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Emerald Emerging Markets Case Studies From Asia to Africa: the international expansion of Hon Chuan enterprise Caleb Huanyong Chen, Allan KK Chan,

Article information: To cite this document: Caleb Huanyong Chen, Allan KK Chan, (2018) "From Asia to Africa: the international expansion of Hon Chuan enterprise", Emerald Emerging Markets Case Studies, Vol. 8 Issue: 1, pp.1-33, https://doi.org/10.1108/EEMCS-06-2017-0145 Permanent link to this document: https://doi.org/10.1108/EEMCS-06-2017-0145

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https://doi.org/10.1108/EEMCS-06-2017-0145

From Asia to Africa: the international expansion of Hon Chuan enterprise

Caleb Huanyong Chen and Allan KK Chan

Caleb Huanyong Chen is Research Associate at Chinese Businesses Case Centre, Hong Kong Baptist University, Kowloon, Hong Kong. Allan KK Chan is Professor at the Department of Marketing, Hong Kong Baptist University, Kowloon, Hong Kong.

It was an October morning in 2016, and it was still hot in Taiwan. At the Hon Chuan Enterprise headquarters, the president, Hsih-Chung Tsao, was reading the latest monthly report. Beside him was the chairman, Hung-Chuan Dai, his sister’s son. Together they had led the company expansion from Taiwan to mainland China and then into Southeast Asia. Their 41st factory had begun production two months earlier in Mozambique, Africa. The African base may help the company reach the turnover milestone of NT$20bn (approximately US$640m) in the next year. This NT$20bn turnover had been a target since 2013, but they have so far failed to reach it. As an original equipment manufacturer (OEM) in beverage packaging and filling, Hon Chuan to some extent relied on customers that owned brands. After losing a key customer in mainland China, the company had experienced a three-year slump that forced Tsao to modify his strategy. At the next board meeting, Tsao had to present a strategic plan to the directors. He had to get the company back on a fast-growth track. However, his intention was not just to add another manufacturing base, but to transform the company’s business structure through international expansion. Africa was the new battlefield bearing his ambition. In his mind, there should be three stages. The first stage would entail occupying the markets of Mozambique and South Africa. The second stage would involve establishing more factories and penetrating more African locations. The final stage would be launching self-owned brand beverages, as the company had done in Cambodia just one year earlier. Tsao’s plan was to upgrade Hon Chuan to an OBM, holding destiny in its own hands. Yet, how could this be achieved in Africa? It would be a new journey full of challenges. Africa was more complex than other markets. The company’s first factory there had just been established and its future was still unknown. It was uncertain whether the Cambodian model would also work in Africa. Looking through the window, Tsao’s thoughts were far away.

Company history

Hon Chuan was founded by Chin-Si Dai with NT$600,000 (approximately US$19,200)[1] in 1969. Chin-Si Dai named the company Hon Chuan after his son, Hung-Chuan Dai. It started as just a family business, producing straws and cap liners. Six years later, the factory faced some problems and was almost sold. Hsih-Chung Tsao, whose elder sister married Chin-Si Dai, returned from the army. Tsao joined the business, investing all of the money he had, and became a shareholder alongside the Dai family. At the time, Tsao was only 24 years old. Starting as a salesman, he worked very hard and actively visited customers to seek orders. In 1978, when Tsao was 27, the company’s capital reached NT$4m (approximately US$128,000) after reorganisation and Tsao took the role as the company’s president.

Tsao tried to expand and improve products. He bought new equipment to produce more types of products including aluminium caps and colour labels. These products received certifications from international beverage companies such as Coca-Cola and Pepsi. As the

Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision-making. The authors may have disguised names; financial and other recognizable information to protect confidentiality.

DOI 10.1108/EEMCS-06-2017-0145 VOL. 8 NO. 1 2018, pp. 1-33, © Emerald Publishing Limited, ISSN 2045-0621 EMERALD EMERGING MARKETS CASE STUDIES PAGE 1

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http://dx.doi.org/10.1108/EEMCS-06-2017-0145

company’s reputation grew, more orders arrived. Hence, Tsao expanded production and moved the company to a bigger place. Tsao himself was recognised as the Model of Youth Career Development of Taiwan in 1990.

