Coke to Put Up $2 billion Stake in China, Hedging Decline in NA Market

Amidst the global economic downturn, Coca Cola is set to increase its direct investment in China by $2 billion within the next three years, a larger sum than its total investment in China since it returned there in 1979.

 

Coca Cola President and CEO Muhtar Kent announced in Shanghai on March 6 that China had become the company's most important R&D laboratory. The company plans to establish a global innovation and technology center in Shanghai, at a cost of $900 billion, which will also become the Coca Cola headquarters for Greater China. 

 

Coke's $2 billion investment will mainly be spent on building new factories in China, expanding sales channels, and reinforcing marketing. Muhtar Kent said this had nothing to do with the company's early promise to invest $2.4 billion in Huiyuan, a major domestic juice maker, and that the company was cooperating with the Ministry of Commerce to get approval for its takeover of Huiyuan. "Coke is to further develop Huiyuan Juice with its global resource advantage."

 

According Huiyuan chairman Zhu Xinli, some Coca Cola board members have turned against the acquisition in present financial situation, but Zhu said he would meet with the Coca Cola's president to "raise him up," triggering rumors over Coca Cola's possible reevaluation of the Huiyuan deal.

 

Coke has invested $1.6 billion in China in the past 30 years. Kent says the company's further investment in China is supported by its confidence in the Chinese market. Coke's business in China grew 19% in 2008, and gained a 29% growth in the fourth quarter alone, during the worst economic conditions of the year. 

 

Coke has decided to increase its investment in China at a time when its North American business is seeing a recession. North America's carbonated beverage market, which used to be the largest in the world, is shrinking rapidly, due in part to the state of the economy but also to a growing consumer desire for non-carbonated healthy beverages. Between January and September, 2008, carbonated beverage sales in the US dropped by 4.8% year on year. According to Coke's third quarter, 2008, financial report, its sales in North America were down 4.4%. 

 

Pepsi, Coke's perennial main rival, is facing the same problem, its third-quarter report showing a 9% fall in sales profits, forcing Pepsi to dismiss 3,300 employees globally and shut down six factories. The two giants are competing fiercely in emerging Asia markets, especially China. 

 

According to Coca Cola China Vice President Li Xiaoyun, daily consumption in China is apparently not influenced by the economic situation. The potential here is enormous, and if Coke doesn't seize the opportunity, it will fall behind its rivals. 

 

Although China has overtaken Brazil as Coke's third largest market, on average Chinese drink only 28 bottles of Coke every year per capita, while in the US and Mexico this number is higher than 500. And regional differences are great in China. In developed cities such as Beijing and Shanghai, each resident drinks on average over 100 bottles annually. 

 

Coke's new Greater China headquarters and global innovation and technology center will hire over 100 researchers and experts in the food industry. It will also recruit a horde of sales specialists. The center will focus on research and development for new products, such as tea, juice, coffee, and some of its carbonated beverages such as Sprite and Fanta. But Coke's key products, such as Coca Cola and Coca Cola Zero, will still be developed and produced in Coke's Atlanta lab, as the company will never reveal the formula to any other area in the world.

 

 

 

Tags: Coca Cola   Huiyuan