Marketing Ultra High-Temperature Pasteurization (UHT) Milk in China Today

International Business Report: Ultra High-Temperature Pasteurization (UHT) Milk for Chinese Children Aged 3 to 11 Years
Executive Summary
A number of important trends have converged in recent years that have significant implications for companies competing in the dairy industry that seek to expand their commercial operations into China. The world’s most populous country, China has an enormous population of infants which translates into a major demand for milk products (Cui, 2016). Moreover, the relaxation of the former draconian one-child policy has created a new surge in childbirths, and many experts believe that the population of young people in China will continue to increase well into the foreseeable future.
Besides wanting more children, the Chinese people are increasingly able to afford them as well, and the growing middle class in China has also translated into a new demand for the best of what is available for young children today. Because the United Kingdom (UK) enjoys a global reputation for exporting high quality products, it is not surprising that the demand for milk from the UK dairy industry has also increased in China. Therefore, the purpose of this study is to provide a systematic overview and analysis of the current Chinese market for ultra high temperature (UHT) milk and its byproducts, including an industry analysis and recommendations for the future.
Introduction
At present, there are approximately 1.8 million dairy cows that comprise the UK’s dairy industry which is supported by about 14,550 dairy farms. The UK dairy industry is also characterized by a significant animal husbandry enterprise which means that the UK’s dairy cows give birth to about 2 million calves each year (The dairy industry in Britain, 2019). Although herd sizes vary dramatically across the country, the average size of dairy herds in the UK is about 125 animals. It is noteworthy that this average herd size has increased dramatically, even on small farms, from the 30 cows per herd as recently as the 1970s (The dairy industry in Britain, 2019). These figures indicate that even smaller family farms in the UK have become more efficient in their animal handling procedures, and this has translated into greater revenues and global reputation for high quality (The dairy industry in Britain, 2019).
The breeds of dairy cows also vary widely across the UK, but the overwhelming majority (about 90%) are Holstein-Friesian animals (e.g., black and white), but other breeds include Guernsey, Ayshire, and Jersey cows. Regardless of the breed, though, the efficiency of the UK dairy industry has also been evinced by the fact that a single dairy cow’s production of milk has also increased since the 1970s from just around 990 gallons per year to 1996 to nearly 1967 gallons in 2012 (The dairy industry in Britain, 2019). In fact, the yield per dairy cow in the UK has more than doubled since the 1970s due to improved herd management methods and selective breeding practices (The dairy industry in Britain, 2019). While milk production per cow also varies widely from farm to farm, the amount of milk produced by dairy cows in the UK is about ten times as much as cows would typically produce to feed calves alone (The dairy industry in Britain, 2019).
This increased production in milk has also translated into significantly greater demands on the animals, and it is not surprising that this intensified milk production has resulted in increased casualties to dairy cows in the UK. In this regard, one industry analyst report that, “The unnatural physical demands placed on modern dairy cows result in a large number of the national dairy herd being killed every year due to lameness, mastitis (udder infection) and infertility” (The dairy industry in Britain, 2019 p. 3). While cows can generally live to the ripe old age of 20 to 30 years old otherwise, dairy cows in high production settings are typically slaughtered prior to their four lactation period (about 5 years old) (The dairy industry in Britain, 2019).
It is also noteworthy that the largest single agricultural sector in the UK is dairy farming, representing about $5 billion annually, a figure that accounts for about 17% of the UK’s annual agricultural production (The dairy industry in Britain, 2019). Notwithstanding these impressive production figures for the dairy industry in the UK, the country still imports more milk products than it exports and the UK experienced a $2 million trade deficit as recently as 2012 (The dairy industry in Britain, 2019). Nevertheless, the UK remains essentially self supporting with respect to milk from its dairy industry and the sector is well situated to take advantage of new export opportunities.
At present, the largest dairy company in the UK is Dairy Crest with annual revenues of about $13 billion in 2012. Another major company in the UK dairy industry today is Muller-Wiseman with approximately $52 million in revenues during the fiscal year 2011-2012, followed by Arla, a European conglomerate that accounted for more than $11 million in revenues in 2012 (The dairy industry in Britain, 2019). Taken together, it is clear that milk is big business in the UK, and it just makes good business sense to explore new opportunities for expansion, including the enormous Chinese market, through the internationalization of their operations. This asssertion is consistent with the guidance provided by Elkins (2018) who advises, “In general, companies go international because they want to grow or expand operations. More specific motives include generating more revenue, competing for new sales, investment opportunities, diversifying, reducing costs and recruiting new talent” (para. 3).
