Brewers hit big trouble in China but Lion decides to tough it out

By Michele Simpson

Friday 14th April 2000

ON TRACK: Jim O'Mahony is pedalling hard in an attempt to get Lion's Chinese operations to break even in 2001/02

Brewer Lion Nathan is not going to follow competitors choosing to flee the red-ink generating Chinese market.

Despite year-upon-year of huge losses since it first set up in China, Lion Nathan is ploughing on with its Asian venture as other big name brewers suddenly quit the market.

British brewer Bass has decided to pull the plug on its $80 million joint venture in China, the world's second-largest market.

"There is an overcapacity in China," Lion Nathan's managing director of the Chinese operation, Jim O'Mahony said. "The industry needs consolidation and we're not overly concerned whether that process is by people exiting or folding."

Bass said talks had begun to sell its 55% share in a joint venture after it fell out with its local partner in China. Foster's last year grew tired of the much hyped potential of the 1.3 billion strong Chinese market. It sold its breweries in Tianjin and Guangzhou.

Lion Nathan set up operations in the Yangtze River Delta five years ago and has aimed to start making a profit early this century. The losses for Lion's Chinese venture have risen sharply in the past three years. In 1997 it was $8.8 million, in 1998 it tripled to nearly $30 million and for the financial year ended August 31, 1999, the loss before interest and tax was $32.6 million.

"We're on track to substantially reduce our loss and in 2001/02 we hope to break even," Mr O'Mahony said.

But he predicted in doing so the 500-550 brewers trying to pick up a piece of the Chinese beer market would be reduced. Profitability was one of the key drivers of industry consolidation, he said.

Overseas investors are believed to control about 45 breweries in China.

Mr O'Mahony said most of the reduction in brewers has been from local companies that were former state-owned enterprises making a loss or marginal profits.

But Bass has pulled out over problems with its local partner. "The gaps between our cultures have led to different views and even clashes, as the foreign party felt it didn't get what it wanted," a Bass spokeswoman said. The Bass case is even being considered as a test case by the foreign trade ministry in Beijing on how not to run a joint venture. Guinness has also withdrawn from its small Chinese operation.

Beck's is the top-selling premium beer in China and last year Lion secured the rights to produce and sell it. Lion had had to clear up licensing issues in the past year and would "ensure a profitable stewardship of the brand," the New Zealand and Australian listed brewer said.

Lion also plans to look at further ventures and partnerships in China as part of the industry consolidation. Lion Nathan's share price has fallen since February when it was $4.40. It has been hovering between $3.40 and $3.60 over the past few weeks.

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