Neptune International Ltd: Risks and Opportunities in Chinese Market

This document discusses the risks and opportunities for Neptune International Ltd in the Chinese market. It explores the quality of Kiewa milk and the reliance on subsidiaries for sales. It also delves into the importance of Guanxi and Power Distance in Chinese business culture and provides insights on managing cultural differences in management accounting.

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Answer to Question 4:
1. Neptune International ltd. is a renowned company in the market with operations
throughout the world through its diversified businesses. With its head office in
Sydney, Australia the company has a well-diversified portfolio of products/ services
in the FMCG (Fast Moving Consumer Goods) business.
Off late there has been a major growth in demand of the consumer goods in the
Chinese market and the company is seeing this as an important strategic opportunity
to capitalise. In their endeavour to capitalise on the Chinese consumer goods they
have identified a large diary which is not shut, but once sold Kiewa milk – high
quality, creamy and rich. The company will purchase Kiewa milk, produce infant food
formula and plans to sell 100% of the production through ChinaSouth Diary Co.
The assumption of the deal is that the entire production will be sold in the market
through the subsidiary and that the Kiewa milk is still high quality, creamy and rich as
it had been. The inherent risks in the deal are as below:
a. Quality of the milk based on which the entire plan is based – Neptune is planning the
operation based on the fact that the Kiewa milk has quality which is world
renowned. The plan will be vain if the quality has deteriorated and questionable.
b. Sales through subsidiaries – Neptune International Ltd. is planning 100% sales
through subsidiaries and this monopoly can jeopardize the business in case the
subsidiary backs out.
The inherent dangers in the Neptune’s purchase of milk processing business based
on Chinese domestic sales estimates are 100% reliance on one single party for sales
and reliance on one single raw material (milk) source for the products. This heavy

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reliance on one single source for both seller and raw material may have adverse
effects on the company’s growth plan and strategy.
2. The concept of Guanxi or relationship is very important for all Chinese dealings as
they place teams above the “I” culture. Guanxi for Chinese people have a vital role to
play in their business dealing. Guanxi envisages on having trust and strong
bond/relationship with the partners. They believe in having moral obligations in their
business dealings and want others to upheld integrity and honesty in all their
dealings. ("What Geert Hofstede tells us about Chinese business culture", 2019)
“Power Distance” is another concept which is prevalent in the Chinese culture.
Simply put “Power Distance” is the unequal distribution of powers. Chinese culture
believes in unequal distribution of power. They want to have controlling hands in the
dealings and believe in making some people less powerful than others.
Mr. Davis Nicks while dealing with the Chinese counterparts should make an effort to
bond with the executive to win on Guanxi points. He should be as transparent as he
could be while dealing with the expatriate. Further, the distribution of rights and
power in the dealings should be openly discussed and documents in order to
eliminate any discrepancies in the future as we want it to be a long term association.
Every culture has theories and practices which are unique in their own little way. The
same is the case with the management style or approach to management accounting
between Chinese and Western culture. While Chinese believe in Guanxi, Power
distance, Official position, egalitarian thinking western culture lays more emphasis
on numbers, strict budget, open relationship, equal powers etc. (Scapens & Yan,
1993)

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Davis Nicks should be a patient listener while his dealings with the executive and
understand their point of view regarding all the above points and then strike a
balanced chord for the business.

