Tsingtao Brewery Co, founded in 1903 when the city of Qingdao was under German rule, makes China's most famous beer. That doesn't impress taxi driver Ge Heying, 1125km west in Xian, who always drinks Hans, a 20-year-old local brand named after a visiting German engineer.
"Hans is a great thirst-quencher," said the 40-year-old Ge, ferrying tourists to see statues at the Xian tomb of Emperor Qin Shihuang. After a drink of Hans at night in the hot, dusty city "there's no need to wake up and drink water." Both beers, in fact, are made by Tsingtao. That China's biggest brewer hasn't been able to bring tastes and production techniques in line with those of its home base in the five years since buying Xian Brewery worries investors. Much as Emperor Qin faced walls when he tried to unify the nation in the third century BC, Tsingtao is meeting obstacles in its bid to conquer an US$8.5 billion beer market divided among 400 brewers.
"Right now its acquisitions are too segregated," said David Chapman, a senior fund manager at Towry Law (Asia) Ltd, which holds some of the stock in its US$700 million mutual fund.
"It has too many small breweries in little towns." While acquisitions helped Tsingtao's sales rise 50 percent in the first five months, Lisa Bao, an analyst at ING Barings, forecasts per-share earnings to fall 11 percent this year on debt payments and plant-upgrading costs, before rising again next year.
She has a "hold" recommendation on the Hong Kong-traded stock.
Striking south and west from its base on the northern coast in Qingdao, the brewer has already swallowed 40 rivals since 1994.
Yet regional brews still predominate: Tsingtao has only 8 percent of sales and doesn't expect to reach double digits until 2003.
Rivals
Nearest rivals Beijing Yanjing Brewery Co and China Resources Enterprise Ltd, with 11 percent between them, are also buying smaller breweries putting pressure on Tsingtao to continue its buying spree.
"It's unlikely Tsingtao will slow the pace of acquisitions," said Bao. "If it does, rivals such as Yanjing and China Resources will catch up." Tsingtao's operations in Xian illustrate the challenge it faces and the potential rewards. Like many of its acquisitions, the unit was losing money when Tsingtao bought it. After cutting about 300 jobs and persuading local banks to waive 46 million yuan (US$5.6 million) in interest payments, the unit returned to profit in 1997.
"We wouldn't have returned to profit without Tsingtao and the waiver," said Zhang Anwen, the unit's vice general manager.
Last year, the unit had pretax earnings of 74 million yuan, up 48 percent from a year earlier. This year, it aims to sell 250,000 tons of Hans beer and will spend 120 million yuan to install 50,000 tons of new capacity.
Just one thing is missing in Xian: Tsingtao-brand beer. In only a few cases is the company producing its premium brand at recently acquired plants -- partly out of concern to maintain quality and partly due to respect for local tastes.
"We keep most of the local brands because they are already accepted by local drinkers," said Tsingtao spokeswoman Yuan Lu, "but we plan to unify all brands and produce Tsingtao at local brewers if they meet our criteria and if there is market demand." Newly acquired brands carry its trademark red circle enclosing a motif of a Qingdao pagoda. The company plans to spend about 100 million yuan annually, or about 4 percent of sales, to promote its brands, said spokesman Zhang Ruixiang.
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