Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender won’t compensate investors for losses tied to a troubled trust product distributed by the bank, CNBC reported on its website.

The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland. The Beijing-based lender won’t take “rigid responsibility” for the losses and will review all its partnerships in entities with which it does business, Jiang said, according to CNBC.

Investors in the 3 billion-yuan ($496 million) Credit Equals Gold No. 1 high-yield product met with ICBC officials at a Shanghai branch yesterday to demand their money amid concern that they wouldn’t be repaid when the trust matures Jan. 31. A default on the product, which raised money for a failed coal mining company, would undermine the implicit guarantees offered by trust companies to draw funds from wealthy investors.

Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September, according to the China Trustee Association, even as policy makers sought to curb money flows outside the formal banking system.

Credit Equals Gold No. 1, which has a tenure of three years, indicated investors would get an annual return of 10 percent, according to information posted on the website of Beijing-based China Credit Trust Co., which structured the product to raise funds for Shanxi Zhenfu Energy Group. The coal miner collapsed after its owner Wang Pingyan was arrested in 2012 for illegally collecting deposits.

Safety Guaranteed

Individuals were asked to put at least 3 million yuan in the product with guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went to ICBC’s private-banking branch yesterday. The trust product was distributed by China’s biggest bank, and some investors were its own private-banking clients.

ICBC had assigned the top A ranking to China Credit Trust in 2009 under a four-step scale by which the lender rates its trust partners, according to a marketing presentation for the product that was obtained by Bloomberg News. The sales document included a page on risks attached to the coal industry, such as slower economic growth and the prospect of emission controls lowering demand for the fuel.

Trusts’ Risks

According to China Banking Regulatory Commission rules, banks aren’t responsible for compensating investors for failures of the trust products they sell. Trust companies that issue the products must make clear the risks, including that there’s no guarantee of principal or minimum return, and compensate investors with their own assets in the event of failure or default, the regulations say.

Bank customers need to “see clearly” the risks associated with wealth-management products and other such investments, Jiang told CNBC. ICBC was a distributor of Credit Equals Gold No. 1 and didn’t offer “ironclad guarantees,” Jiang said, according to the report.

The government of Shanxi province, where Zhenfu Energy is based, may take responsibility for about 50 percent of the payments due on Credit Equals Gold No. 1, according to a report this week on the website of Guangzhou city-based Time-Weekly. Local authorities said they won’t take responsibility, and instead urged the financial institutions to prevent and diffuse the risks, the Shanxi government-controlled Yellow River News reported on its website yesterday.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net

U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

Chinese stocks traded in New York fell to a two-month low, led by E-Commerce China Dangdang Inc. (DANG) and Baidu Inc. (BIDU), after U.S. regulators barred the four largest accounting firms from conducting audits in the Asian nation.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped 3.5 percent to 100.48 yesterday as the ruling sparked concern that the companies won’t be able to put together their 2013 earnings reports in time to meet listing requirements in the U.S. Dangdang, China’s biggest web book retailer, sank 11 percent while SouFun Holdings Ltd. (SFUN), a real-estate information website, posted the biggest drop since October. Baidu, China’s largest web search engine, fell the most in nine months.

The decision was made after the accounting firms’ units in China failed to comply with Securities and Exchange Commission orders for documents needed for a series of accounting fraud probes. The firms receiving six-month bans are Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. The ruling, if finalized, could impact the 425 Chinese companies with market capitalization of $185 billion traded in New York

“There’s a fear that the U.S.-listed Chinese companies may not file their 2013 annual reports in compliance with SEC rules, leading to the possibility that they may fail to meet listing requirements,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis Asset Management, which oversees $1 billion in assets, said by phone. “This issue has been dragging on for a long time, and this will act as an overhang on U.S.-traded Chinese stocks.”

The sanctioned firms said in an e-mailed statement that they will appeal the decision.

Dangdang Drops

Dangdang’s American depositary receipts fell to $9.89 in the biggest drop since Oct. 22. The slump cut Beijing-based Dangdang’s gain to 3.6 percent this year, compared with a 130 percent surge in 2013. Baidu’s ADRs slid 6.2 percent to $163.58, a two-month low. SouFun’s ADRs sank 7.7 percent to $87.47. YY Inc. (YY), owner of an entertainment website, retreated 7.4 percent to $63.77, falling the most since Nov. 6.

