E-Malt.com News article: 2002

China: Lion Nathan's $10 million acquisition of its third brewery in China earlier this month confirms its plans to expand in the world's largest beer market despite $230 million of cumulative losses, according to The Courier Mail News.

The acquisition which will make the Australian brewing force, Lion Nathan, the largest brewer in the town of Changzhou, 90km west of Nanjing, comes as the company has stemmed its losses on its China beer business and is on a focused expansion strategy for the country.

Situated between Nanjing and its existing brewery in Wuxi, the Hua Xia brewery in Changzhou is Lion's latest move in a strategy of expanding its foothold in the rich Yangtze River Delta region. It will not only give Lion access to some 22 million litres of capacity in the city, where the brewery markets the Linkman beer, but will make it easier to sell its other China brands in the region.

Lion's China business broke even for the first time on a cash basis in its financial year to the end of September 2003 and is expected to grow by another 30 per cent in 2004, on the way to overtaking production in Lion's New Zealand home.

While serious profits are still a long way off, the China business is on the look out for more acquisitions in the Yangtze River Delta area and is eyeing the high level alliances being struck with the fast moving consolidation of the Chinese beer market.

"We have definitely turned it around," says Lion Nathan's managing director, China operations, David Carter, who took on the job in August 2000 when losses were running at some $25 million a year. "The (production) volumes could be bigger than New Zealand very quickly."

Revenues from Lion's China business were up by 30 % to $75 million for the year to September 30, 2003, while losses before interest and tax were down to $6.2 million from $14.7 million in 2002 and $19.3 million in 2001. In Chinese currency, the losses more than halved over the period while the business broke even on a cash-flow basis (before depreciation allowances).

Even with the latest buy, the goal for 2004 is to break even on an EBITDA basis.

Lion Nathan bought a brewery in Wuxi, 120km northeast of Shanghai in 1994 after a two-year search for an acquisition in China.

Carter describes it as "the best of a bad bunch" of state-owned breweries on the market at the time, but it did give Lion Nathan access to the biggest beer brand in the city, called Taihushui.

Lion upgraded Wuxi, doubling its capacity to some 120 million litres a year. It also spent $205 million building a greenfields brewery in an industrial park in Suzhou, 90km west of Shanghai, which produced its first beer in February 1998.

But the business suffered increasing losses. In August 2000, Lion Nathan took the unusual decision to appoint two people as joint managing directors of the China business - Carter, who had been in China since 1997 setting up the Suzhou brewery, and James Brindley, the finance director of the China operations who had come to the country in the same year.

At the same time, it wrote down the value of its Chinese assets by more than $120 million to $150 million. "We went downhill fast," Carter recalls. "We had to move quickly."

One of their first moves was to eliminate all bar the top two expatriate positions. This not only cut out the high cost of paying expats to work in Shanghai, it also gave the Chinese staff more ownership of the business.

Instead of being told by Western managers how Lion Nathan sold beer in Australia and New Zealand, the locals were encouraged to make their own suggestions about how to grow the business in the cut-throat China market. "We are now running the business in a more Chinese way," Carter says.

Lion also introduced a new product - a lighter version of Taihushui, a lager beer which was lighter in taste and colour. "It went through the roof," Carter recalls. "People went crazy for the taste. We couldn't believe it."

Lion Nathan's production volumes in China have increased at 30 % a year for the past three years.

With a new, state-of-the-art brewery in Suzhou, contract brewing for other foreign companies has become a good business for the China operations. In 1999, it won the right to make and sell Beck's beers in China and recently won the licence to make Coors.

In January this year, Lion Nathan's Japanese shareholder, Kirin, handed over the production and sales of its beers in China to the Lion Nathan team. "It was a huge show of confidence in us," Carter says.

Lion Nathan is now looking for more acquisitions like the Changzhou deal which will give it access to more markets in the region. It is focusing its sites on the Yangtze River Delta -- in Shanghai and Jaingsu province to the north and Zhejiang province to the south. Buying a local brewery is as much about buying access to the local beer market which is often fiercely protected by local business and political interests.

Carter tells the story of one of his salesmen venturing into a new town. He was arrested by the police and driven to the city limits to protect the local beer interests.

Once into a market with the local brand, the company can then introduce its existing beer range. Carter sees the Chinese beer market, which has just overtaken the US as the largest in the world with sales of some 20 billion litres a year, worth about $8.5 billion, as set for further consolidation.

The number of brewing companies in China has come down from about 900 in 1997 to around 400 and Carter believes it will eventually merge into 5 to 6 big groups. Recent times have seen alliances between the big Chinese brewers and the international players.

The world's largest brewer, Anheuser Busch, is increasing its stake in Tsingtao, China's largest brewer to 27 %. South African Breweries is now the second largest beer maker in China after making a deal with its Sichuan-based partner, China Resources.

Europe's largest brewer, Scottish & Newcastle, announced this month that it would buy a 19.5 % stake in Chongqing Brewery for $US63 million ($84.5 million) while the Belgian company, Interbrew, is set to become the fourth largest brewer in China when it takes over the Chinese operations of Malaysian beer company Lion.

The Chinese market is still a risky one compared to Australia where Lion Nathan is one of only two major players. But the market is expanding as people's incomes rise and they eat out more and drinking tastes mature. Lion wants to continue to expand volumes and seek the market dominance that brings more control over pricing. Whether Lion Nathan eventually gets to play in the bigger stakes game in the Chinese beer market might depend on whether Carter and Brindley can sell enough beer to convince the Lion Nathan board and shareholders that the China business is worth another great leap forward.


04 January, 2004