Case Study on "Cooperative Interfirm Relationships"

Case Study 10 pages (2920 words) Sources: 10

[EXCERPT] . . . .

Lion Nathan

Relationships

The first relationship mentioned is the tie-up between Pabst and Zhujiang. In this deal, Pabst licensed Zhujiang to produce Pabst Blue Ribbon, its flagship brand, under license. This is a relational exchange, according to Arino, Torre & Ring (2001). The two companies have an ongoing relationship, based on Pabst providing the brand and Zhujiang providing the production and marketing. Pabst's brand is widely known and something of an icon in American brewing, giving it cachet in the Chinese market as a premium brand. Zhujiang's local production has a low cost, low shipping prices and no duties, all of which combine to allow the companies to bring this product to market at a competitive price vs. brands like Heineken and Corona that continue to produce overseas. Pabst is faced with a flat domestic market, and saw opportunity in China, but in order to dodge trade barriers wanted local production. For its part, Zhujiang had a strong local market, but needed a credible premium brand. Pabst has limited control, which is a weakness in the relationship because the company has little legal power in China. For its part, Zhujiang, is weak in brand development, something that necessitates seeking out a foreign brand.

The second relationship identified is between Asia Pacific Breweries and Shanghai Mila to develop Reeb. Unlike Pabst and Zhujiang, which is a licensing agreement, the relationship between APB and Mila is a partnership. APB brings expertise to the partnership, while Mila brings local brewing capacity, the brand and access to the Shanghai market. APB most likely wanted to try this type of arrangement to assess the market. With major brands like Heineken and Tiger in its stable, APB is a power in Southeast Asia, but had no access to or understanding of the Chinese market. Thus, it wanted to use Mila to get into the market and gain some expertise. For its part, Mila needed to boost its local brand, and the combination of capital and marketing expertise from APB allowed it to do just that. In this situation, APB has savvy with respect to more open markets like Singapore, but it needs to combine this with local knowledge that Mila has. For its part, Mila was likely undercapitalized. Both parties no doubt expected that at some point, the joint venture would produce Heineken and Tiger.

APB also entered into a three-way joint venture. Its partner was a Singaporean food company (APB is based in Singapore), and the local partner was Fujian Brewery. In this venture, APB brought Tiger to China, as well as capital to expand production capacity. The company then invested in an 80% stake in a brewery in Hainan. This venture is far from major markets, but was intended to increase total production capacity and perhaps project a luxury image, since Hainan is being developed as a high-end resort island.

The third relationship identified in the case is Beck's, which licensed to a local Shanghai producer. In this situation, Beck's brought the brand, which is famous around the world and matches the German heritage of Shanghai, while the local producer had production capacity and market access as assets. It is not easy for foreign firms to enter the Chinese market. Despite market reforms, China is still a Communist country and it is difficult to start a new business there free from government intervention, the exception being when there is a local Chinese partner to ensure that difficulties are minimal. This is why Becks wanted the deal, and presumably the local producer had excess capacity and needed a premium brand to broaden its portfolio.

The fourth relationship is between Foster's and Guangming, a brand from Wuhan. This was in the form of an acquisition. The assets and advantages were similar to the other market entries. Fosters brought capital and a marketable premium brand to the table, while Guangming brought a local brand, market access and production capacity. In addition, Guangming had a presence outside of Shanghai as well, something some of the other foreign market entry partners did not have. Fosters likely chose acquisition instead of partnership because the asking price for Guangming was reasonable, and because it wanted more control over the situation. Guangming likely retained local management, and Fosters likely left the company alone with respect to its local brands, another benefit for Guangming.

Foster's also bought breweries near Beijing in order to build capacity in the wealthy northeast of the country. Foster's took a more collaborative approach to building its presence in China, focusing on the idea of regional production and distribution hubs. This led to some of its joint ventures building greenfield breweries in a number of different cities. Foster's, therefore, continued to bring capital to the partnerships, whereas the local partners brought local brands, and the local market expertise and connections that allowed them to build these breweries and build distribution networks from scratch in multiple locations.

ASIMCO was owned in part by Miller (60% stake) and owned the Five Star Brewery Group. This deal was essentially an acquisition, albeit a majority stake rather than an outright purchase. For Miller, this deal gave it production capacity, a local brand and market access. For ASIMCO, it is likely that Miller's capital was valuable, since it trailed Yanjing in the local market. In addition, ASIMCO would gain a premium brand and some Western management as well. For Miller, access to the Chinese market, especially with a base as significant as Beijing, was important.

Asahi entered the market via the Beijing Zhongce Brewery, like Miller utilizing a majority stake. Asahi brought a strong brand, capital and Japanese managerial expertise, again in exchange for distribution networks, a local brand and market access. Asahi made a total of five deals. This is important because transportation networks in China are less than ideal (or were at the time). With these wholly-owned subsidiaries, Asahi underestimated how much managerial expertise they would have to provide, and the ventures struggled. The company erred in thinking that production capacity was all that would be needed to bring its flagship brand successfully to the Chinese market.

Another type of deal was that signed by Kirin with the Chinese General Association of Light Industry. This deal would be a technology transfer agreement, with Kirin exchanging technical assistance in both brewing and bottling in exchange for support in finding joint ventures across the country. This approach is different from that of other first world brewers, in that Kirin saw its primary asset as being its technical knowledge, rather that its capital. Kirin was focused on exchanging intellectual capital, something that benefited the Chinese industry broadly. The CGALI benefited from this knowledge, which could also be applied to other industries. The asset that CGALI brought to this deal was its connections with local producers, something Kirin hoped to leverage in order to gain better market access.

Anheuser-Busch took a 5% stake in Tsingtao, a major Chinese brand, and intended to increase its stake. By taking a minority stake, AB wanted to build on that stake with a relationship. This fell apart because AB took at 80% stake in a brewer in Wuhan. That deal gave AB full control over the production facility, and support of the government since it bought the brewery from the local government. The location was strategic, and fit with AB's plan to become a national brand. With support of the government, the deal gave AB substantial market access as well. For the Wuhan government, there is some prestige in having AB on board in the city, but also the government benefits in terms of jobs as well, and maximizing return on an otherwise underperforming asset.

San Miguel is also active in the Chinese market. Its mode of market entry was different from the other companies, in that it hired production capacity from a brewery in Guangdong initially (the company was already a player in Hong Kong at that point). The company had more control over many elements of the business with this arrangement, and did not have to deal with local ownership on many key issues. The downside is that while San Miguel had a brand, it needed to build out every other asset itself. It had the ability, however, with its knowledge of the local culture, to build good relations with the local government that made its transition to the Guangdong market easier. The company forged unique arrangement with wholesalers, for example using them just for delivery while handling all of its own marketing, an approach that was not taken by too many other of the foreign brewers in the Chinese market.

Lastly, New Zealand's Lion Nathan wanted to enter the Chinese market. It sought joint ventures, most likely for the same reasons as most of the other foreign brewers had done so. Most of the potential partners, however, were inappropriate. They wanted Lion Nathan's capital to eliminate their debt, or to create jobs for the local government, but were either unwilling or unable to offer much in exchange… READ MORE

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