Soft drinks major Coca-Cola expands search for water sources to feed its thirsty plant

Lack of access to fresh water may prove to be a stumbling block for Coca-Cola Co, the world's biggest soft drinks maker, as it seeks to further expand its presence in China.

Zhan Zaizhong, general manager of Cofco Coca-Cola Beverages (Xinjiang) Co Ltd, a joint venture between the US company and the State-owned trading conglomerate Cofco Group, says that despite the strong demand, the company is being forced to re-look at its investment plans in Xinjiang Uygur autonomous region due to lack of water resources.

Coca-Cola was earlier toying with the idea of investing 100 million yuan ($15.75 million, 12.46 million euros) for an additional soda production line in its three-year-old Urumqi plant.

Set up in 2009 with an investment of more than 100 million yuan, the Urumqi plant is Coca-Cola's 38th factory in China. It already has two production lines for juices and soda in Urumqi.

The Urumqi plant has already attracted much attention, considering that it is located in an area that is surrounded by deserts. Melted ice from the Tianshan Mountain is the only major source of water, while the average annual precipitation for the region is just 200 millimeters.

However, Coca-Cola has made handsome gains from the plant, with annual growth rates in excess of 30 percent, compared with just 10 percent in mature markets like Guangdong province.

Zhan says that though it normally takes five years for a Coca-Cola facility to break even, the Urumqi facility has achieved this in just three years.

"By the end of this year, we will start making profits," he says. "Our revenue reached 300 million yuan in 2011, and this year we expect it to surpass 400 million yuan."

At the same time Zhan also admits that based on Coca-Cola's site standards, Xinjiang is not the optimal location to house a manufacturing facility.

"According to Coca-Cola's guidelines for choosing factory sites, the 1.6 million square kilometer area in Xinjiang needed to earn revenue of at least 360 million yuan to house a factory. Though the region gained only 160 million yuan revenue in 2009, we decided to build a factory," Zhan says. "At that time, the decision to set up the facility was based more on strategic considerations."

Wang Ping, a food and drinks industry analyst at Shenzhen-based brokerage Great Wall Securities Co Ltd, says having an ideal location is an important factor for beverage companies, failing which it may lose ground to other brands.

"If there are not enough supplies in the shops, the huge amounts of money spent on advertisements will be a waste," she says.

"With most of the manufacturing potential in the eastern coastal regions having been fully exploited, the company had to look for alternate greenfield locations in China, that also had good growth prospects. The decision to set up a unit in Xinjiang was prompted due to these factors," she says.

The sparsely populated Xinjiang region accounts for one-sixth of China's land territory, but has only roughly 1/60 of the total population.

Unlike the eastern coastal regions, where the drinks market is saturated with several beverage brands, there are not too many firms in Xinjiang. Only companies like Uni-President Enterprises, Master Kong, and Wahaha have factories in Xinjiang. The people in Xinjiang are mostly fond of lamb and beef, and soda is often perceived as the ideal accompaniment for a meal, Zhan says.

Wang says promotion and logistics are the two biggest costs for beverage companies.

"There is a transportation radius for drinks. If the transportation distance is beyond this radius, the profit will be reduced greatly," Wang says.

"Besides, the railways and highways in Xinjiang are not as developed as in the eastern regions, and it takes even longer time than in the east coast to deliver boxes of drinks to the retailers."

According to Zhan, a box of Coca-Cola containing 24 tins costs 5 yuan to transport from Xi'an to Xinjiang. The logistics cost can add up to between 50 and 60 million yuan every year.

However, not all the materials can be produced in local factories. The local factories are unable to produce plastic bottles that meet Coca-Cola's requirement, or CO2 used for soda. "We have to ship them from Xi'an, Shaanxi province. The 1 percent 'secret ingredient' of Coca-Cola is flown in from the United States," Zhan says.

But in the past few months, it is water that is proving to be a major issue for the company. Though the company made water storage provisions when it set up the facility, it did not anticipate the problem would become as bad as it is now.

Coca-Cola had set up a water tank in Urumqi to supply water continuously to the plant for 24 hours. But, in April, a stoppage in water supply shuttered output for a whole week in Xinjiang. This has led to huge losses, Zhan admits.

"Buying beverages is not like buying furniture. People will come again if the furniture shop is closed, but they will not make a repeat visit to buy a Coca-Cola beverage, if they do not find it on the shelves."

Zhan says that among his tasks now is to ensure that there is constant water supply to the facility.

"We are hiring professionals to search for underground water sources, and we may even dig a well and use it. If we can't find underground water, we hope the government will help us out in some way."

Finding water in Urumqi may not prove to be that easy, as the region is far from the sea and has very few rivers running through it. "At our Saudi Arabian units, we can overcome the problem by using the desalination process to convert sea water into fresh water. No such techniques are available in Urumqi."

With this year's precipitation already at a considerably lower level than last year, Urumqi is having a tough time coping with the water requirements of its citizens and industries.

Yang Ming, a director from the Urumqi water supply group, says the city will irrigate the green belts only between 11 pm and 2 am, and if the temperature touches 34 C, there will be no water for green belts.

To cope with the water crisis, the city is also planning a major water purification project, which when completed will boost daily production capacity to 200,000 cubic meters. It will also be the biggest water-purifying company in Urumqi, says the water supply group.

"Hopefully the measures that the government takes will benefit Coca-Cola, and help us expand to our full potential," Zhan says.

wangchao@chinadaily.com.cn

(China Daily 07/06/2012 page15)