The Three Kingdoms of Beer

Source: Fan Tong Dai Laoban Data support: Yuanchuan Research After Ma Ying-jeou stepped down in 2016, the Kuomintang's fortunes went from bad to worse. The newly empowered Democratic Progressive Party introduced the harsh "Improper Party Assets Act," stipulating that any party asset without a legal source would be deemed improper and confiscated. This threw the KMT, with its tangled historical accounts, into chaos. To sort out its books, the KMT sent a team to a warehouse in Nanshijiao, New Taipei City, piled high with old documents, to dig through them. After days and nights of sorting, they didn't find the information they wanted, but they stumbled upon an unexpected treasure. While sorting through the yellowed ledgers of a company called "Qilu Company," the KMT was delighted to discover: Tsingtao Brewery was actually KMT party property! Overjoyed, the KMT immediately held a press conference to announce this to media on both sides of the strait. At the scene, KMT legislators even called on Tsai Ing-wen to demand that the mainland return Tsingtao Brewery's shares. This series of actions was like someone suddenly claiming to be Jack Ma's father and preparing to come to Hangzhou to claim kinship—breathtaking. △The KMT showed media materials from "Qilu Company," 2016 How did the century-old Tsingtao Brewery become KMT party property? That's a long story. In November 1897, Germany invaded Jiaozhou Bay, forcing the Qing government to sign the "Jiaozhou Bay Lease Treaty," taking the beautiful city of Qingdao for itself. The Germans apparently couldn't get used to the baijiu and huangjiu of the Shandong Peninsula, so on August 1, 1903, they founded the "Germania Brewery Qingdao Co., Ltd.," which was the predecessor of Tsingtao Brewery. After World War I ended in 1916, Japan seized the Jiaozhou Peninsula from Germany and took over German assets, including Tsingtao Brewery. The Japanese carried out large-scale renovations and expansions of the brewery. By 1936, Tsingtao Brewery's maximum annual output had reached over 4,600 tons. After the victory in the War of Resistance against Japan, the factory was immediately sealed by the KMT government's Military and Political Department and taken over by the Qingdao municipal government. In 1947, the KMT organized the establishment of the "Qilu Company" in Qingdao, then "bought" the factory from the Enemy and Puppet Property Disposal Bureau, renaming it "Qingdao Brewery." Thus, Tsingtao Brewery became "KMT party property." When Qingdao was liberated in 1949, the KMT packed up its valuables, cast a disdainful glance at the half-idle brewery with an annual output of only 1,200 tons, and fled. Now the KMT wants to reclaim Tsingtao Brewery? Tsingtao Brewery's official response is basically to treat it as a joke, and netizens' replies are simple: Come and take it if you dare. Tsingtao Brewery truly became world-famous in the 1970s and 1980s. In 1972, Tsingtao Beer began exporting to the United States. By 1978, sales reached 20,000 cases, and three years later, they multiplied 40 times to 800,000 cases. That same year, Tsingtao Beer won first place at the Washington International Beer Competition, beating out 350 other beers from around the world. In 1985, Tsingtao Beer again won the championship at the Washington Asian Beer Competition. In 1987, at the Mississippi International Beer Competition, Tsingtao Beer was crowned "World Beer Queen." This proved that Tsingtao Beer's taste and brewing technology were world-class at the time, and its exports to the U.S. ranked first in Asia. In the 1980s, Tsingtao Brewery faced a rosy path: a globally recognized brand and products in short supply. At that time, no one would have predicted that the top spot in China's beer industry would go to another up-and-coming brewery. More interestingly, this company, called China Resources, was once the party property of the KMT's old rival. However, before the "party property civil war" between Tsingtao Brewery and China Resources Snow, Tsingtao's first enemy was Yanjing Beer. 01 Yanjing Beer was born in early 1980. Coinciding with the reform and opening-up, the capital's residents had a growing demand for beer. Beijing's daily beer production was only enough to sell for 2-3 hours. Sometimes, to buy a bottle of beer at a restaurant, you had to buy two dishes as a bundle. At that time, the Beijing market was divided between Five Star Beer (founded in 1916) and Beijing Beer (founded in 1947). Five Star was in the west of the city, and Beijing Beer was in the east, with the flagpole at Tiananmen as the dividing line, each taking half, like water from different wells. The newly launched Yanjing Beer did not attract the attention of its peers. After all, Beijing's Second Ring Road was only half open at the time, and Yanjing Beer, produced in Shunyi, 30 kilometers away, was seen by the capital's distributors as nothing more than "peasant beer." But fortunately, the market was big enough, and the beer produced was not hard to sell. Two years after Yanjing Beer went into production, its output