In the 1990s, Hon Chuan began to establish subsidiary factories. In 1991, the company became Taiwan’s largest professional cap manufacturer. In 1992, Hon Chuan bought a factory as its second manufacturing base in the same city. In 1993, Hon Chuan expanded into mainland China by establishing a factory in Suzhou, a city in the southeast of the country. That was the company’s first step towards internationalisation. In 1996, Chin-Si Dai retired and his 32-year-old son, Hung-Chuan Dai, took over as chairman. Hung-Chuan Dai graduated from the National Taiwan University, the best university in Taiwan. He then obtained two master’s degrees, one in civil engineering and the other in business administration, from two American universities. When he returned to Taiwan from the USA, he first worked for the government. A few years later, when his father retired, he joined the family business. Together, the uncle, Hsih-Chung Tsao, and his nephew, Hung-Chuan Dai, led the company into a long, fast-growing period. They shared the same office, where they could discuss issues at any time and make decisions together.

In the first decade of the twenty-first century, Hon Chuan experienced fast growth and expansion. In 2001, Hon Chuan was publicly listed on Taiwan’s stock market. The company began to produce bottles in addition to caps and labels. In 2003, Hon Chuan (China) Holdings Co Ltd. was launched to manage the company’s business in mainland China. Four additional factories were built in the southeastern, central and northern regions of China in the same year. In 2004, Hon Chuan launched a new business model called the “in-house model”. Cooperating with its top customer, Uni-President, Hon Chuan built bottling lines in Uni-President’s beverage factories in Taiwan. The in-house model was also applied to Coca-Cola’s and other customers’ factories in both Taiwan and mainland China. Later, Hon Chuan expanded into the Southeast Asian countries, namely, Thailand (2005), Indonesia (2006) and Vietnam (2007). Hon Chuan (Asia) Holdings Co Ltd. was established to manage the business in Southeast Asia. Thus, Hon Chuan established its business layout in three regions: Taiwan, mainland China and Southeast Asia. The sales turnover reached a milestone of NT$10bn (approximately US$320m) in 2009, which was ten times the turnover of 2001.

Since 2010, Hon Chuan had expanded even faster. Half of its factories were built in that period. Of the new factories, 12 were in Southeast Asia, 9 were in mainland China and 2 in Taiwan. By October 2016, a total of 41 factories had been established: 8 in Taiwan, 17 in mainland China, 15 in Southeast Asia and 1 in Africa (Exhibit 1). After 47 years, the originally small family business had become an international, modern enterprise (Exhibits 2 and 3). Hon Chuan had developed a wide range of products and services (Exhibit 4 and 5). It was the largest company in Taiwan and the third-largest company in mainland China in beverage packaging and filling. For 2020, Tsao and Dai set the goal of achieving a sales turnover of NT$40bn (approximately US$1.28bn), effectively doubling the number every five years from 2010.

Nevertheless, the sales turnover in recent years had not met expectations. After reaching the milestone of NT$10bn in 2009, the company’s sales turnover continued to grow quickly, reaching NT$15.6bn in 2012. However, the growth had slowed down after 2013. The company had expected the number would exceed the milestone of NT$20bn (approximately US$640m) since 2013. However, it had failed to do so every year (Exhibit 6). The sales turnover was NT$16.6bn in 2013 and NT$17.2bn in 2014. The number even dropped for the first time in 2015 to NT$16.6bn, back to the 2013 level. In 2016, the company again adjusted its prediction from NT$20bn to NT$17-18bn. Tsao explained that the company had lost billions in orders because its biggest customer in mainland China left. In Taiwan, food-safety scandals had influenced customers’ businesses and thus

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affected Hon Chuan’s performance. In Southeast Asia, the construction of Hon Chuan’s new factories had been delayed, and with that so had production.

Hon Chuan’s business model

Tsao always valued good customer relationships. He tried hard to develop good-quality products and services. New materials, technologies and methods were used to satisfy customers’ various needs, such as material saving, environmental protection, sterility and aesthetic appeal. In the early years, Hon Chuan provided products separately. Tsao, however, developed a business model called the “vertically integrated beverage packaging and OEM strategic alliance”. He started integrating different products such as caps, labels and bottles and services such as beverage bottling and logistics, in bundles to provide customers with holistic, one-stop services (Exhibit 7). His efforts won customers’ recognition and trust. International giants such as Coca-Cola and Pepsi and top local companies such as Uni-President and HeySong had been Hon Chuan’s key partners for many years. Due to strong alliances with these customers, Hon Chuan had become the number one company in Taiwan, holding 80 per cent of the market share. In the overseas markets, Hon Chuan had also gained a lot. When its customers expanded into new markets, they often demanded Hon Chuan’s good-quality products and services. Seeing the demand, Hon Chuan was also glad to enter these markets. By following its customers’ footsteps, Hon Chuan expanded its business into mainland China and then Southeast Asia.