The accounting firms have 21 days to file a so-called petition for review with the SEC before the decision by U.S. Administrative Law Judge Cameron Elliot would become final and go into effect. If the five-member commission were to uphold the judge’s decision, the firms could then take it to the U.S. Court of Appeals in Washington.

‘Law Violations’

The SEC enforcement division was “gratified” by the decision, chief litigation counsel Matthew Solomon said in an e-mailed statement. “These records are critical to our ability to investigate potential securities law violations and protect investors.”

NQ Mobile Inc., a Chinese mobile-security service provider, was accused by Muddy Waters LLC of inflating sales in a October report. Beijing-based NQ Mobile has denied the allegations and set up an independent committee to review Muddy Waters’s report.

Carson Block, founder of Muddy Waters, sent a letter to NQ Mobile auditor PricewaterhouseCoopers urging the accounting firm to take a closer look at NQ’s accounting books, according to a Twitter posting of the short-selling firm on Jan. 22. In 2011, Block accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it file for bankruptcy protection.


Ernst & Young didn’t conduct audits of Sino-Forest in accordance with accounting industry standards, the Ontario Securities Commission said in a statement of allegations issued in December 2012, and the accounting firm agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit in the largest settlement by an auditor in Canadian history.

“This is a preliminary ruling,” Kim Titus, senior director of corporate communication at NQ Mobile, said by phone from Dallas. “All the reports are going to be out as scheduled. All the work with PricewaterhouseCoopers will continue as it has.”

The worst possible time for the suspension would be in the next month or two, as companies need to file an annual report with an audit opinion on Form 20-F, which is due on April 30, Paul Gillis, a professor of accounting at China’s Peking University, said in a post in his China Accounting blog.

Ctrip, NetEase

“If the firms are suspended, they cannot issue audit reports, so the clients cannot file Form 20-F,” he wrote. “Under exchange rules, this should lead to the companies being suspended from trading since investors do not have the data they need to be able to trade.”

More than two-thirds of web traffic in China, which has more than 618 million Internet users, was disrupted on Jan. 21, according to the online security provider Qihoo 360 Technology Co. Affected sites included those of Alibaba Group and Baidu. China said hackers may have been to blame.

Ctrip.com International Ltd., the biggest online travel agency in China, and NetEase Inc., a web game operator, are scheduled to report their 2013 full-year results on Feb. 12, according to their statements this week. Calls seeking comments from the companies after regular business hours in China weren’t returned.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., tumbled 4.5 percent to $35.02, the largest retreat since November 2011. The Standard & Poor’s 500 Index declined 0.9 percent after a China manufacturing index showed contraction and investors analyzed corporate earnings.

The preliminary reading of 49.6 for January in a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics yesterday was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

Musk Says China Possible Top Market for Tesla

Musk Says China Possible Top Market for Tesla

Tesla Motors Inc. (TSLA)’s Elon Musk said sales of electric Model S cars in China should match U.S. levels as early as next year, with demand from the world’s largest auto market eventually requiring a local plant.

The electric-car maker said yesterday the Model S will be priced from 734,000 yuan ($121,280) in China when deliveries begin. Musk, Tesla’s billionaire co-founder and chief executive officer, will travel to China in late March to inaugurate the company’s entry there, he said in a phone interview.

For Tesla, “it could be as big as the U.S. market, maybe bigger. I don’t want to get overexcited about it,” Musk said yesterday. “Even without building there locally, it’s always going to be the second-biggest market after the U.S.”

After a rocky start ramping up Model S assembly in 2012, Palo Alto, California-based Tesla surprised analysts and investors this month when it said fourth-quarter deliveries were 20 percent above its target. Musk, 42, has pinned his goal of selling hundreds of thousands of electric autos annually to a global strategy in which China, Europe, Japan and other markets bolster its U.S. business.

If all goes well, Model S shipments to China can match U.S. sales by 2015, Musk said. “It’s not my firm prediction — it’s more like a low-fidelity guess.”

