When the world's big brewers first ventured into China in the early 1990s, they saw a vast market waiting to be conquered. It was a conquest, but the victors were hundreds of local Chinese brands.

Today, Wai Kee Tan, who until earlier this month headed Chinese operations for Belgian-based Interbrew SA, and is now the company's vice president for corporate affairs in Asia, sees a much different picture. Surveying a wall-size map of China, he says, "We want to be in this patch and in this patch," pointing to two modest red splotches along China's eastern and southeastern coasts.

Interbrew, which is soon to become the world's largest brewer by volume after it completes its plan to acquire Brazil's Cia. de Bebidas das Americas SA, or AmBev, isn't simply rolling out one of its global brands, such as Stella Artois or Beck's. Instead, it has snapped up local labels, including KK and Zhujiang, some of which distribute no farther than their home city's border. After seeing the first big foreign-beer push fail because of high prices and poor distribution, Mr. Tan has adopted a new guiding principle: "China is a nation, but not a national market," he says.

It is a lesson that extends far beyond beer. As the world's consumer-goods giants charge headlong into China, well-entrenched local brands are proving to be formidable competitors. And some regions have their own distinctive tastes and requirements.

Procter & Gamble Co.'s Rejoice shampoo, for example, is far and away the top-seller in China, with 14.2% of the national market, according to ACNielsen. But in some provinces, such as Anhui and Hunan, home collectively to 125 million people, Rejoice dips to 6.8%, almost neck and neck with a local brand, Lafang, at 6.2%. Lafang's edge is its low price and its more focused regional distribution.

China is littered with similar brands, which have burrowed deep into local markets, making it difficult for foreign companies to bust through. In laundry detergent, big brands such as P&G's Tide and Unilever PLC's Omo, hold sway only in certain big cities. But in the provinces, they lose out to a local brand, Diaopai, the country's top seller.

These local brands have an advantage that extends beyond price, says Linda Kovarik, a planner with Publicis Groupe SA's Leo Burnett ad agency. Their long history in smaller markets can give them a closer connection to consumers that multinationals have trouble matching. "It's often word of mouth. `If my cousin uses it, I will, too,' " she says.

China isn't a battleground that the world's global brewers can afford to cede. In 2002, China surpassed the U.S. to become the world's largest beer market by volume, now accounting for 16.9% of world-wide consumption, according to Impact Databank. With beer consumption flat or on the decline in other major markets, Chinese consumers now have more power than ever to determine the industry's global winners and losers.

Still, China's beer market is fragmented, with the top 25 brewers accounting for less than 50% of the market, according to Euromonitor. Only one Chinese brewer distributes nationally, Tsingtao Brewing Co., the market leader, with a 12.1% share in 2002, the most recent year for which data are available, according to Euromonitor.

In their first foray into China in the early 1990s, the global brewers thought they would be able to sweep across the country, waving the flags of their well-known brands, such as Budweiser, Foster's or Beck's. China was awash in beer, with more than 800 breweries, many of them built by local governments as a way to soak up unemployment. But few had modern technology; most were churning out rivers of bad beer at unprofitable prices. As had happened in other markets, including the U.S. decades ago, the big brewing companies figured their standardized products would eventually drive out the local competition.

What followed was one of the worst debacles foreign companies have ever experienced in China. By 1997, there were more than 40 beer ventures involving international brewers, including Ireland's Guinness, now owned by Diageo PLC, Asahi Breweries Ltd. of Japan and Group Danone SA of France. Most were trying to sell premium beer at a price that was out of reach to all but a few Chinese. And they had no clue about how to transport it across a country of rutted roads and treacherous terrain. The cases of beer piled up and the losses mounted.

"There seemed to be no end to the red ink," says Rick Scully, who heads the international beer unit of Australia's Foster's Group Ltd. After incurring an average loss of $15 million a year throughout the mid-to-late 1990s on its joint venture, Foster's took a $126 million charge at current exchange rates on its investment in two of its three breweries in China. England's Bass Brewers Ltd., now a part of Interbrew, sold out of a state-of-the-art brewery it built in the northern Jilin province and left the country in 2000. Before it was picked up by Interbrew, Beck's had a strong presence in China, but it too fell on hard times.

