We're in the business of satisfying thirst. We do it very well. We're also thirsty ourselves. Thirsty for continued profitable growth. Every gain delivers more for our shareholders. We're thirsty for knowledge. People and their preferences change all the time. We're open to ideas from everywhere that will make us better at beverages and brands. We're thirsty for a bigger share of the market. It's a competitive place, but we're determined to prevail through the sheer quality of our brands. We're doing all this with passion, integrity and a "can do" attitude that enables us to face reality and turn it to our advantage.
The key challenge was to adapt the Chinese guanxi (relationship) way of doing business to Western minds, particularly those that emphasized selling. Lion's human resources director in China, Shane Slipais, said, "Relationship building is vital to all success in China, either personal or in business.... Chinese spend more time on and off the job with each other than in Australia or New Zealand. ... The secret of doing business in China is to be rigid in what you want to achieve but be flexible in the way you get there."3Guanxi worked in both formal and infor¬mal ways. Outright confrontation in the workplace was generally a no-no, and employer/employee disputes were dealt with through intermediaries.
Compliance with regulations, such as paying taxes and not polluting the environment, was far less obvious. The pecking order put multinational companies at the top of the compliance list, Chinese state-owned enterprises at the bottom, and overseas-Chinese-run businesses in the middle. Corruption was endemic in any system where a form of authority, in this case the Communist Party, was above the law. It was a day-to-day reality.4 From a Western perspective the main problem was the need to understand different business philosophies and practices. Failure to do so could be expensive. As one commentator stated, "There is a rule of thumb about China—do your homework before you get here. Take your worst-case scenario for cost and time, multiply it by two and you have the full cost estimate."
The desire for short-term profits and/or high rates of return did not bring much success for foreign investors in China. Chinese partners emphasized long-term relationships with reasonable returns and mutual benefits. Only half of China's breweries made money, and the foreigners' track record so far had not been conspicuously better than the locals'. Both Lion's Australian archrival, Foster's, whose three loss-making breweries together notched up a deficit of $29 million in 1997, and British brewer Bass decided to quit.
In deciding to get out of China, Lion entered into an unconditional agreement in 2004 to sell for US$154 million its Chinese beer business to China Resources Breweries Limited (CRB),5 which was formed in 1994 and was engaged in the production, sales, and marketing of beer and beverages in China. At the time, Lion's business in China consisted of three breweries employing over 1,000 people in the economically developed Yangtze River Delta region close to Shanghai. The breweries had installed capacity of 5.16 million hectoliters, with sales volume of 2.19 million hectoliters forecast for the year ending September 2004. Lion's brands included the mainstream beers Taihushui, Linkman, and Rheineck, which were distributed in the Yangtze River Delta. In this region, Lion had an estimated market share of 20 percent and leading positions in and around the cities of Wuxi, Suzhou, Changzhou, and Nanjing.
Required
Write a report identifying the main strategic issues associated with Lion's China operation.