Global Economics

What Bud's Takeover Means for China


InBev's $52 billion acquisition of Anheuser-Busch makes it the largest brewer in the mainland, up from No. 5 before the deal

Even though InBev is the largest brewer in the world, it has lagged behind in the world's largest beer market: China. Perhaps nothing highlights InBev's laggard status in China more so than this summer's Olympics. The Beijing Olympics will have three official beer sponsors: Beijing Yanjing Brewery, Tsingtao Brewery, and Anheuser-Busch (BUD). No InBev.

Now, InBev is no longer playing catch-up in China. Its $52 billion takeover of Anheuser-Busch has created not only the largest brewer in the world but also the largest one in China. "The sale of Anheuser-Busch to InBev will not alter Anheuser-Busch's leading position in China, but it will dramatically strengthen InBev's presence in the Chinese market," Zhigang Tao, professor at the University of Hong Kong's Faculty of Business & Economics wrote in an e-mail.

Before the merger, InBev was stuck in fifth place among breweries in China, behind China Resources Snow Breweries, Tsingtao Brewery, Yanjing Brewery, and Anheuser-Busch. With the merger, InBev not only gains control of Anheuser-Busch's breweries in China, but also two of the American brewer's crown jewels: its 27% stake in Tsingtao and 100% ownership in Harbin Brewery, which combined dominate China's mid-tier beer market. "One of the things that makes this deal attractive for them, in terms of a China perspective, is that there's a shoo-in with that relationship with Tsingtao," points out Matthew Crabbe, director of Access Asia, a British market research firm based in Bristol.

Fragmented Market Hurts Margins

China's title as the world's biggest beer market, with 1.3 billion thirsty Chinese drinking 39 million kiloliters last year, has been deceptively alluring to foreign brewers. In reality, most breweries are having a hard time earning healthy profits because the market remains incredibly fragmented. A number of foreign breweries have already pulled out after failing to make any money. Only a handful of China's 400 or so breweries have managed to build up a nationwide presence, such as Tsingtao.

Even InBev's presence has been limited primarily to southeastern China. The Belgian-Brazilian brewer first dipped its toe in China in 1984, when it provided technology transfers to Zhujiang Brewery in the southern city of Guangzhou. So far, InBev has accumulated 33 breweries, through various joint ventures, and its 100% acquisition of Fujian Sedrin Brewery. But InBev has not had much success expanding north or west.

On the other hand, Anheuser-Busch's operations are spread more broadly across China. A-B brews Bud in central China, in Wuhan, Hubei province, but also is focused in the eastern and northeastern parts of the country with its equity investments in Tsingtao Brewery in the eastern province of Shandong and Harbin Brewery in the northeastern province of Harbin. In the press statement announcing the merger, InBev says: "The two companies' footprints in China are complementary. InBev's China Business in southeastern China will be enhanced by Anheuser-Busch's strength in northeastern China."

Bud has a Valuable Sales Network

Anheuser-Busch has also been gradually building up its network in China to sell Budweiser, Corona, and Harbin premium beer nationwide, instead of just in the northeast. This, analysts say, is Anheuser-Busch's most valuable asset in China. After making a fact-finding trip to China, Credit Suisse (CS) beverage analysts Carlos Laboy and Anthony Bucalo wrote in a research note to clients: "It was clear that InBev is executing an inferior model to both SAB and A-B, and this has implications for all parties in light of recent speculation" about the merger of Anheuser-Busch and InBev.

The integration of Anheuser-Busch and InBev's China operations will allow the two foreign brewers to build up economies of scale by mass producing and mass distributing their beer, making it easier for them to earn fatter profit margins. But this could spell trouble for smaller, local Chinese brewers. "The merger of two major international brewers will have a major impact on China's brewery industry," says Xiao Derun, chairman of the board of directors of the China Alcoholic Drinks Industry Assn.'s beer chapter. "This may force more Chinese brewers to expand overseas," (BusinessWeek.com, 2/19/08) he says.

Tschang is a correspondent in BusinessWeek's Beijing bureau.

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