Executive Summary
The purpose of this report is to analyse the dairy industry in China and provide recommendations on the creation of a joint venture between a foreign company and a local company in China. A market overview is done to establish the current market situation. The current market situation is analysed when overviewing the market. The writer looks at the production and consumption rate in the country.
A literature review is used to analyse the production and consumption of dairy products in the country. Information from website and other secondary sources especially statistics from the dairy associations in country is used to analyse the current market situation and trends. An industry analysis is done to identify the major competitors, the market trends and analyse the distribution channels. SWOT analysis is done to identify the strengths, weakness, opportunities and threats that the joint venture could face.
The report reveals that the dairy business in China is quite lucrative and with the right strategies, and great profitability is assured. China has great demand and consumption for dairy products, with prices being twice as high compared to the average global price. Expansion will be beneficial to the company with possible increase in profits and market control. It also reveals that expansion through a joint venture would enable the companies to control a greater percentage of the market. Local companies already control or have certain market shares. Forming a joint venture with a regional company means BMG market share will go high. The company is recommended to form a joint venture with a regional company to increase its regional dominance and be able to meet its expansion goal. The number of dairy products being manufactured should also be increased, and an ideal production site be identified.
1.0 Introduction
China is one of the largest market for dairy products and in the past ten years, dairy production and consumption in China has increased. In 2006, the total consumption of dairy products in China had reached 19 million tonnes, and the annual growth rate had grown by more than 10% (KPMG; Appendix 1). In 2008, there was a large scandal in the milk market where some diary companies were found to adding melamine to their products. The melamine, mainly in powdered milk was reported to causing harm to children (Yi-Zhuo, L. I. U. 2009). It raised security issues over the locally produced milk products, and People opted for expensive and imported milk products. This increased foreign dairy product dominance in China market.
Consumption went down around 2011 since people were cutting down on consumption as a result of the global financial crisis. China cut down on powder milk importation in 2014 causing a decrease in milk prices globally (Research and Markets, 2015). As of 2015, the dairy industry had expanded with consumption going up to 40 million tons in 2016 (Ibisworld.com, 2016).
Aim
The purpose of this report is to provide analysis of the dairy products industry in China. It analyzes the milk market in China while looking at the market demand, supply and consumption of dairy products in the country. It also analyses competition in the market looking at the possibility of joint ventures operating profitably in the country. In the first part, the dairy products are overviewed concerning total consumption and demand. In the second part, an industry analysis and a SWOT analysis are applied. The next part looks at the industry dynamics concerning future forecast of the industry. The last part concludes the report while giving recommendations on the feasibility of a possible joint venture.
Scope
The scope is to deliver an analysis of the feasibility of a joint venture between Benson Murray Goulburn and a local company with a key emphasis on the dairy products consumption trends, growth, and the benefits of expanding the company.
Assumptions and Delimitations
The report focuses on the market trends of the dairy industry and the consumption growth in the country. It helps in the analysis of the feasibility of a possible expansion into China’s dairy market. Websites, academic journals, texts, and various secondary sources are reviewed. Based on the analysis and the information gathered, it has been concluded that expanding BMG activities through a joint venture would be beneficial or rather profitable to the company. The report applies a SWOT analysis to determine the strengths, weaknesses, opportunities, and threats that the company will face individually and when in a joint venture.
2.0 Industry Overview
Production and Consumption
Milk production in China is estimated to be 38 million tons while consumption is at 40 tons (Ibisworld.com, 2016). It is evident that demand is higher than supply (Bai et al., 2007; Bai et al., 2008; Fuller et al. 2006). The capita milk consumption is low in the country. It is estimated that the consumption of the milk products is 42 grams per day compared to world's average of 270 grams per day and 140 grams per day in Asia. However, consumption is expected to go up (Fu et al., 2012). Most of the milk production happens in north and northeast China. Inner Mongolia has been the largest milk production area in China. The most common and sold milk being UHT (The Weekly Times).
