The UK SME enters the Chinese market

This report analyzes the Chinese market for UHT milk and the entry of a UK SME. It discusses the business drivers, trade barriers, ethical and social issues, and cultural preferences that need to be considered. The demand for UHT milk in China is high, and the UK brand is trusted for safety and quality.

The UK SME enters the Chinese market
“Research Project”
Research in Business
Study Mode:
Lecturer:
Student Name and ID:
Word count:
1

The UK SME enters the Chinese market
Table of Contents
Table of Contents.........................................................................................................................2
List of figures................................................................................................................................3
List of tables..................................................................................................................................3
1. Executive Summary.............................................................................................................4
2. Introduction:.............................................................................................................................4
UHT milk industry in China:.....................................................................................................4
UHT milk industry in UK..........................................................................................................5
3. Business drivers of the company's expansion into the Chinese market..............................6
Key drivers from PESTEL and five force analysis....................................................................6
Economic factor.........................................................................................................................6
Social Factors.............................................................................................................................7
Bargaining power of supplier.....................................................................................................7
Political Factors..........................................................................................................................7
4. Trade Barriers..........................................................................................................................8
5. Ethical and social issues to be considered by the UK SME..................................................9
 Children abuse in marketing strategies..................................................................................9
 Ethical dilemma on UHT milk...............................................................................................9
 Corporate bribery.................................................................................................................10
 Renewable resources............................................................................................................10
 Business sustainability.........................................................................................................10
6. Cultural preferences to be considered by UK SME............................................................10
Hofstede model........................................................................................................................11
7. Expansion Methods to be chosen by the business...............................................................12
8. Conclusion...............................................................................................................................14
2

The UK SME enters the Chinese market
9. References..............................................................................................................................14
List of figures
Figure 1 China dairy product consumption....................................................................................5
Figure 2 UHT milk consumption in Britain...................................................................................6
Figure 3 UK China trade Data........................................................................................................8
Figure 4 Hofstede model for UK and China................................................................................11
List of tables
Table 1 Foreign Investment Vehicle: Advantages & Disadvantages with respect to china
3

The UK SME enters the Chinese market
1. Executive Summary
The report aims to analyze the Chinese market of UHT milk for a new entry. The UK SME
intends to enter with organic and safe UHT milk in the Chinese market. Hence, the study has
been carried out to analyze the internal and external factors of the Chinese market which affect
the market entry of UK SME. The industry analysis includes the discussion about key business
drivers such as PESTEL analysis and Porter’s five force model analysis. Moreover, the trade
barriers between the UK and China have been discussed, which can be potential threats for the
UK based SME to succeed in the market. The demand for UHT milk is high in China and the
black market of UHT in 2008 has substantially created an opportunity for UK dairy products in
the market. After analyzing several market entry strategies, we can say that it is better to adopt
joint venture methodology to enter the market. The report also talks about several sustainability
measures and cultural aspects which are important for UK SME while entering in the Chinese
market.
2. Introduction:
UHT milk industry in China:
The demand for dairy products in China has been growing for since decades. The health and
safety issues reported for UHT milk that were exposed in 2008 provide a green signal for UK
SME to enter the market. The black market issue of UHT milk with melamine adulteration
increases the demand for quality dairy products from tenacious UK farmers. People are now
hesitating to trust local players for producing safe UHT milk for their kids.
The overall consumption for milk and related dairy products is expected to grow by 49% in the
year of 2025. People are exciting about the imported UHT milk and they have given an
overwhelming response. With increasing population and more disposable income, more than
60% of total population tends to use UHT milk in China. The graph depicts the overall demand
for UHT milk against yogurt and fresh milk. We can see that the demand is increasing
immensely (statista.com, 2018).
4

The UK SME enters the Chinese market
Figure 1 China dairy product consumption
Based on the survey, the UK dairy products are normally perceived as high in quality in
Chinese market. The consumers are looking for natural processed cow milk and not the one
which has been treated with hormones or hazardous chemicals. Chinese suppliers are also
interested to tie up with the UK suppliers to meet the current demand of the market
(Fredenburgh, 2017),
The price of UHT milk is 50% higher in China than average price in the UK for UHT milk.
Consumers blindly trust UK brand for safety and quality, the trust and confidence on imported
UHT milk brand enables UK to earn more revenue and generate value for their customers
(Halleron, 2015).
UHT milk industry in UK
The study describes about OMSCo which is a group of organic milk manufacturers
(cooperative) with 200 farmers connected across United Kingdom. Overall, 250 million liters of
milk is produced every year and 65% of the total production is being exported to different
countries. It has been awarded as the first European organic producer certified by the US
Department of Agriculture and organic standards. In 2015, it received accreditation from the
Chinese standards through the Soil Association. The statistics graph explains that 234 million
liters of UHT milk is consumed by the population of United Kingdom (Alimenta, 2016).
5

