China's Beer Market

will build up its capacity and distribution network through cheap local brands. But expensive brands will be introduced gradually and will pay oft' in the longer term. The potential is there as the standard of living in China is rising to attractive levels for western food and beverages.

lleineken believes its unrivalled track record in countries such as Africa gives it more knowledge about brewing abroad than any of its competitors. Anheuser-Busch is primarily operating in the American and Latin American markets. Others, like Carlsberg and Beck's are too small to rival Heineken in a big place like China. With a foothold gained in Asia's largest market, Heineken looks set to conquer the region's other promising markets.

Although Heineken s decision to exploit the Chinese beer market was straightforward - the sheer size of China's population - we can stil! question whether market size alone is reason enough for selecting China. The company must also consider other factors: Will the Chinese gov ernment be stable and supportive? Does China provide for the production and distribution technologies needed to produce and market Heineken products profitably? Will their products fit Chinese tastes, means and lifestyles? What resources are required? Should the firm expand uuickly or slowly?

For many foreign brewers in China, once giddy at the prospect of a huge and thirsty market, China has become a cash strain. Mounting losses mean that many now look to seale back and change strategy. Those with the resources and the commitment will have a better chance of surviving.

SOURCES: Barbara Smit, 'Heineken sets out to quench China's thirst', The European (22-8 April 1994), p. 20; Bruce Oilley, 'Gone flat', Far Eastern Economic Kecitti' (18 September 3997), pp. 54-5; Barbara Smit, 'Heineken satisfies its thirst for expansion', The European (7-13 March 1996), p. 32.

11 ecu = US81.08 = Dfl 2.2,1 (Netherlands Guilder)

Direct Investment

The biggest involvement in a foreign market comes through direct investment -the development of foreign-based assembly or manufacturing facilities. If a company has gained experience in exporting, and if the foreign market is large enough, foreign production facilities offer many advantages:

1. The firm may have lower costs in the form of cheaper labour or raw materials, foreign government investment incentives and freight savings.

2. The firm may improve its image in the host country because it creates jobs.

3. Generally, a firm develops a deeper relationship with government, customers, local suppliers.and distributors, allowing it to adapt its products better to the local market.

4. Finally, the firm keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives.

The main disadvantage of direct investment is that the firm faces many risks, such as restricted or devalued currencies, declining markets or government takeovers. In some cases, a firm has no choice but to accept these risks if it wants to operate in the host country.

There are therefore direct and indirect ways of entering a foreign market. The important point is to note that entry mode decisions are dependent on market conditions and die firm's product characteristics, objectives and capabilities. The direct investment Entering a foreign •market by developing foreign-based assembly or manufacturing facilities.

208 • Chapter 5 The Global Marketplace

Licensing: Tokyo Disneyland is oinned and operated by the Oriental Land Co., Ltd, (a Japanese development company), under license from Walt Disney Company.

Licensing: Tokyo Disneyland is oinned and operated by the Oriental Land Co., Ltd, (a Japanese development company), under license from Walt Disney Company.

British construction machinery maker JCB initially faced severe problems in the French market. It recognized that these stemmed from using manufacturers' agents (that Is, independent intermediaries) which sold the product but did not provide the service support needed for competitive success in this market. Fortunately, it responded in time. It set up a company-owned, full service distribution network and was rewarded by a large increase in market share and healthy profits.

To summarize, there arc three alternative routes for entering foreign markets. It is useful to note that these are not mutually exclusive options. Neither should a linear progression - from engaging in exporting, through setting up joint ventures to direct investment - be assumed. Firms seeking to market goods and services in a foreign market should evaluate the alternative modes of entry and decide upon the most cost-effective path that would ensure long-term performance in that market.

A (locating Necessary Resources

To build successfully a strong market position in a foreign country, the firm must be prepared to allocate necessary resources to the planned expansion. Building a strong brand image and channel networks is a difficult and highly expensive undertaking for any company. The investment needed to achieve international brand recognition, even in Europe alone, is enormous. When the Japanese firm Canon launched its first photocopier in the United States, it spent $15 million on TV advertising, a third of its K & D budget for the year. It has been calculated that, to create 20 per cent brand awareness across Japan, the United States and West Germany costs $1 billion. The ratio between investment in product development, manufacturing or service delivery and worldwide marketing is often 1:10:100. Too many companies get this ratio reversed, and so often underestimate the costs of doing business abroad. This, together with their expectation of early high returns on investment, which are often unlikely, explains why firms all too readily withdraw from foreign markets before establishing a firm market presence.15

Exploiting international marketing opportunities also requires a strong commitment from the company. It took European dairy products producers a good 20 years to build up a market for their products in Japan, A lack of commitment to a foreign market is a significant reason for poor exporting performance."' In emerging markets, such as China and Russia, many international firms have learnt that it is a long haul as they battle against the myriad problems in their markets. Rec.-ill, too, the preview ease highlighting McDonald's fight to build a presence in the South African market. The costs of prising open new foreign markets are generally high. Successful companies expect not only to invest huge sums of money in marketing and distribution, but also to set realistic timeseales for achieving market objectives. Britain's Inchcape, one of Coca-Cola's bottlers, invested over £77 million in opening three plants in Russia in the late 1990s. It does not expect to be making money yet. The costs are higher and the timing of getting things done longer than anticipated. Take construction - local builders are used to building walls a metre thick, but lack the speed of western firms. Then mere is distribution. In a Russian winter, Coca-Cola will freeze on the back of the lorry. It means having to use heated trucks and railway wagons, and the state of the roads means that a lorry can take a week to complete a 1,000-kilomctre journey. Then there is the bureaucracy, which dampens the pace when even minor work has to be secured from a multitude of local, regional and national departments.

The demonstrable commitment to the foreign market cannot be overstated. It must come from the senior levels of management and be communicated throughout the company. Target customers in foreign countries must also be convinced that this commitment is lasting. Buyers of capital goods or expensive durable items feel more secure and happier to adopt a brand that is here to stay and enjoys strong service and after-sales support.

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