UK SME Expansion in Chinese Market: PESTLE Analysis and Trade Barriers

The report discusses UK SME's plan to expand its business in the Chinese market. It includes a PESTLE analysis, trade barriers, ethical and social issues, and recommendations for the company. The report also highlights the importance of corporate social responsibility and cultural preferences to be considered by the company. The subject is business and the course code is not mentioned. The college/university is not mentioned.

UK - SME

EXECUTIVE SUMMARY
The present report is based on UK SME planning to expand its business in the Chinese market.
The chosen SME is UK - SME that is planning to introduce its business within the regions of
China. The present reports include a PESTLE analysis with respect to the chosen company in the
market of China and determines various external factors which the business operations of the
same.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................5
MAIN BODY..................................................................................................................................5
Business drivers behind UK - SMEexpansion into Chinese market...........................................5
Competitive analysis using Porter’s 5 forces model....................................................................9
Ethical and social issues to be considered by Crediton Dairy...................................................10
Importance of Corporate Social Responsibility.........................................................................10
Trade Barriers............................................................................................................................11
Consequences of Ignoring Trade Barriers.................................................................................12
Business Uncertainties and Opportunities.................................................................................12
Ethical theory of rights and ethical issues in China...................................................................13
Cultural preferences to be considered by the Crediton Dairy....................................................13
The significance of culture........................................................................................................13
Impact of Chinese culture on the UK - SME.............................................................................13
Range of potential internationalisation methods.......................................................................14
Recommendations......................................................................................................................15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Dairy Industries are the dairy plants that conducts the activities of milk production at the dairy
farms and processing them in the milk products. The industries also produce the dairy products
such as cheese, yoghurt,ice cream, butter, and so on. UK is the 13th largest producer of milk
country in the world. In year 2020, out of total agricultural output 16.4% was accounted for milk
which was £4.4billion worth in the UK market (Ajiero, and Campbell, 2018). China is also the
largest consumer of dairy products in the world. The market of Dairy products expected a rise of
income by $176 billion till the year 2026.
In UK, the demands of Ultra High -Temperature milk is high as the annual consumption
of UHT milk in UK is 240 million litres approximately. The producers of UHT milk in UK is
Crediton Dairies in Devon. The demand of UHT milk in China is very high as in the year 2019 ,
the producers have covered the dairy market around 74% and holds up to 38.8 % of the market
shares. The largest producer of UHT milk in China is Inner Mongolia Yili Industrial Group.
China's economy is the World's 2nd largest economy when measured by the nominal
GDP. The GDP showed a growth of 2.3% in the year 2020 and it increase by 8.5 % in the year
2021. The dairy industry contribute over RMB 574billion revenue and around 30 million tons
consumption of milk products in the year 2020(Ding, and et.al., 2019.).
The report will discuss the business drivers of the UK SME and the PESTLE and trade
theory analysis. Next, it will discuss trade barriers and their consequences and ethical and socio
cultural issues and preferences need to be considered by the business. Lastly, it will recommend
the expansion methods of the company and how the UK SME can target Chinese market.
MAIN BODY
Business drivers behind UK - SMEexpansion into Chinese market
The UK - SMEis a diary brand of United Kingdom that falls under the category of small and
medium enterprise in United Kingdom. However, it is a leading seller of dairy products within
UK. Business drivers can be defined as a process or a set of strategies that needs to be
implemented by an organization for the purpose of ensuring the continued growth and success of
the organization. Similarly, there are certain reasons for which the UK - SMEdecided to expand
across the boundaries of China and carry out the activities of expansion. The reasons have been
explained below:
Financial resources

The major reason behind opting for internationalisation by the UK – SME and expand its
business to Chinese market is access more of financial resources for the smooth and efficient
functioning of the business (Sang, 2019). By initiating the business activities in the Chinese
market, the UK - SMEwill gain access to a number of business opportunities. It will be easier for
the company to find investors who can invest in the company and help the company in enhancing
and extending its market share. Everyone knows that China is one the strongest economies in the
world and it has a population of around 140.21 crores as per the year 2020. Having a strong base
of operational business within China can help the company in enhancing its brand image in the
market and help the company in attracting new customers. Certain governments offer investment
opportunities to firms or enterprises who wants set up their business operations within national
boundaries. Thus, internationalising the UK - SMEto the Chinese markets will help the company
in attracting new investment opportunities and increase the financial resources of the company.
Competition
It has been identified that there is tough competition in the market of United Kingdom
between the firms which sells UHT milk within the country. This affects the profitability of the
UK - SMEas the customers has a variety of options available within the market from where they
can purchase the UHT milk. Therefore, in order to gain competitive advantage, the company
decided to extend its reach and opt for internationalisation by expanding its business in the
Chinese market. The current competitors of the company are not present in the Chinese market,
this will help the company in setting up its position in the new markets and help the company in
increasing its profitability.
PESTLE analysis
Political factors
Since the business operations of the UK – SME are based in United Kingdom, there are
certain political factors that affects the functioning of a business. The political stability of a
country plays an important role the same. The local policy laws which implemented within the
Chinese dairy industry can affect the functioning of UK – SME in the market. The local laws
existing within the Chinese market will be different from the laws existing within the United
Kingdom due to which the business operations might get affected. The changing policies to due
to a change in the government of China, other stakeholders such as non-governmental

