The China Phenomenon

1. The China Phenomenon Present to : The Duke MBA Program Prepared by : Francis Chu Date : February 26, 2003

2. Two Case Studies • Multi-national beverage product • Local household appliance product

3. Multi-national Beverage Product Market Expansion Considerations in 1997

4. CRITERIA 3 Factors • Demographics • Market size (demographics) • Purchasing power(average income) • Market Environment • Competitive beverage market • Other multi-national competitors • Advertising Efficiency • 30” TVC CPRP comparison on city level

5. China - Geographic Segmentation Heilongjiang Jilin Liaoning Xinjiang Beijing Inner Mongolia Hebei Tianjin Shanxi Shandong Qinghai Gansu Henan Shaanxi Jiangsu Tibet Anhui Shanghai Hubei Sichuan Chongqing Zhejiang Hunan Jiangxi East South North North East South West North West Guizhou Fujian Yunan Autonomous Region Guangxi Guangdong Hainan

6. China - Geographic Segmentation

7. China Cities - Population 2MM+ HRB CC SY BJ TJ XA NJ SH WH CD CQ Population 2MM+ GZ

8. China Cities - Population 2MM+

9. China Cities - Population 1MM+ QQHR HRB CC JL WLMQ JL SY FS AS BJ TS BT TJ DL SJZ TY JN ZB QD LZ ZZ XZ XA NJ SH WH CD HZ CQ NC CS GY FZ KM Population 2MM+ GZ Population 1-2MM

10. China Cities - Population 1-2MM

11. China Cities - Population 600M+ QQHR YC DQ HRB JX MDJ CC JL WLMQ JL SY FS FX BX ZJK JZ AS HHHT BJ TS BT DT TJ DL SJZ YT TY HD JN ZB QD LZ WF ZaZ ZZ XZ LY XA HN NJ CZ WX SH HF SZ WH CD JZ HZ CQ NB NC CS GY ZhuZ FZ KM Population 2MM+ LuZ GZ NN ST Population 1-2MM SHZ Population 0.6-1MM

12. China Cities - Population 0.6-1MM

13. China VS World - GDP & Personal Spending

14. Personal Spending - Indicator of Wealth

15. Per Capita Annual Income of Urban and Rural Household and the Related Index

16. Market Profile

17. Market Profile

18. Market Profile

19. Market Profile

20. Market Profile

21. Demographics - Summary • In general, coastal cities are better developed than inland cities. • The wealthiest cities are concentrated in the East (Shanghai, Jiangsu, Zhejiang) and the South (Guangdong). • There is a 10 years’ difference between income level of urban and rural population. In 1997, the net income of rural household is only 40% of the disposable income of urban household. • According to the En Ge Er Index, the food spending percentage in total spending is an indicator of the nation’s state of wealth. Urban China is now in the “moderately well-off”state while rural China is still at “subsistent”level. • The food & beverage market in US & Japan grew at the fastest rate when GDP per capita has reached US$1000 and food spending at En Ge Er Index is between 23 to 32%. China is expected to hit the US$1000 level at year 2003 or even later. We are market developer at present, taking up important market positions and pre-empting key competitors. We would only be able to look at a more rewarding return of investment by year 2003.

22. Market Environment

23. Leading Beverage Companies in China

24. Beverage Market - Ad Spending Share 1998 Jan - Dec* Spending: 2,777,782,078 Source: X&L * 250 Channels +350 Print

25. Beverage Market- Ad Spending Share Company / Brand 1998 Spending (TV & Print) (RMB ‘000) 1 Wahaha 332,869 2 Jianlibao 43,078 3 Robust 205,163 4 Xuershen 153,967 5 Cocacola 164,679 6 Pepsi 99,544 7 Yieshu 39,001 8 Zhenguanghe 7,287 9 Weiwei 28,153 10 Huiyuan 24,542 11 Yibao 5,899 12 Huierkang 3,216 13 Lulu 48,404 Others 1,621,982 TV & Print Total 2,777,784

26. Beverage Advertising - Market Allocation 1998 Jan - Dec* Spending: 2,639,434,820(TV only) Source: X&L * 250 Channels

27. Fast Food & Cola Consumption Source: CMMS 98, Universe: people aged 15-59

28. Cola Consumption Vs Share of Spending Source:CMMS 98 & X&L, Universe: people aged 15-59

29. CCI / PCI / KFC Distribution

30. CCI / PCI /KFC Distribution

31. CCI / PCI / KFC Distribution

32. CCI / PCI / KFC Distribution

33. CCI / PCI / KFC Distribution

34. Market Environment - Summary • Current market size of total beverages is 10,690,000 tons. Average consumption per capita is only 10 litre, which is only 1/4 of the world average. • Leading top 20 producers account for approximately 50% of China’s total productions. This 20 producers represent 13 companies. With exception of CocaCola and Pepsi Cola, all the rest are local companies. • Carbonated drinks still dominate the market with 46% share, being followed by bottled water (18.2%) and fruit / vegetable juice (11.2%). • Foreign food like Coke/ Pepsi and KFC/McDonald are more concentrated in the East and South. Beijing and Tianjin are the only 2 cities of focus in the North while there are also attempts in the other 3 less developed regions Performance is less satisfactory comparing to the East, South & North.

