Australia & China: Foster’s brewery hits the Chinese dust. What went wrong?

Last week, Foster's sold the last of three breweries in China into which it had pumped large amounts of money, management, technical expertise and hopes. What went wrong? What does the failure of Foster's and its competitor Lion Nathan, which pulled out of its three Chinese breweries nearly two years ago, say about the capacity of Australian manufacturing to follow the rest of the world into China?, The Australian asked June 19.

Most of China's exports are today produced by foreign-owned companies. Yet Australia's best-known brands are only present at the margins.

It was different in the early 1990s, when The South China Morning Post reported on "China fever, which is being compared with the gold rush of the 1850s when thousands of Chinese prospectors poured into Australia to seek their fortune. This time the rush is in the other direction - Australian companies seeking a share of the world's fastest-growing economy". In the first few months of 1993 alone, Australian industry sloshed $1 billion into China. That was when Foster's bought breweries in Guangdong, Tianjin and Shanghai.

Since that first youthful foray into China, Australian manufacturing as a whole has slid down the corporate poll, with only 10 or so firms surviving in today's top 50 listed companies.

Foster's moved in a feisty way into China, animated by grand dreams. Instead, now, its final brewery there, in Shanghai, is to make beers for Japan's Suntory. It then had two great projects to build the business globally: to Fosterise China, and then the world, and to export wines from Australia. The latter, at which it has proved adept, has of course been the winner. Lucky it had more than one strategy.

The mistakes made in China, especially during the early years of its opening to the international economy, are today the stuff of business school MBA course material.

These include, in Foster's case:

First, taking on joint venture partners even when not required to do so. Foster's brought in state-owned firms as 40 per cent partners in two of the breweries.

In China, 60 per cent does not deliver effective control. It moved in time to 90 per cent, but too late.

Today, any investor allowed by China's rules to go it alone, would do so - and hire the local expertise needed. The joke used to be that with joint ventures, the foreign partner supplied the capital and the technology and management skills, and the Chinese partner supplied the local knowledge. Within a comparatively short time, the Chinese partner acquired the capital, the technology and the management skills, and the foreigners acquired the local knowledge.

Second, although it's a cliche often used to excuse making losses to say "we're in China for the long term", it remains true that a long-term strategy is needed to develop a new manufacturing business.

Patience is needed, on the part of directors and shareholders as well as managements, as well as deep pockets - something Lion Nathan's former chief executive Gordon Cairns admitted the company lacked as it pulled the plug on China.

Foster's gave up on most of its China business in less than six years. Carlsberg has 20 breweries in China and two in Vietnam and says it is prepared to wait until 2013-15 for "reasonable returns".

Third, it was over-ambitious to acquire three big plants almost at the same time. If the firm had started with its Shanghai brewery, where it was producing a popular local brand, and built slowly from there, it might have stood a better chance of developing a successful China strategy. China famously comprises myriad discrete markets.

Fourth, Foster's is a premium brewer, while China is fundamentally a commodity beer market. When China's emerging bourgeoisie want to consume a product that confers class, they still prefer to buy foreign made -- including drinks.

Finally, the majority of the successful foreign manufacturers in China still focus mostly on supplying international markets, while Australian firms have mostly failed to develop such strategies, their imaginations sated by the 2.6 billion armpits, for instance, theoretically offered by the domestic deodorant market - where Procter & Gamble has become the model of the successful international player.

Ted Kunkel, the former chief executive of Foster's, said the company made the mistake of "sending in expat managers to run the business". The issue, however, is not so much where they come from, as what they know and what they can learn and how quickly.

It's essential to build a team that enmeshes core corporate values with profound local knowledge, including, in the case of retail products like Foster's, how to distribute them effectively and cheaply.

Meanwhile, so far this year Belgian brewer InBev has bought Sedrin, China's eighth biggest brewery, in Fujian province, for almost $1 billion cash. Japanese brewer Asahi is spending $48 million on building a fifth plant, and Heineken's Chinese partner Kingsway is building a brewery in Chengdu. And the Chinese market overall has been growing at more than 10 per cent a year, overtaking the US in 2003 to become the biggest beer market in the world.

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