Enter the dragon - can you gain a foothold?
With the Chinese soft drinks market dominated by Coke and Pepsi and local brands, what are the real chances of success for other international players? Will Clark of Atradius, one of the world's leading credit insurance companies, weighs up the odds.
China is the current business buzzword. Everybody is talking about it, and Western businesses are falling over themselves to make sure they don't miss out on the opportunities offered by the world's fastest-growing economy.
Twenty years ago, there were only eight Chinese factories producing a limited range of soft drinks for the whole country. Today, there are nearly 800 drinks manufacturers and the soft drinks sector has become one of China's most profitable industries. Although statistics vary, the average annual growth of the sector's total output over the past five years is put at around 20%.
As the Chinese economy booms and disposable income increases across all regions, soft drinks will become ever more popular - particularly the more healthy options such as bottled water, fruit and vegetable juices and flavoured teas.
"China is the most attractive market in the world," according to Paul Etchells, president of Coca-Cola in China. It's no wonder, then, that since Coca-Cola re-entered China in 1979, it has invested more than $1.2 billion in its China operations, and employs around 20,000 people - nearly all Chinese. It now has 34 bottling plants, 600 service centres and 1.1 million distributors around the country. It recently held a ceremony in Shanghai to commemorate the rolling out of the 100 billionth bottle of Coke in China.
PepsiCo runs a similar size operation in China, with 30 businesses throughout the country, including some joint venture projects. Between them, these two foreign giants account for the vast bulk of the nation's soft drinks market - with some statistics suggesting that they command over 70%.
Competition from domestic manufacturers, however, is heating up fast. Currently, there are 10 major Chinese drinks producers, including Wahaha, Huiyuan and Coconut Palm. The largest and most successful of these is the Wahaha Group, which owns more than 50 subsidiaries that are wholly controlled or held by shares in over 20 provinces and cities throughout China.
Using advanced technology, marketing and management expertise adopted from western countries, Wahaha has succeeded by focusing on rural areas - Coke and Pepsi have tended to focus on major cities - and refusing to compromise on the independence of its brand.
Between Coca-Cola, PepsiCo and the big domestic producers, the Chinese soft drinks market is - at the moment - fairly well sewn up. There's no doubt that opportunities for smaller foreign drinks producers are limited, and it is a very difficult and complicated market to crack.
However, there are still opportunities. The rural market, for example, is just beginning to change and has started to throw off the chains of poverty. Drinks other than the traditional Chinese tea will become more popular in the countryside over the next few years, as they represent a new way of life and go hand-in-hand with the embrace of capitalism. This could be a rich seam of opportunities for foreign drinks brands.
Local knowledge and an intricate network of contacts are essential to doing business in China. Indeed, building relationships - known as 'guanxi' (pronounced gwon-shee) - is the central tenet of successful trade in the country. It is critical, therefore, that you have some form of partnership arrangement right from the outset.
Probably the best route for a foreign SME drinks producer to follow would be the joint venture. This would enable you to tap into the domestic producer's existing network of distribution channels, manufacturing processes, bottling plants, sales outlets, ingredients suppliers, and all-important contacts. Also, there are still very strict regulations governing the import of food and drink products into China, so a JV would help a foreign company cope with these.
The main advantage of a JV is the local connection that it gives you, and the value of this cannot be underestimated. If you choose a partner carefully, work hard at developing a deep trust and respect between you, and you both understand the benefits that the JV can bring to each of you, then it will have every chance of succeeding.
Another possible route to market is licensing, where a local third party licensee produces your goods. The main issue surrounding this is, of course, protecting your intellectual property, and this can be a very real problem. The benefits of licensing are that you use the resources and contacts of the local licensee. It is a relatively straightforward and effective way to explore most new markets. But in China, the international laws governing intellectual property rights have not yet been implemented fully, and this leaves Western licensors extremely exposed.
This is not to say that licensing can never work in China. It can and it does for other sectors. What is important is that before you choose this route you must do your own detailed risk assessment, and base your decision around this.
In summary, the Chinese soft drinks industry is extremely difficult to break into. But times are a-changing in China - and at a phenomenal rate. For those smaller foreign companies that are prepared to do their research, develop their contacts and keep their finger on the pulse of the Chinese market, they will be in a strong position to identify any shifts in the market and quickly move in to fill a new niche as it starts to emerge.
For further information on Soft Drinks International, go to www.softdrinksjournal.com
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