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Answer to Question 5:
(i) Neptune Confectionary is considering the impact of recommendation to save on
“Nutty Nut”. As per estimates, reducing the wholesale price to $2.95 per unit and
saving 10% on prime cost, the sales could increase by 20% i.e. from 18m today to
21.6 million after the implementation of the recommendation. The “before and
after” of the revenues and costs for “Nutty Nut” is presented as below:
For Nutty Nut
Particulars
Befor
e After
Total Assets
$30.0
0 $30.00
No. of Units
$18.0
0 $21.60
Whole sale Price Per unit $3.20 $2.95
Less: Advertising Rebate $0.20 $0.20
Net Sales Price p.u $3.00 $2.75
Prime Cost $0.75 $0.68
Other Mfg Cost
Variable (20% - 1.25 * 20%) $0.25 $0.25
Logistics Cost
Variable (20% - 0.75 * 20%) $0.15 $0.15
Gross Margin p.u $1.85 $1.68
Total Gorss Margin (GM p.u * No. of units)
$33.3
0 $36.18
Other Mfg Cost - Fixed (80% - 1.25 * 80% = $1.00)
$18.0
0 $18.00
Logistics Cost - Fixed (80% - 0.75 * 80% = $0.60)
$10.8
0 $10.80
Total Gross Margin $4.50 $7.38
Return on Sales 8.33%
12.42
%
Return on Total Assets 15% 25%
Here, we see that the return on total assets will increase from 15% to 25%
and is able to meet the requirement of the minimum level of 17.5%. The fixed
component of Other Manufacturing Cost and logistics cost is considered as it

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is and only the variable components is varying with the increase in
production.
(ii) A. From our analysis in part (i) we see that the decrease in prices from $3.20 to
$2.95, alone brings 20% growth in the sales from 18 million to 21.6 million. If this
alone was the case, the company would have been able to achieve a Return on
Total Assets (ROTA) of 19% as below:
For Nutty Nut
Particulars Before After
Total Assets $30.00 $30.00
No. of Units $18.00 $21.60
Whole sale Price Per unit $3.20 $2.95
Less: Advertising Rebate $0.20 $0.20
Net Sales Price p.u $3.00 $2.75
Prime Cost $0.75 $0.75
Other Mfg Cost
Variable (20% - 1.25 * 20%) $0.25 $0.25
Logistics Cost
Variable (20% - 0.75 * 20%) $0.15 $0.15
Gross Margin p.u $1.85 $1.60
Total Gorss Margin (GM p.u * No. of units) $33.30 $34.56
Other Mfg Cost - Fixed (80% - 1.25 * 80% = $1.00) $18.00 $18.00
Logistics Cost - Fixed (80% - 0.75 * 80% = $0.60) $10.80 $10.80
Total Gross Margin $4.50 $5.76
Return on Sales 8.33% 9.70%
Return on Total Assets 15% 19%
It is with the support of the R&D department, that the company would be able to
save on 10% in prime cost without affecting the quality and taste. This 10%
saving in the prime cost which is 100% variable is crucial in raising the ROTA from
19% to further 25%.
B. The likely impact of this on the N&N’s cost structure would be as below:
Particulars Current Scenario After Changes

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Nutty Nut 60% 18 72% 21.6
N&N 30% 9 18% 5.4
Other Brands 10% 3 10% 3
Total Market Share 100% 30 100% 30
Considering that the total market share of the product is 30mn as derived from
the fact that the current sales of 18 million of “Nutty Nut” is 60% of market
share, the market share of Nutty Nut will grow to 72% with the increase in sales
to 21.6 million units.
Further, considering that the other brands still hold the 10% market share, the
market share of N&N reduces from 30% to 18%.
C. Based on the above analysis the committee should implement the strategic
changes as recommended by the team. The recommendations are reducing the
price to $2.95 per unit to foster a sales growth jump of 20%. Further, the
recommendation of the R&D department to save 10% on prime cost which is the
most important variable cost in the entire cost structure also helps the firm to
increase ROTA from 19% to 25%.
The other relevant factors to consider while accepting the recommendation is to
ensure that the R&D’s department claim that the taste and quality will not be
affected should be true at all times as “Nutty Nut” is known for its quality. A
deteriorating quality will have an adverse effect on the market share. The other
factor to be considered is to try and finds ways to reduce the fixed cost to ensure
better profitability.

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References:
Scapens, R., & Yan, M. (1993). Management accounting research in China. Management
Accounting Research, 4(4), 321-341. doi: 10.1006/mare.1993.1018
What Geert Hofstede tells us about Chinese business culture. (2019). Retrieved from
https://www.marketmechina.com/geert-hofstede-tells-us-chinese-business-culture/ on 21st
April, 2019