Analysis of Venturing into Chinese Market and Comparative Analysis of Nutty Nut Product Line

This document provides an analysis of the risks and assumptions involved in venturing into the Chinese market for Neptune International Ltd. It also includes a comparative analysis of the Nutty Nut product line before and after implementing a price reduction and cost savings. The document discusses the cultural factors of Guanxi and Power Distance in the Chinese business environment.

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Answer to Question 4: Part 1.
I have been appointed as a trainee management accountant at Neptune
International ltd. The company based out of Sydney, Australia is a
renowned name in the Fast Moving Consumer Goods (FMCG) sector with
businesses across the world. The company recently has eyed the Chinese
market owing to the massive growth in the demand and their spending
powers.
The company is planning the purchase of ChinaSouth Diary Co., a large
distributor network which has its reach throughout the South East China.
Neptune International Ltd. will venture into the Chinese market with baby
food or infant formula for nutrition. This will be achieved in two ways:
1. Purchase of Kiewa milk: Kiewa milk produced by the Kiewa valley is
known for its richness and high quality milk derivative products. The
company aims to purchase this Kiewa milk business from Murray
Goulburn (which has closed its diary due to financial crunch).
2. The second part is to sell 100% of production through ChinaSouth
Diary Co, a wholly owned subsidiary of the company.
Company’s CFO Mr Davis Nicks is travelling to China for assessing the
deal. The key risks of the unit which Nicks must consider during his
analysis are
a. Quality of the milk, which is an important factor for the success of
the estimates.

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b. Dependence of the distributor network of ChinaSouth Diary Co.
Nicks must during his visit evaluate the accuracy of their claims in
terms of their wide spread network in the country.
The key assumptions of the deal has been the same which is Kiewa milk is
still of that quality and richness as it used to be in the past, ChinaSouth
Diary Co. has distributor network which is spread enough to sell 100% of
the company’s production and that the Kiewa milk business of Murray
Goulburn was shut down only because of the financial crunch and not
falling demands.
The inherent dangers in the deal are single window dependence on
one company for distribution, fear of unknown as the company has
never worked into the lands of the country and thus not aware of the
various applicable rules and regulations of the land, purchase of a
closed Kiewa milk business (the firm should exercise adequate due
diligence to identify the cause of failure and eventual shut down of the
business)
Answer to Question 4: Part 2.
Venturing into Chinese boundaries is new for the company and every
culture is unique with different sets of value and policies. For Chinese,
“Guanxi” and “Power Distance” are two of the main detrimental factors in
the business environment.
“Guanxi” in Chinese culture emphasize that Chinese pay importance to
building relationship in the work place. They work in teams and place

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“WE” before “I”. They believe in building trust and relationship in their
dealings, keeping the moral grounds high with utmost integrity and
honesty.
“Power Distance” on the other hand envisages that the Chinese believe in
unequal distribution of power and do not involve everybody in equally in
important decision making for the company. They believe in hierarchical
organization, wherein in teams one will always have an upper hand.
Mr Davis Nicks, the CFO of the company should pay adequate attention to
both these important factors while his discussion with the executive of
ChinaSouth Diary Co. He should be able to strike a strong bond with him
while still maintaining power distance.
He should note that while facts, figures, budgets, equal rights and powers
are important for western culture it is Guanxi, Power distance, power and
position which dominates the Chinese Culture. (Scapens & Yan, 1993)

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Answer to Question 5: Part i
The ‘before and after’ comparative analysis of revenues and cost of
“Nutty Nut” product line after incorporating the 20% increase in sale
owing to reduction of price from $3.20 to $2.95 and 10% saving in the
prime cost is as below:
For Nutty Nut - before and after
Particulars Before After
Total Assets $30.00 $30.00
No. of Units (in million) 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 $0.68
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) $33.30 $36.18
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 $7.38
Return on Sales 8.33% 12.42%
Return on Total Assets 15% 25%

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Answer to Question 5: Part ii:
To,
The Strategic Committee
Neptune International Ltd.
Neptune Confectionary, a division of the company is off late facing tough
completion in the market from N&N and as a result the market share of
our product “Nutty Nut” has reduced from 80% to 60%.
If the estimates are believed to be true, a 7.8% decrease in the wholesale
price of the product from $3.20 (current) to $2.95 (proposed), we could
achieve a 20% increase in sakes from current 18 million to 21.6 million.
The R&D department has further contributed sta8ing that they would be
able to reduce the 10% cost on prime used (the major raw material)
without affecting the taste and quality of the offering.
a. If the recommendation is implemented we see that the gross margin
per unit of the product will reduce from $1.85 to $1.68 i.e. a
reduction of 9.2%. But the main crux of the recommendation is
when the fixed cost comes into play. The total gross margin
increases from $4.50 mn to $7.38 mn i.e. a sharp increase of 64%.
b. The implementation of the recommendation will increase the sales
by 20% and thus the market share will increase from current 60% to
72% which will be taken uo from the market share of N&N
(considering other brands stay as it is) and thus the market share of
N&N will drop from current 30% to 18%.
c. The confectionary division should definitely implement the
recommendation and reduce the prices whilst saving on the prime

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cost. The combined effect of both high revenues with lower cost will
help the firm raise greater margins.
The other relevant factors which the committee should also consider are
ensuring that the taste and quality are not affected by saving on the
prime cost as quality makes up the offering and look for opportunities for
reducing fixed cost.
Regards,
Management Trainee

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References:
Guanxi in China: A Little Understood Concept in the West | The Chairman's
Bao. (2019). Retrieved from https://www.thechairmansbao.com/guanxi-in-
china-a-little-understood-concept-in-the-west/
Scapens, R., & Yan, M. (1993). Management accounting research in
China. Management Accounting Research, 4(4), 321-341. doi:
10.1006/mare.1993.1018