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.
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 10th. 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.
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.
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 3rd 2008, Coca-Cola announced its intention to acquire Huiyuan for US$ 2.4 billion. On December 4th, 2008, China's Ministry of Commerce claimed to accept this case for the first time to public. On March 18th 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 1st 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.
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.
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.
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.
Since 2004, Dabao saw negative growth in brand share followed by yearly decline in net profit. In 2005, Dabao generated a sales revenue of 780 million yuan, ranking No. 1 in domestic skincare products. However, Dabao sales only accounted for 1% of the total 70 billion yuan sales of Chinese cosmetics market.
The sales revenue of Dabao kept around 800 million yuan in recent years, much lower than 20% growth rate in Chinese cosmetics industry. On February 27th 2007, Dabao was listed for transferring 100% stocks in Beijing Equity Exchange, quoting 2.3 billion yuan as the highest price among all stock right transfer projects here. This project was also a high price project in Chinese daily cosmetics industry. During the listing period, it attracted some international well-known cosmetics enterprises such as Johnson & Johnson (China) Investment Co., Ltd., Unilever (China) Ltd. and Kao Corp. for consultancy and investigation. Johnson & Johnson and Unilever were both willing to be the transferee.
There were three problems in acquisition process: price, brand maintenance, and staffing. Unilever only offered 1.7 billion yuan, much lower than the sticker price. Finally Johnson & Johnson won and signed the stocks transfer agreement on April 18th 2008 and preceded the application to government. On July 30th, Johnson & Johnson completed acquisition of Dabao, purchasing 83.42% of state-owned shares and 16.58% of staff shares respectively from Beijing Sanlu Factory and Dabao shareholding employees. Its acquisition was approved by relevant government and the necessary procedure was completed.
Founded in 1887, Johnson & Johnson is a large enterprise in the world engaging in health, medical care and well-being of consumers. Since establishing the first joint venture in China in 1985, Johnson & Johnson has developed baby care series and cosmetics in China with skin care brands including Johnson Baby, Neutrogena and Clean & Clear.
Johnson & Johnson planned to keep and develop Dabao brand with respect for the brand, its global brand net and the long term and stable trust among Chinese consumers. Their win-win partnership will realize brand complementation with the global marketing experience and technology innovation of Johnson & Johnson. It's a variable whether Dabao brand can be rebuilt or not.
Before Johnson & Johnson's acquisition of Dabao, many national daily chemical brands were successively involved in acquisition upsurge. For instance, Mininurse was acquired by L'Oreal; C-Bons Daily Chemicals under C-Bons Group sold 85% stocks to Beiersdorf; Zhonghua Dentifrice became a product under Unilever. These acquired brands didn't make breakthrough as expected but kept silent and finally vanished. China's national daily chemical products are greatly challenged by foreign investment acquisition.