UK SME Expansion in China

Introduction

International business operations include trading of services, goods and technology, knowledge and capital cross-borders to promote better transaction of global nature. The advantage of international business operation is market diversification. In order to operate internationally, the companies require identifying the nature of cultural preferences, legal obligations, trade policies and others in the country of their expansion. In this assignment, the business drivers behind the UK SME to help them expand in the Chinese market to sell UHT Milk are being discussed. The trade barriers to be experienced by the UK SME and threat and opportunities of trade policies of China for the company are also to be explained. Further, the ethical and social issues to be considered and cultural preferences in the Chinese market are also to be mentioned. Lastly, the expansion method of the UK SME in the Chinese market is to be discussed.

Overview of UHT Milk Industry in China

UHT Milk (Ultra-high treatment) Milk is referred to the nature of processed milk which is sterilised by heating at the temperature of 135ºC so that the spores in the milk are killed (Anema, 2019). It is estimated that 60% of the total consumption of milk in China drinks UHT milk (www.foodbev.com, 2014). This indicates UHT milk has more demand compared to the high-end fresh milk usually available in the market. In 2018, it is seen that nearly 670,000 tons of milk are being imported in China which is less than 2% of the total consumption. The majority of the milk is UHT milk which has the market among the lower middle-class and urban middle-class consumers with shelving ranging from 9-18 months (gain.fas.usda.gov, 2018). This means that in China the demand for UHT milk is more among the middle-class consumers compared to the other classes. In 2017, it is informed that the total population of China is 138.64 cores and 55.8% of them live in the urban areas as well as it is expected to rise by 300-400 million by 2030 (www.ers.usda.gov, 2018). This indicates that the population in China is going to grow at a faster creating more demands of the UHT milk both in the urban and rural areas.

Business drivers behind UK SME expansion into the Chinese market

PESTEL Analysis

Analysis

The presence of political stability in the country is seen to be directly related to economic growth as stable political condition boost increased financial investment as well as promote economic pace of industries in the country (Steinhardt, 2016). Thus, political stability of China is going to help UK SME to have stable economic support through proper investment while expanding in the country to sell UHT milk for the children. The Chinese government has also informed to lower the VAT for UHT milk which would act in positive nature for the UK SME business. This is because it would help the UK SME to sell their UHT milk is lower prices for the children in China making their products more economically affordable for the public in the country. The UHT milk demand in China is expected to rise at an immense rate by 2020 (english.agri.gov.cn, 2015). As mentioned by Snyder et al. (2015), rise in demand for products in the market boosts the business of the industry. This is because increased demand of goods in the market means the companies require producing more that would eventually lead them to get greater revenue as result of increased sales of product on bulk in the market. Thus, it would act as positive driver for the UK SME as they would be able to gain increased revenue than expected from the market due to increased demand of their products. The increase in disposable income of the people in China would mean they will be able to spend more in availing their basic needs of products from the market (www.dairyfoods.com, 2013). It is going to act as a positive driver for the UK SME business regarding the selling of UHT milk for children in the country. This is because Chinese people are going to buy the UHT milk products even though they are costly than normal milk as they would have improved economic condition to spend. The presence of e-commerce services and other updated technology is delivering and manufacturing UHT milk in China is going to act as positive driver for the UK SME. This is because the UK SME would have better machineries and services to be used for producing and delivering UHT milk for the children in the market within less time and with better efficiency.

The increased production of greenhouse gases leads to pollution and deterioration of the environment (www.anthropocenemagazine.org, 2018). This is because the greenhouse gases react with the atmosphere to create hole in the ozone layer which protects us from UV rays and extreme heat rays of the sun. The production of UHT milk in China is seen to create increased pollution. Thus, the UK SME is required to be remained concerned regarding production of UHT milk for children in China in the aspect that they are to use services, machinery and efforts so that pollution and production of greenhouse gases are reduced while manufacturing of the milk. This is because polluting the environment would lead them to face negative image in the market as no public supports the company that pollutes their environment and makes it improper to live. In China, the foreign companies to operate and expand in the dairy industry have to follow Decree 145, Law of Farmer Specialised Cooperative Society 2007 and various other food laws (www.npc.gov.cn, 2007; gain.fas.usda.gov, 2018). Thus, the UK SME to operate legally requires ensuring they follow the guidelines while importing or manufacturing UHT milk for children in the market to avoid lawsuits.

