China Business Guide 中 国 商 务 指 南 2009 （The Light Industry）

Source: Ministry of Commerce of the People's Republic of China Department of Foreign Investment Administration

6.1 Current situation of China's foreign investment in 2008

2008 China's Balance of Payments Report shows that to calculate on balance of payment statistics caliber, foreign direct investment to China was US$ 160.9 billion, up by 8% on a year-on-year basis, which dropped by 65 percentage points than previous year. Withdraw investment and clearing flowed out US$ 13.1 billion, up by 17% on a year-on-year basis, which dropped by 16 percentage points. The net inflow was US$ 147.8，up by 7%, which dropped by 70 percentage points.

In terms of sector composition of foreign direct investment, China's non-financial sectors absorbed US$ 146.2 billion, up by 3%. The financial sectors absorbed US$ 14.7 billion, up by 88%. The main features of non-financial sectors attracting foreign direct investment are as follows.

The sources of foreign direct investment in China are quite concentrated. In 2008, the top ten countries or regions were: Hong Kong, China (US$ 70.1 billion), United States (US$ 5.9 billion), Singapore (US$ 5.5 billion), Taiwan, China (US$ 5.2 billion), Japan (US$ 4.5 billion), Korea (US $ 3.4 billion), Britain Virgin Islands (US$ 3.0 billion), Cayman Islands (US$ 1.7 billion), France (US$ 1.4 billion), and Germany (US$ 1.4 billion). Investment from the top ten countries or regions accounted for 91% of the total investment over the same period. Investment from some free-trade ports declined slightly. In 2008, the direct investment from ports including Virgin Islands, Cayman Islands, Mauritius, Barbados, Western Samoa and Bermuda stood at US$ 7.2 billion, decreased by 2% over the previous year, accounting for 6% of China's absorption of foreign direct investment.

The east of China gathers the main foreign direct investment while the investment in the west grew rapidly. In 2008, the investment in east areas such as Jiangsu, Shanghai, Guangdong, Beijing and Zhejiang accounted for 81% of total investment in China, down by 14% over the previous year. Investment of middle area of China such as Hubei and Anhui accounted for 9% of total investment in China, down by 6% over the previous year. The west attracted 10% investment, up by 19% over the previous year. The foreign direct investment growth in the west grew faster than in the east and the middle, up by 1 percentage point over the previous year. But the total amount in the west far lagged behind the east.

According to the industry structure of foreign direct investment fund in 2008, the followed industries enjoyed popularity from foreign investment and saw large increase, to make it detailed, 41% in mining industry, 46% in education, 32% in resident services and other services, 20% in agriculture and forestry, and 10 % in animal husbandry and fishery. The actual utilization of investment in real estate, accommodation and catering industry, leasing and business services, as well as information transmission, computer services and software industry fell down rapidly, which is 30% in real estate, 30% in accommodation and catering industry, 47% in leasing and business services, and 23% in information transmission, computer services and software industry. The investment in manufacturing, architecture and transportation industry declined slightly, which is 8%, 10% and 10% respectively.

6.2 Foreign investment competition in food and beverage industries

The huge food and beverage market in China with 1.3 billion population attracts foreign investment. The international food and beverage tycoons must come to China to expand global business. As a country with the largest population in the world, China's population base is a big piece of cake for this industry. Meanwhile, China boasts of the rapidest and sustainable economic growth and its development room and growth potential in food and beverage industry are obvious to all.

In recent years, China's food and beverage industry has seen more and more mergers and acquisitions of foreign investment with increasing enterprise scale. Almost every year this industry is on the list of China's Top Ten M & A Events launched by China Mergers & Acquisitions Association, Global M &A Research Center and Mergers-China.com. Changyu Group transferred stock right in 2005. American AB acquired Harbin Brewery in 2004. Japanese Asahi Breweries and Itochu Corporation both joined in Masterkong holdings in the same year. In 2006, InBev acquired Fujian Xuejin Beer. Shineway Group attracted investors by transferring the whole stock. In 2008, Coca-Cola acquired Huiyuan.

