The Coca-Cola Company, the quintessential American multinational that is the world’s largest non-alcoholic beverages enterprise, is in the process of addressing the most consequential force majeure political risk it faces for the remainder of this century: China—U.S. geostrategic tension that very likely will lead to economic warfare and possibly military confrontation. Coca-Cola was blindsided by the U.S. government’s overwhelming response to Russia’s invasion of Ukraine in February 2022: comprehensive economic warfare against Russia and extensive military support for Ukraine.
The U.S. and India … have converging vital geostrategic interests in seeking to counterbalance China.
The Company was forced to completely exit from the Russian market and recognize a loss of $96 million, which fortunately was not significant. If the adage, “once bitten, twice shy” is a truism, then it is reasonable to assume that Coca-Cola has a strategy to immunize itself against China political risk. Surprisingly, investment analysts have not exhibited any curiosity as to what such a strategy might be and, not surprisingly, the company has refrained from discussing it. Consequently, one must connect the dots of publicly available information to decode Coca-Cola’s strategy to address its China challenge. The picture that emerges is quite reassuring.
The China Challenge in Context
Simply put, China matters. Although Russia may be characterized as a 1 percent problem, China is a 10 percent plus problem. After all, according to the World Bank, China is the world’s largest economy with a 2022 GDP (in terms of purchasing power parity or PPP) of $30 trillion, which completely dwarf’s Russia’s GDP of $5 trillion and is ahead of America’s GDP of $25 trillion. From the perspective of Coca-Cola, addressing its China political risk challenge has three facets: (1) purchase of investments of Chinese-controlled entities in U.S. bottlers of Coca-Cola, (2) sale of the Company’s investments in Coca-Cola bottlers in China and surrounding countries within China’s sphere of influence, and (3) developing alternatives to Coca-Cola sales of concentrates to bottlers in China and to Chinese-controlled bottlers outside China. Bottom line: Coca-Cola has yet to address the first facet but may be preparing to make a move, while it has made considerable progress on the other two fronts. So, let’s connect the dots.
Acquisition of Chinese Investments in US Bottlers of Coca-Cola
The Swire Group, which has extensive business interests and deep roots in China since the 1860s, is among the top five Coca-Cola bottlers world-wide. Swire Coca-Cola, wholly owned by the Swire Group, is a key Coca-Cola bottler in the western United States, with a franchise area covering 13 states. The Swire Group is also a major Coca-Cola bottler in Greater China, including 11 provinces, plus Shanghai, Hong Kong, and Taiwan. From a China political risk perspective, the Swire Group as a practical matter is a Chinese entity. Ultimately, the only way Coca-Cola can eliminate Chinese political risk within its U.S. bottling system is to acquire the Swire Group’s U.S. bottling franchises and, at an appropriate time, refranchise them to a suitable non-Chinese partner. In September 2023, in an intragroup restructuring involving the cash sale of Swire Coca-Cola’s U.S. operations by Swire Pacific (Hong Kong) to its controlling shareholder, John Swire & Sons Ltd (UK), the U.S. bottling business was valued at about $4 billion. There is now a clear path, including a valuation benchmark, for a possible Coca-Cola transaction to acquire the U.S. bottling operations of the Swire Group that helps address a key facet of the company’s China political risk challenge. The critical importance of such a potential transaction is manifest, so the company is likely to make a decisive move sometime in 2024.
Coca-Cola Divestments in China, Cambodia, and Vietnam
In 2022, Coca-Cola divested its minority interest in the Coca-Cola bottling operations in China to the majority owner, COFCO (a Chinese state-owned enterprise), and sold its wholly owned Coca-Cola bottling operations in Vietnam and Cambodia for an aggregate amount of about $1.3 billion cash to Swire Pacific (HK), part of the Swire Group. As a consequence, Coca-Cola has successfully eliminated its exposure as a shareholder in the manufacturing, bottling, and distribution operations of its local franchisees in China and the two major countries within China’s sphere of influence. Coca-Cola can now focus on selling its concentrates to local franchisees in these countries, and reducing its China political risk exposure by diversifying away from China and expanding in other markets such as India.
India: Coca-Cola’s Future Crown Jewel?
If mushrooming political risk is eclipsing the future growth potential of the Greater China market for Coca-Cola, what is the alternative? India is the obvious answer. The U.S. and India (which has an unresolved border dispute with China that has been festering for 65 years) have converging vital geostrategic interests in seeking to counterbalance China, so from a political risk perspective, ultimately India is a lower risk than China. Per the World Bank, India has the world’s third largest economy, with a 2022 GDP (PPP basis) of $12 trillion, and the largest population of 1.42 billion. The International Monetary Fund (IMF) is bullish on India and expects India’s economy to grow at about 6.3 percent annually in 2023 and 2024. (READ MORE from Samir Tata: Cold War With China Requires Mercantilism 2.0)
The U.S. government projects that India’s economy will be larger than that of the U.S. within a generation — by 2043. In terms of annual per capita consumption of nonalcoholic beverages (as measured by the number of 8-ounce servings) India has one of the lowest at 95 compared to China at 337 and the U.S. at 1,447 — clearly there is huge upside growth potential for Coca-Cola. There is every indication that the company is determined to seize the opportunity to make India its crown jewel. If the India pivot succeeds, and the next five years will be crucial in this regard, Coca-Cola will have knocked out its threat of China political risk.
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