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Entering Chinese Dairy Market Advices

Options of entry modes

The decision concerning how a business gains entry to a foreign market usually imposes significant impacts on the outcomes. The options of foreign market entry modes vary by the level of the risk that they impose to the business, the control and the dedication of resources needed, and the Return on Investment (ROI) that they guarantee (Hill & Cronk 2010). The two principal entry modes that a business can deploy to facilitate global expansion are the equity and non-equity modes (Duane & Hoskisson, 2008). The non-equity mode of entry comprises exporting and contractual agreements while the equity model of entry comprises joint ventures and Wholly Owned Subsidiaries (WOS). The following paragraphs offer a discussion of the various methods that the business can deploy to gain entry into the global market (Alkhafaji, 2003).

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Exporting is one of the well-established and conventional approaches that businesses have deployed to target foreign markets. It mainly involves the direct sale of locally produced goods in a foreign country (Peng 2008). A notable characteristic of exporting is that production of goods is not required in the foreign country, implying that there is no need to invest in production facilities in the foreign countries. A significant percentage of exporting expenses are derived from marketing expenses (Peng, 2008).

Licensing grants permission to the company to make use of the property belonging to the licensor; this is mostly intangible and includes elements such as trademarks, patents, and methods of production. The licensee is required to pay a fee before having the right to make use of the intangible property and gain assistance during technical production. Licensing as a mode of entry has the potential of delivering high rates of return because there is little investment in the side of the licensor (Hill & Cronk, 2010).

Foreign Direct investment is also an entry method that refers to the direct ownership of production facilities in the foreign country. Direct investment usually entails the transfer of resources such as human capital, financial capital, and technology. Some of the avenues through which FDI can be facilitated include the establishment of a new business entity and acquiring an already existing business entity in the foreign market (Goldsmith & Hu-Chan 2003). Direct ownership offers a high level of control regarding the firm’s business processes and increases the ability of the company to have a better knowledge of its consumers in the competitive market. The significant constraint is that it needs a high amount of resources and a high amount of dedication to delivering positive results.

Joint Ventures and the reasons for its choice in this paper

Joint Venture is motivated by five core purposes, which in the case of Norco includes gaining access to the foreign markets in China, the distribution of risks and rewards with the partnering company, distribution of technology and collective product development, and compliance with Chinese government set of laws (Hodgetts & Luthans 2003). Another potential benefit associated with entering into a joint venture with the Shanghai Guangyu Food Company Limited is that it facilitates political connections and the channels used for distributing products based on the relationships. Political connections that the partnering company has included the goodwill that the company has developed in the course of its existence in the Chinese dairy market. The Joint ventures are usually effective in instances where the strategic goals of the partnering companies are in convergence; this is because the strategic business objectives of Norco lay more emphasis on global expansion to the Chinese market, which is similar to the strategic goals of the partner company. The joint venture is also preferred in the attempt to gain entry into the Chinese market because there is a divergence in their competitive goals. Norco aims at gaining market entry in the Chinese dairy industry while the partner company intends to expand its business strategies outside the Chinese market. In addition, there is a significant variation regarding the size, resources, scope, and market power of the partner company compared to that of the industry leaders (Goldsmith & Hu-Chan, 2003). The selected partner is not an industry leader, implying that the joint venture will both be beneficial to Norco and the selected company in China.

Potential constraints associated with joint ventures when entering the Chinese market include the absence of support from the parent enterprise; this is because the organizational efficiency and collaboration will reduce because of shared operations such as joint executive management and proprietary rights. Cases of mistrust regarding proprietary knowledge and cultural clashes are also a significant constraint when Norco attempts to gain entry into the Chinese market. Other issues include conflicting viewpoints regarding new investments that are not symmetric and the ways that can be deployed to end the relationship, especially when the joint venture does not work out according to the anticipated plans (Duane & Hoskisson, 2008). The following table 1 shows a comparison between the various entry modes to foreign markets in the context of Norco.