had already reached the designed capacity of 20,000 tons. After paying taxes and profits, it was difficult to expand further. At that moment, the Shunyi County government made a decision in 1982: For the next ten years, we'll reduce taxes by 20 million yuan to help you expand. Not only that, Shunyi County also gave flexible policies: cadres below the deputy factory director level were appointed by the top leader. It can be said that although Yanjing started late, it had the right timing (rapid industry development), the right place (strong government support), and the right people (leaders who knew how to use talent), and was poised for takeoff. In 1983, the People's Daily published an article on the front page titled "What Does One Fast and One Slow Show?" It talked about how Shunyi County invested in Yanjing and it went into production within a year, while Tsingtao Brewery's expansion had been stuck for three years without even getting all the seals. It concluded that Tsingtao had too many bosses, each holding the others back. By the late 1980s, the state launched a "beer special project," and more than 800 breweries sprang up across the country. Every province and city had its own local brand, and Beijing alone had over a dozen. However, after the panic buying at the end of 1988, sales slowed, supply and demand reversed, and beer became "tired" beer. In 1989, Li Fucheng, a 35-year-old deputy factory director, became the factory director, also serving as chairman, general manager, and party secretary—a trinity of power. The young Li Fucheng began leading the equally young Yanjing to break out, marking the start of his 30-year tenure as Yanjing's leader. The breakout strategy was simple: stop letting the state-owned tobacco and liquor companies monopolize Yanjing's sales, and instead build a sales network directly into the streets and alleys of the capital. To this end, Yanjing bought 2,600 tricycles in 1989 to deliver beer to distributors for free. Thousands of tricycles shuttling through the hutongs became a sight in the capital. This angered the state-owned tobacco and liquor companies that were used to comfortable lives. One district directly issued an ultimatum, ordering Yanjing to stop self-distributing beer in that district within three days, or face a ban on Yanjing Beer in the district. Li Fucheng responded bluntly and forcefully: "If you dare to ban me, I'll dare to ban you. Don't you want the sales rights?" In the end, that state-owned company came to reconcile. In this way, Yanjing broke the monopoly purchase and distribution model of the tobacco and liquor companies and established its own sales network. From the 1990s onward, Yanjing surged ahead, entering the national top ten in 1991, top five in 1992, top three in 1993, and second place in 1994. By 1995, Yanjing Beer's market share in Beijing reached 85%, leaving old rivals like Five Star and Beijing Beer far behind. Around that time, Yanjing Beer began to surpass Tsingtao Beer in production and sales. For a time, Tsingtao was under immense pressure. Zhu Rongji was furious with the Tsingtao Brewery Group. At an inspection meeting in Shandong, he said: "China's only world-famous brand products are Tsingtao Beer and Hangzhou West Lake Longjing tea. We must preserve these two brands. Whoever smashes this brand will bear historical responsibility!" During the years when Yanjing Beer was advancing rapidly, what Tsingtao did can be summed up in one sentence: it had a royal flush in hand but played it as a losing hand. 02 In 1993, Tsingtao Brewery was listed on both the Shanghai and Hong Kong stock exchanges, raising 1.6 billion yuan. This was a huge sum—at the time, the entire city of Qingdao, with a population of 6 million, had an annual fiscal expenditure of only 1.56 billion yuan. Tsingtao Brewery listing ceremony, 1993 This 90-year-old company suddenly became rich overnight and had no idea how to use its massive wealth wisely. Apart from spending 126 million yuan on four beer production lines, the remaining billion or so sat in the bank. The company stayed up late studying how to spend the money and finally decided: Buy! Buy! Buy! This was related to the nature of the industry. Beer has a high concentration of carbon dioxide, and alcohol can dissolve many organic compounds. Glass bottles, being inorganic, are pressure-resistant and not easily deformed, making them most suitable for storing beer. However, glass bottles are heavy, and with the return bottle issue, transportation costs are extremely high. So shipping beer produced in Qingdao to other parts of China would make prices prohibitively high. Therefore, acquiring local breweries became an inevitable choice for the cash-rich Tsingtao. In 1994, Tsingtao went to Yangzhou in the dead of winter and spent 80 million yuan to acquire the Yangzhou Brewery. At the time, Yangzhou Brewery had a capacity of 50,000 tons but was operating at less than 40% capacity. Tsingtao invested 40 million yuan in technical upgrades, doubling capacity, but the market didn't open up. Over three years, it accumulated an additional 