Tsingtao set to breach world's top 10 brewers in two years
The company has said it intends to claim a place among the world's top 10 brewers. And, it is already well into an aggressive programme of acquisitions that could make it happen.
There is a platform to build on. The brewery has easily the most prominent of the tiny handful of Chinese trademarks to enjoy any recognition outside China at all, and on the strength of this was the first mainland Chinese company to seek and obtain a listing on the Hong Kong stock exchange.
But although overseas Tsingtao has been by far the best known and biggest selling Chinese beer for many years, until very recently it enjoyed nothing like the same level of recognition at home.
With a population of more than 1.2 billion people, China is a massive but diffuse market. It currently ranks second only to the US as the world's largest consumer of beer (17 billion litres per year) and it is generally believed that the US will be reduced to playing second fiddle in five years.
As little as five years ago however, non-Chinese beer drinkers familiar only with Tsingtao were routinely surprised on visits to China to find their chosen brew was often simply not on offer. During the 1980s and early 1990s it enjoyed a mere 3% of the total market.
The reasons for this were largely logistical. Thanks to the difficulties of distribution in a country with a road and rail system that is, to put it politely, "challenged", most towns have had breweries of their own, and local brands have held local sway. China has more than 500 individual brands.
Over the past five years Tsingtao has more than doubled its domestic market share to around 7%
Most of these have not been particularly good, but they have been cheap, and in China this is important, as the 60 or so foreign brewers who charged into China in the 1990s with "premium products" have since discovered to their cost - and Tsingtao's gain. Patience is a Chinese virtue, and the company has waited for a long time for the opportunities on which it is now capitalising.
Over the past five years Tsingtao has more than doubled its domestic market share to around 7% and has begun to flex its muscles overseas. Moves are already afoot to establish Tsingtao brewing bases in both Malaysia and South Africa to service the local markets.
In China itself, recent growth has been dramatic. During the 1990s it acquired no fewer than 29 breweries, 15 of them in 1999 alone, and a further four in 2000. The buying spree continues.
One reason Tsingtao has had these opportunities is that the majority of foreign brewers have misjudged the market. Incomes in many parts of China are rising, and a willingness on the part of the consumer to pay a premium for foreign branded products is well established.
Unfortunately this does not appear to apply to beer. The foreign brewers, including Foster's which led the charge and Carlsberg which is a major player in all the Far Eastern markets, have discovered belatedly that while the Chinese will pay handsomely for Bordeaux wines and deluxe spirits they have only one expectation of beer. It has to be cheap.
As a result many brewers who have already invested heavily are cutting their losses and selling out, which is the point at which Tsingtao moves in.
The company is now by far the country's biggest brewer, making around 1.5m tonnes per year, almost 400,000 tonnes more than its nearest competitor. However, with substantially less than 10% of the national market, soaring overheads and profits lagging far behind sales, the wisdom of the rapid expansion programme remains somewhat open to question.
The banks and investors however do seem to be willing to back Tsingtao chairman Li Guirong's masterplan. Li claims that the company's debt burden is only around 54% and the company is currently (February) marketing a share offer expected to raise about 800m renminbi (RMB) (£67.2m) for further strategic investment.
In support of this offer the company has issued net profit forecasts of RMB97.58m for 2000 and a surprising RMB170.51m for 2001. The audited net profit for 1999 was RMB89.47m.
Turnover projections also seem to be optimistic. The audited figure for 1999 was RMB2.44 billion but the company is projecting RMB3.9 billion for 2000 and RMB5.9 billion for 2001.
However, there are audits and audits to contend with. All those figures, as the company is obliged to acknowledge to would be investors, are based on "mainland accounting standards and regulations". These are not the same as international standards - on the basis of which the audited figure for 1999 comes in at RMB40.66m, well under half the Chinese mainland estimate. Viewed from this perspective the forecasts shrink accordingly.
Nevertheless sentiment in Hong Kong and China is bullish, and analysts believe the company is likely to raise the money. Around half the proceeds from the offer are intended to pay for new acquisitions and renovations of the 30 existing facilities.
The jury is still out on whether, in the long term, Tsingtao's management structure will prove equal to the demands of managing more than its present 29 subsidiaries. But the company is undoubtedly growing, and if its performance argues an assured grip of the China market, its acquisitions underline the failure of most foreign brewing concerns to get properly to grips with it.
Beating back the foreign invasion
It is also in a position to brew high quality beer with state of the art equipment paid for by its foreign competitors
In 1999, when a bruised Foster's pulled out of its brewery holdings in Zhuhai in the increasingly affluent south, Tsingtao acquired a 60% stake in the venture for RMB36m - much less than Foster's initial investment of $5.5m.
At around the same time Tsingtao bought a 75% interest in another southern brewery from Canadian stakeholder EVG Enterprises and acquired a 95% interest in a brewery serving China's largest city, Shanghai, from Philippines-based Asia Breweries International.
Denmark's Carlsberg was the next international to throw in the towel. In August last year (2000) Tsingtao acquired a 75% stake in the hi tech Carlsbrew Shanghai brewery from Carlsberg Hong Kong, which was rumoured to be running up losses in the region of RMB100m per year. The brewery's registered assets were valued at $66m. Tsingtao paid $18.1m for a controlling interest.
The next obvious move was to take on its arch-rival in the country's capital. China's second biggest brewer, albeit an increasingly distant second, is Beijing's Yanjing Beer, and with the acquisition of a 63% stake in Five Star, a brewery in which US brewer Miller was one of a group of investors, Tsingtao announced its arrival as a contender in the city.
The company is now strongly positioned in the country's three biggest markets - Beijing, Shanghai and Guangzhou - and with a steadily expanding presence in a growing number of secondary locations. It is also in a position to brew high quality beer with state of the art equipment paid for by its foreign competitors. Game, set and match.
A foreign future
Its international expansion plans could eventually place the company at number two
Although Tsingtao insists on a controlling interest in its brewing ventures analysts point out that it has the flexibility to enter into co-operative ventures with foreign concerns. A successful example is a joint venture brewery in Shenzen near Hong Kong, in which the company has a 51% interest, with Japan's Asahi.
The strategy in most markets so far has been to stick with existing brands or develop new ones rather than make Tsingtao Beer in a variety of locations, although the flagship brand is used in Shanghai and Shenzen. The original version however is made only in Qingdao, and some beer lovers have complained that there is a noticeable difference between the original and its offspring.
In the short term Tsingtao's Li says the company's ambition is to increase its market share in China by 3% within the next two years. That would give it 10% of the pie, and place it among the world's top 10 brewers. Peng Zuoyi, executive manager of the Tsingtao Beer Group, goes further and is on the record as saying that its international expansion plans could eventually place the company at number two.
Time will tell, but it certainly looks as though Tsingtao will hit its first target in time to celebrate its centenary in 2003.
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