The UK SME enters the Chinese market
Figure 2 UHT milk consumption in Britain
UHT milk is prepared by heating milk at high temperatures. It enables company to remove
harmful bacteria. This particular heat based treatment of dairy products helps to have a longer
expiry date (Anon., 2018).
3. Business drivers of the company's expansion into the Chinese market.
The section discusses about the key business drivers which affect the business expansion
strategy of the UK SME entering into Chinese market. Here, the report has included 5 relevant
drivers.
Key drivers from PESTEL and five force analysis
Economic factor
Let us discuss the economic factors of China with respect to UHT milk from the UK. It has
been observed that the economy has converted into service economy from heavy manufacturing
economy. Moreover, the citizens are continuously contributing to the GDP of the country and it
shows that purchasing power of an individual has increased substantially. The country has an
impressive growth rate for both rural and urban regions. Hence, it is possible for customers to
pay more for quality products. In a nutshell, the economic background of China is favorable for
UK based SME. However, the economy is facing inflation and increased property prices. The
banks have increased interest rates and attracted more fund from the market. Furthermore, the
reserve requirement for local banks has been increased. The bank of China has imposed certain
limits for house purchases. Overall, the banks are trying to minimize the cash prevailing in the
market (hanpag, 2015).
6

The UK SME enters the Chinese market
Social Factors
The social and cultural factors of Chinese economy play essential role when it comes to
internationalisation. The report studies the market and environment of China for UK based UHT
Milk SME. The study says that China ranks first in terms of population. Moreover, it ranks 4th
in terms of land cover on the globe. It has enough space to accommodate the growing
population. People trust the UK brands more than local Chinese brands. The detailed social and
cultural values will be discussed in the section of Hofstede’s value dimensions. China is putting
a lot of effort to enhance the education of its citizens. The literacy rate in China is over 90%.
However, there are still some groups of people who prefer purchasing from physical stores than
online shop.
Bargaining power of supplier
Here, the bargaining power of supplier is high because the demand for UHT milk is high in the
society and there are few trustworthy suppliers who supply organic UHT milk. Moreover, the
instances of black market of Chinese milk during 2008 affect the purchasing intention of the
customers. There is less number of suppliers in the Chinese market and that to small suppliers.
The suppliers of UK will be able to grab substantial market growth and market share in Chinese
market which is buyers in this case (N.A, 2015).
Political Factors
The political environment in China does have formal and informal rules of governance. The
country has a strong political force on all the aspects within the country and China is not a
democratic country. The government has focussed on ecommerce with the rise of companies
like Alibaba Group. However, it tries to restrict the entry of outside players but it invites a lot of
foreign direct investment (FDI). With Xi being the lifetime president of China, it would be
interesting to see how he responds to US-China trade war and creating relations with countries
like UK and India. China has a stable political force but there is minimal freedom to the citizens
on multiple aspects such as freedom of speech is restricted, media cannot post anything without
government’s permission, facebook is not allowed, etc. These factors may cause hindrance on
the activities, branding and operations of the UK based UHT milk SME. Moreover, the usage of
internet is restricted which may affect the branding of products. The advantages in China are
that they have very cheap labour and hence local production of UHT milk by UK SME will be
very profitable. Also, the infrastructure is being developed at a rapid pace and some marvellous
structures are being built in China which makes logistics efficient (|, 2018).
7

The UK SME enters the Chinese market
4. Trade Barriers
Let us identify the trade barriers between the UK and China.
There are several trade barriers between the UK and china, which may hinder the smooth
entry of UK SME in Chinese market. However, the demand of high quality UHT milk
products is high in China. Moreover, the trade issue between US and china has opened door
for UK companies to enter China. Observing the current state, there are few aspects which
need to be consider by the UK SME before entering the Chinese market (Turner, 2018).
It has been observed that conservative attitude of the present UK government restricts the trade
with China. The current government under the leadership of Prime Minister Theresa May does
not prefer Chinese companies entering the UK market. Moreover, China has transformed its
economy completely and getting closer to a closed economy (cbbc.org, 2016).
Figure 3 UK China trade Data
UK government is protecting their local firms from Chinese investments in infrastructure
market. The absence of trust affects the international trade between the two countries
(Phillips, 2014).
Although China is considered as a potential market for rest of the world, China’s complex
regulations and requirement for food and beverages industry stops them from entering the
UK. It does not have free trade agreements due to delayed BREXIT (http://hong-kong-
economy-research.hktdc.com, 2018).
Moreover, the food and drink association along with world trade organization has jointly
articulated a hundred regulations related to food industry in the year 2011. The British
8

