Carlsberg has a long history in China. I have a poster hung in my office which is an advertisement from 1902 or 1903 of Carlsberg in China. In the 1980s, the business environment was very small and complicated - people could only find imported Carlsberg beers in five-star hotels.

It was not until China opened its door in 1978 that Carlsberg decided to do more in this interesting market. With its low per capita consumption of beer in the early 1990s, the growth potential for Carlsberg in China was huge. But in the 90s Carlsberg took a cautious approach to the Chinese market and we didn't want to invest too much initially. The best solution for us was to find a qualified partner who was prepared to produce, sell and market our products under a licensing agreement, while we provided our know-how, our brand, etc.

Such co-operation was established in 1991 and went very well. Our appetite started to grow when we realised the beer market in China was actually very strong and the economic development was sound, so in 1994 Carlsberg established a joint venture with Swire Pacific, a Hong Kong-based company with a lot of experience in China. Our first step was the acquisition of our license partner in Huizhou, Guangdong Province, thus enabling us to control our own destiny for the Carlsberg brand in China.

As our business continued to grow, so did our desire for more market share. For the obvious reasons we chose Shanghai as our next destination. Although consumption was still low, we figured with strong economic growth the market for premium beer would increase significantly. At the time the biggest brand in Shanghai was Reeb, a mainstream brand that was strong, but not strong enough to dominate the market. Our analysis of the beer market in Shanghai, and China as a whole appeared to be fantastic. We decided it would be worth our while to take a calculated risk and make a significant investment importing expensive western equipment, etc.

It turns our calculations were wrong. Unfortunately, while we were building our brewery, the market changed. The Japanese brewer, Suntory, entered the mainstream market with a product that was attractive in every way, from packaging, to quality, to price, and it was all backed by an excellent marketing strategy. Suntory wiped out the main competitor, Reeb, and started to dominate the market. As a result the premium sector didn't grow as expected. In fact, it stagnated. Our first important investment in China somehow fell apart.

Our second setback in the Shanghai market was the way in which premium beers were bottled. It turns out big bottles had big problems. Not only did the big bottles not have the same margins as the smaller bottles, but they were not an attractive business, as you had to give a lot of discounts. Suntory was such a strong brand at the time that even the local brand we introduced as part of our investment was not successful. We had to sell 75% of our shares to Tsingtao. I remained the director of the company because we still kept 25% of the shares. Also Tsingtao initially faced a tough time but is now doing better.

Actually throughout China the premium market was not as strong as we had expected. It turns out we had underestimated local brands. They had more brand equity than we'd thought. Because Carlsberg and other premium brands were able to sell despite the high price in the early 1990s, we assumed the local brands were low quality and thus had a low brand loyalty. However, the Chinese brewers caught on very fast and learned from premium beers so that all of a sudden, there were very good local brands selling at 1/3, 1/4, even 1/5 the price of the premium brands.

In 2004, with many lessons learned, we decided to once again invest aggressively. We invested a lot putting a new Carlsberg product on the market. If you want to be a big player in China, you must be in the mainstream segmentation as well. We did a lot of research in the Chinese beer market, and found that Western China was a good place to invest. With a new strategy in place, Carlsberg set forth with a new vision: not only to become the leading brewery group in Western China, but also to become a major brewery group and a leading international premium brand in China. Today, our vision is becoming reality.

Why did we choose to go west? First of all, it is often beneficial to follow the strategy of the government. And the fact is that a government policy also means that the government will provide a lot of support. We assume that a lot of money will continue to move to the west of China, thus helping close the gap in purchasing power that exists between the East and the West. Additionally, the people of Western China are clever and will catch up over time when they get the right support from the government in Beijing.

The second reason for choosing Western China is, relatively speaking, the market in the West is less competitive. If you are operating with a market share of 50%, the competitor has to be pretty brave to move into the market, because they know that you have the muscles, the strong brand, the connections, the distribution network, and that you can respond very aggressively to any competitive threat. But of course there will be competition, and competition will increase, and we are prepared for that.

