Coke and China Need Each Other

Buying China Huiyuan, China's No. 1 maker of fruit juices, is a no-brainer for Coca-Cola, which wants to significantly boost its presence in the growing Chinese drinks market. As the Chinese, like most people, shift away from carbonated soft drinks, the best way to hold onto them is to sell them juice and water.

Unfortunately, though, Coke's timing was off. It made the $2.4 billion deal for Huiyan a month after the country passed new antitrust legislation and at a time when Chinese nationalism is increasingly focused on economics and trade: The Chinese, and the Chinese government, don't like the idea of foreign companies taking control of well-known brands like Huiyuan. So, three months after the deal was made, it is still awaiting approval.

At the same time, Chinese officials recognize that Coke's ownership would be good for Huiyuan, which has the brands but not the distribution or access to financing that Coke would give it.

The merger is "the first big test" of the anti-monopoly law, says Business Week. Which is somewhat ironic, given how fragmented the Chinese juice market is. Even if the deal goes through, Coke and Huiyuan would make up less than half the market.

Coke is the top seller of soft drinks in the country, and the company's Minute Maid products are No. 2 in diluted juice drinks. But Coke has no presence at all in the market for 100 percent juice, which is growing fast and offers wider margins. China's growing middle class is flocking to healthier, more expensive beverages.

The deal must be approved by March 23, or it will expire. And that could be very bad for Huiyuan and hence for China. Huiyuan laid off about one-quarter of its workers this year, and operating profits are on the decline. Sales increased nearly 29 percent last year, but, Business Week reports, are expected to fall by 9 percent this year.

The Chinese government has no reason, other than a misplaced notion of national pride, to block the deal.