Question: We’re in the business of satisfying
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. Background Lion Nathan Limited (hereafter, Lion) was formed in 1988 by the merger of two New Zealand companies: Lion Corporation, a brewer, wine and spirit manufacturer, and hotel operator, and LD Nathan & Company, a food and general merchandise retailer with consumer goods and soft drink interests. The company’s strategic direction had been heavily influenced by its longtime leader, Douglas Myers, who retired from the chairmanship of the company in 2001, which he had held since 1997 (Exhibit C1). Lion was the leading brewer in the duopolistic New Zealand market. Realizing the need to transform itself from a small New Zealand–focused company into a strong Australasian business with an increasingly international outlook, it bought 50 percent of Nat brew Holdings in Australia in 1990. The company also entered into a franchise arrangement with PepsiCo Inc. to manufacture, market, and distribute Pepsi products in Australia. In 1992, Lion acquired the remaining 50 percent of Nat brew and expanded the Pepsi franchise arrangement to New Zealand. In 1993, the company added Hahn Brewery and South Australian Breweries to the operation. The company’s Australian breweries now had a 41 percent share of the Australian beer market and accounted for about 75 percent of Lion’s assets (see Exhibit C2 ). Lion was the second-largest brewer in Australasia. Lion entered the China beer market in April 1995, when it spent NZ$21.6 million to purchase a 60 percent interest in the Taihushui brewery in Wuxi (approximately 120 kilometers west of Shanghai), with the Mashan District Government as the joint venture partner. Unlike most foreign joint-venture breweries in China, the Wuxi brewery had been turned from a loss maker to a profit center before Lion became involved. According to the 50-year agreement with Taihushui, Lion would have management control of the joint venture, and it was envisaged that the local management would be retained, supplemented by Lion personnel in specialist areas such as production and marketing. In January 1996, ownership of the Taihushui brewery was increased to 80 percent. The Taihushui purchase was funded out of Lion’s operating cash flow from its existing brewing businesses in Australia and New Zealand. Lion’s CEO, Myers, said the Wuxi joint venture gave Lion a significant foothold from which to build a greater presence in a high-growth area of China—the Yangtse River Delta. Although beer consumption in China was growing rapidly, with per capita…………………….. 
Required: Write a report identifying the main strategic issues associated with Lion’s China operation.
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Douglas Myers, Chairman since 1997, and CEO for 15 years from 1982, retired as Chairman in 2001. Myers' formal association with the liquor industry began in 1965. It was then he became Managing Director of the family company, The Campbell & Ehrenfried Co. Ltd., continuing the Myers' already long history in brewing and liquor retailing. Six years later he founded New Zealand Wines and Spirits and by 1981 headed Lion Breweries. Under his direction and later under his Chairmanship, Lion Nathan has grown from a small local New Zealand brewer to become one of Australasia's largest beverages companies delivering double digit compound annual growth for shareholders. New Zealand Australia China 1989 95% 5% 0% 1999 20% 75% 5% Lion Seeks Foreign Fizz for Its China Operations Lion Nathan yesterday quashed rumours that its majority shareholder, Japan's largest brewer Kirin Breweries, might take its loss-making Chinese operations off its hands. But Lion is looking for a buyer-or at least a partner-to help stem losses in China. Lion's losses in China were reduced to $A12.9 million during the period compared to the previous half year loss of $A15.7 million. Despite five-year prediction to the contrary, the operation has reported only bad news since Lion entered the market in 1995. Kirin bought 46 percent of Lion in 1998 for about $1.4 billion. At the time, it said one of the reasons for its purchase was Lion's toe-hold in China which accounts for about 5 percent of Lion's overall business. Since this "partnership agreement" lapsed last month, speculation has been rife about Kirin's long-term plans. Lockey (Paul Lockey is Lion's Chief Financial Officer) says Kirin is not interested in Lion's Chinese operation and that it was not the key driver to the company's investment. "It is supportive of the process we're going through and has stated it has no intention to change or operate any differently as a result of the expiry of the partnership principles". Lockey denied there was a link between Friday's resignation of Lion director Mike Smith, who was instrumental in the setting-up of the Chinese operations and negotiations with Kirin, and the problems in China. After 30 years with Lion, 15 as director, Smith said it was simply time to move on. He has been a key contributor to Lion's progress from a small New Zealand brewer to a multinational of considerable clout.
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