mode advantages disadvantages
Exporting
  1. Speedy entry into the Chinese dairy market
  2. Increases the scale because it relies on existing facilities
  3. Risk minimization and increases investment because all operations are handled in the host country
  1. Trade barriers and tariffs increases expenses
  2. Costs of transportation increases with increase in geographical scope
  3. restricted access to information at the local level because of limited influence
  4. the firm is perceived to be an outsider in the Chinese dairy market
Licensing
  1. risk minimization and increases investment
  2. speedy entry into the Chinese dairy market
  3. high Return on Investments
  4. can avoid the trade barriers associated with exporting and international trade
  1. licensing duration is usually limited
  2. the licensee has the potential of becoming a competitor in the long run with regard to the Chinese milk products market
  3. there is no control regarding asset use
  4. potential cases of knowledge spillovers
Joint Ventures
  1. the firm is perceived as an insider because it operates in partnership with a host company
  2. integrates the resources of two firms in order to enhance production and cost efficiency for the partner firms
  3. minimal investment needed because there is technology and capital sharing
  4. overcomes the barriers associated with restrictions regarding ownership and the cultural distance
  1. management difficulties due to different management frameworks from Norco and the Shanghai Guangyu Food Company Limited
  2. there is dilution regarding control of joint resources and production
  3. imposes significant risks compared to exporting and licensing
  4. potential cases of knowledge spillovers in cases of management differences
  5. there is a possibility that the partner can become a potential competitor in the long run
Foreign Direct Investment
  1. greater knowledge concerning the Chinese dairy market
  2. better applicability of specialized expertise
  3. reduces case of knowledge spillover because there are possibilities of management differences
  4. there is insider perception, which increases the way the company is perceived in the Chinese dairy market
  1. imposes higher risk compared to other entry modes
  2. requires high amount of resources because there is no shared technology and production.
  3. difficulty in the management of the resources at the local level

The desired partner and the governance attribute

The entry into the Chinese dairy market will involve a joint venture with the Shanghai Guangyu Food Company Ltd, which specializes in the production and sale of assorted dairy and egg products. The choice of Shanghai Guangyu Food Company Limited as a partner was reached after a careful analysis of the company’s business-level strategies, policies, its competitive positions, and how well the company associates with the consumers of dairy products in China. The following section outlines the reasons for the choice of the Shanghai Guangyu Company Limited as a partner during the entry into the Chinese dairy market (China Briefing Media, 2005).

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The per capita consumption of milk products in the Chinese market currently stands at about 6.8 kilograms, in addition, the Chinese market hosts about 23 percent of the global population. This means that China is potential for foreign investors in the milk industry. In addition, the government of China is embarking on a public awareness campaign regarding the significance of consuming milk products (Yinya, 2005). Other findings regarding the Chinese consumer market reports that industry players hope that there is a potential growth of approximately 20-30 percent in the coming years. The market implications for these findings are that there is a projected increase in demand for milk in China (Yinya, 2005). For example, if the Chinese per capita consumption of milk attained 25 percent of the neighboring nations, the country will require an extra 16 billion kilograms of milk. This level of demand can be equated to about 5 percent of the global milk production. Another implication is that these findings represent an immediate opportunity for investors dealing with high-quality milk in the Chinese dairy market. (China Briefing Media, 2005) This is enhanced by the fact that the Chinese government policies favor foreign investment. The significant challenge is cultural barriers and isolation that will make it difficult to penetrate the market when taking into consideration Chinese cultural values and needs. Another potential constraint is that other foreign investors from the United States, New Zealand have invested in the Chinese developing dairy market. Irrespective of this, China offers a potentially large market opportunity for milk products that Norco can exploit through joint ventures (China Briefing Media, 2005).

Reasons for the choice of the firm

The first reason for the choice of the Shanghai Guangyu Food Company Limited is that there is limited potential that the company may become a competitor in the end. This is because the company engages in diverse food commodities, and milk supply is not a core business consideration for the firm. This comes to Norco’s advantage since it will exploit the good name that the company has established in the food market in Shanghai (Yinya, 2005).