In addition to industrial capital, financial capital is also active in joining the stocks of fast growing food and beverage enterprises released at late times. It obtains high returns from listing overseas of these enterprises. Morgan Stanley investing Mengniu Dairy and the Goldman Sachs investing Yurun Food are successful examples. Furthermore, Mengniu Dairy, Yurun Food and Dynasty Wines listed in Hang Kong in recent 2 years have been warmly sought and actively acquired by overseas investors. The leading food and beverage companies on China's Shanghai and Shenzhen stock markets also gained popularity from QFII.

Various indications show that foreign investors are becoming more and more interested in China's food and beverage industry. Dine and wine of 1.3 billion people has become a focus of international industrial capital and financial capital. The coming few years will see more foreign investment M & A cases in China's food and beverage industry.

6.3 Foreign investment competition in daily chemical industry

At present, the market capacity of China's daily chemical industry was approximately 80 billion yuan, 70% of which has been occupied by foreign brands, leaving the 30% in second and third-tier cities and rural market. The final local brand market has also become jittery. In fierce competitions, daily chemical consumer goods enterprises will choose M & A to expand scale, enrich products and reduce risks.

By the end of 1980s and at the beginning of 1990s, foreign tycoons like P & G, Unilever and Henkel entered Chinese market in form of joint-stock due to policy reasons. In this joint-stock movement, local brands essentially transferred their own brands and facilities to foreign companies and only took less than half shares. As a result, some brands faded gradually out of people's eyes. Some enterprises bought the local brands back (such as MAXAM and Power 28 of Shaishi) and realized brand return. However, they had a sea of troubles to obtain the market share in a changed market. China now has over 4000 daily chemical enterprises and about 20,000 cosmetic brands. But only over 50 enterprises produced a sales revenue over 100 million yuan. Among which, P & G generated a sales revenue of 15 billion yuan in 2004. At the beginning of M & A, the foreign sides usually took full control of the resource advantages such as acquired brand channels and implanted their own brands. Later they would hide the acquired brands and dominated the market from high to low end with bargaining power of international brands and brands dislocation. Through M & A and brands suppressing, the foreign sides took advantages of abundant capital and made the domestic enterprises as their local factories.

In detergent market, three of the top four detergent enterprises with an annual output over 80,000 tons in China were acquired by foreign funds. Attributed to brand advantages and tax incentives, U.S. P & G has almost driven out domestic detergent enterprises. The top ten detergent brands in China almost annihilated completely. Only the four brands including Rejoice, Head & Shoulders, Pantene and VS Sassoon covered more than 60% of domestic market, exceeding the monopoly line recognized internationally. In cosmetics market, L'Oreal from France is expanding in Chinese market rapidly. Acquiring Mininurse in 2003 and Yue-Sai in 2004, L'Oreal ranked No.1 in make-up products and No.2 in skin care area. Foreign investment becomes the leader of China's cosmetic market competition. Transnational corporations occupy the high-end domestic market and then will further develop in low and middle-end brands to strike the local enterprises. For instance, Uniliver has promoted stationing distribution in second and third tier cities. P &G reduced the prices of Rejoice and Tide dramatically and made great effort in promoting Olay sales in China. After acquiring Mininurse, L'Oreal was seeking for partners to open up third tier cities and rural market. As the No.1 local enterprise in skin care in 2008, Beijing Dabao was put on the transfer list in Beijing Equity Exchange and finally transferred its full ownership to Johnson & Johnson.

6.4 Foreign investment competition in household appliance industry

During China's 30 years reform and opening-up, uncountable foreign enterprises came to China for the Gold Rush, many of which involved in household appliance industry. The first foreign household appliance enterprises such as Japan's Noritz, Germany's Siemens and Holand's Philips enjoyed a series of preferential policies and competitive market at the beginning of China's reform and opening-up. They had built up good brand images in Chinese consumers, made huge market returns and also stimulated more foreign enterprises to China. At early times, the foreign enterprises tried to build up factories and develop their own brands in China but encountered great challenges. Some foreign household appliance enterprises pulled back their battlefront. Panasonic contracted its gas heater business and retreated from Chinese market. LG microwave ovens also shortened its battlefront and only competed in northern market. Bosch water heaters retreated quietly before overall layout in China. Electrolux withdrew some brands from Chinese market. They failed mainly because external challenges of price war and large-scale expansion of Chinese local enterprises and internal factors such as non-acclimatization, deficiency of localization, high cost, as well as constraints of high end, advantaged technology and high prices.