Trade Barriers in Chinese Market

Tariffs: The Tariff is referred to the tax which is implemented by the government on products and services so that the exported goods are increased in price compared to the domestic products (Imbruno, 2016). In China, it is seen that they have cut tariffs on more than 200 products which include beverages, dairy products, UHT milk and others and have reduced 17-18% tariff on UHT milk alone so that more exports can be received to meet the milk crisis in the country (www.bbc.com, 2017; www.ers.usda.gov, 2018). It is going to help the UK SME to have the advantage of paying lower tariff to China while exporting their milk into the country. This, in turn, is going to help the UK SME to maintain cost-effective pricing of their products for the Chinese population. However, it is seen that China has reduced the price of local milk products in the market as well as an increased supply of raw milk to the population (www.agr.gc.ca, 2018). This going to act in a negative manner for the UK SME while selling UHT milk in China as even after the reduced tariffs they would face high price competition from the local market as they would be offering milk products at much lower prices than them with the support from the government. As mentioned by Smith (2015), a cost-effective price leads consumers to get attracted to a particular company and its products. This is because they feel they can avail their needs at much lower prices. Thus, the lower prices of local milk products in the China market is going to pose hindrance for the UK SME to freely operate in the industry for achieving profits.

Non-tariffs: The non-tariffs are referred to the barriers in trade imposed to restrict export of import of goods through mechanisms without imposition of tariffs. In China, it is seen that they have imposed non-tariffs in many cases that have to make wide part of the economy to remain closed for free trade purposes by the foreign countries (Guo and Li, 2019). This trade barrier would limit the operation of the UK SME in China to sell UHT milk in the country as they would face various legal constraints and increased tariff regulations while operating in many areas within the country. The Chinese government has imposed barriers on foreign companies trading in the beverage and dairy industry in the sense that they have used 50% of the produced sugar in the country (research briefings.parliament.uk, 2019; www.reuters.com, 2018). This indicates that the UK SME to operate in China requires to buy at least 50% sugar from the Chinese market in preparing UHT milk which may contribute to raise the financial investment in preparation of UHT milk, in turn, affecting to led them to raise the price of the products. The rise in price would lead locals in China to avoid purchasing the UHT milk by the UK SME as they would feel paying more to avail the product which would lead the UK SME to face lower scope of business in the market.

Quotas: Quota is referred to as the trade restriction imposed by the government which acts to limit the number of goods in monetary value in the country that can be imported or exported for a particular period. The quotas are mainly used by the countries in international trade to manage the trade volume between them with the other nations (Zahniser et al. 2018). The Chinese government has quotas regarding UHT milk which allows the entry of milk products at lower tariffs rates than normal. In 2016, the quota for UHT milk was extended until 19th January when milk products are able to enter China at the tariff rate of 2.5% (agrihq.co.nz, 2016). The trade barrier to be faced by UK SME in this respect of quota system in China is that the US, Australia and Ireland are the key exporters of UHT milk to China who usually covers the quota at the earliest. Thus, the UK SME is required to pay normal tariffs which would increase the price of their products and face increased competition in the Chinese market to export their UHT milk goods at lower tariff.

Currency Devaluation: The currency devaluation is referred to the official lowering of the value of the currency of a country within the fixed exchange rate system (Okoyeuzu et al. 2018). In the UK, 1 Chinese Yuan is noted to be equal to 0.11-pound sterling (themoneyconverter.com, 2019). This means that the amount of finance to be collected by operating in the Chinese market by the UK SME would be much lower when transferred back into the pound. This means that the UK SME is going to face high currency devaluation by operating in China create trade barriers as they may not get effective return on invested amount of finances for providing products in the Chinese market.