The company named for inventor Nikola Tesla more than quadrupled in value in 2013. Tesla rose 1.6 percent to $181.50 yesterday in New York, the highest in three months. The shares have gained 13 percent since Jan. 14, when it announced quarterly deliveries.

Pricing Comparison

The price of Tesla’s flagship Model S in China, a version equipped with a premium 85 kilowatt hour battery pack, puts it in the same bracket there as Volkswagen AG (VOW)’s Audi S5 sedan and Bayerische Motoren Werke AG’s 5-series GT sedan, according to Autohome, a car-pricing website. It’s also 50 percent more expensive than in the U.S., where the equivalent model sells for $81,070, according to a Tesla statement.

In the U.S., Audi’s S5 is priced at $64,117 and BMW’s 5-series GT costs $70,429, according to Edmunds.com, a Santa Monica, California-based auto pricing and data company.

While more costly than the U.S. version, the Model S price in China appears “well below expectations,” John Lovallo, an equity analyst for Bank of America who rates Tesla underperform, said yesterday in a research note.

Since the Model S is imported to China from California, a duty of as much as 25 percent is added to the price tag, Musk said. The company also must cover shipping costs and taxes. Tesla could have charged more than $160,000 had it followed standard industry practices.

‘Huge Idiots’

“They’re basically calling us huge idiots for not ripping off customers in China.” Musk said. “I don’t think ripping off customers is a good long-term strategy.”

Foreign companies have come under scrutiny in China for their pricing practices, with state broadcaster China Central Television producing reports accusing companies from Tata Motors Ltd.’s Jaguar Land Rover to Starbucks Corp. of overcharging consumers in the country.

“It’s a good price,” John Zeng, Shanghai-based managing director of researcher LMC Automotive, said of Tesla’s Model S. “This should attract premium customers to try this product, especially in big cities.”

Tesla’s entry is also being closely watched by other automakers that have been trying to convince local consumers that electric vehicles are worth the hassle. China is lagging behind its target to have 5 million alternative energy-powered vehicles by 2020 because of a lack of charging stations and high costs, even amid mounting concerns over worsening air pollution.

Rigorous Standards

Gaining China’s approval to sell Model S there was the toughest the company has faced to date, Musk said.

“They were the most rigorous of any in the world,” he said.

Beyond safety issues, government officials even inspected the leather used in Model S seats, Musk said. “They seemed to be quite concerned about quality.”

To eliminate tariffs and potentially qualify for Chinese incentives for non-pollution autos, Tesla must produce there, he said.

“Long-term there’s no question we’ll have a factory in China,” he said. “There is an argument for having that be our first major factory outside the U.S.”

At Tesla’s flagship store in a Beijing mall populated by high-end boutiques such as Van Cleef & Arpels and Mulberry, hotelier Kevin Chen says he’s interested in buying the Model S to bump up his green credentials.

“I heard about the car from my friends overseas and we are very interested in getting one,” said Chen, a 28. “Smog in China is getting so bad that we should do whatever we can to help.”

— with assistance from Alexandra Ho in Shanghai and Tian Ying in Beijing. Editors: Niamh Ring, Jamie Butters, Ben Livesey

To contact Bloomberg News staff for this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

‘Mac’ turns 30 in changing computer world

‘Mac’ turns 30 in changing computer world


San Francisco (AFP)

Decades before changing the world with iPhones and iPads, Apple transformed home computing with the Macintosh.

The friendly desktop machine referred to as the “Mac” and, importantly, the ability to control it by clicking on icons with a “mouse,” opened computing to non-geeks in much the way that touchscreens later allowed almost anyone get instantly comfortable with smartphones or tablets.

The Macintosh computer, introduced 30 years ago Friday, was at the core of a legendary rivalry between late Apple co-founder Steve Jobs and Microsoft mastermind Bill Gates.

Thousands of Apple faithful are expected for a birthday party this weekend in a performing arts center in Silicon Valley, not far from the company’s headquarters in the city of Cupertino.

“The Mac was a quantum leap forward,” early Apple employee Randy Wigginton told AFP.

“We didn’t invent everything, but we did make everything very accessible and smooth,” he continued. “It was the first computer people would play with and say: ‘That’s cool.'”

