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Running Head: Corporate Strategy / Case Study/Coca-Cola's Re-entry and growth Strategies in China

 

Corporate Strategy / Case Study/Coca-Cola's Re-entry and growth Strategies in China

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                Coca-Cola originally entered China in 1927, but left in 1949 when the Communists took over the country. In 1979, it returned with a shipment of 30,000 cases from Hong Kong. Even though Coca-Cola's head start in China has given it an edge, there is plenty of room in the country for both companies. Currently, Coca-Cola and Pepsi control 15 and 7 of the Chinese soft-drink market respectively. The Chinese market presents unique problems.

For example, 2,800 local soft-drink bottlers, many of whom are state-owned, control nearly 75 of the Chinese market. Those bottlers located in remote areas have virtual monopolies. The battle for China will take place in the interior regions. These areas are unpenetrated as most of the foreign soft-drink producers have set up in the booming coastal cities. China's high transportation and distribution costs mean that plants must be located close to their markets. Otherwise, in a country of China's size, Coca-Cola and Pepsi risk pricing their products as luxury items. In China, it is easier and politically safer to expand through joint ventures with local bottlers.

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It is expected that, in China, the company that wins the cola war will win based on the locations of their bottling plants and the quality of the partners they choose. Coca-Cola is bottled at 13 sites across China; five of these are state-owned. Also, Coca-Cola owns 2 concentrate plants in China. By 1996, Coca-Cola and its joint venture partners will have invested nearly 500 million in China.

Today The Coca-Cola Company (Coke) is recognized as one of China's most trusted brands according to Interbrand. It was voted number 5 of the top 10 multinational companies doing business in Asia in the 2003 Review 200, a survey conducted by Far Eastern Economic Review (FEER).

Since 1990 it has been making profits in China and according to AC Nielsen it had a market share of over 50 percent share of the Chinese beverages market in 2002. How did Coke achieve this success in China? Coke's top managers and industry observers too believe that it is the company's winning approach of "Think local, act local that has enabled it to capture markets outside of the United States. This is particularly true of the Asian markets where the diversity of cultures and income levels makes for a rather diverse consumer base. Coke encourages local managers to develop strategies that are best suited for their areas, and regional offices have the freedom to approve local initiatives. From the very beginning, Coke's strategy for re-entry into the Chinese market has been based on localization of the entire Coca-Cola system.

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In order to achieve this, Coke had to work closely with Chinese state-owned enterprises and develop strong relationships with the Chinese government. Since China had just opened up to foreign investment at the time of its re-entry, Coke had to deal with its restrictive policies.

It brought its technology and equipment to China and built bottling plants, which it then handed over to the Chinese government. Later it formed joint ventures with state-owned enterprises to set up more bottling plants. Coke formed joint ventures with local Chinese companies as well. Even though initially it had to import certain inputs for the production process, Coke eventually sourced them from Chinese companies. Coke developed its own infrastructure for distribution but gradually came to mainly rely upon state-owned distribution companies and local Chinese distribution companies. This strategy of localization of the Coca-Cola system in China proved to be a success and China grew to be its second largest market in Asia in 2003 (in terms of volume).

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In the early 1920s, Coke made its entry into China with bottles imported from its plant in the Philippines. In an effort to localize production, two bottling plants were opened in 1927. These plants were located in Shanghai and Tianjin, and in 1930 another was opened in Qingdao.

Coke faced setbacks during the World War II when the Japanese occupied China and took over its plants. However, in 1946, after the war ended Coke opened a bottling plant in Guangzhou. The Shanghai plant had the distinction of being the most up-to-date and fastest bottling line in China, and in 1948 became the first overseas plant to make annual sales of more than 1 million cases. This was great progress for Coke, even though the customers in Shanghai were mostly expatriates. When the People's Republic of China (PRC) was formed in 1949, all foreign companies were asked to cease operations and leave the country. Coke shut down operations in China and its bottling plants were nationalized by the government.

State owned companies were formed to produce beverages and some of these companies used the former Coke plants to produce soft drinks. In case of the Shanghai plant, the equipment was shipped to Beijing to be re-installed in a factory there.

For almost 30 years after the PRC was formed, foreign direct investment and direct production activity by a foreign company were not allowed. Only the state-owned foreign trade corporations were allowed to have contact with foreign businesses and to carry out exporting and importing of goods.

Coke's Re-Entry in China

In December 1978, Deng Xiaoping (Deng) announced the 'open door policy'. This policy was part of Deng's larger plan for economic reforms in China. An open door policy meant that China would allow foreign trade and investment.

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Long before Coke was given permission to sell its products to the Chinese people, it began developing production capabilities through various joint ventures with the Chinese government.

In sharp contrast to its strategies in the past (in China and other countries as well), initially Coke did not own any bottling plants in China. It imported the concentrate and sold it to bottling plants. The bottling plants (that it sold the concentrate to) had been built by Coke and handed over to the Chinese government. The first of these plants was built in Beijing and was operational in 1981. According to an agreement between Coke and the state-owned China National Cereals, Oils, and Foodstuffs Import and Export Corporation (COFCO) in 1980, Coke agreed to build a plant and hand it over to the government in exchange for approval to expand distribution and sales in China. The second bottling plant was built in Guangzhou and was also handed over to the Chinese government in 1982.
Coke has enjoyed great success in China and in the Asian markets on the whole. According to the 2003 Annual report, Coke's Asian operating segments boosted its revenues when growth in its US market was slowing down.

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In terms of volume, China was Coke's second largest market in Asia in 2003 (Refer to Exhibit II) and Coke estimates that China will beat Japan to the top position in 2004. Encouraged by its success in big cities and towns, Coke wants to reach more customers in rural areas. "We'd grown well by reaching the top 100 cities, but how many people were we reaching? Rather than continuing to focus solely on those highly competitive urban areas, Coke must push aggressively into the rest of China and India", said Patrick Siewert, Coke's East and South Asia group president. In early 2004, Coke announced plans to build two new bottling plants in China's western provinces to tap the market potential of China's rural areas.

References

Carpenter, Mason A. Strategic Management: Concepts and Cases, Prentice Hall, 2005.

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