Threat and Opportunities for Trade policies in China

The trade policies are set by the government so that the domestic economy can be protected from international competition of goods that are exported to the country (Che et al. 2016). This is required so that the domestic market is not threatened by external goods as otherwise, it would lower the internal economic state of the country. China is seen to imply strict trade policies so that the exported goods do not threaten the domestic market as it would economic instability with the country in different industries. In order to sell UHT milk by the foreign companies, China has mentioned that they are to follow the guidelines of Decree 145, Food Safety Law of the People's Republic of China, Dairy product Quality and Safety Regulations and others (www.npc.gov.cn, 2018; gain.fas.usda.gov, 2018). Thus, UK SME while operating in the China market to sell UHT milk for the children requires to ensure that they follow the legislation so that no lawsuits are faced by them due to violation of regulations. The policies act as opportunity for UK SME as they are going to have clear understanding and knowledge about the way their UHT milk quality is to be maintained so that they can effectively operate in the Chinese market. The Chinese government set Green Standards to be maintained for packing so they are eco-friendly in nature (Zhu et al. 2017). The UK SME is seen still to be using plastic in packing of their UHT milk which they require to reconsider by implementing better eco-friendly packaging ways. This is because without such initiative they are going to face threat in the Chinese market in relation to violation of Green Standards for packaging as plastic used by UK SME is not eco-friendly in nature and pollutes the environment.

Ethical and Social Issues to be considered in Chinese Market

The ethical issues are the situation or problem which requires an organisation to determine their choice between two or more alternatives regarding which is right and wrong. The UK SME while operating in the market of China may face ethical issues in relation to corruption, employment practices, human rights and others.

Employment Practices: In Chine, the laws informs that working 8 hours each day meaning 40 hrs per week is considered normal office hours and working beyond the time is considered as overtime (www.shrm.org, 2018). The UK SME requires following the rules while recruiting individuals in China for their organisation so that they proper offer overtime fees to be offered to the employees. This is required to ensure no ethical violation of the employment law for overtime is made as otherwise it would lead the UK SME to face lawsuits from the employees and legal charges by the government for unethical practices. The employment laws in China informs that no discrimination is to be made among employees each is to be offered fair remuneration, health and safety facilities, salary as per industry standards (www.globallegalinsights.com, 2018). The UK SME requires following the law as overwriting would make them face ethical issues due to improper employee management. In the UK, employment laws are totally different from the existing laws in China. Therefore, in this respect, UK SME is going to face hindrance in understanding and implementation of employment laws of China while expanding in the country for UHT milk that is liable to raise ethical issues for them.

Corruption: In China, the anti-corruption provisions are mentioned in the Anti-Unfair Competition Law of the PRC and Criminal Law of the PRC (www.globallegalinsights.com, 2018). The UK SME require to follow the guidelines mentioned in the laws while operating in China to avoid corruption as it is one of the ethical issues to be faced in China for which they may experience the downfall in the market. This is because corruption results in portraying negative image of the company which makes the consumers avoid availing products from them as they feel they would be cheated and not offered good quality products as promised during promotion in the market (Zhang et al. 2016). Therefore, corruption is one of the key ethical issues to be avoided by the UK SME while operating in the market of China to successfully run their business.