6.5 Foreign investment competition in wine-making industry

Foreign investment in China's wine-making industry mainly experienced beer brewing M & A in 2004, wine M & A in 2005 and Baijiu (Chinese spirit) M & A in 2007.

2004 witnessed an upsurge of Chinese beer brewing industry acquired by foreign investments. Chinese beer market has been a main battlefield of M & A. Foreign investments shared stocks of the two of the top three leading enterprises with 40% market coverage. South African SAB joined in China Resources Snow Breweries and took 49% of total stocks. InBev merged AB in 2008 and holds 27% stock in Tsingtao Brewery. In recent years, multinational companies acquire second class beer enterprises with medium and small brands. China Resources Snow Breweries joined by South African SAB spent 4 billion yuan in 8 years to hold 48 factories in China. Denmarks' Carlsberg joined stocks in more than 10 beer companies and its production capacity reached 1.3 million tons.

InBev's main market in China is mainly distributed in southeast with 33 wholly owned and joint-venture factories. With famous brands in many areas, it accounts for the largest or the second largest market in Fujian, Zhejiang and other provinces. It holds 25.3% stocks in Zhujiang Brewery. As the largest beer group in U.S., AB mainly focuses on northeast market in China. It owns the flagship brand Budweiser and full shares in Harbin Brewery and so on. As one of the largest beer producers in Japan, Asahi conducted M & A for the interest of cooperating with Tsingdao. Carlsberg has acquired Kunming Huashi, beer assets of Xinjiang Hops and Chongqing Beer and so on to enhance its position in Middle West of China. The second world beer producer SAB holds 49% of China Resources Snow Breweries and extends its business all over the country with brands such as Shenyang Snow and Sichuan Blue Sword. At present, only Yanjing Brewery and Henan Jinxing Brewery didn't absorb any foreign investment but cover more than half of northern market in China.

At the beginning of 2006, Diageo indirectly controlled 16.64% stocks of Shuijingfang and became its second holder. In May 2007, Moet Hennessy of Louis Vuitton signed an agreement with Sichuan Jiannanchun (Group) Co., Ltd. and acquired 55% of its shares. In April 2008, Gujing Group released that the state-owned property right of Gujinggou jiu was totally transferred to IBHL on April 10^th. IBHL is a Hong Kong subsidiary wholly owned by ThaiBev, a Thai enterprise held by Su Xuming, Thailand's richest Chinese. Chinese baijiu industry is experiencing foreign M & A.

6.6 Typical cases of foreign investment M & A in 2008

The M & A quantities and money value of foreign investment have increased remarkably in recent 3 years. In 2007 there were 1266 M & A cases related to Chinese enterprises. There were 490 cases of foreign investment M & A, accounting for 38.7%. The local M & A cases accounted for 55.5%. Foreign enterprises conduct M & A in China mainly for high returns (the most important reason), large market and monopoly through local sales system. Over two third of the acquired enterprises by foreign investment involve in manufacturing industry. China used to pull in foreign investment but now held back to some extent.

6.6.1 Coca-Cola´s Acquisition of Huiyuan

Seven of the original top eight carbonated beverages enterprises in China have been acquired by Coca-Cola and PepsiCo, covering more than 90% of market shares. Coca-Cola announced its intention to buy China Huiyuan Juice Group Limited in September 2008 and started to advance in Chinese pure juice beverage industry.

