Asia Pacific Breweries opens a brewery in Ulan Bator

Singapore’s Asia Pacific Breweries (APB), the maker of Tiger Beer, opened a USD 20 million brewery in the Mongolian capital through a venture with a local partner.

Salted tea with rancid yak butter – not exactly everybody’s idea of a nice cup of tea. For Mongolian herders, this constitutes the height of hospitality. Visit them in their yurts and this is what they will offer you. Perhaps not much longer. Soon they might force a Tiger beer into your hands, provided the owners of the new brewery will overcome the major obstacle to beer distribution in a country as vast and sparsely populated as Mongolia: the distance between neighbours.

In all likelihood, beer in the steppe will remain a thing of the far future. If the herdsmen bother with taking any liquid with them at all it is vodka.

In a country of only 2.9 million people (according to the CIA Factbook) scattered over an area four times the size of Germany, beer distribution is a nightmare, were it not for the fact that Mongolia, a landlocked country, located between the Russian Federation in the north and the PR China in the south, is becoming increasingly urbanised. According to a recent survey, 63 percent of the population lives in cities, some one million in Ulan Bator (‘The Red Hero’) alone, the country’s capital since 1924. Other urban centres are Darkhan (95,000 inhabitants) and Erdenet (74,000 inhabitants).

If out and about, the Mongolians’ traditional tipple is Airag, that is fermented horse’s milk with an alcohol content of about 3 %. Many Mongolians distil it further to produce shimiin arkhi, which boosts the alcohol content to around 12 % Photo: Nouicer

Mongolia was ruled by China for some 200 years until the early 20th century. After declaring its independence in 1921 it fell under the control of the Soviet Union. A few years later, in 1924, the country’s first brewery was built in Ulan Bator: APU. In true planned economy style, which was not given to inspirational naming, APU stands for Archi (= alcohol), Piva (= beer) and Undaa (= Lemonade). That about sums up its product range.

The Russians knew what it took to pacify the Mongolians: Vodka and frequent purges of politically undesirable people. If Mongolia today suffers from an appalling level of alcoholism, that is, quite literally, a hangover from Soviet times.

Thanks to having covered all corners of the beverage market, APU managed to maintain a monopoly until after Mongolian independence. It was privatised in 2001 when it was sold to Tuul International, a Mongolian–Russian–German consortium for USD 4.5 million. Since then it has undergone a complete overhaul so that it can produce in excess of 200,000 hl of beer.

APU’s opposition, if you will, are two brewpubs, also located in the capital, which attract a crowd of well-to-do locals and foreigners who can afford their beers. One is called Khan Bräu, owned by a German character, Klaus Bader, the other one is the Chinggis beer brewery (the usual spelling of Genghis Khan’s name in Mongolia).

Last year, there were nearly 230,000 hl of beer sold in the country, some of it imports from both Russia and China. As this amounts to only about 9 litres for each Mongolian, there could be scope for further growth, especially if beer manages to wean Mongolians from vodka.

However, and that’s a HOWEVER in capital letters, one of the rules of market research is to beware of averages. Given that Mongolians are amongst the poorest people in the world, we are safe to assume that only city dwellers with their higher wages can afford to buy beer. Bearing this in mind, beer consumption in Ulan Bator must be in the order of 20 litres. That’s a fair amount considering that beer is an expensive beverage in Mongolia.

If they had to choose between vodka and beer, would they take the beer? Photo: Nouicer

According to rumour, it was Dutch Heineken that has been studying Mongolia with great interest for years with the intention of building a brewery there. In the end the Dutch decided that it would be better if their Singaporean partner Asia Pacific Breweries (APB) set up shop.

Why Heineken/APB singled out Mongolia as the place to hoist their flag remains a mystery to many market observers. For one, APB is not going to be the first or the only one. APU has made sure of that already. For another, consumption seems fairly satisfied. In addition, beer production will be a very costly affair. Most ingredients need to be imported and in view of the recent doubling of international malt prices our readers will be able to work out for themselves how expensive it is going to be. And we have not even mentioned that water in Ulan Bator could be a problem – securing the necessary volumes and quality levels throughout the year.