Tsao considered long-term, win–win alliances with customers as the road to success. He found that even beverage giants such as Coca-Cola were concerned about costs due to the tough competition in the beverage market. Thus, Tsao developed the “in-house coalition production model” (Exhibit 8) to help customers cut costs. Under the model, Hon Chuan built production lines in customers’ factories. Later, Tsao developed an updated version of the in-house model, which could take care of the whole production process for customers. Take bottled beverages as an example. After installing bottle-blowing facilities in customers’ factories and connecting them to customers’ filling machines, Hon Chuan could produce bottles, fill them with beverages, attach labels to them and then pack the bottled beverages into boxes in the customers’ factories. Hon Chuan provided personnel, technology, equipment, packaging materials and production management. Customers did not need to invest in any of these; they only needed to provide space. The in-house model had a number of advantages:

� operating the whole production process in the same place to save on transportation, storage and supply management;

� keeping the supply of packaging materials efficient and uniform;

� increasing productivity and reducing the defect rate;

� ensuring quality, sanitation and safety;

� enabling the use of lightweight PET bottles to reduce spending on raw materials and recycling; and

� reducing customers’ investment risk.

According to Tsao:

The in-house model is based on an extremely high level of trust. The customers hand over the production process to us because they trust us. You know, the beverage will be sold to consumers directly. On the other side, we put million-dollar equipment in customers’ places. If we do not trust them, that will not work. Hence, the cooperation is very intimate. We sign contracts as long as 10 years with customers under the in-house model. It is very difficult for competitors to break in. The model helps us grow stably and guarantees us a certain level of profit margin.

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Using the in-house model, Tsao servitised the manufacturing business. This was considered to be the company’s key strategy and at the core of its competitiveness. The in-house model had been applied to more customers. About a half of Hon Chuan’s factories operated under this model. In-house factories usually cost NT$100-200m (approximately US$3.2-6.4m) for producing packaging materials or NT700-800 million (approximately US$22.4-25.6m) for beverage filling, approximately half of a normal factory. Due to high automation, the in-house factories only needed very few employees: 4-8 in Taiwan, 10-40 in mainland China and 10-30 in Southeast Asia, depending on how many production lines a factory had. Even in its normal factories, the employee numbers were low compared to other manufacturing companies. Its 41 factories had only 4,491 employees as of June 2016.

Entering mainland China

Despite the fact that Hon Chuan was an industry leader in Taiwan, Tsao had never felt complacent. Having a population of only 23 million people, Taiwan’s market was small. However, mainland China had a huge population, over 50 times that of Taiwan’s. Like many other Taiwanese companies, Hon Chuan went to mainland China to seek a much bigger market. In 1993, it established its first factory in mainland China to produce caps and labels for customers, such as Coca-Cola and Pepsi. In the 2000s, as China’s beverage market grew quickly, Hon Chuan built seven more factories. The Hon Chuan (China) Holdings Co Ltd. was launched in 2003 to manage its business in mainland China. After 2010, Hon Chuan built nine more factories to further expand its business in mainland China. Although competition was fierce, Hon Chuan earned a place among the top three manufacturers in mainland China.

Nevertheless, Tsao still felt that there was a sword of Damocles hanging over his head – as an OEM company, Hon Chuan relied heavily on its customers just like all other OEM companies do. In 2012, Tsao’s concerns were realised when Hon Chuan lost its biggest customer, Uni-President Enterprises Corporation. Uni-President was the largest food and beverage company in Taiwan. It entered mainland China in 1992 and became a key player there. As Uni-President’s supplier, Hon Chuan had also benefitted a lot from the expansion of Uni-President’s business. In total, 40 per cent of the company’s sales turnovers in mainland China had been from Uni-President. Moreover, Hon Chuan’s in-house model was first launched with Uni-President in Taiwan and then applied to more customers. However, Uni-President reorganised its business in 2012: Ton Yi Industrial Corp, its manufacturing subsidiary in mainland China, launched a division to produce packaging materials and perform bottling. Therefore, Uni-President gradually cut orders from Hon Chuan, which pushed the company into a three-year slump from 2012 to 2014 and a loss of NT$5bn (approximately US$160m) in mainland China.