35. Market Environment - Summary • Beverage product is highly responsive to advertising. Total beverage TV advertising in 1998 amount to RMB 2,778 million. There are 4 companies spending more than 100 million in their brands, including Wahaha, Robust, Xuersher and CocaCola. • While most local companies use CCTV for national media penctration, Coke and Pepsi only focus on regional or local media. Shanghai, Guangzhou and Beijing are again the most important markets for advertising outside of CCTV. • Coke is a national leader in the carbonated drinks, yet lost to Pepsi in 2 key markets (Shanghai and Guangzhou). Pepsi is investing far ahead of their market share in these two markets, being 48% and 19% of their total advertising spend. • With exception of CocaCola, there is a lack of an obvious national winner. Most brands focus in the hometown and their vincity, and perform much better compared to the more distant regions. This is due to regional cultural difference as well as greater loyalty to a home brand.

36. Advertising Efficiency

37. Advertising Cost Efficiency

38. Advertising Cost Efficiency

39. Advertising Cost Efficiency

40. Advertising Cost Efficiency

41. Maket Cost Efficiency

42. Advertising Efficiency - Summary • In terms of cost per rating point (CPRP) it varies significantly among different cities. In general, it has a direct relationship with the buying power. The higher the buying power is , the more expensive will be its CPRP. • Shanghai is the most expensive, at RMB2,271 per 30” spot, being followed by Beijing at RMB1,800. • CPRP for the other more populated and higher income cities are running between RMB 500 to 800. The rest are running at RMB 500 and below.

43. Conclusions

44. Conclusions & Recommendations • Focus on urban cities. Skip the rural towns for the following reasons • We sell at premium price, while rurals are more sensitive to pricing due to a lower income. • Local brands are stronger in achieving deeper penetration and attracting local loyalty in their hometown neighbourhood. • Higher risk of money collection. • Follow the success of other multi-national brands. Do not be a pioneer to cultivate and develop a new market • Strategy is to reinforce our existing markets. • New market developments should be evolutionary instead of revolutionary, and with a long term objective.

45. Conclusions & Recommendations • Needs to be realistic in setting our sales target. • Lack of an obvious national winner in this market. Even for a national brand dike CocaCola, is losing to Pepsi in two key cities Shanghai and Guangzhou. • Still a long way to go from an underdeveloped beverage market to a more mature market. Expects the faster growth at 2003 the earliest or maybe as late as 2010. • Be persistent in advertising. It is as competitive as in the marketing sales. • To maintain high exposure at existing key markets. • To attain a threshold level in new markets as beverage products are highly responsive to advertising.

46. Conclusions & Recommendations • A third regional sales hub should be considered if we want to compete in a more established and therefore more competitive market. In such case, the neighbourhood areas should have the potential enough to justify a strong hub office. • Recommended Zone 1 - China North • Pros:Extablished market where other multi-national companies are successful. Able to serve as a hub for Tianjin and the Shandong province. • Cons:More established and therefore more competitive. Higher entry cost in terms of marketing and advertising. • Recommended Zone 2 - Chengdu • Pros:High population. Relatively low entry cost. • Cons:Still establishing, not a place of proven success for other multi-national companies. Lack of potential cities for development in the neighbourhood.

47. New Market - Recommendations QQHR YC DQ HRB JX MDJ CC JL WLMQ JL SY FS FX BX ZJK JZ AS HHHT BJ TS BT DT TJ DL SJZ YT TY HD JN ZB QD LZ WF ZaZ ZZ XZ LY XA HN NJ CZ WX SH HF SZ WH CD JZ HZ CQ NB NC CS GY ZhuZ FZ KM Population 2MM+ LuZ GZ NN ST Population 1-2MM Recommended Zone 1 SHZ Population 0.6-1MM Recommended Zone 2

48. Local Household Appliance Product Idal, the rise & fall TCL, from one peak to another

49. Idal, the rise & fall • 1995, Idal established at Zhongshan, Guangdong • 1996 Oct, tactical price at RMB1,997 • 1996 Nov, TVC featuring celebrity Jacky Chan • 1997, bidding CCTV prime time with RMB82 million • 1998, bidding CCTV prime time with RMB210 million

50. Idal, the rise & fall (cont’d) • 1998 April, Idal passed ISO9001 • 1999 April, internal war between Idal shareholders. Legal announcements indemnity on leading Guangzhou newspapers. • 2000 April, court case and Idal dissolved.