1. Cracking the China Market:
Successful Marketing
Strategies
Prepared for: US Conference Board
Global Marketing and Communications Conference 2005
Prepared by: Spire Research & Consulting
Date: 15 June 2005
Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 1

2. China’s Beer Industry: A Case study
Foreign brewers like Interbrew, Heineken and Carlsberg entered the China market in
a major way in the 1990s, only to suffer major losses and sell off their operations.
Chinese consumers did not take well to, and could not afford, premium foreign brands,
opting to stick with Chinese provincial or regional favorites which were priced much more
cheaply (sometimes 20-25% of premium beer prices) and had lower alcohol content.
The premium market was estimated at 5% of total volume and did not grow
substantially in spite of the foreign presence
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3. China’s Beer Industry: A Case study
The beer industry structure in China in the early 1990s was complex
In most provinces and regions, beer production had created national oligopolies controlled
by local companies – resulting in severe distribution barriers to entry
In China there were over 800 local beer producers in the late 1990s
Global foreign brewers started to enter China:
4 foreign brewers entered China in 1992: San Miguel, Asia Pacific Breweries, Pabst, and
Becks.
There were 16 in 1995.
By 2001, most major foreign brewers were in China, including: Annheuser-Busch, Heineken,
South African Breweries, Carlsberg, Kirin, Interbrew, San Miguel, Lion Nathan, and Foster’s.
Most of the companies built state-of-the-art breweries and promoted their global brands.
Their global brands were positioned as premium beer.
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4. China’s Beer Industry: A Case study
The outcome of the foreign breweries’ market entry:
Most plants ran at a loss due to low capacity utilization.
Low selling prices depressed margins.
Foster’s had to sell two of its three Chinese breweries in August 1998, following heavy losses.
Carlsberg and Lion Nathan also sold off their operations eventually.
By the end of 1990s, the foreign brewers had made little impact. The market remained
fragmented - all top ten brewers in China, representing around 21% of the market share,
were local companies.
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5. China’s Beer Industry: A Case study
Explaining the failure of foreign breweries in the early 1990s
The demand pyramid meant a small market size for premium beer.
Hyper-competition and over-capacity took a toll There were 800+ breweries.
Foreign brands were priced at 400 – 500 % the price of local brands.
The market for premium beer was only 5 % at the most (of total beer consumption market),
compared to roughly 15% in Australia, for example – foreign brands failed to stimulate
radical growth in this category.
Consumer sentiment towards local brands
As in the rest of the world, beer drinking followed an intensely local pattern, with “patriotic”
associations.
“Chinese have a very strong sense of “home place”… If I live in a place, I want to drink my
local brand… I don’t go into a place and say, ‘My Tsingtao beer is better than your beer.
My quality is better than yours. So why don’t you drink mine?’” (a comment by a local beer
industry executive in the 1990s)
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6. China’s Beer Industry: A Case study
A Failure of Consumer Advertising and Promotions
Foreign brewers employed competitive weapons that worked well in the West.
They tried to build global brands through expensive advertising campaigns aimed at
differentiating premium beer in the eyes of consumers.
These campaigns merely created awareness, but not the desire for, nor the ability to pay for
the premium price of the beer. Consumer sentiment towards local brands
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7. China’s Beer Industry: A Case study
In short: the 1990s saw a failure to understand the size and dynamics of the demand
pyramid for beer in China.
In the past 3 years, many of the foreign companies who failed in the 1990s are
re-entering the market by buying stakes in large Chinese breweries.
Most are pursuing a strategy of buying over successful Chinese brewers which have
a dominant position in one or more provincial/regional markets.
They would then use that brewers distribution network, production capacity and
expertise to gradually build the market for their premium international brands while
maintaining the local brands they now own.
Anheuser Busch is pursing this strategy with its acquisition of Harbin Brewery (China’s
4th largest), as is Heineken with Guangdong Brewery Holdings and Scottish &
Newcastle with Chongqing Brewery.
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8. Why a China challenge?