The UK SME enters the Chinese market
embassy in Beijing has rolled out the list in the market saying foreign Food and Beverages
Company needs to fulfil certain labelling and packaging criteria and ingredient
specifications. The government aims to have safe and quality products in the market.
On the contrary, China is welcoming imported products, because demand overrides the
supply in the market. It is surprising to note that the Chinese food health legislation
is being sceptical to release the foreign labelling goods in the Chinese market. People are
happy to purchase the products but government does not allow it. Hence the Chairman of
PFB Associates named Peter Bloxham says that patience is needed by the UK exporters in
dealing with the changing legislation (Liddle, 2017).
5. Ethical and social issues to be considered by the UK SME.
It is essential to look at the sustainability aspects of local government while entering in the
market. Here are few important factors that need to be taken care by the UK based SME while
entering in Chinese market with UHT milk.
 Children abuse in marketing strategies
As we know that children and adults are physically or mentally abused by few of the individuals
or groups, it affects their mindset negatively; they may indulge in bad habits. Here the UK SME
will have to take some steps towards removing such children abuse. The company can start a
campaign which educates the parents to protect their child. The campaign would consist of
lectures on what are the signs of child abuse and how to take disciplinary actions for the same
etc (Anup Shah, 2010).
 Ethical dilemma on UHT milk
The 2008 issue of UHT milk has affected the Chinese dairy market tremendously and there are
number of safety standards that have been added post the black marketing scandal of UHT milk.
The incident of ‘melamine adulterated baby milk’ of 2008 has received mass media coverage.
This led to the reduction of trust between Chinese dairy companies and Chinese society. This
actually increases the demand of UK SME’s quality UHT milk. The incident has negatively
affected the Chinese UHT suppliers and raised the demand for imported UHT milk alternatives.
The society felt that the hygiene, safety and quality of imported UHT milk are anyways better
than locally produced milk. However, there are few sections of the society who even hesitate to
9

The UK SME enters the Chinese market
purchase UHT milk as a product. The UK SME needs to consider this issue and collaborate
with Chinese distributors to sell their products in Chinese market.
 Corporate bribery
Since the year 2013, the government of China has started a sustained anti-corruption campaign,
to minimize the corporate bribe given to government officials for approving illegal licenses. A
number of high-level officials have been charged with corruption and expelled. China has
enacted extensively on anti-bribery legislation along with two other laws named as China’s
Criminal Law and the Law of the PRC against unfair competition (gov.uk, 18).
 Renewable resources
There is a continual growth of renewable energy around the world and China is building a
lot of infrastructure on top of that. However, this undermines the influence of oil exporters
across the globe such as Saudi Arabia. A report on geological implications clearly states the
changing dynamics in the energy and resources sector. China has been on the way to
achieve a leading position in the energy sector using renewable energy and related
technologies. China has started using electric vehicles and this is influencing the entire
world. The oil based economies may suffer due to implementation of electric modes of
transport (Dudley, 2019).
 Business sustainability
The world powers, US and China, are the biggest emitters of green house gases and hence the
corporates are moulding their business sustainability models to ensure reduction in CO2
emissions and reduced pollution. There are couple of trends or targets that have been observed
in China related to sustainability, China gels itself with all environmental policies finding ways
to leverage renewable resources. China makes use of green supply chains to reduce emissions.
Two largest greenhouse gas emitters, China and the U.S, are having a greater focus on their
sustainability efforts to save energy and limit climate pollution (Chen, 2019).
6. Cultural preferences to be considered by UK SME
The topic includes the cultural differences that prevail between two countries. As we studied in
Hofstede’s model, both cultural norms and values differ from each other. The UK SME needs to
understand the local market and their customers’ choices and it is essential to hire a local
manager who knows about the market and UHT milk industry.
10