As a result, Tsao changed his strategy:

We can’t depend solely on Uni-President forever – that was a valuable lesson I learned. After that, we adjusted our strategy to spread orders to more customers. We gained more big customers, like Master Kong[2], France’s Danone, China Resources C’estbon Beverage, and China’s Jiaduobao, so that any changes to a single customer won’t cause us a fatal blow.

Hon Chuan had since won long-term contracts from these big customers. The contracts with the top 10 biggest customers were all over three years long, whereas the contracts with the key customers such as Master Kong[3], Jiaduobao and Wanglaoji were 10 years or even longer.

Tsao also kept his eyes on market trends to choose customers. He found that bottled water was one of the fastest-growing goods in mainland China, which had the largest market of bottled water in the world. To take advantage of this opportunity, Hon Chuan

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took on a subcontract from C’estbon, which was one of China’s top three brands of bottled water. For this, Tsao invested in four production lines in 2015.

The traditional functional beverage was another fast-growing product in China. The key players were mainly local companies, such as Jiaduobao and Wanglaoji. Therefore, Hon Chuan cooperated with Jiaduobao to build in-house production lines, providing plastic caps, labels, PET bottles and bottling services.

This strategy helped Hon Chuan turn a slump into growth, which was soon expected to reach the turnover milestone of NT$20bn (approximately US$640m). However, Tsao believed that the company had to take hold of its own destiny by upgrading to an OBM and developing its own brands.

Although mainland China was a huge market, the competition in the beverage industry was very tough. International brands, such as Coca-Cola and Pepsi, had all come to compete for the market. Taiwanese brands, such as Uni-President and Master Kong, had invested heavily in mainland China. Some of the local brands, such as Wahaha, Jiaduobao and C’estbon, were strong players. All of this made it difficult for Hon Chuan to gain a foothold. Furthermore, these brands were Hon Chuan’s important customers. If Hon Chuan were to become their competitor in the beverage industry, they might abandon it. Then Hon Chuan might lose its original manufacturing business. Therefore, Tsao wanted to seek a new, smaller market that the big customers would not care too much for and in which the competition would not be so strong.

Hon Chuan also needed a new market in which to expand its manufacturing business. Its brand customer, Uni-President, had expanded into Hon Chuan’s manufacturing area and quickly surpassed it. The largest manufacturer was a local company, Zijiang. These top three together shared 60 per cent of the market in mainland China, with half of their share held by Zijiang.

Expansion in Southeast Asia

At the beginning of the twenty-first century, Hon Chuan sought a market other than mainland China. At the time, one of its key customers, Uni-President, was also looking for a professional beverage packaging partner in Thailand. Before then, all of Hon Chuan’s products sold in Thailand and in other Southeast Asian countries, exported from Taiwan. If Hon Chuan had a manufacturing base in the region, Tsao thought that it would be much closer to the customers. Tsao considered Uni-President’s invitation to be a good opportunity to enter Southeast Asia. The two companies had worked very well together for years in Taiwan and mainland China. Hence, Hon Chuan expanded into Thailand, taking full control of the factory’s investment and production lines for Uni-President. Its first factory there was established in 2005, producing beverage labels and PET preforms. One year later, Hon Chuan expanded into Indonesia by cooperating with a local company under the in-house model. Then, in 2007, Hon Chuan cooperated with a company in Vietnam to set up in-house production lines for PET bottles.

After entering Southeast Asia, Tsao realised how big the market was. He thought it was necessary to build Hon Chuan’s own factories there to increase production. However, the company had just established the above three in-house factories in the first five years. Political stability was one of the reasons. For example, the political situation in Myanmar had been unstable during the early years of Hon Chuan’s expansion into Southeast Asia. Hence, the products sold to Myanmar were transported from factories in Thailand, Taiwan, mainland China and Indonesia until the situation changed in 2012 and the political situation stabilised. Coca-Cola, Hon Chuan’s key customer, also began production in Myanmar at that time. In addition, Pepsi and a local company also demanded Hon Chuan’s products for their beverage businesses in Myanmar. Following in its customers’ footsteps, Hon Chuan confirmed its decision to enter the country. The construction of its first factory began in

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2012. The factory began operations in 2015. Later, in 2016, the USA ended its economic sanctions against Myanmar and resumed special trade preferences with the country. Tsao sensed that economic prospects would improve. Therefore, Hon Chuan expanded its existing factory and increased its investment in a second factory in Myanmar. Thus, it strengthened its production capacity to serve the local market.

