When Premier Wen Jiabao warned in March that government officials must curtail their consumption of baijiu, one company wasn’t paying much heed: Lenovo. While Wen’s remark was aimed at thwarting corruption and waste, the computer maker obviously didn’t think his comment needed to be taken too seriously.
Or, at least, that seems to be the suggestion in Lenovo’s continued enthusiasm for the drinks business. A string of purchases by Legend – Lenovo’s parent – in the baijiu industry highlights what analysts believe is a new direction for the company. The plan is to create a booze conglomerate to buttress Legend against a personal computer market that’s experiencing slimmer margins.
Legend has always been ready to invest beyond its controlling stake in Lenovo and was also a founder shareholder in Hony Capital, a pioneer in China’s private equity industry.
Legend’s taste for alcohol was highlighted once again when it invested Rmb140 million in a 51% stake in Shuguang Wine in Sichuan province recently, reports the Western China Metropolis. It now aims to turn the distillery, located near Luzhou city, into a large production base for the group. Shuguang plans to build 10 new production and packaging lines with an expected capacity of 10,000 tonnes of alcohol, the newspaper says.
Last year Legend also acquired a 39% stake in Wuling Wine in Hunan province for Rmb130 million, and a 87% stake in Qianlongzui Wine in Hebei for an undisclosed sum thought to be less than Rmb1 billion, according to the Investor Journal.
Further, there are rumours that Legend is in negotiations to buy the Confucian Family Wine company in Shandong, as well as Wenwang Wine in Anhui province.
Another Legend subsidiary also holds a stake in Yingjia Wine company in Anhui.
The new strategy is being guided by Legend chairman Liu Chuanzhi, and carried out by Lu Tong, a wine and spirits specialist who was previously vice-president of Vats Group, an owner of 13 alcoholic beverage companies.
What’s the attraction? Baijiu, a clear spirit derived from sorghum, is seen as a smart investment because of its growth. In his new book Tiger Head, Snake Tails Jonathan Fenby says consumption of baijiu has increased by 50% in the past three years. In WiC134 we even described how the nation’s most famous baijiu Kweichow Moutai saw it profits rise around 80% last year.
Why such fast growth? Baijiu is an intimate part of dealmaking and networking. Businessmen and officials regularly imbibe large quantities, presumably expensing most of the final bill. (So much gets drunk, in fact, that more than a few have died of alcohol poisoning.) Hence when Wen warned of plans to ban the purchasing of liquor with the public purse, shares in associated drinks companies on the Shanghai Stock Exchange fell by over 6%.
Still, Legend’s Liu seems to see the industry as a potential cash cow. Yue Chuanbo, deputy editor of Peking University’s Business Review, says the large-scale investment in liquor is designed to support his ambitious plans to become the GE of China by improving cashflow and profits.
The move comes as returns in the personal computer industry are slowing; sales growth dropped to 12.4% in 2011 and operating margins fell to 5.1% from 5.6% the previous year.
But the comparison with GE rankles with some of Legend’s critics.
“Lenovo as a leading national brand sells liquor, while GE, Siemens and other international companies are expanding into energy, lighting, medical services and so on,” reflected one disparaging source quoted by the Investor Journal.
In an article from the Tsinghua Business Review, titled ‘How to Become a Great Company’, Liu has also said that Lenovo must become a “long-life, large-scale and socially responsible” enterprise.
But is the focus on booming baijiu – an industry with links to corruption and the abuse of state funds – really the best way to do that, the Investor Journal queries?
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