China’s position in some product markets out-ranks its 6th place in global GDP
China is among the world’s biggest markets for industrial products
and intermediates, like concrete, steel & coal…
…but is also among the world’s biggest volume markets for consumer products, outpacing
its 6th position in world GDP:
Beer (No. 1 – 30m barrels)
Mobile phones (No. 1)
Cigarettes (No. 1 – 35% of global demand)
Cars (No. 3 – 5m units in 04)
Platinum (No. 1)
Advertising (No. 3 – est. USD10b)
Gold (No. 4 – 235 tons)
Real GDP has grown 700% since 1978. Growth in consumer spending has been
stunning, even if there are signs of slowdown from the government’s credit tightening
measures in 2004
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9. Hyper-competition
Chinese customers are exposed to a dazzling array of brands and (falling) prices
Hyper-competition in China is all about:
Presence of huge number of brands, both foreign and local
Over-capacity and intense price competition in the mass market
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10. Hyper-competition
Brands are especially important in China given the array of choices
Hyper-competition means that customers are faced with a huge range of products,
brands and prices, both local and foreign - more so than in other emerging
countries:
Example: in low to mid-range diesel power generators, Spire found at least 28
brands in just three of the four major regions of China, including all the ten or so
leading international brands, compared with just 13 brands in all of Malaysia
This helps explain the great importance of brands as differentiators. In most cases,
brands are more important in China than other emerging markets.
Foreign brands like Nike, Adidas & Sony score highly in brand preference surveys…
….but local brands are still strong in some sectors, leveraging price and local brand
familiarity:
Examples: PCs (Lenovo, Founder), TVs (Changhong, Konka), beer (numerous local brands
peculiar to provinces or counties)
A recent study published in Harvard Business Review advised that foreign brands will find it
hard to command premiums of over 30% in China.
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11. Hyper-competition and Over capacity
In the mass market, price competition is intense
The traditional SOE and bank loan system has led to over-capacity in markets like
TVs, cement, steel and motorcycles – sparking vicious price competition that
sometimes prompts Government intervention (as with the TV industry in 1999).
Motorcycles: 300 manufacturers; Cement: >1,000 plants; Breweries: >400
Car prices have been falling by 7%-10% per year since 2002
In the consumer electronics and office products sector, our research has shown
steeper price drops at the low-end of the market compared to other countries in
Asia, but a roughly similar price trend in the high-end of the market.
Over-capacity and price sensitivity are a major threat at the low-end, while absolute
market size is the issue for high-end products
Marketers need accurate competitor analysis to keep price premiums at an acceptable
level
Enter at the early stage of the PLC curve wherever possible – launch new products and be a
pioneer in new categories; intense competition will arrive very fast.
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12. Consumer demand growth potential
Penetration of consumer products lags behind the West & Japan, BUT…
China’s per capita consumption is:
22 litres of beer a year, compared to over 80 for the USA
8 cars per 1,000 people compared to over 600 in the USA
0.5 litres of wine a year, compared to over 7 litres for developed economies
Products per 100 urban households 2002 2004
Colour Television 126.4 -
Mobile phone 63 -
Air-Conditioner 51.1 -
Camera 44
Oven 30.9 -
Personal Computer 20 -
Video Recorder 18.4 -
Credit card* 18 (2003)* 22*
Internet users** 6.1 (2003)** 9.2**
Automobile 0.9 -
* Per hundred of urban population
** Per hundred of total population
Source: China Statistical Yearbook 2004 and Spire analysis of published data
from various Government and private sources
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13. China still has an emerging market income profile
…China still has emerging economy income profile
China’s national income differs widely between the PPP figure and hard currency
market exchange rates
The shows the limits to the market size for (consumer) products which are expensive
in international currency terms – markets in China are often much bigger in global
volume (unit) than global value (hard currency) share
GDP (at market exchange rates; US$ Bn)
US
Japan
Germany
China
India
Taiwan
Indonesia
0 3000 6000 9000 12000
2003 2004
GDP (PPP; US$ Bn)
GDP per capita (at market exchange rates; US$)
US
US China
Japan Japan
Germany India
Taiwan Germany
Italy
China
Indonesia
Indonesia
Taiwan
India
0 3000 6000 9000 12000
0 5000 10000 15000 20000 25000 30000 35000 40000
2003 2004
2003 2004
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14. The Demand Pyramid in China
Realistic sizing of the premium and mass market spaces is vital…
For short-term results, marketers need to be realistic about the size of the premium
market and the costs of competing in the mass market
Most consumers cannot (yet) afford to buy large quantities of high-end products,
even if product penetration shows huge room for growth
Premium
market
(OECD prices)
Mass market
(local prices, price-sensitive, high
distribution cost)
Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 14

15. The Demand Pyramid in China
Realistic sizing of the premium and mass market spaces is vital…
MasterCard International estimated China's middle class (those earning US$5,000
per year and above) to 160 million by 2010.