The unstable political situation in Thailand was also challenging. The country was controlled by the military. Coups would occur from time to time. Fortunately, the coups did not have a huge effect on Hon Chuan. Its factories were all located in the industrial area outside of the capital, Bangkok. Although there were clashes and martial law was imposed in Bangkok, neither traffic nor transportation in the industrial area was restricted. Hon Chuan’s factories could operate and shipments were regular.

After 2010, Hon Chuan started to expand into Southeast Asia on a large scale. The political situation had improved and economic growth had been stable. Members of the Association of Southeast Asian Nations (ASEAN) had gradually lowered their import duties to zero. Moreover, losing Uni-President in mainland China also forced Hon Chuan to pay more attention to Southeast Asia. Hence, Hon Chuan increased investment by establishing more factories or in-house production lines in its existing bases: three more in Thailand (in 2010, 2011 and 2015), three more in Indonesia (2010, May 2014 and September 2014) and one more in Vietnam (2011). Moreover, the business was also expanded into more countries in the region, such as Malaysia (2011 and 2013), Myanmar (2014 and 2016) and Cambodia (2015). Hon Chuan built as many as 15 factories (six under the in-house model) in six Southeast Asian countries. The factory network enabled Hon Chuan to coordinate resources, orders and manufacturing among different factories in the region when some of them were fully loaded or were affected by accidents such as flooding. This was one of the reasons why Hon Chuan increased investment in the region. Tsao predicted that Southeast Asia would contribute to up to 40 per cent of the company’s sales turnover, which would equal the contribution of mainland China.

Cambodia was Hon Chuan’s newest base in Southeast Asia. Tsao met a Taiwanese business owner who had a food company in Cambodia. The company had experience producing self-owned brand products and had accumulated channels in the local market. Tsao thought it was the right time to transform Hon Chuan’s business structure by upgrading to an OBM. Hence, in 2015, Hon Chuan launched its first self-owned beverage brand, “Honly” (Exhibit 9). Cooperating with that company, Hon Chuan invested US$8.82m, holding 60 per cent of the shares in the joint venture[4]. Hon Chuan provided the technology and took charge of operations and management, whereas its partner focused on marketing channels. The first product, “Pobo Yogurt”, went on sale in August 2016. There were three flavours: original, grape and strawberry. The retail price was set at KHR2000 (approximately US$0.5) per bottle, the same as that of Coca-Cola and double of bottled water. The company ran marketing campaigns all year long, including television adverts, sales promotions (KHR3000 for two bottles), street/market promotions, rewards printed inside bottle caps (to redeem free drinks, cash, cell phones, computers and motorcycles etc.), and community activities. Honly’s banners and beach umbrellas were seen everywhere, such as small vendors, retail stores, supermarkets and markets in both urban and rural regions. Later, the company introduced more products, such as refreshing drinks and fruit juices. As the weather in Southeast Asia was hot all year-round, the demand for beverages remained strong[5]. Tsao predicted that, after promotion and development in the first year, the sales turnover might reach NT$200-300m (approximately US$6.4-9.6m) in the second year and NT$500m (approximately US$16m) in the fifth year. Hon Chuan also planned to add more flavours and introduce more products such as honey lemon green tea and vitamin water in the coming months. Different products, flavours and packages would target different clusters of consumers. Moreover, Tsao was thinking about expanding marketing channels and branding in other countries.

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Tsao explained his strategy:

We chose Southeast Asia rather than China to launch our self-owned brand. Mainland China of course has the largest population of 1.3 billion and will be the world’s largest beverage market. However, the competition is too fierce to us. Western leading brands have invested heavily there. Besides, local brands have also occupied significant shares. We are not able to compete with them. Moreover, they are our current customers and some are key customers, indeed. We don’t want to displease them by entering the business as a rival, which may influence our current core business in packaging and filling. So, we decided to start in a smaller market, like Southeast Asia. The competition is less intense. Large companies may have less interest in such small markets. And the local brands haven’t maturely developed yet. I think this would be our chance.

Nevertheless, Tsao’s ambition was more than that. He then turned his gaze towards Africa.

