The Chinese market is difficult and failure is common. This is true for both domestic and foreign companies. But the country is also huge and there is almost always another opportunity available. The brutality of the Chinese market is compensated for by its breadth.
French food company Danone and Danish brewer Carlsberg Group provide good examples of what to do when you struggle in China. Both were confronted with serious problems. And their responses hold important lessons. One went on to a reasonable outcome, and the other to great success.
Danone wins big in China – and then goes home
Danone’s biggest move into China was a 51/49 joint venture with Hangzhou Wahaha Group in 1996. It was a fairly typical inbound development deal based on combining foreign expertise, products and capital with local management and distribution, especially into secondary cities.
The joint venture grew rapidly and expanded from a small struggling beverage company into a conglomerate of over 40 food joint ventures in milk drinks, soft drinks, bottled water, teas and fruit juices. Over the course of 10 years, Danone and Wahaha built the largest beverage company in China.
The joint venture, however, made headlines in 2007 after a dispute between the parties erupted. This led to legal action in both Hangzhou and Los Angeles. There was a lot of sniping in the press. Eventually, Danone sold its stake in the joint venture to Wahaha in 2009.
Carlsberg struggles in China and eventually gives up
In contrast, Carlsberg’s problems in China did not get this type of press. They happened fairly quietly.
The brewer arrived in 1981, at first limiting itself to importing beer and operating a Hong Kong brewery. It made its first major move on the mainland in 1995 with the acquisition of a brewery in Huizhou, Guangdong Province. This would become the company’s main hub in China. It also invested in a Shanghai brewery and began producing there in 1998. Unlike Danone, it did not really form a partnership on the mainland.
But like most international brewers, Carlsberg struggled in China. Small state-owned breweries already existed in almost every Chinese city. This legacy meant there was already a lot of beer infrastructure and that Chinese consumers were accustomed to very low-priced beer.
Later, foreign entrants had to contend with these small state-owned breweries being rolled up into state-owned giants. By the late 1990s, China was still an unprofitable beer market and large shares of it were held by state-owned Tsingtao Brewery, Beijing Yanjing Brewery and China Resources Snow Breweries.
In 1999, Carlsberg effectively gave up on China. It sold its Shanghai brewery and let its staff go. Sunny Wong, one of its key China sales people, left the country and returned to the U.K. More on him in a moment.
So Danone left China with a bang. Carlsberg left quietly. What happened to both after, though, is important.
Carlsberg returns to China and wins big
In 2002-2003, Carlsberg suddenly reappeared in China. It is not clear who made the decision or why. But it relaunched its China operations and took everyone by surprise with its strategy: It basically ignored the major cities and beer markets of Shanghai, Beijing and the east coast. Instead, it went far west, into China’s big backyard.
These western regions, including the provinces of Gansu, Qinghai, Xinjiang and Yunnan, remain relatively undeveloped today. Back in 2003, they formed a vast nowhere, by far the poorest part of China. There was little infrastructure and even less money.
Around 2002, Sunny Wong returned from the U.K. with what he would later describe as his “mission impossible” — to develop Carlsberg’s western China business in places he had never been before. He promptly flew to Yunnan and Tibet, and over the next couple years put together a flurry of joint ventures and development deals across the region.
By 2006, Carlsberg had over 20 breweries in western China. It also had become the market leader in all the western provinces in which it had invested. Its network would eventually expand to more than 39 breweries in central and western China. Today, Carlsberg has more than a 60% share of the market in western China, where beer consumption is growing at a 12% annual clip, compared with 4% to 5% nationally.
Carlsberg also expanded into Chongqing, in central China. For most companies, starting operations in Chongqing is considered moving inland. For Carlsberg, it was actually a move toward the east. In Yunnan, the company is building what will be its second largest brewery anywhere in the world.
Danone returns and starts to make inroads
The story for Danone has been quite different. Following their exit from the Wahaha deal, they met with multiple other potential partners. And following China’s 2008 powdered milk contamination scandals, Danone found itself well-positioned in the infant nutrition market in China. Food scandals and a general lack of trust in domestic brands have led to a massive increase in imports of foreign milk formula. More than 30% of baby formula is now purchased online, and it is common for vacationing Chinese to bring home suitcases full of powdered milk.
Danone and other foreign leaders like Mead Johnson and Nestle are now well-positioned in China. Things are starting to look better and better for Danone in China. The lesson being with 1.4 billion consumers, there is always another opportunity in China.
I think there are three important lessons in these two stories:
- Things change very fast in China. So there are always new opportunities. However, bear in mind that this works both ways. Success in China is also not necessarily forever.
- If you are partnering with local companies, you need something of value to add long-term. Think brands, technology, foreign customers and foreign products. And be conscious of when they are no longer going to be of as much value. Get a pre-nuptual agreement (to use the marriage metaphor).
- When going directly into China without a local partner, the key question is how to avoid or beat the competition. You need a powerful answer to this question. It is far better and cheaper to avoid this struggle altogether, if you can. Carlsberg did this by going west. Danone is doing this now by focusing on infant nutrition.
Thanks for reading, jeff
Re-printed with permission of Nikkei Asian Review (link here)
I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.