organizations, pressure groups, protests also affect the functioning of a business within the
country.
Economic factors
The factors of production such as land, labour, capital and entrepreneurship plays an
important in affecting the business operations of dairy industry within China. The cost of
acquiring labour within the country has decreased within the dairy industry due to the outbreak
of COVID19 (Seregina, and et.al 2019). This feature will help the UK – SME in reducing its cost
of production and operation within the Chinese market. Currently, the deal of Britain leaving the
European Union has restricted the import of labour force from Europe to United Kingdom.
Therefore, the UK – SME needs to acquire labour force from other countries which leads to an
increase in the labour force for the company. The tax rate, inflation, foreign direct investment
also affects the growth of dairy industry within the Chinese market.
Social factors
It has been identified that China is the second highest consumer of dairy and dairy related
products all over the world. This helps the company in setting up a company which provide milk
and milk related products within the Chinese market and gain a market share within the Chinese
market. This will help the company in attracting new customers towards the brand and increase
the revenue of the company. It has been determined that due to the outbreak of Covid 19, many
people lost their jobs due to which the consumer spending habits have been decreased. This
might affect the profitability of UK – SME within Chinese market.
Technological factors
There are factors related to the technology which positively affects the functioning of
Dairy industry within the China. In today’s world, technology is present in each and every aspect
of a business. Similarly, the use of technology makes it easier for an organization to process its
manufacturing functions and increase the capacity of the company. There are technologies used
by UK - SMEsuch as Health Tracking Devices for the cattle which help them to identify any
kind of health related issue that the cattle are facing with respect to its reproductivity,
productivity and longevity. Currently, the cost of using certain technologies within the United
Kingdom is very high but using them within the boundaries of China will be cost effective for
the company. Internationalisation can help UK – SME to resource technology and financial
resources at a low rate of interest and provides the company with a comparative advantage.

Legal factors
Post COVID19, the government of China has relaxed the competition law in order to
support the Dairy industry existing within the country and increase the supply of milk and milk
related products within the markets (Shahbaz, and et.al 2018.). This has led to an increase in the
number of competitors within the industry selling milk and milk related products including UHT
milk. The UK – SME also needs to abide by certain rules and regulation such as employment
policies, trading practices, the use of technology and many more in order to assure the
government that the company is conducting its trading practices in a fair manner
Environmental factors
In today’s world, the consumers are well aware of the harmful effects of the
manufacturing processes of an organization on the environment. For the same, the UK - SMEis
putting in extra efforts to attract new customers within the markets and reducing its harmful
impact on the environment by using the policy of 5 R’s. The 5 R’s policy include the use reuse,
recycle, reduce, refuse and repurpose. The environmental factors such as climatic conditions, bad
weather also affects the production of the dairy industry as certain breeds of cattle are not
friendly with certain weather conditions.

Competitive analysis using Porter’s 5 forces model
It is a strategic framework used by the companies in order to identify the level of
competition in the industry. The current model has been used to identify the market for dairy
industry in China.
Bargaining power of the suppliers
It has been identified that within the dairy industry of China, the bargaining power of the
suppliers is quite high (Ozer, 2019). Therefore, the Yili which already based in China has to
spend extra cost in order source the material required for the purpose of production. However,
the UK - SMEwill face a little less competition as it can import the required products from
United Kingdom.
Bargaining power of consumers
The bargaining power of the consumers within China is low. Therefore, the Yili company
gets the advantage of increasing their profitability as the consumers of the company do not
bargain with company and buy the milk at the offered prices. This feature will also help the UK -
SMEwhile operating in the markets of china as the customers will not bargain to them while
making a purchase.
Threat of new entrants
Yili faces high competition in the dairy industry as there are new companies who are
waiting to initiate their business processes. On the other hand, UK – SME will be new in the
Chinese market and its competition will be high to the existing companies falling within the
dairy industry.
Threat of substitute products
It has been identified that the China is the second largest consumer of dairy and dairy
related products all over the world (Oyekola, 2018). This adds to the list of advantages for the
UK – SME as people will not substitute the OHT milk with any other product in the market. The
UK – SME will constantly need to invest in the company in order to provide its customers which
are beneficial for them and helps the company in retaining them.
Rivalry among existing players
Since, the demand for the milk products is high in the Chinese market, there will be high
competition within the dairy industry in China. Therefore, it will be take extra efforts from the
UK - SMEin order to survive in the market.

