Malt House Renovation Strategy for Dragon Brewery Beijing

Introduction: BPL and the Dragon Brewery Challenge

Franz Berger is quality assurance manager and master brewer at Brewing Partner Ltd. (BPL), a Beijing-based management services organization. BPL had been established by the China Investment Group (CIG) with the precise mission of helping two local breweries — Dragon and Golden Spring — realize their aggressive return on invested capital targets. One of the main tools in achieving these goals was an improved product that could begin to rival some of the Western beers that had appeared on the Chinese market (Foster's, Budweiser, etc.). These beers, even when sold at a much higher price than local beers, had become serious competitors through their higher quality and Western brand recognition.

In his attempt to improve product quality, Berger implemented several measures aimed at monitoring and controlling the production process. Among these, he introduced testing programs and sampling methods to track everything from alcohol and pH levels to microbiological control and taste tests. Despite obvious successes, Berger maintained that improvements remained minimal after two and a half years on the job. This was mainly because many gains had been counterbalanced by problems related to the malt house or to specific features of Chinese management practice — including the fact that many production facilities were overcrowded due to strict governmental policies restricting layoffs. For Berger, however, the central concern remained quality as it related to the production facilities, and specifically to the malt house.

Malt House Operations and Their Role in Beer Production

Because malts act as the catalysts that transform starch into sugar, malt production is a key stage in beer production. A brewery generally has two options regarding malt supply: it can either produce malt internally within its own facilities, or it can purchase it from an outside producer. Even though business trends in the late twentieth century leaned toward decentralization, Dragon chose to produce malts internally and built its malt house in 1988 using mostly local equipment.

The malt house Dragon built consists of two separate buildings, each with a specific purpose. The first building is used for cleaning grain entering the malt house and for processing the finished malts. The second building is used for steeping, germination, and kiln-drying operations.

Key Problems Identified in the Malt House

Since its construction in 1988, the malt house has developed several serious problems. The first concerns the dust collection systems. There are twelve such systems in the malt house; their purpose is to collect dust into special towers where it is then bagged. The problem with these systems — as with many other malt house components — is that the ventilation fans had not been balanced for a long period of time. As a result, they vibrated excessively, and on occasion dust was blown back into the malt house rather than directed to the cyclone towers.

A second problem involves the gear boxes and electrical motors attached to the collection systems. Because of large amounts of sludge that had accumulated in the gear boxes, these components had become largely inefficient. As for the electrical motors, dust had blocked their ventilation outlets, causing them to overheat. Even more worryingly, there were many loose and unprotected wires throughout the malt house — a serious danger given that the dusty, dry atmosphere created conditions highly conducive to fire.

A third problem was the unacceptable state of the cleaning room. The very room in which processed malts were cleaned was itself completely dirty and badly maintained. Accumulated dust had created conditions suitable for rodents and insects, as well as a significant fire risk. Birds and mice appeared to have made the cleaning room their home, and these were clearly not proper working conditions for any production facility — least of all a cleaning room.

A fourth and closely related issue concerned worker safety. The improper conditions described above meant that the danger of fire was ever-present. The combination of dust and static electricity also represented a potential explosion risk. Workers themselves showed no awareness of safety rules, as evidenced by cigarette butts found inside the malt house.

Proposed Solutions for Malt House Improvement

There is also a significant efficiency problem. The calculated optimal number of annual operating days was, in Berger's estimation, 330 days, with the remaining 35 days allocated to maintenance and holidays. However, the malt house was operating for only approximately 100 days per year — less than one third of projected utilization.

Berger identified several potential solutions, to which an additional option can be added.

Solution 1 — Refurbishment: The first solution is to refurbish the malt house by repairing existing components such as gear boxes, electrical motors, and ventilation fans. This would require approximately one month to shut down and thoroughly sanitize the cleaning room, plus an additional month of work on the equipment (during which one cleaning system could remain available). The fixed cost of this option is 2.5 million Rmb, with an additional variable cost of 425,000 Rmb per year for spare parts. The advantage is that the cleaning room could subsequently operate for another six years before a complete equipment overhaul would be needed. However, this is essentially a "patching" solution — the underlying problems are deferred rather than resolved.

Solution 2 — Complete re-fitting: The second solution involves replacing all equipment entirely. As with Solution 1, the cleaning and sanitizing process would require shutting down all operational activity for approximately one month. Following that, the replacement of equipment would mean the cleaning room operating at roughly half capacity for the next eight to twelve weeks. The cost of a complete re-fitting is estimated at 7.5 to 10 million Rmb, with additional annual variable costs of 100,000 Rmb for spare parts. The key advantage of this solution is that new equipment would provide a lifespan of at least twenty years, effectively eliminating all current equipment-related problems for that period (routine maintenance and cleaning aside).

Solution 3 — Leasing to a foreign maltster: The third solution is to lease the malt house to a foreign maltster. The maltster would assume full responsibility for cleaning, sanitizing, refurbishing, and upgrading the equipment. It would also be required to provide Dragon with a full malt supply, while retaining the right to sell any surplus production commercially. However, this alternative presents several challenges for Berger, primarily related to asset valuation and the fact that many of Dragon's cost assessments are unreliable. Determining an appropriate lease price is difficult, though comparable prices from recent transactions and the knowledge that constructing a new malt house in China is valued at between $7 and $8 million provide some benchmarks.

Solution 4 — Selling the malt house: An additional solution, not explicitly presented in the original case, emerges from the broader question of whether Dragon must produce its own malts at all. Given the current state of the malt house, the costs associated with refurbishing or re-fitting it, and the general business trend toward decentralization, it is worth considering whether Dragon should sell the malt house entirely and instead purchase malts from foreign producers operating in superior conditions. For the first few years, the proceeds from the sale could potentially offset purchasing costs. Unfortunately, insufficient data is available to fully evaluate this option. In many respects it resembles the leasing solution, except that ownership rights are fully transferred. Asset valuation would remain the primary challenge.

Conclusion

As examined above, Franz Berger faces several serious problems at the malt house, the most important being the unsanitary conditions in the cleaning room and the fact that most equipment is old and poorly maintained. Four alternative solutions have been analyzed. Given that Dragon will most likely wish to maintain its centralized production cycle and is unlikely to consider selling or leasing the malt house, the second solution — a complete re-fitting of the malt house — is recommended as the most appropriate course of action. In implementing this solution, proper ongoing maintenance must be prioritized, and workers must be trained to operate in a clean environment and to observe fundamental safety regulations.