From Asia to Africa

Africa (Exhibit 10) had been regarded as the last undeveloped continent but had recently been recognised as the newest emerging market with great potential. Economic growth in Africa had been rapid in the past decade. The average GDP growth in Africa was 5.4 per cent between 2000 and 2010. In that period, six of the ten fastest-growing economies in the world were from Africa. This growth slowed down after 2011, but it was still relatively high among all continents of the world. In 2016, some African countries made it to the top of the list of the fastest-developing economies (Exhibit 11). The continent’s population was growing fast, suggesting a large labour force. African cities were expanding rapidly, implying a growth in consumption. Technological and infrastructural improvements were attracting more foreign investment. The governments were also offering various tax preferences and rent concessions to investors.

Hon Chuan decided to take a step further out of Asia to expand its business in Africa. Regarding emerging markets, most Taiwanese companies were then familiar with mainland China and Southeast Asia. Hon Chuan, however, acknowledged the potential of the African market earlier than other companies, as Tsao explained:

In my opinion, today’s Africa is just like Southeast Asia 20 years ago or mainland China 30 years ago. Africa definitely will be the next hotspot for economic growth. Its market potential will be great. The market for fast-moving consumer goods has started rising. Hence, I think it’s a good time to invest in Africa and benefit from its economic growth.

To explore the African market, Hon Chuan started participating in exhibitions in South Africa. There, it obtained orders from Shimada, a company from Mozambique. Hon Chuan sold plastic caps and preforms to Shimada, which earned it NT$50m (approximately US$1.6m) annually. With the help of these business activities, Hon Chuan gained important knowledge about Mozambique and Africa.

Setting foot in Mozambique

Located in the southeast of Africa, Mozambique had a population of 25.8 million, similar to Taiwan’s, but was much larger than Taiwan (about 22 times). It had been a Portuguese colony but gained independence in 1975. Unlike the hot, dry weather of other African countries, Mozambique had a warm and wet climate. Mozambique was one of Africa’s best performing economies. Its GDP growth rate had maintained a high level of 6 to 8 per cent over the past decade. Bordering South Africa, Mozambique had close economic ties with Africa’s largest market: South Africa was its largest import source and export market. Moreover, Mozambique was a member of the Southern African Development Community (SADC). Goods were exempt from customs duties when sold to the other 14 members. Located in the central east of the SADC, Mozambique offered Hon Chuan the advantage of delivering products at low costs. The SADC market had a large population, as high as 277 million, approximately one-forth of the entire population of Africa. Mozambique was

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also a member of the African Union, the Commonwealth and the Organisation of the Islamic Cooperation. Having joined these regional trading organisations, Mozambique was considered to be an appropriate place for Hon Chuan’s expansion.

The Government of Mozambique had been actively inviting foreign investment. The government offered duty-free concessions for the importation of equipment and raw materials and placed no restrictions on foreigners for owning land or buildings in the country. Considering Hon Chuan’s experiences in Southeast Asian countries, Mozambique was a friendlier place for foreign investment.

There had been no direct investment between Mozambique and Taiwan until the Mozambique Investment Promotion Centre in Taiwan was established in July 2013. The representative, Achilles Yeh, was born in Taiwan but migrated to South Africa and then to Mozambique. His background facilitated communication and cooperation between the companies on both sides. Yeh helped Hon Chuan to understand the economic and trade background of Mozambique.

Tsao decided to make a brave move: expand into Africa by establishing its own factory, rather than only selling products. Tsao himself went to Mozambique to conduct a field study in November of 2013. This expedition confirmed his resolution for Mozambique. He found it to be a seller’s market, with a shortage of beverage package materials available for sale in the country. All transactions were paid in cash. Moreover, Coca-Cola was more expensive in Mozambique than in Taiwan. Tsao sensed that Mozambique would be a good market for the beverage industry. As Hon Chuan’s most important customer, Coca-Cola had entered Mozambique and welcomed Hon Chuan to join the supply chain. Hon Chuan had an intimate relationship with Coca-Cola and followed in Coca-Cola’s footsteps to expand into mainland China and Southeast Asia. If Hon Chuan started producing in Mozambique, it could sell products to both Coca-Cola and other companies in the region.

Tsao explained:

We always pay great attention to the development of new markets. Africa has more than one billion people. The market is huge. Starting from Mozambique, our business may extend to all of Africa. As I observed, the current market lacks low-priced beverages. The market is still young. I think there is very much potential. According to my years of experience, following international brand customers, like Coca-Cola, into new markets would be a good strategy. It’s easier when you stand on the shoulders of giants.