The brewers' mistake, says Glen Steinman, a Hong Kong-based consultant to international brewers, is that they "so thoroughly underestimated the competition from the locals." The tiny Chinese brewers had something the giants couldn't match: the loyalty of local beer drinkers. As the foreigners piled in, the Chinese brands kept their prices low and made sure their beer was available in every corner shop and roadside stand. Now, however, big international brewers are learning from their early mistakes. In the past two years, they have returned to China in force, buying up local brewers and pushing local brands.

Last year, Interbrew paid more than $166.5 million for stakes in two local Chinese brewers and now has a portfolio of more than 30 local brands, including Double Deer, Santai and Jinlongquan. It plans to reintroduce its Beck's brand this spring, using its local distribution network to sell it locally as well as in several large cities.

London-based SABMiller PLC is also taking an entirely local approach to China for now. In June, the world's second-largest brewer said it had acquired a 29.6% stake in Harbin Brewery, China's fourth-largest beer company. SAB also has a partnership with China Resources Ltd., controlled by China's foreign-trade ministry, which holds more than 30 local brands. The only company that hasn't retrenched is Anheuser-Busch Cos. In 1993, the world's biggest brewer purchased a small stake in Tsingtao, which it will increase to 27% by 2010 as part of a mandatory bond conversion. It has also spent half a billion dollars and 10 years to brew, market and distribute its flagship Budweiser in a bid to go after the elusive upper-echelon of Chinese beer drinkers. In 1995, it began brewing Budweiser in the centrally located city of Wuhan. Today, Anheuser-Busch's bet seems to be paying off. The company's operation reached profitability in 2001. Premium-priced beers count for only 2% of the market, but Budweiser now controls more than half of that.

Interbrew got its first real taste of China in 1997, when it acquired two small brewers in Nanjing, a city of more than five million along the eastern seaboard. It purchased one of the breweries, Jinling, from Mr. Tan, who took early retirement after the purchase. Three years after Interbrew took it over, the venture was teetering on the verge of collapse. Production volume had dropped by 40%. Morale at the brewery, which previously had been operating at full capacity, was low, as workers who had depended on overtime to make ends meet now stood idle. Interbrew's strategy had been to gild Jinling's image. It crafted a Jinling Web site and rolled out advertising that made Jinling appear elegant, the beer for special occasions. Meanwhile, other local breweries, some in even worse shape than Jinling, had flooded the market with "value" beer, a brew that, while foul tasting, is dirt cheap -- sometimes selling for less than 12 U.S. cents for a 600-gram bottle.

By 2001, Interbrew's senior executives, concerned that they were missing out on a huge opportunity in China, reassigned Patrice Thys to head its Asian operations. One of his first acts was hiring back Mr. Tan. After a four-year hiatus, Mr. Tan, a 55-year-old Singaporean and onetime accountant, was shocked at what had become of his former brewery. He felt that Interbrew's stab at making Jinling into "classical music" was a disaster. "How many farmers listen to classical music?" He changed the beer's slogan from "happiness" to "the natural flavor of Jinling," which is also Nanjing's historic name. "We said, `We're not this snooty stuff. We're you,' " Mr. Tan says.

Whereas Interbrew had looked at the value-beer market with disdain, Mr. Tan began to devote the brewery's extra capacity to churning out its own value brand. The value beer was no money-earner, explains Mr. Tan, but it kept the brewery at full capacity, helping to amortize operating costs. But a larger problem loomed: Interbrew still had no broad strategy for China, and corporate headquarters in Brussels was getting impatient. Part of the problem was that the company brass was asking for something Mr. Tan couldn't provide. "Interbrew wanted a national brand, a national strategy," he says.

While Mr. Tan knew that was the wrong course, he wasn't sure what the right one was. "My business strategies were changing every day. It was tumultuous. You saw big international boys" building breweries from scratch, he says. "I thought that's what we should be doing," he adds. "Then I thought we should wait for them to fold and pick up after them."

Mr. Tan, along with Mr. Thys, began to push for a strategy that might have seemed excessively modest for one of the world's biggest brewers. "Forget about national, forget about regional, even," Mr. Tan told the board members. "Build a patchwork." It was a tough sell. Interbrew's board made three trips to China in 2001 and 2002, visiting big cities such as Shanghai and Guangzhou, and smaller ones, including Nanjing. They began to realize that China would require a radically different approach. "One by one," says Mr. Tan, "the hands on the board rose."

With the board's blessing, Messrs. Tan and Thys began aggressively scouting for local acquisitions in the two areas they had decided to target: the Pearl River Delta in the south, and the area below the Yangtze, along the eastern coast. Both areas were relatively prosperous and, more importantly, no other international brewer had yet to move in. In November 2002, Interbrew paid $19.5 million for a 24% stake in Zhujiang Brewery, the biggest brewer in the southern province of Guangdong. In April 2003, it bought 70% of KK Brewery in Ningbo for $35 million. Then, in September, it beat out other international bidders to acquire half of the Lion Group breweries for $131.5 million, a deal that more than doubled its presence in China and solidified its dominance in its two strongholds. Combined, Interbrew's local holdings make it the No. 3 brewer in the country, with 9% of the market, according to the company.

But on its home turf, it often dominates the competition. In Ningbo, a prosperous city of five million along China's eastern coast, its KK brand controls 90% of the market, a result of its deep roots with the locals. At one fluorescent-lit Ningbo cafeteria, where diners load their trays with food from steam tables, Zheng Miaofeng cracked open a tall green bottle of KK before sitting down to a plate of steaming dumplings with his family. "I've tried others," said the employee of a local clothing company, "but this is what I drink."

At a broom-closet-size corner shop located in a dense warren of apartment blocks, crates of KK, and the lower-price value beer known as K, were piled high, chilled by the cold night air. Wang Jinbao, bundled in layers of clothing against the cold, said KK sells for two yuan (24 U.S. cents), less than a bottle of Coca-Cola, at 4.8 yuan. In the winter, the shop sells two KK cases a week, five in the summertime. Each bottle brings a profit of 20 fen to Mr. Wang. When the shop runs out, he can get new 24-bottle cases in 20 minutes from a nearby warehouse. The other beers on the shelf, including smaller cans of Bud, at 5.5 yuan, and Tsingtao, at 3.5 yuan, barely sell, Mr. Wang said. One of the Tsingtao cans expired five months ago.

Many shoppers prefer these corner shops to the newer supermarkets because they can buy on credit. There are 6,000 shops like this in the Ningbo area, accounting for 90% of beer distribution. But keeping them fully stocked requires an immense local network, one in which many bit players shave a small profit off each bottle sold.

At the loading docks of Interbrew's brewery in Ningbo, workers rush to unload cases of empty green bottles from arriving trucks, before reloading them with fresh beer. Chinese brewers depend on recyclable bottles -- sometimes churning the same bottle as many as eight times -- in order to keep their prices low. But the dependence on recyclable bottles also means that brewers are linked by necessity to their local turf. Because all the bottles must make a round trip, distributing beyond a 200-kilometer radius becomes prohibitively expensive.

That only intensifies the local brewers' focus on their immediate surroundings. Zhou Junping has been a local distributor for KK for 12 years and now supplies 50 small shops, all within walking distance from his dirt-floor warehouse. When he started, the gray-haired Mr. Zhou sold only 2,000 cases a year, making deliveries with a rusty wheelbarrow. He now uses a truck to deliver 20,000 cases, making a profit of one yuan on each. "This has made me a rich man," he says, revealing a toothless grin. Part of what makes this crude supply-chain work is that Mr. Zhou knows it is in his interest to make sure the shops on his route sell more beer. When one of them sells more than usual, "I go there and congratulate them," he says. "If their sales drop, I come to ask why."