4 Pages Posted: 14 Jun 2009
This case is an exercise using real options to value investment opportunities and make investment decisions in an emerging market setting. ADDITIONAL MATERIALS: Spreadsheets
Early in the morning on December 18, 2001, Dino Warner received the much anticipated
proposal to build a greenfield beer operation in China, code-named Dragon Beer. He sat down in his comfortable chair with a mug of coffee and started to read the proposal. Dino was the CEO of International Beer Group (IBG), a U.S.-based beer producer and distributor. He had been in the beer business for over 30 years. China's huge population and booming economy had been attracting his attention for a long time. Viewing China as the world's largest potential beer market, Dino asked Tom Grag, executive vice president for IBG's international operations, to do a feasibility study about entering China's beer market in 2002, the year that would mark China's entry into the WTO.
Confirming his own observations, the proposal showed that China's beer market had been growing rapidly in the past ten years. It further revealed that China's beer market was highly segmented, and producers appeared to earn very low margins due to intense price competition. The main impediments to market integration appeared to be strong local protectionism and the lack of efficient and effective distribution channels. If these market conditions were to persist in the near future, the proposal warned, IBG would have a hard time establishing a profitable operation in China. But there were reasons to be optimistic. China, by joining the WTO, was committed to leveling the playing field to all competitors in the beer market, whether local, regional (in China), or international. Local protectionism in China was expected to diminish as China lowered trade barriers. In addition, China was committed to allowing foreign firms to establish their own distribution channels. Dino understood that getting into the market today might lead to much bigger opportunities in the future. He was also keenly aware that the window of opportunity for IBG to grab a share of the Chinese market was narrowing. IBG's main competitor, Anheuser-Busch, had invested aggressively in China since the mid-1990s and had established its brands in China. Dino knew that he must act now or face the possibility of losing the Chinese market permanently.
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Keywords: emerging markets
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