50 million yuan in debt. After acquiring Yangzhou Brewery, in December 1995, Tsingtao Brewery spent 82.5 million yuan to buy a 55% stake in Xi'an's "Hans" brewery, which had total liabilities of 300 million yuan. The result was that Hans lost 24 million yuan the following year, with Tsingtao bearing 13.2 million yuan of that loss. In two years, Tsingtao invested over 200 million yuan, money that could have built a 100,000-ton brewery, but it only expanded production by 40,000 tons. Not only did it not make money, but it also lost over 60 million yuan. Capital operations suffered repeated defeats, and market development was also rigid. While Yanjing Beer was selling beer on tricycles through the streets, Tsingtao Brewery's sales team consisted of just five people: two for invoicing, two for warehouse management, and one deputy factory director handling "approval slips." To get Tsingtao Beer, you had to use connections and go through the back door to get a slip. Even Peng Zuoyi, who would later become factory director, applied for five cases of Tsingtao Beer for his wedding but only got two approved. This take-it-or-leave-it attitude showed Tsingtao's privileged background. In 1997, Yanjing Beer went public, raising 1.3 billion yuan, and Tsingtao Brewery's capital advantage was lost. At the time, General Manager Peng Zuoyi summed up Tsingtao's situation in one sentence: "Wolves in front, tigers behind, and a bunch of mice in the middle." The "wolves" were foreign beer giants. The "tigers" were domestic beer leaders like Yanjing. The "mice" were small and medium-sized breweries in Shandong Province. Based on this analysis, Tsingtao's solution was to "let go of the wolves, release the tigers, and go home to catch the mice first," meaning to secure the home front before dealing with external threats, and frantically acquire small and medium-sized breweries in the province. For the mice that refused to surrender, Tsingtao launched a dimensionality reduction attack, using big brands to attack the low-price market. China's beer market structure was pyramid-shaped: over 90% was low-price market, mid-price accounted for about 7%, and high-price only 3%. From 1997 to 2001, Tsingtao Brewery successively acquired 36 local breweries, turning the industry upside down. While Tsingtao was busy occupying the bottom of the pyramid, Yanjing was also busy with mergers and acquisitions, but Yanjing's approach was not to acquire "mice" but to form alliances of the strong: the breweries it acquired had to be large in scale and have good market prospects, so they could directly capture the market upon acquisition. Around 2001, Yanjing took controlling stakes in Shandong's "Wuming" and "Sankong" breweries. Together with the previously acquired Laizhou Brewery, Yanjing spent only 295 million yuan to integrate 850,000 tons of beer production capacity and 500,000 tons of market share in Shandong, accounting for a quarter of Shandong's beer production and sales. On November 30, 1999, Yanjing Beer's annual output was the first to exceed one million tons. Tsingtao was not to be outdone. After acquiring more than 30 breweries nationwide, it finally surpassed Yanjing in production and sales in 2001 to return to the top spot. However, this "first place" was very watery. According to the 2001 financial reports of the two companies, Tsingtao Brewery's debt-to-asset ratio was as high as 56%, but its net profit margin was only 2%. In the same period, Yanjing Beer's debt-to-asset ratio was only 14%, but its net profit margin was as high as 12.3%. The difference in operating efficiency was stark. While the two were locked in a fierce battle, a bigger player appeared: China Resources Group. The reason this company decided to enter the beer industry was reportedly quite magical: it believed Tsingtao's prospectus. 03 Companies preparing for listing always like to exaggerate the prospects and opportunities of their industry. For example, Kangning Hospital, whose IPO was rejected earlier this year, claimed in 2015 that one in eight people in China suffered from mental illness, drawing ridicule from netizens. But when Tsingtao went public in 1993, it is said that Ning Gaoning, then head of China Resources Enterprise, was impressed by Tsingtao's prospectus, believing that China's beer industry held huge opportunities, and thus decided to enter the beer industry. Before this, China Resources had never been involved in beer. At the end of 1993, China Resources planned to enter the beer industry through acquisitions. Ning Gaoning set his sights on Shenyang's Snow Beer. He told his subordinates: "Recently, foreign investors are buying breweries in China. In terms of industry selection, foreigners are experienced; what they fancy is usually good." At the time, China Resources knew almost nothing about the beer business, not even how to value an acquisition target. Huang Tieying, who was responsible for negotiations, had to learn on the job. He spent two weeks calculating a price for Snow Brewery, but a year after the acquisition, he discovered that his calculation formula