Basic Structure Of The Chinese Beer Industry

Basic Structure Of The Chinese Beer Industry To understand the current situation in the Chinese beer industry, knowledge about past events is necessary. Todays structure is a result of developments which took place during the last 50 years. Only decades ago, the total amount of beer consumed in China was very low, but steadily on the rise. When growth rates started to increase during the late 1990s, international breweries became interested in this new market, because international competition was very high, but the local competition in China was rather weak, and almost simultaneously international companies tried to set foot in China. In a very short time, nearly 50 joint ventures with local breweries were founded and everybody tried to get a piece of the cake. Yet, as China is a vast and geographically diverse country and infrastructure is poorly developed, the market for breweries is highly fragmented. The sales were all localized and as it was very difficult to ship across regional borders due to protected regional markets, big scale breweries were hard to maintain. Additionally, the price of beer was very low, especially in the rural areas of China and therefore costs could hardly be passed onto the consumer. Only a small group of richer Chinese were willing to spend more money on beer and would prefer international brands to national ones. Due to that, international beer was only available through on-premises sales in bars or hotels, while the majority of beer was sold through retail outlets. All this limited most brands geographical reach, only the Chinese Tsingtao beer was available almost nationwide. In 1995 there were over 800 breweries in China and the largest producer, the Yanjing Brewery, only accounted for 3.4% of the market in 1996. Even the top 10 could only claim 14% of the national production. As the Chinese population became richer, international companies could generate more revenues from the high end and premium sector which was difficult for the local breweries. The Chinese government began to fear foreign domination in the beer market and tried to push local breweries. Even though transportation is improving, the poor infrastructure and the inability to reap the economies of scale still hamper the bigger breweries. Trade barriers and the Chinese government which prefers national breweries further hinder international companies. It is necessary to view China not as a country, but to divide it into distinct areas in which breweries can operate. Competition in rural areas requires different competencies than in metropolitan areas. High fixed costs make it necessary to achieve a high degree of product and process standardization. Which competitors have the strongest (or at least the most viable) positions in the industry, and why? Does any competitor have a sustainable advantage? In 1997, the strongest competitors in China by volume were: 1. Yanjing Brewery, 2. China Strategic Investment, 3. Tsingtao Brewery, 4. Zhujiang Brewery (Interbrew), 5. China Resources (Shenyang) Snowflake Brewery (SAB), 6. Chongquing Brewer, 7. Dongxihu Brewery (Danone), 8. Qianjiang Brewery, 9. Harbin Brewery, 10. Pabst Blue Ribbon Brewery. In 2008, the key competitors in this industry were: Tsingtao Brewery, China Resources Snow Breweries, Beijing Yanjing Beer Group Company and Fujian Sedrin Brewery Company. The market shares of these key competitors are unknown. These companies can hold their positions due to joint ventures and co-operations. The largest producer Beijing Yanjing Brewery accounted for just 3.4% of the total market, but could increase its market share in Beijing from 55% in 1994 to 85% by 1997. Small breweries power to compete will increase during the next years and they will eventually become a strong competitor in the beer industry in China. Chinas market is geographically fragmented and the major domestic brands generally dominate in their local area. A sustainable advantage for competitors in the beer industry in China is the geographic position, because distribution is a major problem. Breweries which are located on the coast or near rivers have advantages due to the fact that shipping was the most reliable way of transporting beer. Foreign brewers realized that nationwide distribution was unrealistic and instead tried to focus on key areas. Another important aspect of the beer market is that the Chinese government favour s larger companies, making it tough for smaller ones. This also puts pressure on companies which lack economies of scale. Furthermore the major breweries invested heavily in increasing output and quality and in packaging. They also spent a lot of money on marketing and distribution, further strengthening their positions on top. Tsingtao and Yanjing Brewery both decided to boost their production capacity and invest in the development of their technologies to get a competitive advantage compared to their competitors. The few companies which will get out on top will use their advantages of capital and scales to further strengthen their positions in the market. The main Chinese breweries will not only be competiing in price and market regions, but also in distribution.  [1]   Is this a profitable industry? What is your prediction for its future profitability? In the 1980s and in the 1990s the beer industry in China was not profitable, but China became a large beer production and consumption country and after 2008 the output of Chinese beer ranked first in the world. Chinas beer market has one of the fastest growths worldwide. The world top ten breweries invest in China because of this growing market.  [2]   The competition between the breweries is a very fierce one, they are fighting for market shares, brands and regional distribution. In China the market is divided in beer areas and each region is occupied by certain beer companies. For its future profitability it will be necessary to increase quality and efficiency, to improve infrastructure for making distribution easier and brand building for high competitive advantage. Furthermore some key factors and data have to be taken into consideration to be able to tell if theres a profitable future for the Chinese beer industry: Key statistics provide the key indicators for the industry for at least the last three years. The statistics include industry revenue, industry gross product, employment, establishments, exports, imports, domestic demand and total wages. These statistics are important for research on how to enter the market. Segmentation covers products and service segmentation like key products. The major market segmentation provides data about key client industries and groups, giving an indication which of these are the most important ones in the industry. Industry concentration can tell us how much industry revenue is accounted for by the top four players and the geographic spread provides a guide to the regional share of the industry revenue or gross product. Market Characteristics deal with market size (size of domestic market and size of export market), linkages (lists the industryà ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢s major suppliers and the major customer industries), demand determinants, domestic and international markets, basis of competition and life cycle. Industry Conditions: Barriers to entry, taxation, regulation and deregulation, cost structure, capital and labor intensity, technology and systems, industry volatility and globalization. Key Factors and Key Competitors: Industryà ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢s Key Sensitivities and Key Success Factors. Key Competitors lists the major players in the industry and their activities. Industry Performance: Analyses the current performance and the historical performance of the Industry.  [3]   All these factors heavily influence the future profitability of the Chinese beer industry and keeping them under surveillance would therefore be advised. How is this industry likely to evolve? What are the key forces that will influence this evolution? The Chinese beer industry is still in the mid and late integration phase today. Competition remains fierce, but it can be estimated that in the future the Chinese beer industry will form a domestic market which will be monopolized by the 10 largest Chinese breweries. The market is most probably headed towards monopolistic and oligarch competition.  [4]   The number of enterprises will decline as the number of competitors which affiliate with the major players will increase. The capacities of the 10 largest breweries will rise, they will most likely expand rapidly and expand their scales. The industry will become more and more concentrated. An estimated 50% of the increase amount of beer worldwide will come from the Chinese market in the next 10 years.4