Prior to the January 24, 1984 unveiling of the Mac with its “graphical user interface,” computers were workplace machines commanded with text typed in what seemed like a foreign language to those were not software programmers.

Credit for inventing the computer mouse in the 1960s went to Stanford Research Institute’s Doug Engelbart, who died last year at 88.

“The Mac’s impact was to bring the graphical user interface to ‘the rest of us,’ as Apple used to say,” Dag Spicer, chief content officer of the Computer History Museum in Silicon Valley, told AFP.

“The Mac GUI was picked up by Microsoft, who named it Windows.”

The man remembered today as a marketing magician was a terrified 27-year-old when he stepped on stage to unveil the Mac, then-chief executive John Sculley said of Jobs in a post at the tech news website CNET.

“He rehearsed over and over every gesture, word, and facial expression,” Sculley said.

“Yet, when he was out there on stage, he made it all look so spontaneous.”

Apple spotlighted the arrival of the Mac with a television commercial portraying a bold blow struck against an Orwellian computer culture.

The “1984” commercial directed by Ridley Scott aired in an expensive time slot during a US Super Bowl football championship in a “huge shot” at IBM, Daniel Kottke of the original Mac team told AFP.

“In the Apple board room, there were strong feelings that it was not appropriate; there was a big battle,” Kottke said.

“Fortunately, Steve Jobs and his reality distortion field won the day and it left a strong memory for everyone who saw it.”

There was a drive to keep the Mac price within reach of consumers in a market where computers costing $10,000 or more were typical.

While clicking an on-screen icon to open a file appeared simple, memory and processing demands were huge for the computing power of that time.

“Every time you move that mouse, you are re-drawing the screen,” Kottke said. “It is almost like video.”

The original vision of launching a Macintosh with 64 kilobytes of RAM and a $1,000 price gave way to introducing one with 128 kilobytes of RAM at $2,500.

“Steve really was crazy about details,” Wigginton said. “He wanted everything to be just right. Compared to the IBM PC of those days, it is just gorgeous.”

Macintosh also arrived with a new feature called “drop-down menus.”

“The Macintosh brought a new level of accessibility for personal computing to a much wider market in the same way the iPad did 25 years later,” Kottke said.

Mac prowess at page layouts and photo editing won the devotion of artistic types.The release of “hypercard” is credited with inspiring fanatical loyalty to Macs.

“It was the idea that you could create a page on your screen and create links to other pages,” Kottke said.

“You could have all your computers networked to share data; it was like a private Internet.”

Macs sold decently out of the gate, but Windows machines hit with a low-price advantage for budget-minded buyers. Microsoft released the first version of Windows in late 1985.

The ensuing rivalry is the stuff of Silicon Valley legend and coffee shop smack talk.

“I think Steve Jobs cultivated a sense of Windows versus Mac,” Kottke said.

“Steve Jobs was always taking swipes at Microsoft, but it really heated up when Microsoft released Windows. He would say they copied us.”

Microsoft took the lead in the home computer market by concentrating on software while partners cranked out Windows-powered machines at prices that undercut the Mac.

“Really, Apple could well have gone out of business in the late 1990s,” Kottke said.

“That would not have surprised people.”

The rivalry between Microsoft and Apple has yielded to the mobile age, with Google and its Android operating system targeted as the new nemesis as lifestyles center on smartphones and tablet computers.

The original boxy Macintosh with a mouth-like slit below the screen for “floppy” data disks has evolved into a line that boasts slim, powerful laptops and a cylindrical Mac Pro desktop model.

“I am thankful to have been a part of it,” Wigginton said.

“Once you go through an experience like that, and it was extremely painful, you look back and every sacrifice is absolutely worth it. It is when Apple leapfrogs in technology that they succeed.”


UBS Says Market Wants Default as Risks to Pile Up: China Credit

UBS Says Market Wants Default as Risks to Pile Up: China Credit

UBS AG’s China securities unit, the leading foreign underwriter of debt sales in the country, says the market wants policy makers to allow the first onshore bond default to reduce long-term hazards to the financial system.

