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Coke Committed to China Expansion

, chairman and chief executive of Coca-Cola ( (KO)), isn't letting the company's failed bid to acquire a Chinese rival stand in the way of his enthusiasm for the China market. On June 23, Kent made his first trip to China since anti-trust regulators in Beijing vetoed in March the company's attempted $2.4 billion acquisition of China Huiyuan Juice Group ( (1886.HK)). At the opening of a new bottling plant in the central city of Nanchang, Kent spoke enthusiastically about the importance of the Chinese market to Coke. "We have unbending faith in China's future," Kent told a crowd of hundreds of employees, reporters, and government officials gathered for the opening ceremony in a cavernous warehouse at the factory. "No future is brighter than China's." Coke's challenge now is how to be part of that bright future without Huiyuan, one of China's top local brands and the country's largest maker of 100% fruit juice. , which is tops in fizzy drinks in China but an also-ran in pure juices, announced its bid for Huiyuan on Sept. 3 last year. The deal would have been the largest for Coke in Asia and the second-largest acquisition overall for the company, behind only the $4.1 billion purchase of Energy Brands in 2007. Having the Huiyuan brands in the Coke stable would have instantly made the Atlanta company the market leader in the fast-growing pure juice segment. Soon after Coke unveiled its bid, though, Lehman Brothers went bankrupt and the intensifying global financial crisis made Coke's offer for the Hong Kong-listed Huiyuan seem especially pricey. Analysts worried Kent had overpaid for Huiyuan, but the deal might have still gone forward if not for the Chinese Commerce Ministry, which made the deal the first test of the country's new anti-monopoly law. On Mar. 18, the government announced it was nixing the deal. "If the acquisition of Huiyuan went into effect, Coca-Cola is very likely to take a dominating position in the domestic market and the consumers may have to accept the high price fixed by the company as they don't have more choices," the ministry said. Coke's Third-Largest Market Where does that leave Coke now? While admitting that the company was "disappointed" by the ruling, Kent said in an interview after the opening ceremony that Coca-Cola is now focusing on ways to build its existing Minute Maid juice business rather than try to grow through acquisition. "We will continue to grow organically, that's as simple as it is," he said. "We understand the rules of the game. We respect them. We understand our way forward is organic growth." On June 24, Kent will be in Urumqi, capital of Xinjiang province in China's far west, to open another bottling plant, the company's 38th in China. Coke is also breaking ground on a new factory in Inner Mongolia. Although it doesn't have Huiyuan, Coke is still growing in China. The country recently passed Brazil to become Coke's third-largest market, behind only the U.S. and Mexico. (The company won't reveal the amount of revenue or profit it gets from China.) Coke, which was a sponsor of the 2008 Olympics in Beijing, will also be a sponsor of the world's fair in Shanghai next year. With acquisitions now apparently off the table, Kent is pushing an aggressive plan to invest $2 billion in building the company's production, sales, distribution, and marketing operations in China by 2011. That's $400 million more than the total amount Coke has invested in the country since the company returned to China in 1979, when senior leader Deng Xiaoping opened Chinese markets to U.S. investors after three decades. Money will go, for instance, toward helping vendors install cold-drink equipment to serve chilled drinks to consumers who want a Coke right away. "There are 6 million outlets in China and only a fraction of them have cold-drink equipment," said Kent. "So there's a huge investment still to be done. A successful Coca-Cola business is one that has very in-depth cold-drink business. We need to develop that." CEO Admires China's Development Beijing blocked his big China deal, but Kent, who was based in Hong Kong in 2005 and 2006 for Coke, is an admirer of the Chinese government's development policies. "No other country has created infrastructure this quickly, on this scale, ever," he said. Arguing that "infrastructure is an absolute must for economic development," Kent said China was now poised to become a big profit center for Coke within a few years as the country's investment in infrastructure and its $586 billion economic stimulus program keep the economy growing. "That's what excites us," he said. "That's why we are investing ahead of the curve." And what about Huiyuan, the deal that got away? Kent said the company would focus on the future, not what went wrong. "We only look in the windshield, not in the rear-view mirror," he said. "We don't think about it."
Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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