China Consumer

The real package?

Tetra Pak cries foul on China challenger

The real package?

Made in Sweden, or China?

There’s a saying that great things come in small packages (often favoured by those of smaller stature, admittedly). But Greatview Aseptic Packaging – a company you’ve almost definitely never heard of – agrees with the proposition. The Chinese maker of milk cartons has ambitions to go global, and thanks to a Hong Kong IPO last month, is getting its fair share of investor attention.

But as the Shandong Business Daily points out, Greatview faces a battle that even its own boss characterises as being akin to a fight between “an ant and an elephant”. The industrial pachyderm (look it up) that chairman Hong Gang has in mind is Tetra Pak. It also happens to be his former employer.

Tetra Pak dominates the world market for aseptic (or sterile) packaging – the cartons commonly used to hold milks, fruit juices and the like. The Swedish firm pioneered their design and manufacture in 1952 and first brought them to China in 1972 (see WiC44). In 2009 it sold 27 billion packs in China, meaning it held roughly 80% of the fast-growing market.

That makes it less of a surprise that a local firm saw an opportunity to take Tetra Pak on. Greatview’s story began in 2001 when Shandong Tralin Packaging was founded. Butthe company’s real growth began after Hong Gang joined in 2003, along with a group of engineers from Tetra Pak.

The strategy was simple: cut packaging prices by 20% to Rmb0.32 per pack. The Shandong Business Daily reports that this immediately got the attention of China’s big milk producers, since up to 40% of their costs were incurred in packaging. Mengniu Dairy became a customer, and this in turn had an added benefit: one of Mengniu’s shareholders was the local private equity player, CDH. It saw the potential of the business, and alongside Bain Capital became Greatview’s major shareholder in 2006.

Hong knew that he’d find it tough to eat into Tetra Pak’s market share. The Swedish firm’s business consists of selling two separate but connected products: industrial machines and aseptic packages. The former are bought by Tetra Pak’s clients and enable them to fill the cartons (for example with milks and juices). But the bulk of earnings result from selling the packaging material itself. As it turns out, that’s a very sticky business model.

Hong indeed argued to China’s Ministry of Commerce that Tetra Pak’s business was monopolistic. He claimed that it signed multi-year deals which prevented buyers of its machines from using third-party packaging, and also had a hold over customers because only it could service the machines and provide spare parts. Nothing came of Hong’s complaint, since China then had no law against monopolies.

Moreover, Tetra Pak could argue its technological lead lay behind its success. In 2006 it launched the world’s fastest packaging machines – capable of filling 24,000 cartons (sized 250ml) per hour.

Hong’s response was to unveil his own machines, and hope that his more competitive carton prices would induce customers to switch. He’s had a decent measure of success, doubling sales volumes between 2007 and 2009 to 3.8 billion packages (which puts it in second place to Tetra Pak in China with 9.1% of the market). More is envisaged: with two new factories soon to come online, Greatview is set to increase its manufacturing capacity from 5.1 billion packs to 9.2 billion by the end of this year.

Meanwhile the $183 million IPO has highlighted Greatview’s global ambitions. The prospectus noted that the Chinese firm is building a factory in Germany to take on the Swedish giant in its home continent. But Tetra Pak is sterling itself for a fight, welcoming its Chinese challenger with a lawsuit alleging patent infringement. Its senior VP for communications told the South China Morning Post: “I don’t know if they [Greatview] are cheaper. What I know is that they build their business primarily on selling packaging material made with machines we have developed. Given this, we will relentlessly defend our proprietary technology from copying.”

In a market where annual global sales volumes are 270 billion units (and rising), it looks like it could develop into quite a battle.

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