The clear, pungent Chinese grain alcohol known as baijiu isn’t normally attractive to foreigners. With alcohol content ranging from 53% to 70%, it’s hard to stomach. But several deals last year suggest that foreign capital, at least, is warming up to the stuff.
Diageo, the multinational that owns the Smirnoff vodka brand, among others, took a 43% stake in Quanxing Group, which owns part of baijiu maker Shuijingfang, in January. Four months later, France’s LVMH became the majority shareholder in Wenjun, another distiller. Then Vin and Sprit (V&S), makers of Absolut vodka, formed a joint venture with Jiannanchun, widely regarded as one of China’s top brands alongside Wuliangye and Maotai. V&S itself was acquired by French conglomerate Pernod Ricard at the end of March.
It’s all win-win
The main idea behind the buy-ins was for the foreign stakeholder to gain exposure to the domestic baijiu market while the Chinese partner would get access to international distribution and knowhow.
A V&S press release said the new joint venture would develop a portfolio of premium baijiu brands, like Tianchengxiang, which it released in March. At Quanxing the sentiment is similar.
“[Chinese baijiu makers] want to expand into the overseas market through the distribution channels of foreign partners,” said Zhang Zongjun, secretary to Quanxing’s board of directors.
The dominance of baijiu in China’s spirits market, and its attractiveness to foreign firms, can’t be denied. Industry revenue is growing at 30% per annum, according to Sinolink Securities, while V&S claims that baijiu is the world’s most popular spirit, with an annual sales volume of over 520 million nine-liter cases. Vodka, the runner-up, sells 497 million cases.
However, baijiu is not so popular abroad. Official statistics show that exports of the liquor in 2005 accounted for just 0.06% of total sales.
“There are no immediate plans to sell Jiannanchun products in the V&S network,” said Johan Simonsson, general manager of the V&S joint venture.
In Chinese cities, splashy, high-profile marketing campaigns for foreign liquors target the country’s burgeoning nouveau riche. But it’s still baijiu for official dinners and family get-togethers, where large quantities of liquor are consumed.
“It’s the culture and national identity behind baijiu. We’d love to try a bit of different taste but it cannot replace [baijiu]; it has been here for thousands of years” said a government official in Sichuan province, where the V&S-Shuijingfang joint venture is based, speaking on condition of anonymity.
Given the cultural significance of baijiu, there is always a risk that foreign firms could wander onto dangerous ground and arouse nationalist sentiment through an attempted bid for a local distillery.
Some industry watchers suggest that the win-win rhetoric may conceal another reason for the influx of foreign capital. A management consultant in Chengdu, who asked not to be named, said some distillers might need the cash to finance management buyouts that were triggered by a withdrawal of state capital.
“It’s time for [baijiu firms’] senior management to pay the debts incurred during the buyouts, and they want foreign capital to finance the debts,” he said.
In 2005, for example, 18 senior managers at Quanxing Group created a new company called Chengdu Yingsheng Investment, which paid US$59 million for a 67.7% stake in Quanxing. At the same time the state divested Quanxing equity as part of a national privatization drive. Quanxing renamed itself Swellfun (or Shuijingfang) in September 2006.
According to a 2004 research paper by UK-based think tank Chatham House, a wave of management buyouts occurred in 2003. The central government and the China Securities Regulatory Commission initially supported this restructuring method but it fell out of favor after it was viewed as a way for insiders to unfairly profit off state assets.
With foreign capital now in play, however, the restructuring of China’s baijiu industry seems to have taken a step in the right direction. Distillers may now have the impetus to increase efficiency, and maybe even begin educating foreign drinkers on baijiu’s pleasures.