“Systematic risk will pile up without any default happening,” Bi Xuewen, head of China debt capital markets at UBS Securities Co., said in an interview in Shanghai. “Market participants would like to see a default in China’s bonds. Only after defaults can the overall risk pricing system be normalized.”

Bi, who has led the bond underwriting unit at UBS since 2010, said he doubts there will be a note default in China this year, following previous cases in which local authorities stepped in to avert non-payment. The yield premium on five-year AA- rated corporate bonds over similar-maturity sovereign securities jumped to 404 basis points this week, the highest since May 2012, as concern mounts about trust defaults.

As Premier Li Keqiang drives up money market rates to deleverage the economy, speculation is mounting yields may increase further after Industrial & Commercial Bank of China Ltd. said it won’t bail out a 3 billion yuan ($496 million) trust-bank product it marketed to its clients. China needs credit-market defaults to help encourage better risk pricing, according to Adam McCabe, deputy head of Asian fixed income at Aberdeen Asset Management Plc, which manages $321 billion.

Risk Reminders

“The policy makers need to remind investors from time to time that there are risks they’re taking,” McCabe said in a briefing in Hong Kong on Jan. 21. “A default will help the Chinese market re-profile itself.”

Authorities in the world’s second-biggest economy must balance efforts to sustain economic growth, which slowed in the fourth quarter to 7.7 percent from 7.8 percent in the previous three months, with steps to trim record borrowings without sparking a financial panic.

Liabilities at non-financial companies may rise to more than 150 percent of gross domestic product in 2014, raising default risks, according to Haitong Securities Co., the nation’s second-biggest brokerage. The ratio of 139 percent at the end of 2012 was already the highest among the world’s 10 biggest economies, according to the most recent data.

“If you don’t allow defaults now, risks will rise,” said Zhang Ming, a senior research fellow at the government-backed Chinese Academy of Social Sciences in Beijing. “If you allow defaults, there will be risks but they are controllable. The sooner the default comes, the better for the long-term growth of the Chinese economy.”

Changzhou Wintafone

Changzhou Wintafone Chemical Co., a maker of herbicides and insecticides based in the eastern province of Jiangsu, said this week it has stopped production and couldn’t repay an aggregate bond due in March. Changzhou Qinghong Chemical Co., the note’s guarantor, repaid 36.9 million yuan on its behalf on Jan. 17, according to a statement from Changzhou Wintafone.

As default concerns escalate, the cost of insuring the nation’s debt against non-payment is rising. China’s credit-default swaps increased 19.5 basis points this month to 99.5, set for the biggest monthly gain since June.

The yuan strengthened 2.9 percent last year, and was little changed at 6.0517 per dollar yesterday, according to China Foreign Exchange Trade System prices.

Bubble Inflating

If defaults come at a time when the currency is no longer appreciating that would spur “massive capital outflows” as Chinese assets would lose their allure for foreign investors, according to Zhang at CASS.

“The bubble is gradually inflating, and sooner or later will burst,” he said. “This year is the best time to squeeze it.”

China Credit Rating Co. lowered the rating for Wuhan Urban Construction Investment & Development Corp., a local-government financing vehicle in the capital of the central Hubei province, from AA to AA-, according to a statement posted on the Chinamoney website on Jan. 6. The Beijing-based rating agency also downgraded Sichuan Coal Industry Group’s rating from A+ to A, according to a statement on Chinamoney on Jan. 13.

The yield on AA- rated five-year corporate bonds has climbed nine basis points this month to 8.34 percent. The rate on the benchmark five-year government bond dropped 14 basis points to 4.32 percent.

Yao Wei, Hong Kong-based China economist at Societe Generale SA, said local governments have helped some companies avert defaults. CHTC Helon Co., a fiber maker that used to be called Shandong Helon Co., repaid 400 million yuan of bonds in April 2012 even as it failed to make loan repayments.

‘Explosive’ Debt

There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service.

Issuance by LGFVs, which has been “explosive,” is set to rise further this year, according to UBS’s Bi. The National Development & Reform Commission, China’s top planning agency, said Dec. 31 that units facing funding shortfalls for projects will be allowed to sell notes for refinancing.

“The NDRC’s statement is actually a signal to encourage LGFVs to sell bonds,” Bi said. “Previously, the NDRC didn’t allow LGFVs to sell new bonds to roll over their debt and the approval of bond sales was based on new projects.”