The UK SME enters the Chinese market
Hofstede model
Figure 4 Hofstede model for UK and China
The blue color reflects cultural aspect of China and purple color reflects the cultural aspect of
UK (hofstede-insights.com, 2019).
Power distance: Power distance shows the unequal distribution of power that prevails within
the country. China scores 80 points against UK which has a score of 35. China believes that
different people possess different power. Unequal distribution of power is acceptable in Chinese
culture whereas in UK, they tend to minimize the power inequality.
Individualism: China has a low score on this aspect, which says that it has a collectivistic
culture imbibed within their norms and values, where as UK scores high on this parameter. In
UK, an individual at early age tends to think about themselves and purpose for their life. In
China, employees and suppliers would give more emphasis on relationships and family than
work. Hence, it is important to maintain a good relationship with suppliers.
Masculinity: It is the extent to which personal and professional are balanced. In China, there is
nothing like a leisure time, they give more importance to work. They migrate to different
countries leaving their families behind in the home country. The factors are more or less similar
for both of the country.
11

The UK SME enters the Chinese market
Uncertainty avoidance: Both countries are adaptable and flexible. Majority of the Chinese
businesses tend to be SME and family owned. They have low uncertainty avoidance.
Long term orientation: China scores 87 and UK scores 51 in the given factor. Long term
orientation is defined by linking past incidents while taking decision in future. China tends to
refer their past incidents while making any decision for future deal, whereas in UK everybody
considers their own knowledge to solve the scenario at that particular time. The technology
keeps changing.
Indulgence: When we rate China on the factor of indulgence, it has been observed
that china is a very restrained society and has scored very low on this cultural factor. On the
other side, UK has very classified culture, they believe in exploring the places and enjoying
their life. The UK based SME which is going to enter in china has no connection with
indulgence because it is for kids and people over there are emotional and they would pay
high to get the quality products for their kids.
7. Expansion Methods to be chosen by the business.
Differentiation strategy aims to differentiate the product in the market from other competitors.
UK SME will have to adopt the strategy of differentiation to stand out from the usual local
products. Product Localization strategy is a process where UK SME will adopt the local culture
and position the product as per their requirements. If the UK SME will adopt localization
strategy to get favorable support from Chinese government, the Chinese customers might see
the UK UHT as the local UHT milk supplier and there are chances that they may lose the
revenue because local citizens do not have faith in their local suppliers after the scandal of
melamine UHT milk (export.gov, 2018).
Based on the study, three of the expansion strategies have been analysed. These are the probable
strategies which can be analysed for UK SME while entering the Chinese UHT milk market.
UK SME will choose joint ventures and collaborations to enter the market (Yang et al., 2019).
12

The UK SME enters the Chinese market
Table 1 Foreign Investment Vehicle: Advantages & Disadvantages with respect to china
Advantages Disadvantages
WFOE  Needs high level of managerial
control in the market
 UK company will be able to
employ own staff without any
restrictions
 leverage huge flexibility and
freedom to execute policies
 Enable company to take 100%
profit share
 High level of Intellectual Property
right protection
 High cost for establishing the
company
 Comparatively long incubation period
 Will not have any support from local
player
 High operating expenses and
registration tariff paid to Chinese
 Industry limitation and unaware about
local market
 Taxation policy of foreign country
and repatriation of profits
Joint
Venture
(JV)
 Opportunity to use the existing
sales networks and customer base
of Chinese economy
 UK company will be able to
access to partner’s existing key
resources
 UK SME will have lower cost for
operations as local staff will be
hired by the distributor already
 UK SME won’t have full managerial
control
 Difficult to get trustworthy distributor
for UHT milk in the market
 Both party must get agree with that
mutual point
 Risk for IPR and stringent business
conditions, if imposed
Regiona
l Office
 It will be easy for UK SME to set
up quickly
 The company will have low
operational costs
 SME will not require any capital
investment
 Unable to trade
 Staff are recruited via third party
consultancy
 UK SME will Limit the number of
staff
13

