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The company eventually bought a majority stake in the Wuxi Brewery
outside Shanghai. In this situation, the company took the capacity and built a local brand with it, using the local connections in distribution and marketing. The company then built a brewery in Suzhou, leveraging the ability of the landlord to deal with the finer points of Chinese bureaucracy. With this brewery, Lion Nathan had full autonomy, something that the company thought was important for strategic reasons. It had market access at this point, so had less need for a Chinese strategic partner; it made more sense to go solo having established itself. This subsidiary had capacity, but lacked an international brand (Lion Nathan's biggest brand being the relatively obscure Steinlager. Normally foreign firms entering the Chinese market brought at least one premium international brand with them.
2. There are a few different types of partnerships that Lion Nathan could pursue to help it gain traction in the Chinese market. The most obvious choice of a partner is a bottler. Bottlers already have the capacity to bottle beer, as they bottle non-alcoholic beverages or something alcoholic drinks like baijiu. Bottlers in small countries frequently double as breweries, though in larger economies this is not a normal relationship. However, the local governments may support their bottlers getting into the beer business because it would make the bottlers more profitable, and create jobs, especially if the entity sold its beer in another province.
A second natural partnership possibility is with distributors. These need not be beverage distributors, but it would help if they were. Distribution in China is one of the biggest challenges in the market. There are tens of thousands of points of sale in any given city. Every block will have at least one small mom-and-pop shop that sells beer, cigarettes and snacks. These stores focus on budget brands, but this is a large segment of the market. For a foreign firm without a local brewing partner, this is also the most difficult segment to reach. Thus, partnership with distributors is important.
In addition, Lion Nathan would need to contend with building share for premium brands, which means selling high end grocers, bars, KTVs and restaurants. The company will be competing against more established brands for placement in these locations, especially since it lacks a serious international brand. No offense to Rheinbeck, but it does not have the high-end global recognition of Corona, Heineken or even Budweiser. In order to get premium treatment from the limited number of locations that will sell premium and super premium beer, Lion Nathan will need an exceptionally strong distribution partner. Thus, partnership with an established beer distributor on a brewing venture has a fairly strong chance of success, even without an established brand.
Another type of partnership is predicated on the fact that Lion Nathan already has some production capacity in the country. There are a number of key suppliers to the industry, including malt and hop suppliers. Most of the ingredients in Chinese beer are sourced domestically, hops from Xinjiang in the far west of the country and malt from Heilongjiang in the north. While it is important to have good relationships with these suppliers, given that there are often scarcities of these products, the agricultural cooperatives charged with running these industries bring little to the table. Worse, the company would not be able to access ingredients on the open market, and could end up with a cost disadvantage.
A fourth type of joint venture would be with a local government. Governments in China engage in significant competition with one another for foreign investment, so there may be opportunity. The biggest challenge in going outside the Yangtze delta region is that Shanghai's region is surrounded by mountains. Combined with mediocre transportation infrastructure, Lion Nathan would need a partner on the east side of those mountains. These are already wealthy states, perhaps less likely to need Lion Nathan's business. There may, however, be some support at the prefecture level. That said, local governments bring little to the table other than their ability to facilitate the growth of the brewery without much red tape. As partner, however, they could become a major problem if they did not like what Lion Nathan was doing. Also, China is moving towards less government involvement in markets, not more.
3. The Chinese market represents a massive opportunity. As noted, it is like 20 markets of 60 million people each. The geographic region where Lion Nathan operates is one of the richest in the country, with cities like Shanghai, Suzhou, Hangzhou, Wuxi, Ningbo and Nanjing all most the wealthiest in China. It is recommended therefore that Lion Nathan continue to focus on China, in particular the Yangtze delta area in and around Shanghai.
There are considerable barriers to entry into the Chinese market, so shipping from outside is not a viable option. The best choice is to produce locally. The Suzhou brewery is a good starting point, but in order to truly develop a strong regional brand, Lion Nathan needs to have substantial brewing capacity, just to reach its target market. As a result, the company should look for partners in other cities in the area. These partners can help Lion Nathan with market access, in particular with marketing, distribution and the cutting of China's red tape. While Suzhou permitted a wholly-owned subsidiary, this situation is not likely to take place elsewhere. It is recommended that Lion Nathan buy a brewery because other partners are unsuitable. A distributor or a bottler would be the most likely partner, but there are no distributors that are large enough to cover the entire region. Lion Nathan already knows how to bottle beer, so there is some question as to what, precisely, a local bottler would bring to the table. Any form of strategic partnership needs both parties to bring assets of value to the agreement, in order for the partnership to work at its best.
Establishing a partner with a Chinese brewer offers several advantages. The first is that these brewers understand how the Chinese markets work. Brewers in this region are familiar with the history of culture of the region, giving them some cultural competency that a partner from another region in China would not have. In addition, because every major city in China had a brewery during the more serious Communist days, there remain a large number of regional breweries on the market. An example would be Qiandaohu in Hangzhou, which is a couple hours outside of Shanghai, and a major city in its own right. There are multiple opportunities for Lion Nathan to find the right partner, or multiple partners in multiple cities.
Lion Nathan is seeking to develop a premium brand, and if it acquires a local brewery will have some basic budget brands. The company should therefore ensure that it has a mainstream brand. It is important that Lion Nathan has a full lineup of beers in the region. Creating a new brand will give it a full lineup, something that will help it achieve greater distribution when it begins to sell this beer in other locations in the region. In addition, this is the largest and fastest-growing segment of the market. This is where the market share is, if not the prestige. As such, Lion Nathan by focusing on the mainstream market would actually be tackling a market that other foreign producers have essentially left alone.
Lastly, it is recommended that Lion Nathan leverage its capital in negotiations with the local partners. Capital and western management are the two most important assets that it brings to the table, so control over the ventures is important. It is not uncommon for a foreign brewer to take a majority stake in a local brewer, and that should therefore be the primary means of expansion in eastern China for Lion Nathan.
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