UBS led underwrote 27.5 billion yuan of debt onshore in 2013, the most among all the foreign-invested securities firms and banks, according to data compiled by Bloomberg.

Xie Ping, deputy general manager at China Investment Corp., the nation’s sovereign wealth fund, said Jan. 11 China’s local governments won’t default and the central government won’t allow them to go insolvent either, Hexun reported on its website.

While a default in shadow banking would help investors better price risk, it would hurt local funding units and property companies that rely on them for capital, according to Ping An Securities Co.

“A default in the trust product will facilitate the healthy development of the market,” said Ping An’s Shi. “If there is a default, the trust market may shrink and those small LGFVS and small property companies which rely on trust financings will be impacted.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

Alibaba, Yunfeng to Buy Control of Citic 21CN for $171 Million

Alibaba, Yunfeng to Buy Control of Citic 21CN for $171 Million

Alibaba Group Holding Ltd., the owner of China’s biggest e-commerce business, and Yunfeng Capital said they will buy control of Citic 21CN Co. (241) for HK$1.33 billion ($171 million) to enter the drug-data industry.

Alibaba, through wholly owned Perfect Advanced Holding Ltd., has agreed to buy 4.4 billion Citic 21CN shares at 30 Hong Kong cents each, taking a 54.3 percent stake, Citic 21CN said in a filing to Hong Kong stock exchange today. Yunfeng, a private equity firm co-founded by Alibaba Chairman Jack Ma, will buy a 29.8 percent stake in Perfect Advance before the share sale is completed, according to the statement.

“The transaction is the foundation for a strategic partnership aiming at jointly driving development of a pharmaceutical-product information platform,” Alibaba said in an e-mailed statement today. The platform will use Citic 21CN’s drug data and Alibaba’s e-commerce, cloud computing and “big data” capabilities, it said.

Alibaba may use the purchase to help it compete against Tencent Holdings Ltd. for China’s 618 million Internet users who spend money online. Tencent earlier this month said it plans to invest HK$1.5 billion for a 9.9 percent stake in a logistics center operator China South City Holdings Ltd.

On completion of the deal, Alibaba will hold 38.1 percent of Citic 21CN and Yunfeng 16.2 percent, Alibaba said. The buyers will seek a waiver from Hong Kong rules that require purchasers of a majority stake in company to make a buyout offer for all outstanding shares, Citic 21CN said.

Citic 21CN mainly engages in system integration, software development and services for drug authentication, tracking and logistics, according to its filing.

Trading in Citic 21CN, suspended since Jan. 16, will resume in Hong Kong tomorrow. The stock has gained 48 percent in 2014, including a 43 percent single-day surge on Jan. 6

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

As Brewing Giants Push Craft Beer, Bud and Miller Suffer

As Brewing Giants Push Craft Beer, Bud and Miller Suffer

Goose Island is the new Bud. So are Shock Top and ZiegenBock. And Leinenkugel’s and Blue Moon, for that matter, could be called the new Coors or Miller.

Those brands are all owned by the world’s biggest brewers, which are aggressively rolling out products designed to appeal to fans of craft beer. But they’re not putting the microbrewers who started the movement out of business.

Instead, the new labels are taking sales from already-troubled mass-market brands owned by the industry giants peddling these crafty brews. Analysts say that may actually be a boon for their owners as margins can be “considerably higher” for craft beers, according to researcher Canadean.

“I don’t really drink Bud Light anymore,” said Tait Foster, a 27-year-old who works at a foreign policy research group in New York. Instead, he’s started sampling a wider range of brews such as Goose Island and Blue Moon. “Bud Light, Coors and all those others are like beer-flavored water.”

Sales of craft beers grew 16 percent in volume over the past year versus a 1.7 percent decline for the biggest U.S. beer brands, according to researcher Symphony IRI Group. Sales of Bud Light were off by 1.3 percent and Miller Lite slid 4.4 percent.

That’s prompted multinationals like Anheuser-Busch InBev NV (ABI) and MillerCoors LLC, with about 75 percent of the U.S. market between them, to introduce their own craft-like brews — many of which make little or no mention of their corporate parentage.