Beijing Huiyuan Beverage and Food Group Co., Ltd. was founded in 1992. It is a large and modern group company engaged in producing and marketing fruit and vegetable juice and juice drinks. Huiyuan Brand has grown into the leading brand in China’s beverage industry, and the Group has won various honors and titles, such as “China Famous Trademark” for Huiyuan trademarks, “China Famous Products” and “Exemption from Products Quality Inspection” for Huiyuan products. More than 500 kinds of products have been developed and produced. According to the latest data from AC Nielson, Huiyuan Juice has taken 46% of the pure juice market share, and 39.8% of the nectar market share. Huiyuan’s juice concentrates, purees and juice products have been exported to over 30 countries and regions, including USA, Japan, and Australia and so on.

On September 3^rd 2008, Coca-Cola announced its intention to acquire Huiyuan for US$ 2.4 billion. On December 4^th, 2008, China's Ministry of Commerce claimed to accept this case for the first time to public. On March 18^th 2008, the Ministry of Commerce announced that it has rejected the bid by Coca-Cola to acquired Huiyuan in accordance with Chinese Anti-monopoly Law. It may become the first acquisition case rejected since the country's Anti-monopoly Law took effect on August 1^st 2008. The Ministry of Commerce proposed three reasons for the bid's failure: first, if the acquisition succeeded, Coca-Cola would be able to transmit its dominant position in carbonated beverage industry into juice industry; second, if the acquisition succeeded, Coca-Cola would obtain so much more controlling force in juice that other enterprises would be unable to have excess to this market; third, if the acquisition succeeded, the medium and small domestic enterprises would be challenged and suppressed in the juice market competition.

The disapproval by the Ministry of Commerce will be positive and favorable to juice industry for the long run. In recent years along with the gradual shrinking of carbonated beverage industry, consumers tended to turn to juice beverage. Pure juice beverage industry has a very promising future. Therefore, juice industry shall have a market of full competition without extra monopoly and concentration ratio. The disapproval of Ministry of Commerce is a step towards this aim. For a middle or short term, this will compress the cooperation room between domestic enterprises and foreign investment. Especially those in financial potential risks will be limited in funds without help of foreign investment. But it will benefit the domestic enterprises for long run. Resistance of foreign tycoon acquisition means the country's support for medium and small juice enterprises. It will reduce the obstacle for their future development.

In the current Chinese beverage market, Wahaha ranks the first in sales volume while Coca-Cola leads in turnover followed by Masterkong, PepsiCo and Uni-president and so on. The acquisition failure for Coca-Cola has pros and cons. From 2007 to 2008, the assets value of Huiyuan was shrinking along with the downturn of economic situation home and abroad. The acquisition is not profitable for short term. It was able to acquire better assets for the same cost. The attitude of the Ministry of Commerce towards this acquisition might indicate that foreign investment would be restricted more strictly in acquiring domestic leading enterprises in future.

Attachment: Announcement No.22, 2009 of the Ministry of Commerce of the People's Republic of China

The Ministry of Commence of the People’s Republic of China (MOFCOM) has received an application from Coca-Cola Corporation (Coca-Cola) and China Huiyuan Fruit Juice Group Limited (Huiyuan) for Anti-monopoly review on concentration of business operators and, according to Article 30 of the Anti-monopoly Law (the Law), hereby makes this announcement as follows:

I. Acceptance and Examination of Application

On 18 September 2008, Coca-Cola submitted an application and the related materials to MOFCOM.  Coca-Cola supplemented a few application materials according to request of MOFCOM on 25 September, 9 October, 16 October and 19 November respectively.  On 20 November, MOFCOM considered that the notification documents had met the standards provided in Article 23 of the Law and decided to accept the application for Anti-monopoly review on the deal with a notice sent to Coca-Cola.  Because of the large scale and high complexity of the concentration involved in this case, as of 20 December 2008, MOFCOM decided to conduct a further examination upon completion of the initial examination, about which a written notice was sent to Coca-Cola.  During the further examinations, MOFCOM assessed the various impacts that would be caused by the concentration.  On 20 March 2009, MOFCOM finished the review. 