Demand
With increased disposable income and a growing population, the demand for milk in the country is ever growing. There is also increased health awareness, which in some way increase the demand for milk and milk products. The demand for imported milk or milk that is just not from China has gone up following the 2008 melamine scandal (Pei et al., 2011). Due to the high population in the country, the demand of milk is so high, and the country's dairy production alone cannot meet the demand. The prices of milk products in China is also estimated to be high compared to the average global prices (Iatp.org, 2016).
The market is also currently flooded with foreign milk products as a result of the signing of a landmark free trade agreement between China and Australia (Australiandairyfarmers.com.au, 2016). The lifting of the milk production quotas in the EU has also made the market get crowded with imported milk product (Fao.org, 2016).
3.0 Industry Analysis
Key players
The market is dominated by domestic companies though there are foreign dairy companies in the country. Some of the big major companies include Mengniu, Yili, Sanlu, and Bright. As of 2015, Inner Mongolia Yili Industrial Group Co Ltd was the leading company in the dairy industry in China with 20% value share of the market (KPMG). Mengniu and Yili have been focusing on UHT milk. Sanlu and Bright are regional brands. There are also around 700 companies that cover people with low incomes and those in the rural areas. Some foreign companies have joint ventures with the local companies.
Forming a joint venture with companies like Bright would be great. They are regional brands and have a great share in the regional market. With the joint venture, the two companies will be able to control a large percent of the regional market. With future growth, they will control the country’s total market share. Beijing, Shanghai, and Guangzhou have been proven to be the greatest cities with large consumption of dairy products with Beijing and Shanghai consuming twice as much (Dong, 2006). With most people located in north and north east China, setting up a production company there would be ideal to minimize the logistics issues.
Many dairy companies tend to rely on modern retail channels, especially in the cities. Some companies distribute for themselves thus cutting out on producers. In the rural areas, the distribution channels are somewhat small and fragmented (Wang et al., 2011). Traditional shops are the distribution channels there through modern retailers are moving there due to saturation in the cities.
Strengths
The company being the largest processor of milk in Australia puts it in a better position in the dairy product market (International Business Times). Its products are well known and BMG being a veteran in the dairy industry means that they understand the dairy market and trends. Creating a joint venture with a local company will be an added advantage since the local company already has its share of consumers in the Chinese market (Lahouasnia et al., 2014; Smith, 2014). The joint venture will make the company have a better part of the market share of the dairy products consumers. A local company would also be in a position to understand the local market trends, distribution channels and other local factors that would help in the production, distribution and marketing activities of the joint venture.
Weaknesses
The location of BMG puts it at a disadvantage. It is located in the east while most of the consumers are located in north and northeast (Tolkamp, 2016). There could be logistics issues regarding shipping and distribution of their products.
Opportunities
The consumption of milk products is expected to continue rising in the future. With the increase in income, disposable income will increase meaning more consumption. There is also increased awareness of the health benefits of dairy products and increased awareness on food safety. Dairy products from foreign companies enjoy recognition in the China diary market (Li & Frederick, 2015). Also, the introduction of new dairy products such as dairy-based frozen products, soft and semi-soft cheese will boost dairy production in China.
Threats
Competition from the local companies especially the big and established ones (Yu, 2016). The big business in China will offer stiff competition to FOREIGN companies. It is a threat to their existence.
4.0 Industry Dynamics
It is forecasted that the value of milk products in the country will increase in the coming years (Tolkamp, 2012). The volume of sales of the milk products is set to go up on any year-to-year basis and this attributed to the low per capita milk consumption in the country as compared to other countries which are set to go up. Currently, annual growth rate is at three to six percent (KPMG).
There is also a projected increase in the number of dairy products in the market with products such as dairy-based frozen products with increased opportunities of importation of yogurt, cheese and dry milk products (Fu et al., 2012).
5.0 Conclusion
6.0 Recommendation
The above analysis has shown that the dairy industry in China is very promising. Expanding would be a great idea so as to maximize on the current and projected increase in consumption. The recommendations; first, BMG should form a joint venture with a local company so as to achieve its expansion plans. Secondly, they should Increase on their dairy products due to the changing market trends. Lastly, they should consider setting a production site near consumers to reduce on logistics issues.
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Appendix 1
http://www.statista.com/statistics/237825/market-volume-of-milk-drink-products-in-china/