Ethical and social issues to be considered by Crediton Dairy
Importance of Corporate Social Responsibility
The corporate social responsibility plays an important role in the process of
internationalisation as it helps in attracting new customers on the basis of improved public
image. New customers get attracted towards the company on the basis of the brand image within
the particular country. For instance, initially when the Amul launched its CSR activity such as
conducting of blood donation campaign, it helped the company in attracting new customers.
Similarly, the corporate social responsibility of the company also helps an organization in
gaining a competitive advantage over its competitors within the company. When some brands
within a country do not focus on the corporate social responsibility, it provides the other brands
to gain a competitive advantage over them (Naka, 2018). Corporate social responsibility helps in
building a brand image of the company in other countries too and helps the company in targeting
new markets as well as attracting new customers towards the brand. Similarly, the CSR activities
will help the UK – SME in engaging the customers towards the brand and increasing the
profitability of the company. Also, while deciding to go global outside the boundaries of a
nation, the nation in which the company wants to operate might ask for the figures as to how the

company is going to benefit the country. Therefore, it can be stated that corporate social
responsibility is an essential feature which helps a company in globalisation.
Trade Barriers
Tariff and Quotas: .The tariffs are the trade barriers imposed to limit the imports and
increase the revenue whereas quotas are the limit set up by the governments on the quantity of
the goods imported in the country. The industries can also voluntarily set the quota. As the tariff
and quotas are the trade barriers, in China it is easier for the UK – SME to expand its business as
China has reduced its tariff rates from 15.3% to 7.5 % in 2001 to 2020. But it imposed Value
added tax on the consumers goods with three tiers rate that is 13%, 9% and6%. In year 2022, it
removed the licensing and quota requirements on imports of the products.
Cross cultural and Societal Preferences : The preferences and demands of the
consumers vary from region to region and country to country. Thus, to establish or expand the
business in industry, it is necessary to scan and identify the requirements of that region or
country. It is the trade barrier for the expansion of company through imports. As the UK – SME
is established in UK, the operations and the activities are developed as per the preferences of the
UK market and society, in order to expand the business in the China market it is essential for the
company to identify and understand the need of China's population. As the people of China
mostly prefer the UHT milk for the consumption.
Competitors : Competitors are the another trade barriers that reduced the revenue
generation of the company . Competitors provide the different and varied substitutes of products
at the best quality and affordable prices. These increases the competition for the new established
industries. For the Crediton dairy, it is difficult to expand and being the leading producer of the
dairy products and UHT milk because China is the largest market of the milk producers and the
dairy companies offer the customers with best and affordable quality milk products (Liu, and Ye,
2019). Thus, it is trade barrier for the UK – SME to expand and establish in the Chinese Market.

Consequences of Ignoring Trade Barriers
 The UK-SME will face the issue of hike in prices and diversion in the resources for the
production thus reducing the efficiency of the economic activities.
 Considering the trade barriers help in competing with the trends and the competitors in
the market. It helps in assessing the strategies and ways how the competitors are dealing
with the trade and tariffs.
 Ignoring the trade barriers such as rules and regulations imposed by the Government
might result in penalties or fines on the UK-SME and even the businesses can miss out
the opportunities (Liu, and et.al., 2020).
 The cultural and societal preferences are must be considered trade barriers otherwise this
will result in loss of revenue and wastage of the goods and services due to different
demands and preferences of the people of the country. This implies to UK-SME as well.
Business Uncertainties and Opportunities
The US China Trade War in the year 2018 had an adverse effect on the economy of the
China and US. The trade war resulted in 10% tariff on the imported goods which increase in the
price of the products for the consumers. The trade war had negatively impacted the economy of
China and its renminbi (RMB). The trade war resulted in reduction of the profit margins of the
enterprises of the China, this also caused decrease in the price of the Chinese and other countries'
currency thus lowering the profits of the companies (Kalsie, and Arora, 2019).
The US China trade war lowered the job creation and wage growth and also affected the
federal budget by showing deficit. Due to trade war, the China's economy faced a decrease in the
GDP of about 0.1 – 0.25 percent and a 9.5% fall in the RMB. Thus, the trade war had negative
impact on the economy of China.
The UK as most favoured nation is the opportunity for the UK-SME to present them at
the global level in the world market. With the help of MFN, the SMEs got the opportunity to
access the global market and reduce the cost of exports (Tavengerwei, 2018). The products of the
enterprises of the UK had become competitive and it increased the growth opportunities for the
businesses.
The country received the benefits of the economies of scale and this also increased the
economic growth of UK. The enterprises received the benefit of same tariffs and customs rates
on all the imports.