had been wrong. However, despite its reckless entry into the beer industry, China Resources was cash-rich at the time, with total assets of HK$60 billion. At the same time, China Resources partnered with SAB (South African Breweries), then the world's fourth-largest beer company. In this way, China Resources transformed from an outsider into a top player with both capital and experience. In terms of market development, China Resources proposed the famous "mushroom strategy": due to beer bottle limitations, a typical brewery's sales radius was only 150-200 kilometers. Therefore, China Resources acquired breweries across the country, then upgraded equipment and improved product quality, concentrating resources to expand market share within the factory's radiation range. In this way, each acquisition was like planting a mushroom. Once the mushroom in a region grew strong, it would extend to surrounding areas. Regions could support each other, and when the time was ripe, they could connect into a contiguous area, and market share would grow imperceptibly. Shenyang was the first mushroom China Resources planted. Then, with thunderous force, it captured cities and territories, successively entering Sichuan, Anhui, Tianjin, and other regions. Every brewery that China Resources set its sights on was a leading enterprise in its region—a typical strategy of supporting the strong and eliminating the weak. Money really can do anything. Under this strategy, dozens of breweries were swept into China Resources' fold: Shenyang's "Snow," Dalian's "Golden Lion" and "Kailong," Jilin's "Huadan," Wuhan's "East Lake," Heilongjiang's "New Three Stars," Anhui's "Zero Point," Tianjin's "Laige"... While Tsingtao Brewery and Yanjing Beer were locked in a battle for first place, China Resources quickly rose to the top three in China's beer industry. But at the time, established manufacturers looked down on China Resources, asserting: "Without a unified brand, China Resources will never grow big." Unexpectedly, China Resources took the advice to heart. Starting in 2002, it focused on building a national brand: Snow Beer, known for its "foam as white as snow, taste as fragrant as flowers." In 2004, China Resources spent over 100 million yuan to promote the Snow brand nationwide and built dedicated Snow production lines in its subsidiaries, gradually replacing local brands. In this process, many local brands were eliminated, even the Blue Sword brand, which had a strong base in Sichuan, was shelved. Almost at the same time, Tsingtao Brewery was doing the same thing. At that time, Tsingtao had over 100 brands, with chaotic pricing and widely varying tastes. Leader Jin Zhiguo also knew that too many brands would waste resources and reduce efficiency, but he chose a different path from China Resources: gradual progress, cutting meat with a blunt knife. Jin Zhiguo was reluctant to discard the five brands he had worked hard to acquire—Shaanxi Hans, Shandong Laoshan, Xuzhou Pengcheng, Guangdong Shanshui, and Fujian Great White Shark—and invested heavily in a "1+5 strategy," trying to maintain five strong regional brands under one main brand. A year later, Tsingtao had to abandon the Pengcheng and Great White Shark brands, and the strategy became "1+3 brand strategy." Another year later, it was forced to eliminate Hans and Laoshan. After rounds of PK, Shanshui was finally retained, forming a 1+1 brand strategy. This lengthy brand adjustment, with resources continuously diverted to brands that would eventually be eliminated, not only wasted resources but, more importantly, missed the opportunity to defend its leading position in the beer industry, ultimately handing the top spot to China Resources. From then on, the era of tripartite competition in China's beer industry arrived. However, while they were fighting each other, powerful foreign giants were not idle. With their fierce capital, they firmly embedded their influence into China's beer market. 04 The Book of Songs says: "Brothers may quarrel within the walls, but they unite against outsiders." China's beer industry, which began developing in the 1990s, was targeted by foreign capital from the start. More than 50 foreign investors flooded in like a flood of beasts, including Bass Group, China Strategic Holdings, Budweiser, Carlsberg, and others. In the face of this "invasion," Tsingtao Brewery took up the banner of resisting foreign capital. In 2000, Tsingtao acquired 75% of Shanghai Carlsberg, which can be considered a landmark event. That same year, American Asian Strategic Investment Company sold Beijing Beer and Sanhuan Beer, Yanjing's old rivals, to Tsingtao. The following year, Singapore's First (Fujian) Brewery was also acquired by Tsingtao. During this period, most foreign beer companies wanted to achieve everything at once, directly exporting their own brands to China. But China's consumption capacity at the time meant it couldn't bear the high import prices, and foreign investors quickly suffered setbacks and withdrew from China. In 2002, China surpassed the United States for the first time