Caixin
Jun 11, 2019 07:58 PM
BUSINESS & TECH

In Depth: Graft Underpins Distribution at World’s Most Valuable Liquor Company

Moutai products at a store in Beijing on May 25. Photo: VCG
Moutai products at a store in Beijing on May 25. Photo: VCG

Marketers of China’s “national drink” Moutai sometimes dubiously boast that the grain alcohol’s ingredients are so pure a night of drinking the stuff will barely produce a headache the next morning.

But the drink’s state-owned producer Kweichow Moutai Co. Ltd. is currently suffering headaches of its own, after Yuan Renguo, its chairman from 2011 to 2018, was arrested in May for taking a “massive” amount of bribes and other “severe violations of discipline and law,” according to the Central Commission for Discipline Inspection (CCDI). 

The head of the company’s e-commerce division Nie Yong suffered the same fate a few days later. Both men are accused of taking bribes from government officials looking to get into the lucrative Moutai distribution business. 

In response the company is implementing a new registration system under which staff will have to file any contact with public officials or employees of other state-owned enterprises, logging all phone calls, transfers of information or company materials. Any such interaction that goes unreported will be subject to investigation, according to a notice published by the CCDI’s local office in the company’s home province of Guizhou, in southwest China.

Taking its name from its picturesque hometown of Maotai, the company produces a grain alcohol called “baijiu” and is said to have been the favorite brand of Mao Zedong. The Shanghai-listed firm has retained its title as the world’s largest liquor company since early 2017, when its market value exceeded that of British booze giant Diageo PLC. Its market cap is 1.14 trillion yuan ($165 billion).

Moutai sells to designated distributors at an official factory price of 969 yuan. Yet the market price tends to be much higher, exceeding 2,100 yuan in the first quarter of this year.

Yuan is thought to have sold distribution licenses to public officials for private gain. Yet according to several company insiders and members of industry body the China Alcoholic Drinks Association who spoke to Caixin, it has become an open secret that officials from across all level of government would call on senior figures in the company, develop favorable relationships — often through bribes — and set up as distributors. The new rules are an effort to address this.

License to print money

According to the CCDI and several sources close to the company, Yuan handed out lucrative distribution licenses in exchange for favors and bribes from government officials.

Such licenses come with a relatively high upfront cost of between 10 million yuan to 20 million yuan when obtained by legal means, company insiders say. But the returns are high, as Moutai typically sells for twice its official factory price.

Distribution quotas are tightly controlled, with retailers obtaining permission to sell a certain quantity of the liquor that is measured in tons, a senior figure at the company told Caixin. “Generally, dealers start with single digits after obtaining qualifications, such as two tons and five tons per year. Only when they are well managed will they slowly rise up,” he added.

Yet distributors soon make their money back, as Moutai typically sells for around 4 million yuan to 5 million yuan per ton. “Distributors who start with a quota of two or three tons will make back the license fee in a year or two, and after that they can just sit back and watch money come in,” the head of a small-scale liquor business in Maotai town said.

Drunk on power

Yuan’s arrest is thought to center on his relationship with Wang Xiaoguang, the former vice-governor of Guizhou who was sentenced to 20 years in prison for graft in April, and Wang Sanyun, the former secretary of Gansu province, who received 12 years the same month. It is possible Yuan was exposed by investigations into wider crimes by the pair.

According to several industry insiders in Maotai town, Yuan specially approved several Moutai distribution businesses for Wang Xiaoguang and gave him several separate quotas covering the businesses. Unlike distributors who have a quota of two to five tons a year, Wang started with 100 tons directly, one insider said. It was thought that he did not even need to buy from the distillery, but received this quantity as gifts, with enough to support several stores, a person in charge of a small liquor company in Maotai said.

Several sources told Caixin that Yuan had indulged in such behavior for several years before finally being investigated in relation to Wang Xiaoguang and Wang Sanyun. “After these specific cases, we have to ask, who [else] gave him bribes?” one said. “There can’t just be one briber. Now Wang Xiaoguang and Wang Sanyun are removed, Yuan needs to be thoroughly investigated.”

Yuan is just one of several Moutai senior figures to have been arrested for corruption in recent years. Former general manager Qiao Hong was arrested for corruption in 2007. In 2014, deputy secretary Fang Guoxing was arrested for managing several illicit distribution companies registered in the names of his family members, while deputy general manager Tan Dinghua was arrested in 2016 after receiving 34.6 million yuan in property in exchange for helping more than 10 companies become distributors.

Stopping the rot

After Yuan left the company, his successor Li Baofang launched an effort to clean up its dealers. Last year, Moutai severed ties with more than 600 of its dealers, the company said in its annual financial report in March.

The new registration system — including the recording of communications with government at all levels — is an effort to make sure dealings with distributors stay above board.

Yet more than one person close to the company said Moutai’s internal investigations found more illegal distribution deals than it is willing to make public. The company “can’t move, and doesn’t dare move,” the source said.

Many major dealers have strong political support, a long-time employee told Caixin. “Many provincial agents and municipal distributors have high-level backgrounds, such as central officials, senior military officers, or are relatives and friends of provincial leaders. Even if these people have all kinds of irregularities in their business, Moutai can't take action against them,” he added.

Contact reporter David Kirton (davidkirton@caixin.com)

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