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...…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).