Coca-Cola in China :Squeezed out

China indicates the real targets of its anti-monopoly law: outsiders

AP

LAST August, after 14 years of debate, the Chinese government at last imposed what was informally referred to as its “economic constitution”, a broad anti-monopoly law for a country rife with state-imposed monopolies. In the subsequent months, people have wondered how the law would be applied, and whether it would advance China’s transformation into a market economy, or serve as an impediment to genuine competition. On Wednesday March 18th an answer emerged with the rejection of the largest outright acquisition by a foreign company, a $2.4 billion offer by Coca-Cola for China Huiyuan, the country’s largest juice company.

When the deal was announced last September, it was at a price three times Huiyuan’s valuation at the time. Since then, as global markets have collapsed, it has only become more appealing. Huiyuan is a private company and juice had previously been free of government control, so theoretically it should have been available for purchase. “It is a very unfortunate outcome in an industry that has no economic or national-security significance,” says Lester Ross of WilmerHale, a law firm, in Beijing.

The most benign interpretation of the rejection being bandied about by lawyers and bankers is that it reflects a political response to critical comments by America’s new administration—a warning, of sorts, that could dissipate quickly if the economic relationship between China and America can find a firm footing. The more dire interpretation is that even as China publicly urges other countries to commit to opening their markets to Chinese investment and trade, it is imposing yet another barrier to outsiders. Worse still, the barriers are in its domestic consumer sector, one of the rare global economic bright spots.

Adding irony to the decision, it comes just as the Chinese government is indicating that it is actively encouraging, if not forcing, consolidation and greater market concentration in a number of areas, including steel, cars and airlines, and just after it imposed a new oligopoly in telecommunications. No domestic Chinese transaction has fallen foul of the new monopoly law.

Signs that foreign companies might be the primary targets of the law began to emerge in November, when a merger between two brewers, America’s Anheuser-Busch and Belgium’s InBev, was endorsed by Chinese regulators only on the condition that the combined firm’s existing interest in several domestic breweries be frozen. In particular, Anheuser-Busch’s non-controlling 27% stake in Tsingtao, a leading Chinese brewer, was largely liquidated in January after what is presumed to be pressure from the government.

The Coca-Cola Company holds as much as half of the domestic Chinese market for carbonated beverages, but the juice business is highly fragmented. Estimates are not particularly reliable, but various accounts suggest the two companies would control more than of 20% of the juice business. In a brief statement, China’s ministry of commerce said Coke’s “dominant status” might “imperil” small competitors and force consumers to face higher prices and less choice.

After the decision was announced, investment banks were left wondering, in the words of one employee, whether “a key plank in their business had just blown up.” Coke has spent years developing its presence in China, and has invested heavily, presumably making it one of the world’s more acceptable buyers. It is also one of the few companies able to finance a big deal in today’s difficult circumstances. If Coke was not acceptable to the Chinese authorities, then who is? The rejection will inevitably be used as evidence of non-reciprocity, and the collusion between the country’s state and private sectors, by anyone opposed to China’s recent efforts to buy companies abroad.

Deepening the gloom, another new Chinese law comes into effect on May 1st, subjecting any transfer of a state-controlled asset to yet another layer of review, this time by a local commission. Theoretically this is not aimed at any particular kind of acquirer, and would not block well-conceived deals, but that, of course, was said about the monopoly law as well. The new law had not received much attention. It will now.

Optimism pushes downturn

Pessimism is the most serious cause for the global economic tsunami.

It is only with a sense of optimism, preferably accompanied by a sense of energy and laughter, that we will be able to pick ourselves up from a broken Humpty Dumpty Sir David Tang

There is an ocean of people who are now feeling so depressed that not only have they become resigned to the fact that they are in deep trouble, but they have told everybody else that they are also in deep trouble.

Pessimism has an uncanny knack of being self-fulfilling.

No wonder almost every single quoted share in the world has gone down significantly, mostly by half, if not much more.

Even the most solid companies, such as HSBC, which has no real exposure; or BP, which has significant oil reserves; or a company like Dell, which has an enormous amount of cash - the shares of these companies have traded down considerably.

That is the barometer of our general pessimism.

Big collapses

The present condition has also been a wake-up call for those who have lost sight of understanding the businesses in which they invest.

Before now, there were far too many people out there trying to profit from the shuffling of papers and commodities and derivatives and options and hedging: really sophisticated instruments - but all too clever by half.

What we all need to do is to sit down and calm down and go back to basics

It just goes to show that having all these smart theories and ingenious ideas is no substitute for a solid business sense based on the fundamentals of supply and demand, with particular reference to the efficiency of the workforce; all those basic components that people such as Warren Buffett emphasise and are often ridiculed for.

Let this depressing climate also be a reminder that if you grow big, you can collapse big. The higher you climb the harder you fall.

Think small

In this mania for globalisation, it might not necessarily be good to be absolutely massive.

Just look at some of the banks and car manufacturers - they are huge, and they are in huge trouble.

What we all need to do is to sit down and calm down and go back to basics.

And most important of all, shed our sense of pessimism.

It is only with a sense of optimism, preferably accompanied by a sense of energy and laughter, that we will be able to pick ourselves up from a broken Humpty Dumpty.

In particular, governments must immediately instigate infrastructure projects to increase employment, and they must force banks, particularly those that they have rescued, to lend to small businesses.

Without a general sense of gainful employment, from which the ordinary people at large can grow optimistic, we run a huge danger of increasing unemployment.

But we cannot be complacent.

We must stem growing unemployment and promote maximum employment.

Jobs measure feelings more accurately than the Richter scale measures earthquakes.

Sir David Tang is the Hong Kong-born, English-educated entrepreneur who founded the clothing chain Shanghai Tang