The UK SME enters the Chinese market
8. Conclusion
The UK based SME will enter the market by implementing a Joint venture based strategy. The
UK SME will study the market with the help of local suppliers and adopt differentiation
strategy for UHT milk products. It will try to capture maximum market share and profits by
entering in market and offering safe and quality UHT milk.
9. References
|, M.R., 2018. PESTEL analysis of China. [Online] Available at:
https://www.howandwhat.net/pestel-analysis-china/ [Accessed 19 April 2019].
Alimenta, R., 2016. China imports organic milk from the United Kingdom. [Online] Available
at: http://alimentasrl.com/1417/china-imports-organic-milk-from-the-united-kingdom.html
[Accessed 19 April 2019].
Anon., 2018. Usage of milk by dairies in the United Kingdom – July 2018. Kingspool:
Department of food rural affairs.
Anup Shah, 2010. Children as Consumers. [Online] Available at:
http://www.globalissues.org/article/237/children-as-consumers [Accessed 19 April 2019].
cbbc.org, 2016. A Taste of Success – Opportunities for UK companies in China’s food and
beverage market. [Online] Available at: https://opentoexport.com/article/a-taste-of-success-
opportunities-for-uk-companies-in-chinas-food-and-beverage-market/ [Accessed 20 April
2019].
Chen, X., 2019. China Is Set To Become The World's Renewable Energy Superpower,
According To New Report. [Online] Available at: http://business.edf.org/blog/2018/09/20/heres-
what-the-last-5-years-of-corporate-sustainability-in-china-has-looked-like-whats-next
[Accessed April 2019].
Dudley, D., 2019. China Is Set To Become The World's Renewable Energy Superpower,
According To New Report. [Online] Available at:
https://www.forbes.com/sites/dominicdudley/2019/01/11/china-renewable-energy-superpower/
#4818e36c745a [Accessed 19 April 2019].
14

The UK SME enters the Chinese market
export.gov, 2018. China - Market Challenges. [Online] Available at:
https://www.export.gov/article?id=China-Market-Challenges [Accessed 20 April 2019].
Fredenburgh, J., 2017. China: What are the dairy opportunities for UK producers? [Online]
Available at: https://www.fwi.co.uk/business/china-dairy-opportunities-uk-producers [Accessed
April 2019].
gov.uk, 18. Overseas Business Risk – China. [Online] Available at:
https://www.gov.uk/government/publications/overseas-business-risk-china/overseas-business-
risk-china [Accessed 19 April 2019].
Halleron, R., 2015. Chinese imports of UHT milk continue to grow. [Online] Available at:
https://www.agriland.ie/farming-news/chinese-imports-of-uht-milk-continue-to-grow/
[Accessed 19 April 2019].
hanpag, 2015. Analysis of China. [Online] Available at: https://pestleanalysis.com/pest-analysis-
of-china/ [Accessed April 2019].
hofstede-insights.com, 2019. COUNTRY COMPARISON. [Online] Available at:
https://www.hofstede-insights.com/country-comparison/china,the-uk/ [Accessed April 2019].
http://hong-kong-economy-research.hktdc.com, 2018. Trade Regulations of China. [Online]
Available at: http://hong-kong-economy-research.hktdc.com/business-news/article/Small-
Business-Resources/Trade-Regulations-of-China/sbr/en/1/1X000000/1X006MY8.htm
[Accessed 20 April 2019].
Liddle, J., 2017. China – UK Trade: The Effects of Brexit. [Online] Available at:
https://www.china-briefing.com/news/china-uk-trade-the-effects-of-brexit/ [Accessed 18 April
2019].
N.A, 2015. China Dairy Corporation Limited Porter Five Forces Analysis. [Online] Available
at: http://fernfortuniversity.com/term-papers/porter5/asx/642-china-dairy-corporation-
limited.php [Accessed 19 April 2019].
Phillips, S., 2014. Welcome to China. [Online] Available at:
http://www.cbbc.org/NetC.CBBC/cbbc/f4/f472d9d5-34d9-447d-a464-186be3deff07.pdf
[Accessed 20 April 2019].
15

The UK SME enters the Chinese market
statista.com, 2018. Dairy product consumption value in China from 2012 to 2018, by type.
[Online] Available at: https://www.statista.com/statistics/744047/china-dairy-product-
consumption-by-type/ [Accessed 19 April 2019].
Turner, O., 2018. The Golden Era of UK-China Relations Meets Brexit. [Online] Available at:
https://thediplomat.com/2018/12/the-golden-era-of-uk-china-relations-meets-brexit/ [Accessed
19 April 2019].
Yang, C., Xu, Z. & Tongda, J., 2019. International trade in goods and services in China:
overview. [Online] Available at: https://uk.practicallaw.thomsonreuters.com/w-010-1049?
transitionType=Default&contextData=(sc.Default)&firstPage=true&comp=pluk&bhcp=1
[Accessed 20 April 2019].
16