Social Issues

The corporate social responsibility (CSR) is referred to the business approach which contributes towards the sustainable development of the organisation by offering economic, environmental and social benefit for all stakeholders (Yin, 2017). In China, the rising elderly population is the key social issue being faced at the present. This is because it is found that only 1.5-2% of the elderly individuals are able to live in nursing homes or able to avail cheap elderly care whereas the other elderly population have to live on their own as well as experience expensive medical procedures with limited specialists to offer them care (www.coresponsibility.com, 2017). Thus, the UK SME while expanding in China to sell UHT milk for the children they are also required to contribute some of their profit to support the social cause of helping elderly people in China as their CSR responsibility. In China, it is seen that gender inequality still exists as social cause which has led women in the country to remain oppressed at work as well as in the society (chinapower.csis.org, 2018). The UK SME while expanding in China is going to face the social issue of gender inequality. Thus, it is UK SME’s concern of developing CSR activities and employment policies in the company to sell UHT milk for children in China in such a way so that no gender inequality is supported by them. This is because it would help them act in favour of the country to reduce social issues related to gender inequality contributing their effort to bring women empowerment in the country.

Cultural preferences in China

The cultural preferences in China inform that the people respect their culture the most and wish to communicate in Chinese rather than using English or any other languages. This is evident as in China out of 1.3 billion people only 10 million individuals speak English or have knowledge of the language but the rest of the population speak Chinese mainly. This figure indicates that less than 1 in 100 people speak English in China (www.telegraph.co.uk, 2017). Thus, the UK SME while expanding their UHT milk market for children in China require to ensure that they respect the culture and try to communicate in Chinese while trading. This is because without using their language the UK SME cannot operate their business in China. The cultural preferences of China are that they wish to prepare and offer healthy foods for the children as well as the adults so that they can have a longer lifeline with fewer diseases to be experienced (www.forbes.com, 2016). In this respect, the UK SME is required to ensure the production of their UHT milk is done in a proper way so that the required nutrients needed by the children for their improved growth are present in the product. This is because without using such assurance they cannot expand their product in the market.

Expansion methods in China by UK SME

The use of appropriate expansion methods is to be applied by the companies to expand in the international market so that they are retrieved effective return from the investment made ensuring better growth of the organisation (Suzuki and Okamuro, 2017). The UK SME to sell UHT milk for children in China to expand their business further may use joint venture, franchise and trade agreement as potential expansion methods.

Joint Venture:

Joint Venture is referred to the business entity that is formed by two or more parties through shared ownership, returns and risks and shared governance. The importance of joint venture while expanding to a new country is that it help the foreign company to collaborate with existing companies in the country who have better knowledge about the market and preferences of consumers in the specific country (Kostova and Hult, 2016). Thus, the UK SME while following this expansion method would be able to collaborate with existing Chinese dairy companies in the market who could inform them in details about the exact statistics demands of UHT milk for children in the country. This would help UK SME to have better knowledge regarding the way to expand in China but the issue with the method is that they cannot alone enjoy the profit and has to share it with the partner company.

Trade agreement: Trade agreement is referred to a pact that is formed between two countries where they agree in certain trade terms (Moon, 2018). The UK SME by using trade agreement can export readymade UHT milk to China for the children to expand their business in the country.

Franchise: The Franchise is referred to authorisation offered by a company to any company or group which allows them to carry their specific activities in a certain country (Hoffman et al. 2016). The UK SME by opening franchise in the China would be able to manufacture UHT milk in the country. This is the best way of expanding in China as it would help them to avoid import taxes and enjoy business benefit within China by using existing groups in the country to manufacture and market their products of UHT milk to the children.

Conclusion

The above discussion informs that UK SME while expanding in China to sell UHT milk for the children is going to experience political stability, economic growth of dairy industry, improved technology and increased demands of UHT milk by the people in the country which is going to boost their business. The trade barriers to be experienced are tariffs, non-tariffs, quotas and currency devaluation. The best way to enter China by the UK SME is through franchising.

Recommendations

The recommended actions are required to be performed by the UK SME to expand in China to sell UHT milk for children:

UK SME is to ensure that the nutrient content and quality of UHT milk is ensured as per the mentioned food standards by China

UK SME is recommended to communicate in Chinese and respect the cultural preferences of the people of China to effectively expand in the country

UK SME is to offer sample of their products to be used by the school children in China before commercialising their production for the country

UK SME is to execute effective market research to identify the states within China where they are to place their business so that greater returns are achieved

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