Increasing access to credit may expand purchasing power – but this may lead to
phenomena like heavy default rates for car loans in 2004
Marketers need accurate & timely market sizing research based on current sales
measurement and not only projections based on “per capita consumption gaps.”
Premium
market
(OECD prices)
Mass market
(local prices, price-sensitive, high
distribution cost)
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16. Regional disparities
…and grasping regional disparities is crucial to any market sizing
A recent paper reviewing data from 200 cities for a 10-year period, reveals that the
richest city had a per capita income 50 times greater than the poorest. Many
regions may not have the critical mass for a premium market, but have the
population to drive a sizeable mass market
Region Population (millions) GDP per capita in RMB*, top provinces
ranked in descending order
Shanghai Yangtze delta 16. 25 40,646
Beijing North 14. 23 28,449
Tianjin North 10. 07 22,380
Zhejiang Yangtze delta 46. 47 16,838
Guangdong South 78. 59 15,030
Jiangsu Yangtze delta 73. 81 14,391
Fujian South 34. 66 13,497
Liaoning North-east 42. 03 12,986
Shandong North 90. 82 11,646
Heilongjiang North-east 38. 13 10,184
Hebei North 67. 35 9,115
* RMB 8.28 = USD 1
Source: National Bureau of Statistics of China, 2003
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17. Regional disparities & Southern Affluence
It is a common mistake to under-invest in Southern marketing
China has 16 cities with per capita income of over USD 3,000 (RMB 25,000)
Shanghai (RMB 37,380) ranked 6th in terms of GDP per
GDP (RMB billion) Capita by city.
GDP per capita (RMB)
4,951 50,000
5,000
43,926 43,355
41,111
4,000 37,777 38,007 37,380 40,000
31,330
3,000 2,846 30,000
25,520
2,000 1,760 20,000
1,492 14,680
1,000 10,000
558
N.A.
N.A.
N.A.
168
0 0
Beijing Chengdu Doungguan Guangzhou Karamai Shanghai Shenzen Suzhou Xiamen
Southern cities
Total GDP GDP per capita RMB 8.28 = 1 US dollar
Source: China Statistical Almanac, 2003, TDC
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18. A Marketing strategy to fit the Pyramid model
The mass market & premium market present different marketing challenges
The China market requires a marketing strategy to address the premium and mass
market
Dell’s cheap, fixed configuration Smart PC is a response to the mass market challenge
Two tier branding is a solution that some firms have tried:-
In the beer industry, many major international brewers have acquired local Chinese brands
for the mass market, while introducing their international brands for the much smaller
premium market
Automotive and engineering firms like Honda, Caterpillar and Yamaha Motor have
developed second brands for aftermarket parts in some emerging markets, offering
mid-range quality and prices, while positioning their original brand products as premium
Marketers need a clear strategy that addresses both premium and mass market
opportunities – where either one cannot be ignored.
