Problems Facing Fosters Brewing Group in China in the 1990s - Case Study Example

Problems Facing Foster’s Brewing Group in China in 1990s Name: Institution: Problems Facing Foster’s Brewing Group in China in 1990s The case study discusses some of the challenges facing Foster’s Brewing Group in China in 1990s. In particular, the study explores factors that lured the company into the Chinese market, as well as some of the factors that should have alerted the company of potential risks in establishing business in the country. Other issues that the case study examines include entry modes the firm used to enter the market, reasons as to why it failed to use international breweries that had previously made the company’s brands successful in foreign markets, and some of the characteristics the company should have looked for in entering into joint ventures with local partner companies. Factors that Attracted Foster’s Brewing Group into Chinese market One of the most important factors that attract foreign companies into the Chinese market includes the large population of china. By the time Foster’s Brewing Group entered the Chinese market, China had one of the largest and fastest growing population. By 1988, China’s population had reached as high as 1.284 billion, and even though the government established measures to slow down the growth rates, the 1990 census predicted the population to expand to hit 1.3 billion people in 2000 (Benewick & Wingrove, 1999, p.189). With the country having a fast growing middle class population as well as urban population, the company prospected great demand for its products. China’s major regions, such as Beijing, shanghai, and Guangzhou, experienced an increasing population accounting for about six percent of China’s population. This indicated an existence of a steady market for the company products. The high population further guaranteed the company of low cost of operation due availability of cheap labor from the growing population. The large population of consumers lured not only Foster’s Brewing Group, but also many other brewing companies, which entered the Chinese market. Another important factor that influenced Foster’s Brewing Group into the Chinese market involved the high fragmented beer market that existed in the country. In the 1990’s, the Chinese beer market was still dominated by local companies which did not adequately satisfy the growing demand at national level. This presented foreign companies, such as the Foster’s with a good opportunity to enter the market at a national level. In response to the low market share, Foster decided to establish its breweries in the Chinese major towns in order to serve the needs of the growing Chinese population. With Chinese people having a long history of alcohol consumption, especially those in the countryside, the culture presented a good ground for introduction of more strong brands compared to the local brews. The low beer consumption per capita among the Chinese people further provided the company with an insight of the potential of the China market contributing to its decision to venture and exploit the potentially growing market (Ahlstrom & Bruton 2009, p.189). Unlike in mature markets where consolidation had resulted into a few companies dominating the market, the Chinese highly fragmented market presented a good opportunity for foreign companies to invest and prosper. Moreover, the steadily growing Chinese economy also greatly influenced Foster’s Brewing Group to venture into the Chinese market. At the time Foster entered into the market, China’s economy was experiencing a tremendous growth, which led to reduction of poverty among the Chinese people. Notably, China experienced a reduction of poverty from 53% to about 10% in the period between 1981 and 2004. The growth, poverty reduction, and the rise of China’s middle class played a critical role in fostering a fast growing beer market, which attracted attention of Foster’s Brewing Group management. The growing China’s middle class due to economic growth presented a potential market growth for beer as the increase in income posed an opportunity for spending more on beer consumption. As the Chinese people become richer and the greater dispersion of income, it was highly prospected that beer consumption would expand significantly, particularly in the urban regions hence the expected boom in the beer market in following years. Another factor that may have attracted the company to venture into the market revolved around policies that favored investment by foreign companies into the market. These policies included the decision by Chinese government to review its trade regulations to allow business globalization. Chinese entry into the World Trade Organization necessitated removal of restrictions on entry of foreign companies into the local market. In addition, the Chinese government offered attractive incentives to foreign investors, a strategy aimed fostering development of the under developed regions amidst its economic restructuring. Red Flags for Possible Danger in the Chinese Market In early 1990, many companies had sought to enter the Chinese market, including some of the world leading brewing companies such as Anheuser-Busch, SABMiller, and Carlsberg, among other major firms. Conducive environment for investors in the local beer market had caught the interest of many brewing companies, especially China’s growing economy and the low alcohol consumption per capita. Many of these companies sought to enter the Chinese market by making presence at the national level, which experienced limited exploitation from the domestic companies. Each of the new entrants in Chinese market hoped and believed that their economies of scale and superior technology would enable them dominate the market quickly. With all these companies showing determination to dominate the Chinese beer market, Foster’s Brewing Company should have been aware of the pending stiff competition from both the local firms and the already well-established companies. Consideration of the potential competition in the Chinese beer market would have enabled the company’s management to formulate a strategic approach to the Chinese market to gain a competitive edge in the market over other companies. In addition, the company should have put in