CHINA: Comment - SAB: China almost in its hand
SAB has taken control of a joint venture in Sichuan, becoming China's second largest brewer. The consolidating Chinese beer market could be a major opportunity for SAB. Although the brewer will have to fight off serious competition from emerging domestic beer giants such as Tsingtao, SAB's strong experience both in China and other developing beer markets should improve its chances.
South African Breweries has signed a deal to set up a brewing venture in China's Sichuan province. The joint venture, to be called China Resources (Sichuan) Blue Sword Breweries, will own 12 breweries and will produce 6m hectolitres (hl) of beer per year. It will be 62% owned by SAB, with the rest held by local brewer Blue Sword. SAB will become the second-largest brewer in China after Tsingtao Brewery.
China's beer market is huge and growing. It is already second in volume only to the US. In value terms, Datamonitor expects the market to grow from US$5.0 billion in 2000 to US$6.2 billion in 2005 (an annual growth rate of 4.3%) - much higher than in developed markets. However, at present, the industry is highly fragmented. 80% of China's brewers produce less than 500,000 hl of beer a year each.
As such, there are clearly opportunities for western firms such as SAB, which has invested heavily in China over the last few years. Sichuan is a particularly good geography to buy in, since beer consumption is just nine litres a year (compared with the national average of 18), and is also experiencing strong population growth.
Yet while the opportunities are strong, there is strong competition.
Tsingtao, as well as the two other leading domestic brewers, Huarun Beer and Beijing Yanjing Beer Group, will put up fierce opposition. All have been making significant acquisitions recently, trying to establish their strength in a consolidated market.
As a company that is investing in China for the long haul and has strong experience operating in developing beer markets, SAB is certainly better placed to succeed in the territory than the dozens of foreign brewers (from Carlsberg to Budweiser) who rushed into China in the early 1990s only to leave with their tails between their legs. But the domestic dragons will still put up a fierce fight.
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