Business Drivers
Political:
Although the Chinese economic juggernaut has slowed somewhat in recent years, the country continues to enjoy sustained growth due in large part to its transition from a closed, centrally managed political framework to a free market economy that has fueled its increased participation in the global marketplace since the late 1970s (China politics, 2019). While the country is still the target of criticisms concerning its human rights policies and strict oversight of its population in terms of free speech and thought, most analysts agree that China has transformed into a relatively liberal nation, especially when compared to its political policies just a few decades ago.
Economic
The Chinese political leadership has succeeded in making substantive reforms to the country’s economy that have resulted in an increase in gross domestic product by more than 1000 percent since 1978, including the dissolution of collective farming practices and the relaxation of price fixing regimens that artificially kept domestic prices lower than the prevailing market prices (China politics, 2019). Indeed, during the period from 2013 to 2017, China still had the fastest growing economy in the world, with about a 7% increase in real economic growth per year (China politics, 2019). As a result, the Chinese economy became the largest in the world in 2017, outpacing the United States for the first time in history (China politics, 2019). These impressive gains have resulted in an increasingly large middle class in China which wants and expects more than just the bare bones from life.
In early 2015, the Chinese government released its 13th 5-year plan which underscored the need to embrace innovation and increase domestic consumption of goods and services to reduce the country’s historic heavy reliance on government investments (China economy, 2019). The most recent 5-year plan also placed a high priority on increasing exports and heavy industrial investments (China economy, 2019). As can be readily discerned from Figure 1 below, China continues to experience year to year economic growth.
Figure 1. China’s gross domestic product: 2013 projected to 2023
Source: Statista (2019) at https://www.statista.com/statistics/263770/gross-domestic-product-gdp-of-china/
Despite the increased emphasis on reducing government subsidies in the private sector, the Chinese government remains a major force in the economy with a heavy emphasis on state-owned enterprises, but current trends suggest that this level of participation will continue to shrink as the country’s economy improves and diversification of its exports proceeds according to Chinese government economic policies (China economy, 2019). Although it remains unclear whether the country will succeed in achieving the ambitious goals established by the Chinese government to double GDP by 2020, it is apparent that the country is well poised to increase its imports and exports within the foreseeable future (China economy, 2019).
Social
As noted in the introduction, the relaxation of the so-called “one child only” policy in 2013 that restricted Chinese parents to one child resulted in a stagnation of the country’s birth rate as depicted in Figure 2 below.
Figure 2. Chinese birth rate (per 1,000 population): 2000-2017
Note: This entry gives the average annual number of births during a year per 1,000 persons in the population at midyear; also known as crude birth rate. The birth rate is usually the dominant factor in determining the rate of population growth. It depends on both the level of fertility and the age structure of the population.
Source: Index Mundi (2019) at https://www.indexmundi.com/g/g.aspx?c=ch HYPERLINK "https://www.indexmundi.com/g/g.aspx?c=ch&v=25"& HYPERLINK "https://www.indexmundi.com/g/g.aspx?c=ch&v=25"v=25
Nevertheless, the Chinese population is still enormous and nearly a quarter billion people in China are currently aged between 0 and 14 years (128,270,371 males and 110,120,535 females) as depicted in the population pyramid shown in Figure 3 below.
Figure 3. Population pyramid for China: 2019
Source: https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
A quarter billion young people drink a lot of milk, and Chinese parents are increasingly able and willing to afford the best of what is available for their children. Fortunately for these parents and others around the world, there have been some significant technological advances that have made the global dairy industry far more productive in recent years as discussed further below.
Technological
As noted above, milk production in the UK has increased several times over in just the past 40 years, and milk production output per cow continues to increase as innovations in technology and improved herd management practices are implemented across the country (Palliser, 2011). In addition, milk production per cow has also increased in the UK due to culling practices that eliminate slower-producing cattle in favor of proven high production dairy animals (Palliser, 2011).