mind that, despite the government‘s incentives to encourage foreign investors, china was still a communist country and would do anything to protect domestic companies from pressures by foreign investors. Following the anticipated increased competition in the Chinese market, Foster’s Brewing should have taken caution in that the Chinese government in future could undertake policies to protect domestic companies, and therefore approach the market cautiously. The company should have anticipated the implication of cultural diversity on its entry in the Chinese market. The Chinese people have a strong sense of patriotism reflected in the loyalty in local brands. This made local companies succeed in the market, as the Chinese people remain adamant to receive foreign products with a positive attitude. This later became a reality with time as the company’s brands faced stiff competition from local brands. In addition, the sensitivity in price in the Chinese market would have alerted Foster Brewing Group on future difficulty in selling its expensive brands in the Chinese market (Heracleous, 2001, p.39). Coming in terms with this problem, the company would have considered a less capital oriented method of entry other than high capital that the company invested in buying companies. The capital injected by the company in its investment in china compelled the company to sell its brands expensively in order to make profits. Due to competition from the lowly priced local brands, the company resulted in selling its product at a loss hence its eminent difficult to survive in the Chinese market flooded with numerous beer brands. Another eminent problem that should have alerted Foster’s Brewing Group on the danger in the Chinese market involved the underdeveloped distribution systems inherent in such a big state. The distribution system at the time of entry involved individuals, ranging from small stores or restaurant that purchased brands directly from companies. China lacked mass distribution channels, which would downplay the company’s effort in succeeding in the Chinese market. Poor roads and infrastructure in some of the developing parts of the country further posed a greater challenge for mass production. This inherent problem should have alerted Foster Brewing Group on the potential challenges for mass production in the Chinese and enable formulation of responsive strategies, such as supplying its brands to only the major cities and lay less focus on the small stores highly dominated by the local brands. According to Heracleous (2001), the distribution problems faced by many foreign companies resulted from local protectionism such as denial for licenses to supply bottled beer in some cities. Proper market analysis of the Chinese market would have played a critical role in identifying such restrictions that would hinder the success of the company in country. Probably, consideration of the above inherent problems likely to be faced by brewing companies entering the Chinese beer market would have played a critical role in the strategies applied by Foster Brewing Group. The alerts could have prepared the company’s management to lay proper strategies to counter some of the challenges or consider changing entry method for sustainability in the challenging beer industry. Foster’s mode of entry into Chinese market Foster’s Brewing Group adopted a number of methods to enter the Chinese market, with the initial main objective being to establish brewery in China’s main regions, namely Guangdong, Shanghai, and Beijing. The initial entry strategy involved acquisition in which the company sought to purchase regional breweries and transform them into its own production facilities. In 1993, Foster entered into a joint venture with Shanghai brewery, and later increased its ownership to convert it into a fully owned subsidiary. The joint venture strategy played a critical role in reducing the initial capital investment and business risk. The exportation strategy, which normally presents the most convenient method for business expansion into foreign markets, proved inapplicable for the company due to the high import tax rates in China and the high costs of production in Australia. In addition, the joint venture strategy further gave the company an opportunity to learn the implications of Chinese culture on foreign business. Initially, this strategy was successful for company due to the ability to benefit from the long built local companies’ reputation, as well as other benefits enjoyed by the domestic companies. Despite the great benefits associated with Foster’s joint venture with Shanghai brewery, the venture did not succeed, failing to produce a positive balance sheet for company until its final sell by Foster Brewing Group (Chung, Haire, & Hartel, n.d). Failure of this strategy was mainly attributed to its location in a highly competitive and complex market that demanded strong financial injection through long-term strategies that the management did not provide. Although Foster’s Company started its company acquisition strategy as joint ventures, it later increased its shares to assume full ownership of original companies. With its main objective being to establish brewery in the three major regions in China, it entered into another joint venture with Princess Brewery in the Guangdong region. This formed another strategic area of investment that the company believed would necessitate its dominance in the Chinese market. Following the same strategy, Foster purchased another brewery in Tianjin to fulfill its mission of having brewery in the major regions. However, following the increased risks of entering into a joint venture with financially unstable companies in the Chinese market, the company chose to enter into a partnership with Hong Kong group Whee Pacific limited and the Chinese government in acquisition of the Tianjin brewery. This move aimed at reducing the increased risks of joint ventures that had rocked the Chinese market as it presented the only successful means of conquering the complex and dynamic Chinese beer market. However, the joint venture mode of entry only succeeded for a short term, with Foster realizing the declining need for domestic partners. Consequently, the company focused on purchasing domestic breweries, which later proved to