Heineken's purchase of a 21 per cent stake in Guangdong Brewery is expected to generate significant volume increases for the brand and give the Dutch group a stronger foothold in a market with plenty of upside potential for beer consumption.
The investment mirrors Anheuser-Busch's strategy of boosting its stake in Tsingtao, China's largest beer company, from 4.5 to 27 per cent in 2002 to unlock the market's potential with minimal tears.
It's interesting that Heineken has taken a leaf from Anheuser's book.
After all, Heineken's chief rival is likely to be Anheuser's label Budweiser, seen by many as the only credible international beer brand in China.
With a clash between the two rivals in the works, observers believe a brand battle could generate a positive outcome of growing the category.
Analysts say the move to brew locally is a modest first step for Heineken, which has been far more cautious about the prospects for foreign brewers in what has traditionally been an insular market.
Heineken has seen the battle wounds inflicted on gung-ho foreign brewers scrambling for a piece of the market in the early '90s. While it held off making inroads in the mainland, the pressure to enter can no longer be ignored.
Beer volumes in other markets are stagnating or shrinking in some cases, prompting brewers to take a fresh look at China's untapped consumption levels as the country prepares to lift tariffs on imported beer this year.
China is the largest beer market in the world, with an estimated sales volume of 250 million hectoliters of beer in 2003 and a growth potential of up to five per cent - figures that have foreign beer makers thirsty for its possibilities.
Mark Kennedy, director of marketing and brand strategy at Landor Associates, says Heineken's cautious step into China is hardly surprising. "Heineken is incredibly strict about where they brew and about quality control.
They would have waited to get a brewery up to the standard they are looking for to ensure that it is the same product in China."
Heineken's vigilance may, however, be its drawback in China. Budweiser's first mover advantage is already paying dividends. The lager has been locally brewed for more than seven years and aggressive above-the-line advertising, focused largely on television, has given it the lion's share of the beer market among foreign brands.
An industry source explains: "Budweiser came earlier and can leverage on better distribution due to reduced entry cost. Heineken is a latecomer and initial investment will be huge and it will have to meet target and profit margins and look at its distribution."
But Heineken's strategy could still pay off, says Kennedy. "Heineken waited until it built its brand but most (foreign brands) have gone with the product first then built the brand. Even Budweiser did not make money for over 10 years, but they have deep pockets and threw money at advertising."
While the beer battle will be played out largely between Heineken and Budweiser, an industry source says Japanese beer brands such as Suntory - which are aggressive in China's central region - are also jostling for market share.
For now, most brands are regional at best, with Tsingtao (part owned by Anheuser-Busch) the only beer with anything approaching a nationwide presence. International brands, meanwhile, still have only a small share of even the biggest provincial markets.
"The estimated numbers for 2002 market share for the total beer market was about 95 per cent for local brands and five per cent for joint venture/imported brands," says the source, adding, "The local beer is very cheap, between Rmb 1.5 to Rmb 2 for a bottle. Charges for water are higher and during lunch you see the locals choosing to drink beer over soft drinks."
Heineken, which has traditionally focused on below-the-line and on-premise promotions, delved into above-the-line advertising last year. Adds the source: "Heineken sponsored the Shanghai Tennis Open in '02 and launched TVCs in China for their sponsorship of The Matrix. They are still very tactical but they are doing both ATL and BTL to take as much market share as possible. Bud still leads by far among foreign brands and to take a small market share from Bud will not be easy."
It is likely to take aggressive marketing and a deeper distribution network before Heineken can hope to loosen Budweiser's grip on China and makes inroads into a market dominated by local brands.