Tsao decided to cooperate with Shimada to establish a joint venture rather than build a new subsidiary. Having been Shimada’s supplier for a couple of years, Hon Chuan already worked well with the company. Ms Ann Huang, one of Shimada’s owners, was born and had lived in Taichung, the city in which Hon Chuan’s headquarters were located. Huang had left Taiwan for South Africa to do business years before. However, the investment environment in South Africa deteriorated. Hence, Huang moved to Mozambique and later created Shimada with her husband Dave Roy in 2001. Shimada became the largest manufacturer of bottled water in Mozambique and also an OEM for the largest local brand of soda. It produced beverage packages by importing equipment and raw materials from Taiwan. With the exception of giants, such as Coca-Cola and Pepsi, most of the local companies bought packaging materials from Shimada. Due to Huang’s Taiwanese background, she actively promoted economic cooperation between Mozambique and Taiwan. She also promoted the setting of the Mozambique Investment Promotion Centre in Taiwan. Hon Chuan valued Shimada’s leading position and well-established market network, despite its own advantages in management, finance, and of course its core business in beverage packaging. Aligning with Shimada, Hon Chuan attempted to seize the market before it matured.

The Mozambique Government valued Hon Chuan’s investment. A mayor, a congressman and several officials flew to Taiwan in July 2015. Accompanied by Achilles Yeh, they visited

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Hon Chuan’s headquarters and expressed the government’s welcoming of the company’s investment. The mayor promised to assist Hon Chuan in the establishment of a new factory. After obtaining the mayor’s support, Hon Chuan completed the final stage of negotiations in terms of land, tax preference, rent concessions and employee work permits.

In April 2016, Hon Chuan and Shimada officially established a joint venture, Hon Shi Mozambique Lda. Hon Chuan held 60 per cent of the shares and took charge of the operations and management. The new factory was launched in July of 2016 and started production in August of 2016 (Exhibit 12). Hon Chuan became the first listed company from Taiwan to invest in Mozambique. Tsao planned to invest US$50m in Mozambique over 5 years. First, the company would focus on producing packaging materials and expanding the market into neighbouring countries. Then it would move into beverage OEM and build marketing channels.

The company was expected to maintain the market share that Shimada had in Mozambique. The following aim would be penetration into South Africa. As the most mature market in Africa with a population of 55 million, South Africa was identified as the company’s key target for expansion. The new factory was located in Matola, a city in southern Mozambique, only 70 km from South Africa. The location advantage was an important factor when building the factory.

The new company was Hon Chuan’s first base in Africa. In addition to the factory in south Mozambique, the company was considering the establishment of another factory in the north to sell products to neighbouring countries such as Tanzania (with a population of 50 million), Malawi (17 million), Zimbabwe (15 million) and Zambia (15 million). There was a large population (approximately one-seventh of the entire African population) surrounding Hon Chuan’s African base in Mozambique. Moreover, Hon Chuan started a field study in the north of Africa, aiming to reproduce Hon Chuan’s experience in Mozambique in more locations. In the long term, Hon Chuan prepared to cultivate the large African market.

Tsao’s overall ambition, however, was greater than that. Hon Chuan’s international expansion was not just to spread its current core business as an OEM. Tsao aimed to diversify the business by developing and marketing its own brand beverage, just like Honly in Cambodia. This would fulfil Tsao and Dai’s original plan to upgrade Hon Chuan from an OEM to an OBM.

New challenges

Tsao found that most African countries could not be seen as independent units for marketing. The demand of a single country might not be large enough due to low levels of GDP and income. When Hon Chuan entered Mozambique, or expanded to another place in the future, it should set a bigger region rather than a single country as its manufacturing or marketing target. That would be a different approach than that which had been effective in Southeast Asia and mainland China.