Ethical theory of rights and ethical issues in China
The ethical theory of rights states that there are certain rights of each and every individual
has the right to access. This theory includes legal rights, moral value and human rights. These
rights include the right to life, the right to freedom, the right to religion, the right to come and
meet in order to achieve goals, the right to work and many more. This theory states that the rights
specified in this theory cannot be taken away by an individual. Similarly, if while working within
an organization in China, the employees has all the rights if they feel any kind of discrimination
is practiced within the organization, or unequal treatment between people coming from different
age, caste, gender, cultural background is being followed. Similarly, if an the workforce or the
other management of the UK – SME follows any practices that is discriminatory in nature, the
victim has the right to file a complaint against the person practising the same. . The employees
have the right to complain the employer or file a complaint against the company.
Cultural preferences to be considered by the Crediton Dairy
The significance of culture
Culture refers to the ideas, behaviour and customs of a particular individual or a group of
people that affects the functioning of a business. The significance of culture within various
activities associated with international business includes:
It is important for the UK – SME to work on the communication skills of the employees in order
to understand the needs and preferences of the consumers within the China. The employees of
the company need to be aware of the Chinese language in order to survive with the market of
China (Krall, and Knapp, 2021). The knowledge of the culture of the Chinese market as well as
the people that are living in China helps the company in understanding the needs and desires of
the customers help the company in launching new products that attracts the customer based
within that country. Thus, it can be said that in order to be successful while going global it is
important for an organization to understand the culture of the nation in which it is going to
operate.
Impact of Chinese culture on the UK - SME
Customer perception
It has been identified that people of Chinese get attracted towards imported good.
Currently, most of the people are already inclined towards purchasing the imported products

within China. Therefore, it is beneficial for UK - SMEto initiate its business process within
China as people will be attracted towards the brand.
Packaging and Labelling
The people of China prefers organic packaging and labelling of the products that they
purchase. Therefore, it is to be noted by the UK – SME to use organic and sustainable packaging
in order to promote its product that is OHT milk within the Chinese market. It will attract the
consumers and help them to reach the target audience that is the children for the company.
Range of potential internationalisation methods
Acquisition
When a company plan to acquire more than 50% shares of a company either willingly or
by strategizing against a firm in order to gain the control in the operations of that acquiring
company, can be referred to as the process of acquisition.
Merger
When two or more than two companies come together in order to carry out their business
processes is known as a merger.
Partnership
When two or more individuals or companies agrees to arrange a formal agreement for the
purpose of carrying out their business operations with certain terms and condition with regards to
the profitability of the company (Han, 2020.). Under a partnership, the ratio in which the profits
will be shared is already stated in the terms and conditions of the agreement.
Licensing
It can be understood as granting of permission by the licensor to the licensee for the
purpose of using certain rights which includes brand names, technology, patents and trademarks
under certain circumstances.
Franchising
It is kind of strategy used by companies which is similar to the process of licensing. In
this method of expansion, the company provides some of its techniques, tools, procedures, brand
name and certain other factors which helps the firm in initiating a business in another country.
Greenfield investment

Under this method of expansion, the parent company initiates its business in different
nation from the ground level and provides the company with some sponsors, who controls the
functioning of the company.
Organic growth
The process of expanding the company on its own by using its own capacity, resources
and internal management skills can be referred to as the expansion by using organic growth.
Recommendations
 The best method of expansion for the purpose of expanding the business of UK - SMEin
the Chinese market is franchising. The risk associated with failure reduces by this
strategy as the people who will be managing the franchise will be based in China and will
be having proper knowledge of the existing market conditions, needs and desires of the
consumers.
 Financing the business will be easier as the owner of the franchise will be Chinese, the
banks will be able to form a relationship of trust in order to lend the money before
proceeding in the market (Antalová, 2021).
 The risks include high cost of operations; the agreement might impose certain kind of
restrictions on the company or even the franchisor might leave the agreement in between.
CONCLUSION
From the above report, it can be stated that in order to introduce the business of OHT
milk within the Chinese market, it is important for the UK - SMEto analyse the macro
environmental factors that affects the functioning of the business in China. Moreover, it needs to
understand the value of culture and understand the needs and desires of the consumers that exist
in the Chinese market. Morever, the recommendation for the purpose of choosing an expansion

method for the UK - SMEwithin the Chinese market should be Franchising as it helps in
extending the business globally.

REFERENCES
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Han, J., 2020. Impact Factors of Chinese Culture and Globalisation. In Theorising Culture (pp.
69-87). Palgrave Pivot, Cham.
Kalsie, A. and Arora, A., 2019. US–China Trade War: The Tale of Clash Between Biggest
Developed and Developing Economies of the World. Manag Econ Res J. 5(2019).
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