PEPSICO CHANGCHUN JOINT VENTURE : PEPSICO CHANGCHUN JOINT VENTURE INTRODUCTION: GROUP-5 GLOBAL SOFT DRINK BUSINESS : GLOBAL SOFT DRINK BUSINESS Carbonated soft drink(CCD) business grew as multinational firms increased their global operations.
USSR, Latin America and Asia were the focus areas for CCI and PCI expansion.
The early movers into the “white market” held the maximum market share thus it was critical for the Pepsi and coke to enter the market without political and economical access.
. Politics and Deal making : Politics and Deal making CSD was highly fragmented market with major regional players.
Lack of effective wide-area distribution and delivery system CSD brands had less awareness.
Local CSD players did enjoy high market share within their regional centers.
CSD then was given as gifts by the PRC state-owned enterprises to their employees on occasions.
Many Chinese had begun to favor the American products which included CSDs.
Major CSD companies around the globe considered the chinese markets with great demands for their products. Contd… : Contd… Prior to 1993 the price of entry into PRC marketplace was high.
The CG limited the growth of foreign companies in order to protect the regional players and to ensure they were given chance to compete.
The only entry for a foreign company to enter was through the Join-Venture with the local Chinese firms.
The structure of JV was critical for the Foreign companies which stated that that the amount of capital injected into the business did not necessarily equal the profit-sharing.
For Guilin CJV though PepsiCo had supplied 80% of the capital, yet received only 17% of the profit. REFORMS : REFORMS In 1993 Premier Deng Xiaopeng introduced series of reforms to make the market more attractive for foreign investments.
New form of enterprise as EJV was introduced.
The PRC government would appoint the SOEs and let them hold 60% of the share and the remaining 40% by the mainland Chinese interests.
The profits were distributed in line with the ratio of capital injected. CSD JV : CSD JV In 1993 CCI signed a MOU with PCR government for $10 million.
The PCR government gave it rights to build bottling facilities in 10 cities in china.
The product could be sold anywhere in china provided it came form chinese JV and once a bottling plant was established no other competitor could build plant in the same area for 2 years.
Shipping difficulty was sorted by building the plant in the MOU city.. PEPSICO JV : PEPSICO JV In 1994 PepsiCo made a similar investment and invested $10 million.
The JV was for the city rights and also for the overall development of the CSD industry in PRC.
They established The chinese food and beverage training centres. About the industry. : About the industry. Pepsico described China’s beverage industry as non-alcoholic beverages.
CSDs held 77% of the entire beverage industry.
CCI was on the lead, it had 13 operational bottling plants and 15% of total CSD share.
PCI 7 bottling industry and 6% of the total CSD share.
Vision 2000. PEPSI CO’S STRATEGIC GOALS : PEPSI CO’S STRATEGIC GOALS Changchun was one of their prime target for expansion.
PepsiCo considered Changchun as a “build and maintain barriers” site within a “steady phase-in over the first three years”. The Proposed Joint Venture : The Proposed Joint Venture The proposal was for PEPSICO to control a 57.5% interest in JV, 37.5%by the Second Food Factory AND Beijing Chong Yin would hold the remaining five percent.
See Exhibit 5 FINANCIAL PROJECTIONS- JV DATA : FINANCIAL PROJECTIONS- JV DATA WACC – 13%
Hurdle Rate – 16% Income Projections : Income Projections Sales $4.9 million
TAXATION AND STATUTORY RESERVES:-
Tax Holiday for two years.
Then Reduced Taxes 7.5% and then 15% would apply.
Additionally, a new local tax was set to take effect in 2001 and was projected to be 3%. Contd… : Contd… As per PRC Laws , the companies must set aside 15 percent of their earning as a statutory reserve. The company were prohibited from distributing all of their earnings.
Capital Expenditure and Working Capital Changes:-
Exhibit 4. Working Capital Changes : Working Capital Changes Working Capital = Accounts Receivables + Inventory – Accounts Payables.
Half of the sales would be COD and the other Half would have an average credit term of 120 Days.
AP=12.3% OF COGS
Bottle and Shell Deposit And Breakage:-
Exhibit 9. THANK YOU : THANK YOU