Another reason for choosing western China is its current low per capita beer consumption. We think that we can establish and obtain dominance on a provincial and even regional level. Dominance is relevant in a beer market like China, because it is not ONE market but many.

The variance in markets regionally makes it impossible to compare one province with another. Each market has its own spending habits, consumption habits and brand loyalties. For example, in Beijing, the consumption is 93 litres per capita, which is the European standard; in Yunnan, it's only 6 litres per capita. In coastal cities the beer consumption is high due to stronger purchasing power and western influence. Northern China, by far, consumes the most beer with the northern cities of Beijing, Shenyang, Dalian and Harbin, drinking around half of the total beer consumed in China.

Being an active player in the premium sector, Carlsberg is also looking at the size of the premium sectors in the various regions. Market share in the premium beer sector is directly related to purchasing power. In Beijing, premium beer consumption is 2.1 percent, Shanghai 13.2 percent and in Shenzhen it is the highest. But compared with other places in the world, the consumption of premium beer in China is still low. South China is obviously very attractive, having 40 percent of the premium market; East China, 15 percent; North China and West China, both only 6 percent, which is consistent with the purchasing power. So the premium market is East and South China. But by far the biggest part of the market is the mainstream market.

Due to fragmentation amongst the top ten brewery groups and the fact the top brewery only has 30 % of the total market share, there is no clear national brand in China. Even Tsingtao, a widely recognised beer outside of China, is not truly a national brand. It is said that Snow beer from Shenyang, and Yanjing from the north, are also two contenders for the title.

As for a future national brand, will the Chinese beer market be like the US market in ten years, where there is almost only Budweiser and Miller that dominate the whole market? My answer is that we believe local Chinese brands will continue to be strong. These are great brands and the Chinese consumers love them. Carlsberg has three of the six most famous beer brands in China, with which we believe we can maintain a strong position against the local brands, using our experience from Europe as a guide. In Europe, even though there are no trade barriers and beer can freely float across borders, the beer markets are completely local. Fundamentally the beer business is a local business. There is nothing indicating that the Chinese market would be different.

But of course we are paying close attention to our competitors. Snow wants to be national, Kirin wants to be national, and so do Tsingtao and Yanjing. Carlsberg would also like to expand out of the province level to regional level, but for the time being we are happy with the current situation.

The local companies we have acquired have different working styles from ours. But doing things differently doesn't mean it is wrong; it can actually be better. Not all of our formulas work in China and we've learned a lot about China from our local partners and our local management team. On the other hand, they have also learned a lot from us because we have a lot of experience in Europe and some of the practices are universally applicable. It creates an interesting dynamic when you are transferring know-how both ways. Of course there is always room for improvement and that is a good thing.

Budweiser is the biggest competitor to Carlsberg in the premium segment. The premium segment is very small and very competitive. We have not yet considered taking the Carlsberg brand into our portfolio in western China because of the difference in promoting a premium brand and a local brand. We want the local sales teams to be more familiar with our working style before we integrate Carlsberg into local operations. But the combination of premium brand and local brand can surely be a winning strategy.

We came to realise that the Chinese consumers are not yet ready for the full flavoured, more bitter beer like Carlsberg Green Label. The Chinese consumers want something more like Budweiser, which can partly explain Budweiser's success in China. So we launched Carlsberg Chill. When you have two brands with the same name, how do you position them against each other without confusing the consumer? This is quite a challenge and is partly why many companies are reluctant to do line extensions. They are afraid that consumers will get confused. We solved this problem by positioning them quite differently. Green Label is a bit more serious, authentic tasting beer. Chill is the smaller brother of Green Label and is more for young, fun loving people. Our advertising reflects this point of view. One interesting fact is that the launch of Chill has actually also increased the sales of Green Label, something we had not predicted.

The author is Senior Vice President, Carlsberg Breweries.
The article is based on Mr. Jesper B. Madsen's speech delivered at CEIBS Executive Forum on Oct. 23, presided by Prof. Per V. Jenster.

Transcribed by Lene M. Holsen, MBA06 exchange student