Anheuser-Busch and Harbin Brewery Group - Case Study Example

Anheuser-Busch and Harbin Brewery Group of China Case I. Current Situation A. Current Performance: Anheuser-Busch is the U.S. based multinational company. AB has won the takeover over the Harbin Brewery group - the dominant player in the northeastern part of China and fourth largest brewer in China. The company occupies 4 percent market share for the country, 76 percent market share in Harbin city and 43 percent in the Heilongjiang region. Harbin Brewery experienced the gain in net income of $85 mm with total assets of $825 mm in 2000. Harbin Brewery currently (2004) has $1,867 mm in net sales with 16,1 percent return on sales. Even though the company does not experience the deficit, the return on the sales in 2004 is lower compared to return on the sales in 2000, while the net income increased 2.3 times. Harbin Brewery acquisition cost was the highest in China years 2002-2004 and accounted for $28.4 mm. Harbin Brewery was the leader in selling beer in all three segments in Heilongjiang where the per capita consumption was 36 liters, double the national average. However, the high consumption rate has left no opportunity for further growth and the company was forced either to live with the existing sales level or to expand nationally. The acquisition by Anheuser-Busch allowed Harbin Brewery to meet its growth objectives and gain national identity. B/C. Governance and Top Management: Anheuser-Busch, being very interested in expanding to China, has experienced the number of small and big acquisitions of the national and regional breweries. Chinese beer market is very fragmented and the top five firms account only for 38 percent of the market. Anheuser-Busch has bought the minority ownership position in the Tsingtao premier brewer on 2002 in order to gain the access to brewing capacities and distribution channels. Harbin Brewery Group has also experienced numerous ownership changes since 2001. In 2002 the firm has went public with 41 percent of shares distributed to public. On June 1 2004 Anheuser-Busch held 37.4 percent in Harbin. The current CEO of Harbin is Peter Lo who has supported the acquisition of his firm by Anheuser-Busch and is expecting to experience significant expansion of Harbin brands on the national and international markets. II. External Environment (Opportunities and Threats) A. General Environment: Chinese beer market is the greatest in the world since late 1990s with the solid sales growth of more than 40 percent in the recent five years. With the largest sales volume globally, the average sales price is still relatively low, confirming the growth potential for domestic and foreign brewers. In addition, there is significant growth in the target population for beer and rise in the average income. Chinese consumers do not have loyalty to the particular brands, while they favor the domestic brews (99.5 percent of all consumed beer). The acquisition of Harbin by Anheuser-Busch and low level of competition, gives the company the opportunity to gain the loyalty of major segment of beer consumers. B/C. Industry Environment and Summary of External Forces: In overall the Chinese beer market is very attractive - the growth of sales and increasing number of consumers reduces the number of competitors. Even though the threat of substitute is high, the supplier power threat is not significant. Nevertheless, the manufacturing infrastructure and personnel problems make it almost impossible for Harbin to uniform the high quality of the product. III. Internal Environment (Strengths and Weaknesses) A/B Corporate Structure and Culture: The Harbin Brewery, as the part of Anheuser-Busch, did not change the structure and culture. Taking into account the current problems with personnel training and lack of skilled professionals, the workforce is culturally diverse. C. Organizational Activities Analysis: Harbin is not outperforming its competitors (Tsingtao, China Resources Enterprises, Beijing Yanjing Group, and Guangzhou) from both financial and market perspectives. It particular, Harbin's sales volume (in thousands of tons) is less than 1,000, while Tsingtao reached 3,000 and China Resources Enterprises and Beijing Yanjing Group having more than 2,000 volume. In addition, Harbin has gained only 3.1 percent market share by brands, compared to 10.8 percent by Tsingtao and 7.4 percent by Beijing. From 2000 to 2004, the return on the sales at Harbin has decreased from 14.5 percent to 9.7 percent. China has experienced the wave of investments in 1990s; however, most of the foreign brewers were forced to exit the market. Anheuser-Busch has acquired Harbin at the promising period of time and taking into account the significant segmentation of the market, the increased advertising and promotions can guarantee the customers' loyalty. The only strategy which proved to be effective for the last 10 years became the massive acquisition strategy (practiced by the market leader Tsingtao). Harbin has leading positions in some regions of China and the strategy to meet the demand of cost-oriented customers might prove to be highly effective. D/E. Core Competencies and Summary of Internal Factors: Even though Harbin is behind Tsingtao and China Resources Enterprises, Anheuser-Busch has acquired the portion of shares of all competitors and it guarantees significant control level over these firms. Harbin's reputation and leadership on some segments, as well as good manufacturing and personnel infrastructure of Anheuser-Busch create the promising opportunities for expansion and brand loyalty. The position of Harbin on Chinese market is solid and despite of not being the leader, there is the potential to grow and increase market share. IV. Analysis of Strategic Factors Harbin has the solid presentation on the market and is one of the top five sellers of beer in China. Anheuser-Busch, from the other side, has the reputation for quality and skilled employees. Experts believe that the acquisition of Harbin by Anheuser-Busch was at least irrational (especially taking into account the high cost of acquisition), however, the strategy of major acquisition has worked favourably for Tsingtao and might work favourably for Anheuser-Busch as well. The weaknesses of this acquisition are related to Chinese political and legal infrastructure (most of the partnerships end up with copyright battles without winners). The strong and increasing demand for beer constitutes the opportunity for Harbin. V. Identification of Strategic Issues Anheuser-Busch is not planning to combine Harbin with Tsingtao, the largest Chinese brewer, in which it has the 9.9 percent stake. However, the increasing number of consumers and the low market shares of competitors along with the absence of brand loyalty, Anheuser-Busch hopes that Harbin has the potential to gain the major segment of beer market in most regions of the country. The following strategic objectives remain: increasing the sales volumes along with the return on sales ratio, establishing the brand loyalty and presence on the market, improving the infrastructure and quality of the production, training personnel and hiring skilled employees. VI. Strategic Alternatives and Recommendations It appears that Anheuser-Busch has applied the effective strategy of acquisition and controlling the portion of shares of all key competitors provides the significant level of control over their activities. Nevertheless, several challenges still remain. First, the political and legal environments of China are not stable and the government tends to interfere into management of private organizations. Second, it is not clear whether the joint venture is better than wholly foreign-owned enterprise. Thus, Anheuser-Busch needs to take into account these two factors and take corresponding actions. The main recommendation is the maintenance of product quality and personnel training. In addition, more attention should be paid to the support of the small local brewers because the creation of the national producer has proved to be costly and ineffective. VII. Evaluation and Control Unfortunately, the case provides little information about Anheuser-Busch to evaluate and control the success of the acquisition strategy. However, the current situation in China and significant segmentation of the market, as well as Harbin's leadership in some regions of the country and the steady sales growth of the company, make it possible to say that Anheuser-Busch has chosen the proper strategy. Read More