Environmental
While improved herd management methods and innovations in technology have contributed to significant increases in milk production in the UK, there are some environmental factors involved in the dairy industry that cannot be overlooked, especially with respect to UHT milk products. For example, the organic dairies that produce UHT milk products are unable to use the same types of nitrogen-based fertilizers on the grazing pastures as their competitors, and must rely on white and red clover in pastures to produce their higher quality milk products (Morrow, 2002). According to Harmon (2011), “Interestingly, the milk that these cows produce has a healthier fatty acid profile. Organic milk has significantly better quality year-round (less seasonal and annual variability) than conventional milk” (Harmon, 2011).
All of the dairy cows in the UK that produce organic milk are permitted to graze on grass more frequently than their convention counterparts, but there are other factors involved that account for the improved quality of their milk output as well (Palliser, 2011). In this regard, Morrow (2002) reports that, “Dairy cows are strongly affected by their social environment: A positive human-animal bond is critical to cows' welfare and animal density and mixing of cattle is disruptive to the social order” (p. 3). Consequently, it is clear that there is more involved in producing high quality UHT milk products than simply crowding as many animals as possible into a given area, and farm owners must consider the animals’ welfare above all else. These considerations also include compliance with legal regulations concerning the dairy industry in the UK as discussed below.
Legal
The overarching legal restriction on dairy industry producers that specialize in UHT milk is the requirement that all organic milk products must be heated to 280 degrees Fahrenheit for 2 to 4 seconds in order to destroy any bacteria that might be present in the mil (Palliser, 2011). By sharp contrast, conventional milk is pasteurized by heating it to at least 145 degrees F for 30 minutes at a minimum, or heating it to 160 degrees Fahrenheit for at least 15 seconds (Palliser, 2011). As a result, organic UHT milk also has a longer shelf life (Palliser 2011).
Trade Barriers
At present, the dairy industry in the UK is experiencing a veritable boom in domestic demand, just as the Chinese market is undergoing increased demand for high quality milk products. Nevertheless, there are some profound trade barriers involved in dealing with the Chinese market that constrain the ability of exporters to gain access to the billions of consumers that are ready and willing to purchase foreign products. Some of the most salient trade barriers that adversely affect the global dairy industry seeking to gain access to the Chinese market include those listed below:
· Import policies (e.g., tariffs and other import charges, quantitative restrictions, import licensing,
· customs barriers, and other market access barriers);
· Sanitary and phytosanitary measures and technical barriers to trade;
· Government procurement (e.g., “buy national” policies and closed bidding);
· Export subsidies (e.g., export financing on preferential terms and agricultural export subsidies that displace exports in third country markets);
· Lack of intellectual property protection (e.g., inadequate patent, copyright, and trademark regimes and enforcement of intellectual property rights);
· Services barriers (e.g., limits on the range of financial services offered by foreign financial institutions, restrictions on the use of foreign data processing, and barriers to the provision of services by foreign professionals);
· Investment barriers (e.g., limitations on foreign equity participation and on access to foreign government-funded research and development programs, local content requirements, technology transfer requirements and export performance requirements, and restrictions on repatriation of earnings, capital, fees and royalties);
· Government-tolerated anticompetitive conduct of state-owned or private firms that restricts the sale or purchase of goods or services in the foreign country’s markets;
· Digital trade barriers (e.g., restrictions and other discriminatory practices affecting cross-border data flows, digital products, Internet-enabled services, and other restrictive technology requirements); and,
· Other barriers (barriers that encompass more than one category, e.g., bribery and corruption, or that affect a single sector) (Foreign trade barriers, 2017, p. 6).
In sum, it is clear that taking advantage of the growing demand for UHT milk products in China requires more than just loading products on container ships and hoping for the best, but there are also some important ethical and social issues that must be taken into account as discussed below.
Ethical and social issues to be considered by the UK SME
With the largest population in the world, China has more than 16 million birth each year, and this rate is expected to continue to increase well into the foreseeable future due to the aforementioned relaxation of the country’s one-child only policy (Cui, 2016). This increased birth rate is also projected to increase the demand for high quality children’s products, including most especially milk and milk products that are needed to ensure healthy development of infants and children (Cui, 2016). There remains a paucity of timely and relevant research, however, concerning the ethical and social issues that are involved in promoting UHT milk products in the Chinese marketplace today (Cui, 2016).
