1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Shaun Rein
Shaun Rein
Articles (5983)  | Author's Website |

Chinese Companies Go Abroad --- Part 5: The Alcohol Sector

January 28, 2009 | About:

The following is part four of a ten part report evaluating the progress of key Chinese industries as they expand overseas. The report was published by the China Market Research Group as part of the CMR Business Quarterly.

CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's alcohol industry.

Reductions in the import tax on foreign-made alcohol from 65% to 14% in the wake of China's entry into the WTO, in combination with RMB appreciation have led to dramatic increase in imports of alcoholic beverages. Foreign drinks currently comprise 10% of the Chinese market from brands like Johnnie Walker (NYSE:DEO). Wine for instance is becoming more popular a drink during business meetings even if there is still low understanding of how to drink wine. For example, many businessmen will order $1000 USD + bottles of red wine, put in ice cubes, and drink as shots.

As the alcohol market gets increasingly competitive at home, many Chinese liquor companies are looking to expand their own presence overseas.

In interviews with industry leaders, a full 100% of larger respondents had already developed operations overseas. 40% of smaller industry leaders interviewed had either begun the process of moving abroad or planned to begin within the next five years.


In addition to seeking opportunities outside the increasingly competitive domestic market, Chinese alcohol companies are going abroad in order to build their brand image, from "simply a Chinese brand" to a "truly international brand". Many respondents are willing to sacrifice short term profits in order to build larger brand awareness and a profitable, international brand image. This is most true in the beer sector, as brands like Tsingtao and Snow compete with foreign makers like InBev (even though foreign firms like InBev (AHBIF.PK) hold stakes in some Chinese producers).

A majority of respondents going abroad also cited large overseas demand as a motivating factor, especially in overseas Chinese communities. Those companies making traditional Chinese alcoholic beverages such as baijiu (white wine) and huangjiu (yellow wine) in particular enjoy strong demand from Asian countries and can target overseas Chinese communities in particular without the investment in marketing and consumer education that would be needed elsewhere.

Methods of Expansion

The majority of companies going abroad have initialized or plan to begin their overseas development in Southeast Asia, where traditional Chinese alcohol already is very popular. Many also already export to the more developed markets of North America and Europe. The majority view gaining market share in developed markets as an important long term goal, as they consider presence there an opportunity to establish a very "premium" brand image and increase brand awareness worldwide.

All respondents plan to export branded products as their main means of developing their overseas presence. A minority of those companies already going abroad are also considering ODI and M&A. Tsingtao Beer, for example, is building a plant in Thailand in order to avoid import duties on beer.

Respondents also mention rising production costs at home due to RMB appreciation and inflation as a factor pushing them abroad; a minority of respondents have plans to establish production facilities in nearby low cost regions to avoid these issues. This shift awy from production facilities in China can explain to some degree why Guangdong's export sector has been hit hard in recent months -- the shift away from China was already occurring before the financial crisis hit due to rising costs and the push by the Chinese Government to transition from an export to a service oriented economy. It has accelerated because of the financial crisis but the trend was already obvious.


While demand in nearby Asian countries is encouraging a majority of respondents to expand overseas, cultural differences pose a significant challenge to many respondents as they look to enter non-Asian markets, particularly those whose major products are traditional Chinese alcohols. Liquors such as baijiu and huangjiu are very different in taste and smell from beverages traditionally consumed in the West and other parts of the world. For many potential target markets, respondents feel that increasing sales beyond overseas Chinese communities will involve significant outlay of resources for marketing and consumer education.

Respondents also face the challenge of getting products past international rules and regulations and operating in a new business environment. Most markets, for example, require that all ingredients used in alcohol production be clearly listed on packaging. Many Chinese liquor companies prefer not to reveal all ingredients for the sake of preserving the company's individuality, and the "secrecy of key ingredients", as one respondent explained. Even if they do publish all ingredients, customs duties in markets with huge potential demand prevent respondents from growing as quickly as they might like overseas.

While demand for comparatively cheap Chinese alcohol is huge in Russia, for example, customs duties of 280% limit nearly all import to smuggling.

Going Forward

While baijiu and huangjiu may not fly off the shelves worldwide in the near future, demand for traditional Chinese alcohols in neighboring countries will provide respondents with the opportunity to overcome other challenges described above. We believe Chinese wine is still far away from being accepted by Western palates. The most promising international growth will come from beer companies like Tsingtao and Snow.

Ultimately, marketing and consumer education as well as the inroads provided by overseas Chinese communities will make sale of traditional liquors in markets of different cultural backgrounds a very real opportunity.

CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.

Shaun Rein

China Market Research Group


About the author:

Shaun Rein

Shaun Rein is the Founder and Managing Director of the China Market Research Group (CMR). He is a columnist for BusinessWeek's Asia Insight column. He has been widely published, written about and quoted in newspapers worldwide including Forbes, the Harvard Business Review, Dow Jones' MarketWatch, TheStreet.com, Investor's Business Daily, IHT, Finance Asia, the Wall Street Journal, and Barron's. He is regularly interviewed for National Public Radio's Marketplace.

Visit Shaun Rein's Website

Rating: 3.7/5 (15 votes)


Please leave your comment:

Performances of the stocks mentioned by Shaun Rein

User Generated Screeners

mkettler0217hunting grounds
wqecapitalscreening value growth
wqecapitalscreening 1 value growth
buddyswintAquirer's Multiple
HOLKLSUTrump Trade - Late Stage
HOLKLSUTrump Trade Group-Late Stage
jlhpersonalJason's Greenblatt - Updated L
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat