Executive Summary
Mark’s Dairies is a high-profile small and medium-sized enterprise that provides reliable milk delivery to central London as well as its surroundings. The business desires to enter into new territories, that is, the Chinese market. It targets to sell its UHT milk to pre-school aged children and upwards, who range from three to eleven years old. Since the country is recovering from the COVID-19 pandemic and the economy is witnessing some growth, this is an ideal time to venture into internationalisation for Mark’s Dairies. Additionally, due to a rift between the Chinese and United States governments, it offers an opportunity for a United Kingdom-based corporation to gain market share belonging to the U.S. rivals.
China is considered among the top producers of dairy in the world, although the estimated number of cows has dropped significantly. This is due to the production volume for a single animal being high and projected to increase. Even with this, the sector is still reliant on imports with regard to UHT milk. The company in discussion has the opportunity to establish itself in this market due to its great need for dairy products. However, it needs to understand the drivers and barriers that may emerge.
UHT milk consumption in the mentioned city alone is fifty thousand yearly in terms of sales. The imported product is sold more than the one produced locally. For instance, Chinese consumers trust and consider goods from the United Kingdom as reliable. This shows that it can be advantageous for Mark’s Dairies to start operations there where the small and medium-sized enterprises would entirely concentrate on satisfying the demand of the customers. The significant volume of buyers is encouraging not only for this business but for others in the same industry as well. Even though the suppliers’ volume might appear higher in this market, Mark’s Dairies can establish strategies to create a unique brand that will enable consumers to distinguish them from others.
Lastly, one of the barriers is the implementation of import quotas. Many governments try to support their local producers by limiting the quantity of imported goods. Last year, China started implementing import tariffs with a fixed and constant tax rate. For numerous international businesses, this could hinder them from achieving high-profit margins. This essay allows the SME to understand the milk industry in China, the business drivers, barriers to trade, some of the social and ethical issues to consider, and the ideal expansion method to adopt.
Introduction
The U.K. Milk Industry
The United Kingdom’s milk production is greater than most countries in Europe except Germany and France and is considered about the tenth highest worldwide. There are close to twelve thousand dairy farms in the nation, which contribute to the great production. Nearly fourteen billion litres are commercially produced every year in the U.K. (Bard et al., 2019, p. 10380). The population in Britain consumes two thousand tonnes of cheese on a daily basis. Only three percent of milk in the country is delivered to the doorsteps of households (Bard et al., 2019, p. 10380). An eighty percent decline was recorded in deliveries when the supermarkets started to sell their branded milk (Vázquez-López et al., 2021, p. 99). The largest deliverer is estimated to have a customer base of more than five hundred thousand.
The Chinese Milk Industry
The fourth-largest dairy producer globally is China, and in Asia, it is considered to be second. Inner Mongolia Yili Group is the top processor of dairy in the country. Business analysts consider it the number one company for Ultra-high temperature milk as well as a powder (Chen and Yu, 2019, p. 303). Even though the approximated number of dairy cows has dropped in the Asian nation, the volume of production per cow is anticipated to increase. From about 4500 kilograms now to more than 5400 kilograms in the next two years, there is much promise (Chen and Yu, 2019, p. 303). The industry is still dependent on dairy imports despite the improved productivity. In 2018, the country imported packed milk, whole milk powder, and whey in volumes of more than 500 000 tonnes each.
The Chinese Market
Understanding that the country still relies on dairy products imports, it is important to identify the major suppliers. For the Chinese market, data suggests that Australia, New Zealand, France, and Germany are at the top of the list (Liu et al., 2020, p. 454). Mark’s Dairies has a chance to establish itself in that market due to its need for more dairy products. In 2021, China accomplished an output of more than thirty-six million tonnes of cow’s milk (Liu et al., 2020, p.454). The volume of milk production nationwide ranged between thirty and thirty-four million tonnes every year in the last ten years (Liu et al., 2020, p. 454). This improvement can mainly be attributed to particular pros provided by the UHT milk, for example, its relatively long shelf-life.
Business Driver-Economical
Economic Growth
It is easy to conduct business in China for a foreign company, including Mark’s Dairies, as the Shanghai free trade zone offers regulatory as well as operating surroundings for attempting new initiatives. This ensures that there are no fiscal currency impediments or restrictions imposed on international investors (Wang et al., 2019, p. 1). Thus, Mark’s Dairies can acquire lower-cost funding and openly exchange currency when expanding their business activities into the Chinese market. Nevertheless, the team in charge of the expansion needs to track future developments in the free trade zone as it is not immune to any changes.
The pandemic affected the milk sector in China by greatly reducing feed and labour supply in the dairy farms. Due to the inability to predict the status of the COVID-19, the disease significantly impacted the nation’s overall economic growth (Wang et al., 2019, p. 1). It would have been a bad idea to continue with expansion plans two years ago. However, most places worldwide have improved with regard to the issue and businesses in China have recovered. The country’s GDP yearly growth three years ago was six percent (Vargas-Bello-Pérez et al., 2020, p. 4156). Recovery means that the economic status of the nation is thus trending upwards as projected before the pandemic.
Mark’s Dairies’ globalisation into the Chinese market will result in profits as the economy thrives. According to (Farrell et al., 2021, p. 4593), as spending habits alter, the company’s supply can change as well depending on demand. Foreign direct investment in China accounts for more than fifty percent of international trade (Wang et al., 2021, p. 168). This is advantageous to Mark’s Dairies as a small and medium-sized enterprise since it fosters growth through the incorporation of China’s economy with that of the United Kingdom to obtain more shares in the global market.
Interest/Exchange Rates
The interest and exchange rates are important and greatly impact any foreign company’s plans to invest in another country. When they are high, it becomes difficult to predict, which can lead to unanticipated costs for a business. For example, in the case of Mark’s Dairies, the invoices sent in Renminbi result in less revenue when there is a rise in the exchange rate at the release time of the invoice. This means that in order to avoid such, the company has to issue an invoice in Sterling to alleviate the threat. Here, it is China that would be needed to pay a similar amount in pound sterling irrespective of the rate fluctuations.
Additionally, the changes witnessed in fuel interest rates imposed by the Chinese government impact Mark’s Dairies’ exportation costs, minimising the profit margins. Local producers of UHT milk would, however, benefit from the drop in imports and can convince the customer base belonging to Mark’s Dairies. International interest rates cannot directly affect the domestic economy (Huey et al., 2021, p. 5). This does not mean they do not impact indirect variables which contribute to the country’s growth in annual GDP. Due to this, China has a greater incentive to lower its interest rates to protect its gross domestic product.
Business Driver-Bargaining Power of Buyers
Volume of Buyers
In 2021, there were more than twenty-seven million people in Shanghai alone, and the figure saw an increase of about three percent. The targeted audience by Mark’s Dairies consists of children between the age of three and eleven years. This is ten percent of the total populace in Shanghai, where consumption of UHT milk is fifty thousand annually in sales (Wang et al., 2021, p. 169). In the city, UHT milk that is imported is bought twice weekly per a single household. This proves that it is a niche market for the products sold by Mark’s Dairies, where the SME would focus on providing for the demands of the consumers. It indicates a great volume of buyers for the business’ milk (Wu et al., 2018, p. 8). Noteworthy is that the suppliers’ volume is higher than that of the buyers in the area, which makes the bargaining power of a buyer to be high. Mark’s Dairies can ensure this does not hinder them by applying marketing techniques in the online space to distinguish themselves from other brands.
Product Differentiation
Mark’s Dairies’ UHT milk can last long on the shelf without spoiling, it is flavoured and contains nutrients that can boost the life quality of a child. This is not the same case when it comes to UHT milk of other brands, which means that their buyers possess a low bargaining power as imported milk is highly demanded in the Chinese market. The flavour of dairy products has been discovered to have a major impact on purchase as well as consumption. Therefore, the attribute that is most favoured in this industry is taste. Mark’s Dairies is in a good position for its ability to offer products in various flavours.
Trade Barriers
Taxation
In 2013, China and the United Kingdom identified how taxation could hinder trade between the two nations and reached a double taxation agreement. This means that a company from the U.K. intending to export products to the Chinese is only required to pay enterprise tax in one country (Zhang et al., 2019, p. 224). Since Mark’s Dairies is an SME, their taxes will be ridiculously low. According to the treaty, air and shipping tax is only taxed in China for the transit of goods (Zhang et al., 2019, p. 225). In other nations, this would be a major hindrance as a result of the high costs of doing business which leads to reduced profits (Zhang et al., 2019, p. 225). In the event the tax interests become high for the SME in the discussion, it can always seek tax relief in the United Kingdom to minimise the costs.
Import Quotas
Many countries, through their governments, limit the number of imported goods in an attempt to ensure that the local producers thrive. China, 2021 introduced import tariffs on imports with a set as well as constant tax rate (Glauber and Lester, 2021, p. 405). The import taxes and duties are determined in the Renminbi and based on the People’s Bank of China’s standard exchange rate. This is advantageous to Mark’s Dairies due to the tariffs being computed in the Chinese currency leading to a higher profit margin (Glauber and Lester, 2021, p. 406). Even though there do not exist any restrictions on the quantity of imports, exporting a significant amount of milk in the initial stages is risky and has to establish its consumer base in Shanghai first.
Imports/Exports Tariffs
Due to the pandemic, the Chinese government imposed limitations on imported food products after realising there were traces of the COVID-19 disease on the packages. Its tariffs for goods of interest, as well as concentrated milk, are ten percent (Benguria et al., 2022, p. 1). The business costs of Mark’s Dairies will greatly increase, and thus, they will have to minimise the expenditure to sustain the profit margins. Nevertheless, China has added other tariffs on imported products from the United States. This is advantageous to Mark’s Dairies as it offers them the capacity to grab some of the market share owned by the U.S. (Benguria et al., 2022, p. 1). However, if this situation changes, the business would have to find other ways to operate in the market as U.S. companies would be as effective as before.
Certification Process
As suggested earlier, the Chinese government has been strict on imported goods after discovering traces of the coronavirus on some of the packaging. Thus, other countries, such as the United Kingdom, have established mechanisms to ensure that this does not happen (White et al., 2021, p. 1). For instance, Mark’s Dairies is needed to acquire an export health certificate to export milk products and ought to be approved by the General Administration of Customs in China (Fusacchia et al., 2022, p. 28). Compliance is required from the SME with regards to regulations, for example, making sure that the raw milk is extracted from animals free from infections that can be transmitted to human beings. Most SMEs have found certification costs to be high and difficult procedure that they have abandoned their internationalisation plans (White et al., 2021, p.1). Mark’s Dairies is fortunate since it will only cost them about £200.00 to attain one.
Ethical and Social Issues
Corporate Social Responsibility
Corporate social responsibility is an important thing to be considered by a company or business attempting to conduct its operations internationally. It shows that they are committed to wider social matters instead of only focusing on their profit margins (Latapí Agudelo et al., 2019, p. 5). This, in turn, is attractive to consumers who share similar or common values. Thus, it is essential for Mark’s Dairies to operate in the Chinese market sustainably. Social responsibility will help the SME and the government to positively impact business, development as well as society. In a highly competitive market, one has to create uniqueness in terms of the image to ensure that the customers can distinguish them from other brands.
Corruption
Bribery, a form of corruption, is highly prevalent in China, and this poses a threat to the operations of Mark’s Dairies as it could lead to extra expenses and potential legal problems with both governments. In 2013, the Chinese government started an anti-corruption initiative which extends to businesses from the United Kingdom (Kim et al., 2018, p. 112). Even though there is the Bribery Act in place, it is important to understand that it does not mean that corruption is fully prevented. Therefore, the SME, through different policies, needs to ensure that any party affiliated with them does not engage in corrupt activities.
Integrity
The level of confidence or trust a consumer has in a salesperson is more vital than in the organisation to which they are affiliated. This is especially when determining the long-term orientation toward the brand. The meaning of this is that Mark’s Dairies has the responsibility of employing representatives with integrity to sell their products (Kendall et al., 2018, p. 1). They should not just depend on the notion that the UHT milk from the United Kingdom is reliable in the Chinese market. People in China’s decision-making are highly determined by the type of communication from the sellers (Kendall et al., 2018, p. 1). There are practices considered a virtue in the Asian country, for example, punctuality. The business in the discussion can embrace this by scheduling appointments two months prior to the actual meeting, as they will be viewed as noble by the consumer base.
Cultural Preferences
The impact of local culture can be extensive and influences the management of employees, speed of doing business activities, handling of negotiations, and enforcement of risk management. Therefore, detailed comprehension of local business practices is important to global business success. The culture in China in terms of business is mainly influenced by Confucianism. The Confucian idea of Guanxi suggests that a network of relationships is important and based on the values of loyalty, solidarity, courtesy, and modesty. Additionally, hierarchy, in privacy and business, is vertical and much respected.
Thirdly, the population in China is careful to protect their image, dignity, and influence. Nevertheless, it has to be stressed that the values have slowed down over the past ten years, whereas modern Western world approaches have increasingly gained ground. Thus, the international convergence of business culture codes as well as global business values is observable in the Asian nation. The Chinese people are reluctant to take risks (Walheer and Zhang, 2018, p. 5). There are harsh procedures existing for the deciding process. A decision is reached by every relevant person after multiple meetings, and subordinates are not allowed to offer any opinions. Hierarchical variations have to be acknowledged, and attempting to ignore them will always hinder decision-making.
Decision-makers will view the issues, alternatives as well as solutions from a long-term standpoint. Deciding faster than needed is not acceptable and cannot be appreciated by the partners who are Chinese (Hong et al., 2020, p. 1). They usually seek long-lasting associations and establish relations instead of negotiating contracts. Inability to create an individual basis for a commercial relationship might lead to a failure to reach business goals. Starting one can last from a matter of days to even months. This includes having formal meetings or home visits, long dinners, or invitations to sporting events.
Expansion Methods
The table below shows the different expansion methods that are available to Mark’s Dairies, their viability, and strategic evaluation frameworks.
Conclusion
The essay has discussed the milk industries in China and the U.K., the business drivers, barriers to trade, some of the social and ethical issues to consider, and the ideal expansion method to adopt. The United Kingdom is second to only France and Germany with regards to milk production in Europe, with an estimate of 14B litres yearly. The market for milk products is there as well and has enabled many businesses to thrive, an example being Mark’s Dairies. This is a very popular SME based in London and is mainly known for its dependability. It delivers milk throughout central London and its environs. Its desire is to expand into the Chinese market and sell its UKT milk to kids aged between three to eleven years old.
Apart from the high demand for UHT milk, China has a great volume of buyers. The number of people residing in Shanghai, which is the nation’s capital, is more than twenty million. The targeted individuals within the market enjoy different flavours, which is something that the business has committed to providing. Additionally, most Chinese consumers consider products from the U.K. as reliable and thus, it would be a good idea to venture into that market.
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