How Tsingtao, CR Snow and the Other Beer SOEs Won Big in China (Pt 2 of 2)

In Part 1, I asked how Chinese State-owned beer companies won in a business with no real government interests. That’s an unusual outcome and I wanted to figure out how it happened.

My explanation is that Chinese beer SOEs won mostly by being early to market and by being better at acquiring small, legacy State-owned breweries. That got them to regional economies of scale first. And in beer, having a size advantage on your competitor is how you win over time.

Overall, I think Chinese beer is an interesting example of how SOEs can actually compete and win in commercial markets.

I argue this is also about the intersection of competitive advantage and the role of the State, a common situation in China, Saudi Arabia and other State capitalist systems. This intersection is something I spend a lot of time studying.

In the below chart, I define five common scenarios for competition vs. role of the State in consumer-facing industries. I place beer in a group I call “Giants & Dwarves”. For comparison, I place State-owned China Mobile in a group I call “Giants, Dwarves & the State”.

Main Charts.Consumer Book.12.35.14.simple - Copy

I wrote a little book about the above consumer pyramid (located here) so I’m not going to repeat it. But basically the trick is having a clear checklist for the role of the State. That is usually the part that gives people trouble. There is a lot of good thinking for competitive advantage but thinking on the role of the State tends to be fuzzy. My checklist for clarifying the role of the State begins with the following five questions:

Question 1: Is there a government-granted competitive advantage?

Are there licenses, patents, or other government factors seriously limiting competition? Basically, is there anything that creates a hard barrier to entry? For example, when Internet cafes first appeared in China only about 10 companies were allowed licenses to operate them. That was a government-granted competitive advantage (for a while).

In the case of beer, the answer here is no. No parties yet have any sort of hard government-granted competitive advantage or exclusivity.

Question 2: Are strategic SOEs competitors?

Are you trying to compete in mobile with China Mobile or in banking with ICBC? If so, you are more or less competing with an extension of the government. That tends to have a huge impact on industry structure. The State is this case is acting as both policeman and player.

In beer, there are no strategic SOEs. While Tsingtao and Yanjing are State-owned, they basically operate as commercial entities.

Question 3: Do the regulations and rules for the industry favor development? Do they favor specific parties?

In funeral services, I would argue the answers are no and no. The rules are seriously hindering development and we have seen little movement in this sector for thirty years. And I don’t see this changing anytime soon. I would say public hospitals have been similarly stagnant. Although this could be changing now.

For beer, the answers are yes and mostly no. Regulations in beer are pretty minimal and are the normal health and safety-type stuff. And any favoritism (certain brands like Tsingtao are considered somewhat important) is minimal.

Question 4: Are State-related assets decisive in competition?

This is where a lot of the action actually happens in State capitalism.

If you take a resource and asset view of competition (as opposed to an economic forces view), then State-related assets can be a big deal. Who gets government land, loans, legacy assets (factories, operating platforms, etc.), tax credits, etc. on their balance sheet at what price can make a big difference. They don’t even have to technically be owned if you have control or usage of them.

This question was important in taxi hailing apps (i.e., Didi Chuxing) in China early on. Getting access to taxis, which are State-owned assets, helped these taxi-hailing companies grow rapidly. Didi coordinated early on with local governments, got access to State-owned taxis and that is part of how they expanded to +350 cities in a couple years.

For beer, this has actually helped. State-related assets (legacy breweries) have been a big part of the consolidation of the industry.

Question 5: Are State-related capabilities decisive in competition?

I argue this is mostly where the Chinese beer industry has played out over the past twenty years. This is similar to Question #4 but is focused on softer capabilities (and not hard assets) such as technology transfer, government approvals, contracts from SOEs, etc. This can matter a lot in sectors such as construction and solar.

The ability to acquire historically State-owned and operated breweries is what got Tsingtao and Beijing Yanjing to economies of scale first. That plus being early movers. The State-related capability that mattered was an ability to do SOE M&A faster than private and / or foreign competitors. And that was decisive as the industry consolidated.

Basically this fifth factor is the thing that has mattered in this mostly commercial market. Note how different that is to the Didi vs. Uber China fight of 2016 (older article here). In that case, I argued:

  • Kuaidi-Didi won in taxi hailing (not ride-sharing) by getting access to State-related assets (the taxis, #4). That is how they got to 350 cities so quickly.
  • The next big market was p2p private ride sharing. But that depended more on various regulatory changes happening over time (#3). We are seeing this changing right now.

Anyways, that’s a bit of theory. But I find having specific checklists for competition vs. role of the State very important in many China industries. And Chinese beer is an interesting example of how SOEs can compete and win in commercial markets.

Thanks for reading. – jeff


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