Strong brew

Editor's note: Since last year, certain concerns regarding products made in China have aroused worries outside the country. These worries defined Sino-US trade relations over the past year.

China Business Weekly is partnering with Sohu.com to look at quality control within China's leading manufacturers, which are churning out Made-in-China products every day and exporting them to every corner of the world. In this issue, we take a look at beer maker Yanjing Brewery.

In 1996, after Beijing-based Yanjing Brewery Group Corp acquired its smaller crosstown rival, Huasi Brewery, the firm faced a dilemma.

After checking Huasi's beer stockpile, Yanjing found some were fermented at over 20 C, double the required temperature. After a panel of experts confirmed the beer was not up to Yanjing's quality standards, the company decided not to put it on the market.

But the move sparked opposition from many Yangjing employees, who saw abandoning 11,214 tons of beer as a big financial loss for the company, which remained a small player in China's overcrowded beer market.

Some proposed more carbon dioxide be added to the beer to produce more foam, improve taste and cover up the quality problems. After heated discussions, Yanjing still decided to dispose of the beers.

But the firm was fined by the government because the beer was not discharged in line with environmental regulations.

"If we were as aware of environmental protection at that time as we are now, we would have done a better job in properly disposing of the beer," says Li Fucheng, Yanjing's chairman.

Still, abandoning the beer was absolutely the right decision, Li insists. The move did not receive much media coverage but the regulators' decision to fine the company was widely reported.

Initially it seemed like a PR crisis, but Li found it was actually a boon that boosted consumer confidence in Yanjing's quality control.

The move has partly helped Yanjing grow into China's second largest beer maker and become a supplier to China's State banquets. Li is now even more convinced than ever that quality is a business lifeline and a major tool to compete.

Chinese authorities have adopted two quality standards for the beer industry and Li proposed all makers conform to the higher standard. The proposal was accepted by authorities, which later helped consolidate the market, washing small players out.

In February, Yanjing joined more than 30 companies, including Coca-Cola and Nestle to urge the government to unify the quality standards in the food industry. In many sectors, there are more than one standard, including a national standard, a local one and even another standard set by companies themselves, which Li says is hurting the food industry.

With China emerging as a global manufacturing base, "you need to adopt global standards to survive and compete", says Li.

Olympic marketing

Yanjing last year sold a total of 4.01 million tons of beer. Figures released by market researcher Plato Logic early February ranked Yanjing Brewery as the world's No 9 beer maker, jumping ahead of Mexico's FEMSA. Yanjing's major domestic rival Tsingtao Brewery was ranked No 8. Tsingtao Brewery last year sold 5.04 million tons of beer while seventh largest beer maker Modelo sold 5.09 million tons.

"We are expecting to increase our annual sales to 8 million tons within five years," Li says.

The chairman is now betting on the upcoming Olympics to boost Yanjing's sales as well as its global profile.

Yanjing is a sponsor of the Games. But Tsingtao and Budweiser are also on the list. Putting three manufacturers of the same product on the sponsor list is a rare practice for Olympic organizers.

Securing the status of an Olympics corporate sponsor could boost the company's sales and profile. For the Los Angels Olympics in 1984, Fuji Film beat out Kodak to become the exclusive sponsor by increasing its offer from $4 million to $7 million. At that time Kodak was even bargaining with organizers, asking for a 50 percent discount of the $4 million ticket.

The sponsorship helped Fuji erode some of Kodak's advantage and greatly raised the Japanese company's international profile.

But for Li, the battle could be much harder to fight with three beer makers sponsoring the Games.

"We plan to increase our ad budget by 130 million yuan this year," says Li during an interview at the company's headquarters in a Beijing suburb.

The majority of the budget will be spent on Olympic marketing. In fact, almost all the makers are expecting the Olympic boon. Statistics by Beijing-based CTR Market Research showed Chinese beer makers last year already increased their ad spending by 21.6 percent to 2.16 billion yuan. Much of that was "aimed at Olympics", CTR says.

Li says he expects the Olympic marketing to help the firm increase sales by 500,000 tons.

Yanjing Brewery, which is listed in both Shenzhen and Hong Kong, is now raising about 1.8 billion yuan by selling new A shares to expand its production capacity around the country.

Last September the company announced a plan to add 13 production lines to boost sales. Yanjing dominated the North China market and the growing output could help the firm expand its reach into the South China market.

For instance, a factory in Foshan, Guangdong province could increase its output to 180,000 tons, compared to 80,000 tons last year and 30,000 tons in 2006, Li says.

Yanjing's major rivals, Tsingtao Brewery and China Resources, are also expanding output. Li says the domestic market could consolidate in the coming years with 12 or 13 giant beer makers dominating the market.

China Resources, which last year acquired 10 small domestic brewers, is now posing a major threat to Yanjing. But its status as an Olympic sponsor could give Yanjing an edge.

Increased exposure to a global audience during the Olympics might give a boost to its fledgling exports.

Tsingtao Brewery began exporting in the 1950s and has built an international profile. Yanjing Brewery, established in 1980, has been slow tackling overseas markets. It started exporting to the United States in 2000 and Europe in 2005. Exports still account for a just a very small share of its total output.

(China Daily 03/17/2008 page7)