be the beginning of downfall for Foster’s in the market. The full purchase of Chinese Regional Brewery exposed the company to stiff competition from local market players due to cultural influences that made customers show increased loyalty for local brands. Full ownership of subsidiaries in the Chinese market posed a great challenge to sustainability of Foster because it demanded a greater capital investment. These challenges forced the company to downsize its company venture in the Chinese market through disposal of the Tianjin and Guangdong. The company decided to retain its brand in the Chinese market through running the Shanghai brewery as the only subsidiary in order to reduce the challenges. With increasing challenges, the company decided to pull out from the market through the sale of the last operation base in Shanghai to a domestic company in 2006. Reasons why Foster did not Use International Breweries for Beer Production in China By the time foster’s started its venture into the Chinese market, it had undergone great rationalization resulting to concentration of its operations in the beer production. This change and focus in beer production resulted from the growing recognition of the Foster’s brand in the international markets. Foster failed to arrange with international breweries (a previous strategy that had seen the firm’s brands sold in numerous countries) because it had anticipated favorable market conditions in the Chinese market that could make it successful independently. The fast growing Chinese market for beer with low alcohol consumption per capita presented an attractive market to start its full-flagged beer production. In the 1990’s, the Chinese beer market was only dominated by the regional breweries, which did not fully exploit the local market, hence serving as an attraction for company to set foot in the market. Moreover, China had started opening to allow foreign companies to operate during this period, and therefore, only a limited number of international breweries had successful businesses in the country. In addition, Foster had intended to cut its cost of production through taking advantage of joint venture and the cheap labor available in china. The company also decided to venture into the Chinese market without arrangement with international breweries to reduce on operational costs imposed by the high import taxes inherent in the country. Establishment of its plants in China presented a good opportunity to lower the operational costs. In addition, entry into Chinese market through joint ventures would have facilitated better appreciation of the company brands through the perception of Foster’s brands as locally produced products. Basing its production in China also downplayed the cultural challenges experienced by foreign companies introducing their products in the Chinese market. Foster also failed to use the international breweries in order to concentrate on direct promotion of Foster’s brands, which had shown growing promise in the international markets. This was a way to maximize the profits gained from the increasing popularity of its brands rather than sharing the profits with the international breweries. Essential Characteristics for a Joint Venture Partner Some of the important characteristics that Fosters would have looked in a partner for the joint ventures in Chinese market include a partner with praiseworthy management strategy, organizational structure, as well as good financial attributes. A partner with such characteristics would have been instrumental in helping the company achieve sustainable competiveness and success in terms of profitability (Luo, 1999, p.235). These attributes operate jointly because lack of one or the other result in ineffective joint ventures, especially in competitive markets. Another important consideration would have been the strategic position of the partners in the Chinese market. Foster intended to establish its joint venture in three major regions that showed a great potential for growth and that provided a large market for its brands. The company should have particularly looked for partners located in most of the strategic regions in the country. In this way, the company would have been in a position to exploit demand in these regions and in turn, avoid most of the challenges that resulted from joint ventures situated in non-strategic locations. As Doole and Lowe (2008) argue, the company should have targeted companies with relatively developed distribution systems in order to promote success of its brands in the Chinese market because it was aware of the challenges in Chinese distribution network. The company needed a partner with a good distribution system in order to take full advantage of the unexploited national market. In addition, Foster should have looked for a partner with good employee relations in order to ensure that employees did not leave after the merger. This would have made the company’s production processes to continue without interruptions after the ventures commenced. Furthermore, a company with good domestic reputation was necessary to determine reception of its brands in the new market. The partner needed to have a diverse knowledge about the Chinese market involving knowledge on cultural implications to allow the Foster’s understand the Chinese culture. In addition, a company with a strategic shareholder policy would have necessary to allow Foster to relate well with the existing shareholders of the joint ventures. References Ahlstrom, D. & Bruton, G.D. (2009). International management: Strategy and culture in emerging world. Florence, KY: Cengage Learning. Benewick, R. & Wingrove, P. (1999). China in the 1990s. (2nd ed.). Vancouver: UBC Press. Chung, M., Haire, J., & Hartel, C. (n.d). Cultural impact on entry mode strategies into the Chinese market by Australian companies. Retrieved from http://jgxy.usx.edu.cn/DAOM/093_MonaChung.pdf Doole, I. & Lowe, R. (2008). International marketing strategy: Analysis, development, and implementation. (5th ed.). Florence, KY: Cengage Learning. Heracleous, L. (2001). When local beat global: The Chinese beer industry. Business Strategy Review, 12 (3), 37-45. Luo, Y. (1999). Entry and cooperative strategies in international business expansion. Westport, CT: Greenwood Publishing Group. Read More