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19. Go-to-market challenges
Invest in winning access to channels
The battle for distribution access will be critical in the next few years, as the channel
environment changes
The retail sector is “modernizing” and becoming more organized – which will
increase competition by manufacturers for access
Big chains in the future are likely to include foreign players like Carrefour, Walmart, Tesco
and Metro, as well as local chains like Shanghai Bailian Group, Lianhua Supermarket,
Wumart, GOME, YOLO and Lenovo 1+1 franchise
Where channels are not accessible to foreign firms, they can be “acquired” –
foreign brewers have acquired competing local brewers, gaining access to their
captive distribution channels
Outstanding processes in distribution channel management can win the loyalty of
existing channels. Example: rules to police price competition among channels
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20. Trends to watch going forward
Travel and tourism is changing China – creating more “high-end” and “international”
tastes
20 million Chinese traveled abroad in 2003 – placing China among the world’s top 10
outbound tourist nations
In 2004, the average Chinese tourist who visited Europe – China’s favorite overseas
destination – spent between US$2,000 and US$3,000.
Many middle-class Chinese buy luxury products abroad
Expatriate numbers are on the rise: a survey conducted in 2003 by HRBS reflected
that 35% of managers at foreign-owned companies in China were expatriates, a
very high percentage compared to 10% in Thailand, 19% in Singapore and 7% in
South Korea
Some 500,000 Taiwanese are estimated to be living in and around Shanghai
Weak information infrastructure for marketers – quality of data locally available from
Government, think tanks and academia is uneven
Huge IPR issues remain – high penetration of counterfeits, export of counterfeits
Strongly patriotic and anti-Japanese feelings are pervasive:
Less than 2% of Chinese surveyed use positive adjectives to describe Japan;
33% place Japanese at the bottom of their hiring list: Anholt-GMI Nations Brands
Index Q105
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21. Trends to watch going forward (cont’d)
Huge IPR issues remain – high penetration of counterfeits, export of counterfeits
Strongly patriotic and anti-Japanese feelings are pervasive:
Less than 2% of Chinese surveyed use positive adjectives to describe Japan;
33% place Japanese at the bottom of their hiring list: Anholt-GMI Nations Brands Index Q105
Prepared for: Global Marketing and Communications Conference 2005 Date: 15 June 2005 Page 21

22. Trends to watch going forward (cont’d)
China’s population is aging faster than any major economy in modern history – and
unlike many other emerging market economies
The World Bank forecasts that by the year 2030, 22% of China’s population will be over 65
years of age
Country Population Size Population Age Structure (%) Median
Growth rate Age (yrs)
0-14 yrs 15-64 65 yrs
(%)
yrs and
above
Australia (AU) 19,913,144 0.90 20.1 67.2 12.8 36.3
China (CN) 1,298,847,624 0.57 22.3 70.3 7.5 31.8
Hong Kong (HK) 6,855,125 0.65 14.2 73.3 12.5 39.4
India (IN) 1,065,070,607 1.44 31.7 63.5 4.8 24.4
Indonesia (ID) 238,452,952 1.49 29.4 65.5 5.1 26.1
Japan (JP) 127,333,002 0.08 14.3 66.7 19.0 42.3
South Korea (KR) 48,598,175 0.62 20.4 71.4 8.2 33.7
New Zealand (NZ) 3,993,817 1.05 21.7 66.7 11.6 33.4
Taiwan (TW) 22,749,838 0.64 19.9 70.7 9.4 33.7
Thailand (TH) 64,865,523 0.91 24.1 68.7 7.3 30.5
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23. Conclusion: Why is China different from other emerging markets?
In some ways China presents the same challenges as other emerging
markets – the pyramid structure of demand is not unique to China.
Challenges & opportunities that may be unique to China include:
Hyper-competition creates unique branding challenges &
intense price competition in the mass market
Consumer tastes are fairly dynamic, creating many new opportunities for “international
products” which very quickly become hyper-competitive…
…while an aging society creates challenges and opportunities
There is a greater need to protect intellectual property
The distribution channel environment is in flux
World-class levels of export-oriented manufacturing create huge opportunities for B2B sales
of materials, components and services like logistics & construction
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24. Tel: (65) 6838 5355
Fax: (65) 6838 5855
78 Shenton Way #20-01
Singapore 079120
sg.info@spireresearch.com
www.spireresearch.com
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