In China, Drinking is a Business Skill
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One of the most memorable lines I heard from a local friend while I worked in Shanghai was "In China, drinking is a business skill." I was taken aback at the candor of this statement, given the general shyness among most of my colleagues. The more we talked, though, the more I understood the incredible importance of guanxi, basically translated as "connections." In China, just as in the West, connections are forged over drinks, laughter, conversation, dinners, shared interests and the like. In the West, though, after all the social leg work is done and the deal is verbally agreed upon, we will still present our new "friend" with a 3 pound legal document outlining all the ways we don't trust him. In China, the guanxi is used for more than just future business. Guanxi helps each party establish trust in an environment of virtual lawlessness (by Western standards).
If guanxi is a car, then bai jiu is the gasoline. Bai jiu is a spirit distilled from wheat, sorghum, barley or millet and is nearly ubiquitous in China. It is the lubrication for the notoriously long Chinese business dinners that are 95% small talk, 5% actual business discussion. I can't at all call myself a bai jiu expert, but what little I had can best be described as a mixture of vinegar and Everclear. To be fair, I had the cheap stuff, and friends that had better versions weren't entirely nauseated. While bai jiu is the current beverage of choice, there is a new option making its way onto the lazy susan: Whisky.
In the image obsessed world of nouveau riche China, nothing is more impressive than a good foreign brand. The gaudier the better. This ideal permeates through everything: clothes, cars, food, education, and, of course, drinks. If a business prospect orders an expensive foreign spirit, the deal seems more legitimate. Exports of Scotch whisky increased 23% in 2011 over 2010, and some of the companies supplying this include Beam (NYSE: BEAM) and Diageo (NYSE: DEO). The demand is such that Beam's Laphroaig 10 Year Islay Scotch is facing an unprecedented shortage, due primarily to demand in Asia. This contributed to Beam's 7% sales growth rate in their APSA (Pacific Rim) countries (unfortunately Beam doesn't break out each country or brand).
Diageo recently made a huge commitment to Scotch demand in China by announcing a plan to invest more than $1.5 Billion in production over the next five years. Their Johnny Walker brand, the world's most popular whisky, is widely regarded in China as a status symbol and the social stratification implications of red label, black label, gold label, and the most exclusive, blue label, help to push the image conscious consumer into a more expensive product. Diageo is so committed to China, in fact, that in May 2011 they introduced the first Johnny Walker house outside Scotland to Shanghai. The grand opening of this "embassy of whisky culture" featured the sale of a limited edition bottling costing more than $2,500 each.
As China's wealth continues to expand, the demand for brands like Diageo and Beam will increase. While the status quo has long been importing from China, the best side to be on these days is that of the exporter to China. A company with a recognizable brand that can take advantage of this will be a good investment for some time to come.
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