Few markets have attracted the kind of attention being directed at China by the international drinks trade at present. Chris Brook-Carter reviews a recent survey by business analyst KPMG into the hopes and fears of the country's international consumer goods companies.

During the 1990s, as China began to open up commercially, multinational drinks groups poured into the country, convinced it was an untapped goldmine for anyone with the volumes to supply such a marketplace. The world's brewers were the most high profile victims in this wave of investors, as a lack of local knowledge, coupled with China's unique blend of red tape and political interference, took its toll, but they were not alone. Many companies were so badly burnt that they pulled out altogether.

But the arrival of China into the WTO in 2001 signalled a growing economic maturity that has increased investment opportunities, and, seemingly sparked a new round of acquisitions in the marketplace by the world's drinks groups.

A recent survey by the business consultancy company, KPMG, found that of 136 consumer companies that operated in, sourced from or were planning to operate in China, 73% believed that foreign direct investment would now increase. It currently stands at US$57 billion.

Encouragingly, the research showed that 93% of consumer businesses operating in China expect to be profitable in the next five years. More striking however is the fact that 70% feel they are breaking even or making profits right now.

David Matthews, head of drinks at KPMG in the UK, says: "This view from companies on the ground tells you everything you need to know about this booming consumer marketplace. These companies can feel the growing wave of consumer spending which is coming their way and are well placed to make the most of it."

And, when it came to predictions of growth in the coming year, the surveyed businesses are just as bullish. Of the businesses already in China, over one-third believe their business will grow at a rate of at least 30% next year, while 64% forecast growth in excess of 10%. What is less clear is how profitable these businesses will be.

When asked how they expected their margins to change in the next two years, 29% saw no change, 35% saw them reducing while 36% expected an increase. This may be due to an increasingly competitive landscape coupled with the expected increases in raw material prices - one of the side-effects of an economy that is continuing to grow at near double-digit rates.

Regardless of margins though, these consumer businesses realise that they are reaping the rewards of getting into China at an early stage. When asked what their best China-related decision had been, the top response was "deciding to enter the market early", closely followed by "focusing on growth and expansion".

However, there are still real risks involved. And these risks are often quite unique to China. "Looking beyond the trends and figures, if there is one truism about China it is that it is a unique business environment. It remains a communist country politically, but one with a dynamic economy, a combination no other country has ever achieved," KPMG's report says.

Interestingly, when asked to evaluate competitive threats, the surveyed companies saw local competitors posing an equal threat to that posed by other foreign companies and brands. Only 15% of these foreign companies doing business in China regard their local competitors as no threat whatsoever.

Matthews continues: "The figures on how much of a threat the Chinese businesses pose to the multinationals reflects a growing realisation that entering the Chinese market is no cake-walk. Some may have expected that local businesses would simply curl up and die once the large foreign firms rolled into town. This has most definitely not been the case. Admittedly, in certain sectors like fashion, the foreign product is king. In others such as consumable products however, local products are more than able to hold their own. The beer market serves as a good example of the difficulties facing foreign firms wanting to build a national brand. There is a different market leader in major Chinese cities such as Beijing, Shanghai, Nanjing and Guangzhou - and the local brands are very competitive."

He continued: "One further point of interest in the survey arose when businesses were asked what the biggest mistakes of companies like theirs had been in relation to the Chinese market. The single most popular response - just under a quarter of all responses - was that the potential of the Chinese market had been over-estimated. A further 16% felt that companies wrongly believed they would get rich quick."

However, along with the bullish outlook of future growth, there are clear signs that international companies are finally getting to grips with how best to enter and then deal with the Chinese market.

China has insisted on the joint venture/partnership structure for much of the time that Western investment has been permitted. In recent years, however, government insistence on JVs and partnerships has changed and joint ventures are rapidly falling out of favour as the preferred way of establishing a foothold in the Chinese markets.

Of those businesses from the survey that were already in China, 37% are in some form of JV. However, only 19% see it as the best way forward for their business. The preferred way forward is to be a Wholly Owned Foreign Enterprise (WOFE).

Different JVs succeed or fail for different reasons. However, common problems include a divergence of goals, disagreements on how to expand the business, and disputes over management style and roles. However, another well-publicised problem within JV agreements has been the difficulty that foreign entrant firms have in protecting their own IP. For example, direct copies of companies' products, logos and production processes have all come to light after foreign firms have entered into partnership with a local business.

Perhaps unsurprisingly therefore, IP was named as a key concern by 73% of respondents - well ahead of the problems around sourcing decent market information (57%), the repatriation of funds (53%) and import/export procedures (52%).

Summing up the IP concerns of many businesses in China, one president of an FMCG company told KPMG: "Every year 25% of our business is eaten away by counterfeits. In a fair playing field the government should take care of this."

One of the reasons often given for entering into a JV is that it gives instant access to local workforce and management. However, the report argued that availability of labour is now one of the areas of least concern for consumer market companies. "With employee attitudes and the ability to attract expatriates also rated as being of little concern, it becomes clear that the need to buy into an existing workforce is much diminished from what it was," KPMG says.

Mark Baillache, head of food manufacturing at KPMG, said: "Many businesses coming to China have had some pretty bad experiences when engaging in JVs. Successful JVs are the exception, rather than the rule. The two partners may have similar short-term aims but we have seen plenty of cases where one side's long-term aspirations were at odds with the other side's. If the ready-made workforce aspect of the JV - one of the perceived key benefits - is no longer that important, then the appeal of the JV approach will surely fade further."