Fool's Eye View

[ March 27, 2000 ]

The Dragon Bites Back

By Alan Oscroft (TMFAlan)

Liverpool -- It's a land of opportunity, the place where the capitalist dreams of the new century will be fulfilled, and where countless thousands of Western investors will reap boundless rewards as its billion plus inhabitants turn their attentions towards Big Macs and Coke, telephones and cars, whisky and beer. Yes, we're talking about the Middle Kingdom; we're talking China.

China is often touted as the next big pie, our thumbs into which we should get stuck. And China will certainly become a very large and very important player on the world economic stage some time in the not-too-distant future. But to succeed in China, Western companies will have a lot of hard work to do and shouldn't expect expansion into China to be the same as opening up in a new out-of-town shopping centre.

And its isn't going to be all moonlight and roses for investors either, and anyone thinking of investing heavily in China should know the risks and take heed of warnings as they come.

And a warning came this week.

According to the Financial Times, Bass (LSE: BASS) is on the verge of pulling out of its joint venture aimed at selling premium priced lager to millions of thirsty Chinese. Established as a partnership with China's Ginsber not 5 years ago, the project looks like it has already failed. An executive at Ginsber, which is now expected to buy out Bass's 55% stake, is quoted as saying "We have not agreed on a price yet. But the British side is leaving. Most of them have already gone home."

But what went wrong? Well, it looks like a lot of things have gone wrong, and at least a couple of them might have been easily predicted by anyone who had had any experience of Asian countries. And there are lessons to be learned by other companies attempting to muscle in on growing overseas markets too.

The biggest problem, by far, was the price of the beer. Bass chose its premium Scottish lager brand, Tennents, as its play in the booze battle, and the retail price was a lot higher than that of competing local brands. An awful lot. A premium product then, and that requires wealthy or status-conscious consumers. To sell expensive stuff to wealthy consumers you need to do at least one of several things.

Firstly, a product can sell at a premium price if it is of significantly better quality than its competitors. Now, China already has approximately 850 established breweries, and one might expect that they are reasonably well in tune with local tastes. In fact, it would be rather arrogant to assume they produced rubbish and that a decent Western beer would clean up. But I wonder if any Bass executives bothered to travel around a bit and sample Chinese beers. I've drunk one or three myself, and I have to say that I'd probably choose Tsingtao over Tennents most days, particularly at such a price difference.

Another way to get the big bucks from those who have them is to sell fashionable premium brand products. But Tennents isn't a premium brand in China. And they didn't use the brand anyway. China isn't like Japan in the eighties, when Western brands were considered fashion essentials and people would buy top brand Scotch Whiskies simply because they were expensive. No, the big difference was that the eighties Japanese had money. Plenty of it.

Although China is growing economically, the majority of its inhabitants are still very poor, living in subsistence poverty. No premium brands for them, then.

So there's our first lesson....

• Lesson 1 -- "You can't make profits from folk who've got no money"

A number of other things went against Bass too. Expensive advertising in the coastal cities (which is where just about all of the country's wealth is to be found) singularly failed to convince people to fork out loads more of their yuan on trendy foreign beer. And those cities were a long way from the company's base in Jilin province in North Eastern China. Roads round those parts get flooded regularly and the rail freight journey to the Southern cities can take two months (which reminds me of a tale I heard a few years ago about Chinese rail travel, in which I was assured that Chinese railways operate two classes of carriage -- goods and cattle).

Culture was against them too, and attempts to sell things Scottish fell of deaf ears. "Scottish" might mean a lot to Western-conscious Japanese consumers, but to most Chinese it counts for naught, and playing bagpipes at them is far more likely to drive them away than have them come back for more.

So the next lesson is....

• Lesson 2 -- "The territory and culture count. A lot"

Now, were the indigenous breweries and sales channels going to sit back and watch Johnny Foreigner muscle in on their market? Do they want to let Western companies dominate their economies? Of course not, and protectionism against Bass and its beer grew steadily, with the stuff being excluded from many areas where local breweries dominated. And they used road blocks where necessary (which is a lesson that Bass could have learned from French lorry drivers).

A quick look at the economies of developed and developing Asian countries (and any other developing country too, I guess) does not show a preponderance of foreign companies. Fast food outlets might be springing up everywhere, but it's usually local companies (for local people) that dominate most sectors of the economies. Partial foreign ownership of local companies and joint ventures is usually the way to go, but it wasn't until the recent economic downturn in the region that foreign companies had much chance of buying significant shares of many Asian companies.

So that's the last lesson for Bass for today (but I guess they know them all now)....

• Lesson 3. "The locals will protect their turf".

The Asian region has a great future, and China will surely become an important economic power. But it won't grow any faster than is locally sustainable in the long term, and private investors probably shouldn't expect jam just yet.

All opinions welcome on the Fool's Eye View discussion board.

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