The African continent had diverse histories, politics, economies, populations, geographies, cultures and languages across its many different countries. African countries had been ruled as colonies by different countries, causing more distinctions. Northern Africa was distinct from Sub-Saharan Africa due to the barrier created by the Sahara Desert. Northern Africa included Egypt, Morocco, Libya, Tunisia, Sudan, Algeria, Mauritania and Western Sahara. The cultures of these countries were influenced by and had become closer to Southwestern Asia and Europe. The region was also a part of the Muslim world. The economies of Northern Africa and South Africa were the best in the continent. However, the political stability in these regions had been affected by events in the Arab Spring. Sub-Saharan Africa might have most accurately reflected the conventional impressions of the continent. There were 44 countries in the region. The situation here was more diverse than that of Northern Africa. This large region could be divided into Southern Africa, Western Africa, Eastern Africa, and Central Africa. Southern Africa was the key part of the economy in Sub-Saharan Africa. South Africa was the most developed

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country, though its growth rate had decreased. The neighbouring countries usually stayed tied to South Africa, as none of them was big enough to have an individual market. The economy of Western Africa fell behind those of Southern Africa and Northern Africa, as they were small. The economy of Eastern Africa was not large, but it had recently demonstrated the fastest growth rate. Central Africa was the smallest in terms of its economy. Across the entire continent, there were many discrepancies in GDP per capita between different countries (Exhibit 13).

The diversity of African countries increased the difficulty of regional manufacturing and marketing. Hon Chuan’s first step in Mozambique, targeting the regional market of Southern Africa, might be relatively easy because South Africa was the largest market and the centre of the region. However, it would be more difficult if Hon Chuan headed north next. Although the overall political situation had improved, there were still clashes in some countries (Exhibit 14). Thus, the safety of the factories and employees would be a concern. Although some countries had offered various incentives to encourage investment, policy continuity remained at risk. The diversity of legal systems and business manners was another risk.

Poor infrastructure was a bottleneck in Africa. Transportation was a problem, even though there was demand. In remote areas, many distributors and sellers had no vehicles to deliver products. When products were transported across borders, low efficiency and corruption could be very frustrating. However, companies had to cover a large region to balance low consumption. Electric power was usually supplied in limited hours per day, even in many capital cities. Companies often had to set up power generators and dig wells by themselves.

It might only be possible for giants, such as Coca-Cola, to build effective marketing channels over a broad region. Coca-Cola had established 145 bottling plants and 3,000 small distribution centres in Africa. These small centres were run by local individuals, who might use small vans with three wheels to deliver products to local retailers in the community. Coca-Cola’s system successfully overcame the infrastructure challenge, resulting in faster growth in Africa than in other world markets. However, Coca-Cola had invested US$5.5bn in the past decade, one of the largest investors in Africa.

Furthermore, Pepsi and Nestlé had also entered Africa, and many local companies had been established to develop beverage products for local markets. Due to low income and consumption levels, people were more sensitive to prices than brands. Even international brands such as Nestlé had to develop low-price products to satisfy market demand and compete with local brands. These companies could all be Hon Chuan’s customers for packaging materials and filling services, but they would also become competitors if Hon Chuan launched self-owned brand products. It would not be easy to develop a self-owned brand. Hon Chuan had already experienced this difficulty in Southeast Asia. After the first attempt to launch the brand Honly in Cambodia for one year, the subsidiary was still losing money[6].

To Hon Chuan, Africa was a new battlefield of which it had little knowledge. The situation was much more complex than that of Southeast Asia and mainland China. Much more effort might be needed. Tsao realised that a strong team was very important, but human resources would be another challenge. First, most employees had no strong motivation to leave their comfortable environment in Taiwan for other places abroad. Second, it was challenging to deal with cross-cultural issues in management and marketing. Language would pose yet another problem.

Despite these challenges, Tsao firmly held his global vision. As a leader, he had to describe his blueprint to and guide the team. The updated report showed that the production lines of the Mozambique factory had already been fully loaded for the first two months, having earned NT$35m (approximately US$1.1m). That was a good start, but how could the company hold its ground in Mozambique and enter the regional market through South Africa? Should the company launch self-owned brand products in Africa?

Keywords: Diversification, Corporate strategy, International market entry, Joint ventures/strategic alliances

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Notes

1. Exchange rate: NT$1 � US$0.032.

2. Master Kong was another leading company in the beverage industry and a key rival of Uni-President in both Taiwan and mainland China. Obtaining orders from Master Kong (approximately NT$2bn per year) relieved some pressure from the left of Uni-President.

3. The contract with Master Kong was 20 years long.

4. On 11 November 2016, Hon Chuan acquired the joint venture partner’s 35% share and increased investment for a total of US$4.55m.

5. In mainland China, beverage consumption showed a seasonal pattern: sales dropped a lot in winters.

6. According to Hon Chuan’s annual report for 2015, the sales revenue of “Honly” was NT$26.3m (approximately US$0.8m) and the loss was NT$1.5m (approximately US$48,000). After one year’s development, however, a growth was predicted.