Perhaps the overarching social issue involved in this scenario concerns the healthfulness of UHT milk products compared to conventional milk, but the key ethical issue involved concerns whether Chinese parents are amenable to replacing conventional milk products with imported UHT milk and whether UK producers should promote their products in this ancient civilization that has managed to survive for millennia without UHT milk. Given the demonstrated safety and wholesomeness of UHT milk compared to conventional milk, however, it is reasonable to posit that the ethical and social issues involved in promoting these products in the Chinese market are appropriate and well timed given the sustained birth rate the country has experienced in recent years.
Finally, it is also important to note that muntinational companies expanding their operations into China will have some profound issues to consider given the significant cross-cultural differences that are involved between the Chinese people and those living in the UK. These differences include most especially rankings for the cultural dimensions of individualism, long term orientation and power distance (Hofstede, 2019).
Cultural preferences to be considered by the business
The Chinese culture places a high priority on higher education, and this emphasis has translated into higher income levels as well as a more informed electorate that recognizes the importance of high quality products for young people (Cui, 2016). For example, according to Cui (2016), “Education level and income play an important role in parent purchase behavior of baby formula. Imported, organic, and more reputable brands of baby formula are more attractive to respondents than domestic, non-organic, and less reputable brands” (p. 7). In addition, Chinese parents have demonstrated a heavy preference for imported milk products that are produced by reputable foreign operators and they are not only able, they are also willing to pay significantly more for milk produced in countries such as the U.S. and the UK versus those produced in China (Cui, 2016). As one analyst points out, [Chinese parents] are willing to pay more for organic baby formula and baby formula with an excellent reputation” (Cui, 2016 p. 8).
These cultural preferences have been further reinforced by the dismal reputation of the domestic milk producing industry in China which was scandalized in 2004 by problems with baby formula and again in 2008 by milk products that had been adulterated with melamine (Cui, 2016). These events served to undermine consumer confidence in the domestic milk industry, and the fallout from these scandals has not gone away (Cui, 2016). These episodes also serve to help explain why growing numbers of Chinese parents want high quality milk products from exporters in the UK (Cui, 2016). In other words, the Chinese market is ripe for UHT milk products from the UK today, but it is also essential that milk exporters adopt the most appropriate expansion method available for entry into the Chinese marketplace and these issues are discussed further below.
Expansion methods to be chosen by company
.There are several different methods available for entry into a foreign market, including direct exporting, joint ventures, strategic partnerships and franchising (Market entry strategies, 2019). Clearly, some of these expansion methods are more appropriate for certain industrial sectors than others. For example, according to Weidenbaum and James (2003), “When faced with more onerous obstacles to international trade, businesses draw on a variety of alternatives to direct exporting. They set up new manufacturing facilities (so-called greenfield operations) in the host nation” (p. 29).
Most of these expansion methods, though, are untenable for the UK dairy industry’s expansion into China since it relies heavily on the environmental factors discussed above. In other words, dairy cows in the UK may not be as productive if they were living in China and did not receive the same type of grazing opportunities or social environment that they enjoy in the UK. Likewise, the carefully cultivated reputation of the UK dairy industry might be harmed if companies elected to expand their operations into a foreign market by placing their operations there without considering the foregoing environment issues.
Although companies in the UK competing in the dairy industry can select from a range of different expansion methods, ceteris parabus, the optimal approach for most UK companies seeking to gain entry into the Chinese marketplace would appear to be direct exports since the demand for UHT milk has increased enormously in recent years and current trends indicate this demand will continue to expand in the future. Because UHT milk has a much longer shelf life compared to conventional milk products, direct exporting would thereore appear to represent the optimal market entry option that UK milk producers can exploit to increase their revenues and expand their market share.
Thr Chinese government’s commercial laws, howver, typicaly require foreign companies seeking to do business in the country to partner with a Chinese entity (Khalil, 2018). Therefore, the only viable market entry option for UK dairy companies would be a joint venture with Chinese partner. There are a number of advantages to this market entry strategy, including the ability to draw on the experience of a Chinese partner and assistance with complex licensure requirements (Khalil, 2018).
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