An alliance announced this morning (4 November) between PepsiCo and Tingyi Holding has been hailed by analysts as a smart move for both firms, and a signal that competition is set to intensify in China's soft drinks market.

Through the deal, Tingyi Holding has purchased PepsiCo's entire soft drinks bottling business in China in exchange for a 9.5% interest in its beverage unit. PepsiCo will have the option to increase this to 20% by 2015 on a fully-diluted basis.

DBS Vickers Hong Kong analyst Titus Wu analyst told Business Week that Tingyi's distribution network in China will benefit PepsiCo. "It's a smart deal for Pepsi because bottling plants are a non-core asset for them and trading the asset for a stake in Tingyi will benefit them in the long run," said Wu. "With Tingyi's vast distribution network in China, PepsiCo can go deeper across the country and make its products available in more smaller cities, where competitors may find it difficult to reach."

A consumer banker who declined to be identified, echoed the same sentiment to Reuters. "The key issue in China is distribution and Tingyi has one of the best distribution networks in China," he told the publication. "They have not only invested in distribution in tier-one cities, but also in tier-two and tier-three cities."

The US soft drinks firm will need the leg-up as it looks to narrow the gap with the number one player in the Chinese market, The Coca-Cola Co. According to Euromonitor, Coca-Cola accounted for a 16.8% share of the market in 2010. Tingyi ranked second with a 14.4% share, followed by Hangzhou Wahaha Group Co, which holds the third spot with 7.2% of the market.

PepsiCo, which was at number four with a 5.5% share, has continued to invest in the world's most populous nation. Last year, the company announced plans to invest $2.5bn in its food and drinks businesses in China over a three-year period, in addition to plans to open ten to 12 soft drinks plants in the country.

Oriental Patron Financial Group analyst Lawrence Chor described the alliance with Tingyi to Reuters as a "win-win deal for both parties". Chor said the deal will not only help PepsiCo expand its market share in China, but could also help Tingyi enlarge its product mix - Tingyi sells only diluted fruit juice products and has little exposure to the pure fruit juice sector.

Under the deal, Tingyi's beverage subsidiary, Tingyi-Asahi Beverages Holding Co Ltd (TAB), will become PepsiCo's franchise bottler in China. TAB will also begin co-branding its juice products under the Tropicana brand name under a license from PepsiCo, and will have access to the US soft drink giant's global beverage innovation pipeline.

The tie-up is one of only a few in which a Chinese company has acquired a foreign stake within its own borders and not the other way around, according to Reuters. But it is also unsurprising, given the number of companies seeking to seize market share and tap China's growing middle class, widening tastes and purchasing power.

However, attempts by overseas businesses to enter what is now a JPY332.7bn (US$52bn) soft drinks market, have not always been successful. In 2009, Coca-Cola had its bid for Huiyuan Juice blocked by regulators for competition reasons. However, Diageo succeeded where Coca-Cola failed, when it took control of Sichuan Shuijingfang Co, China's fourth-largest white spirits group, last year. Nestle is also said to be looking at a potential $2.6bn deal to buy confectioner Hsu Fu Chi International.

China's massive population has long been enticing to foreign companies. With 115 deals worth $11.3bn taking place last year alone, compared to 31 ten years ago, this only looks set to increase.