The APB plant, which went on-stream in March, has an annual production capacity of 120,000 hl or over 60,000 300ml bottles per day. That’s a lot of beer that has to be put through the brewery in order to achieve satisfactory efficiency levels. In other words, the brewer is not to be envied.

Why APB decided in favour of such a large capacity beats us especially since Heineken has a brewery in nearby Irkutsk which could have easily supplied the beer. Admittedly, Irkutsk is in Siberia, but in this part of the world, that’s basically just round the corner. And by rail the distance could easily be covered in a day or two.

From Heineken’s brewery at Irkutsk the Mongolian market could easily be served. In Russia Heineken has ten breweries. Map: Heineken

Which brings us back to the initial question of why APB had to build a brewery in Ulan Bator in the first place. The answer is: we don’t know. Perhaps APB’s economics are different to ours.

Tiger hopes to become one of the leading beer brands in Mongolia soon.

APB first exported Tiger to Mongolia about 15 years ago, positioning it as a premium brand. In 2005, the brewery group partnered the ubiquitous MCS Group, which seems to have its finger in every pie in Mongolia. Founded in 1993 as the first Mongolian private consulting company in the energy sector, the MCS group has expanded its business operations in such diversified fields, as energy and infrastructure, information and communication technology, beverage manufacturing (a Coke license) and distribution, wholesale and retail, property development, construction and printing. The MCS Group has over 2.000 employees and has been ranked number two taxpayer in Mongolia in 2004.

Together Asia Pacific Breweries and MCS set up MCS-Asia Pacific Brewery LLC in Mongolia, in which APB holds a 55 percent stake while its partner MCS Holdings owns the remaining 45 per cent stake, APB said in a statement.

Like all transition economies Mongolia has been through several rough years. The disintegration of the USSR and of the socialist trading system, says the European Union, threw the Mongolian economy into great difficulties. Losing large external subsidies from the Soviet Union, Mongolia experienced a sharp depression and increasing poverty in the first part of the 1990s.

Between 1990 and 1992 GDP declined by a fifth. According to the Living Standards Measurement Survey (LSMS) of the World Bank in 2002, 36 percent of the population lived below the weighted national average poverty line of USD 17 per month, which does not appear to have changed very much in recent years despite overall GDP growth.

During the 1990s, Mongolia made progress in laying the institutional and policy foundations for a market oriented economy, including price and trade liberalisation, launching large-scale privatisation (retail sector and livestock herding), curtailing budget transfers and lending to state enterprises, and setting-up a commercial banking system. Towards the end of the decade Mongolia also stopped inflationary financing of the public sector and has since then managed to keep inflation under control. In 1991 Mongolia became a member of international financial institutions, such as the World Bank and the International Monetary Fund (IMF). Mongolia joined the World Trade Organisation (WTO) in 1997.

Agriculture, to a large extent livestock production, still accounts for more than a fifth of GDP. Some 40 percent of the Mongolian labour force continues to be employed in mostly nomadic livestock herding (35 million heads in 2006). The share of services has increased significantly over the past years and now exceeds 50 percent. Industry and particularly mining (together a quarter of GDP) have consolidated their share in recent years. Industry also includes wool and cashmere processing, leather goods production, food processing, construction, and, in recent years, garments. Today 80 percent of GDP is generated by the private sector (compared with 10 percent in 1990).

Since 2000 the Mongolian economy has grown between 5 percent and 10 percent annually fostered mostly by high prices for Mongolia’s main export products copper, gold and cashmere.

Generally speaking, China’s economic boom has been creating an opportunity for the landlocked Mongolia to prosper. Economically, China emerged as the most influential country for Mongolia within the last ten years. In 2004, 48 percent of Mongolia’s exports were sent to China and 38 percent of the total foreign investment to Mongolia was made by Chinese companies.

Mongolia is rich in various natural resources that China needs in its rapidly developing industry. China’s investment in Mongolia’s strategically important mining sector has increased rapidly. Clearly, China is going to be the biggest potential market for Mongolia’s mineral and livestock products. In addition, China will serve as one of the primary sources of capital feeding the Mongolian economy in the coming decades, argues the Association for Asian Research in a report. Mongolians may view this dependency with mixed feelings. But what can they do?