to become the world's largest beer producer. No sooner had foreign investors withdrawn from China than they realized their mistake and returned in force. This time, they were smarter, no longer trying to develop markets themselves, but instead choosing to take controlling stakes, participate in equity, or form joint ventures with domestic breweries. SAB, a shareholder of China Resources, can be seen as the most successful foreign investor in China's breweries. Its strategy was the "three no's": no controlling stake, no management, no production of its own brands. International giants came to China to find partners. AB, the world's largest, had already laid out its plans when Tsingtao went public, buying 4.5% of its shares on the Hong Kong stock market. Starting in 2002, AB further increased its stake in Tsingtao to 27%. SAB, the second-largest, had already taken a 49% stake in China Resources Beer. InBev (later Anheuser-Busch InBev), the third-largest, also partnered with Zhujiang Beer at the end of that year, taking a 24% stake. Foreign capital began a frenzy of acquisitions. Carlsberg acquired Dali Beer, Lhasa Beer, and Chongqing Beer. SAB, a shareholder of China Resources Beer, acquired 30% of Harbin Brewery and then sold it to AB, a shareholder of Tsingtao. InBev also attacked on all fronts, with Zhejiang and Fujian falling one after another. At the same time, on the international stage, SAB acquired Miller Brewing Company to become SABMiller; InBev acquired AB, forming what we now know as Anheuser-Busch InBev. Two beer super-oligopolies emerged globally. In China, the pattern was basically 3 domestic companies + 2 global giants: SABMiller, a shareholder of China Resources, had no other breweries in China under its name. The Harbin Brewery it had acquired was quickly sold off. The two were single-minded, binding their interests to this unified cooperation platform; AB InBev, a shareholder of Tsingtao, also owned Harbin Brewery, Zhujiang Beer, Xuejin Beer... many children, all in competition with Tsingtao. In this context, Tsingtao couldn't fully utilize foreign resources, and AB couldn't invest everything in Tsingtao; Yanjing Beer had no foreign shareholders. Li Fucheng once said: "A truly large leading enterprise should not let foreign investors hold a controlling stake and give them the lion's share." Yanjing Beer remained consistently conservative and steady, but when competing with global breweries, this conservatism became a drag. The three companies, once evenly matched, took three different paths, and their sales volumes quickly diverged. By the time Jin Zhiguo stepped down in 2012, Tsingtao's output was only three-quarters of China Resources', and Yanjing Beer was gradually falling behind. Among the three, the most lamentable is probably Tsingtao Brewery. This "national beer" company took too many detours. This teaches us a lesson: even among state-owned enterprises, there is a difference between those in the south and those in the north. 05 It is said that after the Tsingtao Brewery produced beer in 1903, the Germans distributed the freshly brewed beer to the Chinese workers in the factory. After swallowing this pale yellow liquid, one worker uttered two words: Horse urine. More than a hundred years later, if you go to Qingdao, you'll see beer sculptures and advertisements everywhere. Small shops on the streets basically have beer kegs, and at mealtimes, people carrying plastic bags filled with beer can be seen in every street and alley. Beer has been deeply imprinted in Qingdao's culture. On a broader scale, China's beer production now accounts for a quarter of the world's total. Among this, China Resources leads (27%), followed by Tsingtao (18%) and Budweiser (17%), with Yanjing Beer and Carlsberg each under 10%. These five companies share nearly 80% of the national market. Despite being the world's largest producer, China's beer industry is fraught with crises. On one hand, the taste of domestic beer has been criticized by consumers, and it now faces competition from imported and craft beers. On the other hand, since 2014, both sales and production in China's beer industry have been declining. The reasons include the impact of beer substitutes and changing consumer tastes, but the most important reason is probably demographic changes: young people and migrant workers are the largest consumers of beer, and their numbers are decreasing. References: [1]. Peng Zuoyi: I'm tired, but Tsingtao won't stop, 2001 [2]. A Cup of Sea—My Past with Tsingtao Brewery, Jin Zhiguo, 2008 [3]. China Alcoholic Beverage Industry Yearbook, 2009 [4]. Qingdao That's Praised, Yanjing That's Popular, Chen Yuming, 1999 [5]. Analysis of Development Trends and Strategic Models of China's Beer Industry, Fei Xiangang, 2002 [6]. Capital: Can It Brew Mellow Beer?, Wei Guihua, 2002 [7]. China Resources Snow—The Business Wisdom of a Beer Dark Horse, Zan Huifang, 2007 [8]. China Resources, How Long Can It Carry the Capital Banner?, Duan Yanshi, 2002 [9]. Yanjing Under Heaven, Wei Sanshui, 2006 Source: Fan Tong Dai Laoban (ID: worldofboss) -END-