Hard Ciders

AB InBev paid $38.8 million for Goose Island in 2011, five years after it signed a distribution deal with the Chicago brewer. And in 2006 it created Shock Top, a Belgian-style wheat ale, to take on Blue Moon, the biggest of the craft-like labels owned by industry leaders. The Goose Island brands soared 69 percent last year, AB InBev said, citing Symphony IRI data, while Shock Top beers jumped 14 percent.

MillerCoors, co-owned by SABMiller Plc (SAB) and Molson Coors Brewing Co. (TAP), in 2010 set up a unit called Tenth & Blake to focus on Blue Moon and other niche brews as well as premium imports such as Pilsner Urquell from the Czech Republic and Cusquena from Peru. Today, it has more than a dozen brands, including two hard ciders.

“We looked at where the growth sectors were, and craft was exploding,” said Tom Cardella, president of Tenth & Blake. “When you look at the marketing of craft, it requires a different approach.”

Mid-Sized Labels

AB InBev’s shares were little changed at 76.49 euros at 10:20 a.m. in Brussels trading, giving the company a market value of about 123 billion euros. MillerCoors co-owner SABMiller’s shares slid 0.8 percent to 3,013.5 pence in London, and Molson Coors Brewing’s shares rose 0.4 percent in New York yesterday to $55.35.

As the popularity of these beers cuts into sales of the biggest brands, it’s fostering a new crop of mid-sized labels, according to Trevor Stirling, an analyst at Sanford C. Bernstein. Moreover, craft brews are wooing drinkers back from wine and spirits. While craft beer currently has only about 6 percent of the market, that share could more than triple in the next five years, Canadean predicts.

“There’s a new generation choosing a much broader repertoire of drinks,” Stirling said. “It’s virtually inevitable that the larger brands will lose market share to craft.”

Lighter Beers

That’s not to say that the big brands are going to give up on their mass market brews anytime soon. With about 21 percent of the beer market by volume, Bud Light alone is about triple the size of the entire craft sector, Symphony IRI data show.

“I don’t see the era of big brands being over, but more that there’ll be a bigger mix of beers,” said Lawrence Hutter, who heads the European corporate solutions unit at consultant Alvarez & Marsal. “Don’t forget people still like those lighter, lager-style beers; They’re very drinkable”

The U.S. Brewers Association defines “craft” as beers with annual sales below 6 million barrels and ownership by a big player of no more than 25 percent. Despite the industry’s homespun image, 60 percent of drinkers don’t give much thought to what company owns the brand of beer they drink, according to a survey by AB InBev.

“It’s kind of a disconnect for me that being bigger is necessarily bad,” said Paul Chibe, head of U.S. marketing at AB InBev. “What’s important is that if a beer gets bigger, it has to stay true to what it is.”

Rich Uncle

Even as the giant brewers lose share with their leading brands, the shift could shore up their profits since their craft-like beers enjoy higher margins, analysts and the companies say. Goose Island retails for an average of about $33.10 per case versus $20.17 for Bud Light, according to Symphony IRI. Some offshoots can be far pricier. Goose Island sells a brew called Bourbon County Stout one day a year, the Friday after Thanksgiving, at about $25 for a four-pack of 12-ounce bottles.

The higher prices help offset the added costs the industry’s giants face in producing more small brands. They are typically more labor-intensive, use a wider range of ingredients, and have more elaborate packaging and marketing.

The big companies also gain an edge over smaller rivals by producing the craft-like brands in their industrial-scale breweries. Blue Moon is brewed at MillerCoors’ facilities across the U.S. And some Goose Island beers are made by AB InBev in Fort Collins, Colorado, and Baldwinsville, New York, in addition to the brand’s original brewery in Chicago.

“We’ve been a great home for craft brands like Goose Island,” helping out with additional production capacity as their popularity grows, said AB InBev marketing boss Chibe, who plans to leave his job in February. “They have their own leadership team, their own innovation group, the brewers do their own things. We primarily behave as the rich uncle. When they need resources, we give it to them.”

To contact the reporter on this story: Clementine Fletcher in London at cfletcher5@bloomberg.net

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