II. Content of Review

According to Article 27 of the Law, MOFCOM conducted comprehensive examinations on the concentration of business operators in this case from the following aspects:

(1) The market share and control power of the business operators participating in the concentration in the relevant market

(2) The degree of concentration of the relevant market

(3) The influence of the concentration of business operators on the market entry and technology advancement

(4) The influence of the concentration of business operators on the consumers and other related business operators

(5) The influence of the concentration of business operators on the development of national economy

(6) The influence of Huiyuan brand on the competition in the market of fruit juice drinks

III. Anti-monopoly Examination

Upon acceptance of the application, MOFCOM duly conducted an examination through careful verification of the application documents; did thorough analysis on the important issues involved; and solicited opinions from the relevant government departments, industry associations, enterprises of fruit juice drinks, up-stream suppliers of concentrated juice and down-stream distributors of fruit juice drinks, two parties of the concentration deal, Chinese partner of Coca-Cola and experts of law, economy and agriculture by means of written invitation for comments, demonstration meeting, seminar, hearing, onsite investigation, entrusted investigation and meetings with participating parties, etc.

IV. Competition Assessment

After the examinations, MOFCOM made an overall assessment on the concentration case and confirmed that the concentration would cause the following adverse influences:

(1) After the concentration, Coca-Cola will have the ability to spread its dominant position in the market of carbonated soft drinks to the market of fruit juice drinks, therefore it will result in elimination and restraint of competition with existing fruit juice drinks enterprises and further damage the lawful interests and rights of the consumers.

(2) Since the brand of drinks is the key factor of effective market competition, after the concentration, Coca-Cola’s control power in the market of fruit juice drinks will be distinctively enhanced by its control of two famous brand names of fruit juice drinks Mei Zhi Yuan (美汁源) and Huiyuan (汇源). Additionally, in light of the current dominant position of Coca-Cola in the market of carbonated soft drinks and its conducting effect [to the market of fruit juice drinks], the concentration will obviously build up the obstacles for potential competitors to enter the market of fruit juice drinks.

(3) The concentration will squeeze the business opportunities for domestic middle and small sized fruit juice drink enterprises and restrain the capability of domestic enterprises in their participation of competition and independent innovation. As such, adverse impact will be caused on the effective competition structure in the Chinese market of fruit juice drinks which unfavorably affect the healthy development of the fruit juice drink industry in China.

V. Negotiations on Restrictive Conditions

In order to reduce the unfavorable impact discovered in the examination, MOFCOM negotiated with Coca-Cola regarding restrictive conditions to be attached to the deal.  During the negotiation, MOFCOM requested Coca-Cola submit a feasible solution to the problems discovered in the examination.  Coca-Cola stated its opinions on the questions raised by MOFCOM and proposed a preliminary solution plan and its amendments.  After evaluation of the plan, MOFCOM held the view that the plan proposed by Coca-Cola concerning remedy to the impact on competition cannot effectively remove the adverse influences created by the concentration.

VI. Decision of Review

In consideration of the above reasons, according to Article 28 and 29 of the Law, MOFCOM considers that the concentration of business operators in this case has the effect of eliminating and restraining the competition and will have an adverse impact on the effective competition in the market of fruit juice drinks and the healthy development of the industry of fruit juice drinks in China. Further, the business operators participating in the concentration failed to provide sufficient evidence supporting that the favorable influences caused by the concentration are obviously greater than its unfavorable influences or the concentration is in line with the public policy. In addition, Coca-Cola did not offer any feasible plan as a solution for reducing the adverse influences within the requested time limit. Therefore, the concentration of business operators in this case shall be prohibited.

6.6.2 Johnson & Johnson's acquisition of Dabao

The predecessor of Beijing Dabao Cosmetics Co., Ltd. (Dabao) is Beijing Sanlu Factory, a state-owned welfare enterprise established by Beijing Municipal People's Government to settle down employment of the disabled. Dabao was founded in 1958 and started to produce cosmetics from 1985. Since 1997, Dabao swept the daily chemicals market by its low price and large volume and won Sales Champion of domestic skincare products for 8 consecutive years. In 2003, Dabao occupied 17.19% of domestic skincare products market shares, much higher than any other competitors. Dabao SOD protein milk as its flagship product was once very marketable and profitable. Dabao day cream and night cream didn't realize satisfying market performance in breaking away from low end position.