The financial position and feasibility of the company were also taken into consideration before the arrival of the decision. According to information gathered from the company’s website, it has managed to attain the qualification regarding independent international trade and has additionally involved itself in economic unions with the various leading manufactures in the Republic of China. The company is currently embarking on intensifying its cooperation with willing international entities to widen its business scope and establish a mutual relationship with collaborating companies in the dairy market. The company has a rich financial and production history, minimizing any risks associated with its downfall during the joint venture. For instance, the company’s level of production has peaked at 1800 tons of powdered milk and various tonnages of egg powder and butter (Yinya, 2005).

Another reason for the choice of the company is that its base operations are undertaken in Shanghai, which is a target market for Norco products in the larger Chinese milk market. Shanghai’s dairy market is large and constantly growing, even though it is fragmented, which means it imposes significant challenges for companies dealing with food and dairy products. In addition, China still relies on imports, which means that this is a perfect chance for the penetration of new markets with new and existing dairy products. An added advantage is that the Chinese government is supportive of the dairy sector, meaning that investors in the dairy market are less likely to face market barriers.

The industry leaders in the Chinese dairy market are domestic, they include Mengniu, Yili, Sanlu, and Bright, each having a market share of 16%, 15%, 5%, 8% while the remaining 56% belongs to other companies. Smaller players like the selected partner company Shanghai Guangyu Food Company Limited have specialized in the development of niche products for its customers within the locality.

Advantages for collaborating with the firm

There are strategic benefits associated with entering into a joint venture with the Shanghai Guangyu Food Company Limited. Some of the strategic benefits are that the joint venture offers include an opportunity for Norco to achieve new capacity and knowledge and access larger resources in the Chinese dairy market. Another potential benefit is that Norco will share the risks with the Shanghai Guangyu Food Company Limited.

Market overview of Huangpu District in Shanghai

The dairy consumption in the Republic of Chinese is anticipated to grow compared to the dairy markets that are located in Europe despite the low consumption per capita of approximately 42 grams/ day. Based on this, there is a potential that the dairy market in China is likely to face significant growth, especially in its urban cities such as Huangpu District in Shanghai, which is the target location for entry into the Chinese dairy market. In the Huangpu District, milk accounts for at least 6 percent of the dairy industry in the present-day Chinese dairy market (Yinya 2005).

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There are significant demand drivers in the Chinese economy despite the dismal low consumption rates on the per capita basis. In the Huangpu District and other urban areas, personal income has increased by approximately 7-8 percent during 2011. As a result, the Chinese people are spending more on healthy foods such as milk products, which presents a potential market for the case of Huangpu District (Yinya, 2005). This trend is evident by the increasing awareness on health and the residents of Huangpu Districts are perceiving milk as a core requirement of their basic diet. Refrigeration facilities enhance regular buying trends and enhance consumption, which presents a potential opportunity for milk supply in the Huangpu district and the larger dairy market in China (China Briefing Media, 2005).

References

  1. Alkhafaji, A., 2003. Strategic management: formulation, implementation, and control in a dynamic environment. London: Routledge.
  2. China Briefing Media, 2005. China Briefing’s business guide to Shanghai & The Yangtze River Delta. Hong Kong: China Briefing Media Inc.
  3. Duane, I., and Hoskisson, R., 2008. Understanding business strategy: concepts and cases. New York: Cengage Learning.
  4. Goldsmith, M., and Hu-Chan, M., 2003. Global leadership: the next generation. New York: Pearson education Inc.
  5. Hill, C., and Cronk, T., 2010. Global business. New York: McGraw Hill.
  6. Hodgetts, R., and Luthans, F., 2003. International management. New York: McGraw-Hill Higher Education.
  7. Peng, M., 2008. Global strategy. New York: Cengage Learning.
  8. Yinya, L., 2005. Investing in China: the emerging venture capital industry. Hong Kong: GMB Publishing Ltd.

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