America. As profits drain away in mature, recession-hit Western markets, China is tipped to be one of the few growth areas in the international beer market in years to come. The company isn't planning for much of a return on its investment for the next five years. But it is aiming to put the stamp of affluence on its marketing from the start. It pronounces Foster's as Foo-Seh-Teh which, it says, roughly translated means 'power, wealth and prosperity'.
The Foster's subsidiary Carlton United Breweries (CUB) signed two new 60-40 joint ventures for the Huagang Brewery in Shanghai and the Princess Brewery in Doumen. It is negotiating on two others, one believed to be near Beijing. Since then CUB has been slogging through the government bureaucracy to gain its business licences. It expects to have at least one by October and will begin operations then.
Nick Norgard, previously the company's Asia Pacific director based in Melbourne, has moved to Hong Kon to head up the CUB subsidiary Foster s China Ltd. He will run the venture with the help of teams of about five Australians in each brewery.
Kunkel is confident that the timing of the venture is right. Its international competitors are keen to get a piece of the action but, so far, apart from the Phillipines-owned San Miguel company, are thin on the ground. CUB's Australasian rival Lion Nathan has yet to set up planned joint ventures. "China has outstanding potential," he says.
Recent growth in the market is staggering. Beer consumption has been rising at about 18 per cent a year for the past six years. The mainland's 1.2 billion people, chiefly the 650 million in the coastal provinces, are acquiring a taste for the amber fluid as they become more affluent. Annual beer production is estimated at 100 million hectolitres, more than five times that of Australia. In the last year alone, China's beer consumption grew by 18 million hectolitres – as much as the entire Aussie market. Kunkel conservatively estimates that it will continue to grow at ten per cent a year between now and 2000.
Within four years the market is expected to outstrip Germany to be second only to the US. In five, Kunkel expects his two Chinese plants to be pumping out as much beer as CUB does in Australia. On average, the Chinese consume eight litres of beer per person a year compared to 90-110 litres per person in the US, Britain and Australia. In Shanghai it has already risen to 20-40 litres.
One of Foster's plans in Shanghai is for an immediate boost to capacity by almost 50 per cent, to one million hectolitres. It will also add a bottling plant. The site is expected to become the first national brewery, producing Fosters and two well-known local brands, Brightness and Shanghai. Initially it will sink $A30 million into the project, which will rise to $Al20 million. Eventually, Foster's plans to add another three million hectolitres to capacity in each plant.
Foster's has learned that market development in China takes time, especially where state-owned enterprises are involved. Australia's technology and human resource skills are well regarded internationally. The Ministry of Light Industries sought out the company some years ago to see if it could provide technology and quality control expertise in brewing, and two years ago the company sent in a team venture. Foster's China a will help its partners develop their brands and will also offer assistance with training and language.
The mainland has 860 breweries, most of which are owned by central or regional governments. Though small by Western standards, they reflect the key difference in the Australian and Chinese markets. China has no national brand of beer. All breweries focus on regional brands and markets, partly because of sharp regional variations and partly because of the lack of developed infrastructure such as water supply and roads, which are critical to production and distribution.
In Doumen, part of the fast-growing Guangdong province on the Pearl River delta, the brewery is right in the middle of the city. CUB is putting up 60 per cent of the capital, with an initial investment of $A10 million. This will rise to around $A100 million over the next five years. The first priority, Kunkel says, will be to upgrade the existing plant to include a bottling line. Eventually, a new one will be built on the outskirts of the city. The region is also part of China's most sophisticated beer market, close to Hong Kong and Macau, where Western product influence is strong. Foster's is already on sale in some outlets.
The Princess Brewery venture is an important strategic choice. Doumen i on the Pearl River and has its own port. Most beer in Australia is shipped by road, but China's well-developed inland waterways mean it can be shipped by river at comparatively low cost.
The Shanghai brewery, in an area of 15 million people, will require expansion and modernisation. Once capacity has been reached, production will expand to a 10ha greenfield site in the bustling Pudong Development Zone on the other side of the Changjiang (Yangste) River. The brewery will also produce Foster's lager, but the long-term goal is to turn Shanghai into a national brand.
The new venture was made more attractive by financial incentives. The company was able to pick up a two-year holiday from company tax, with an agreement to halve the usual 15 per cent rate for the following three years. Chinese authorities will provide infrastructure such as roads and water.
Foster's will however have to cope with the built-in risks of entering the Chinese market – the potential for bureaucratic interference, the risk of political chaos and shortage of power and water. Demand from increasingly thirsty Chinese beer drinkers is so strong that in some parts of China orders are taken months ahead, with deposits, and therein lies the real risk.
In the next five years, the two ventures should provide Foster's with a three per cent share of the market. But if it wants to remain a serious player, it will find itself locked into investing substantial sums in order to boost production, simply to hang on to market share. This is something rare in its mature Western markets. Kunkel will be keeping his fingers crossed that the Foster's brand name Fooh-Seh-Teh truly lives up to its promise. *