International Business: SME’s Expansion In China

China is a great market for any Dairy firm in the world because it is going to be the largest market within 2022 (Weston, 2019). The UK SME wants to enter the market in China. Because of being a SME firm, it may not have huge investment to capture the whole market competing with other competitors. After analyzing the market and other aspects like trade drivers and barriers, opportunities and uncertainties and expansion methods, it is preferable to merge the UK SME with a local investor or firm to have some facilities and to avoid some barriers. By doing so, the UK SME will be able to reduce their risks and will get time to adjust with the market and the culture. Thus having little expertise in the market, the firm will be able to identify its core customers and their needs and the ways of fulfilling them. They may get enough resource to get the information about the market rather starting alone and wasting huge money on market research. But if they have that much money to start that industry in the Chinese market with a vast people and increasing potentialities, they may be able to advance in the market and sustain competitively reducing the threat of entrance and rivalry and supply power. And meeting at least three of the five forces is a good sign to enter a market (Krugman, Obstfeld and Melitz, 2014). But still it is preferable to share resources and investments with a local firm in China.

Introduction

In United Kingdom, Dairy industry is more favorable than China. There are around 14,550 dairy firms in UK including around 1.8 million dairy cows (Infoseekchina.com, 2019). The Dairy industry in UK spends a lot of money on advertisements. The Dairy UK, The Dairy Council and the DairyCo support and promote the UK dairy industries. On the other hand, the Chinese Dairy industry is largely dependent on imports of dairy products to China. China is the second largest market in the world after United States. And it is assumed that it will be the largest market in the world within 2022 (Weston, 2019). This is a vast market for dairy products because the sales of milk in the domestic market has been reached to 114 billion of yuan in the last few years and most of them are imported from various foreign countries (Corporate Finance Institute, 2019). So, the business firms associated with dairy are looking forward to the Chines market.

1. Business Drivers behind the UK SME’s Expansion in China:

1.1 Porter’s Five Forces to Analyze The UK SME’s Threats and Opportunities in China:

Porter’s Five Forces are used to analyze the UK SMEs’ attractiveness and likely profitability in China. To enter the Chinese market, the UK SME needs to analyze the threats that they may face to do business. Those threats are discussed below:

1. Threat of New Entry: The amount of capital required to enter in the Chinese market is a threat for the UK SME (Barringer and Ireland, 2015). As a UK SME, it should consider the retaliation with the existing companies. Existing companies have brand reputation where it will be tough to get in a good position for the UK SME in the Chinese market. As a new entrance, it needs to find appropriate suppliers and distributors (Chadwick, 2018). Trade policies, cultural preference and legal policies can be considered as the threat of entry in Chinese market for the UK SME.
2. Competitive Rivalry: There are almost fourteen dairy companies including many foreign companies (Infoseekchina.com, 2019). As a UK SME, it may face difficulties to compete with the competitors (Daniels, Radebaugh and Sullivan, 2017). But as the rivalry is intense, the firm can attract customers by decreasing prices than the others and huge promotion campaigns (Kotler and Armstrong, 2017). In markets with lots of rivals, the suppliers and buyers can come to the UK SME if they feel that they are not having a good deal from the other brands, so maintaining a good relationship with them is necessary.
3. Threat of Substitution: As the market of dairy product in China has increased at a huge rate, it seems that people will not go for any other substitute like drinking water, juice, soft drinks etc. So, shifting in any other product is not a threat for that SME (Nenadyshina, 2019). But the customers will judge the taste and cost of other substitute brands according to their needs. If the customers find a better alternative from the UK SME than other brands, they may sift to the UK SME (Kardes, Cronley and Cline, 2015).
4. Supplier Power: In China, the UK SME will find a huge number of suppliers for the machinery, packaging, researching, transportations etc. (Weston, 2019). So, the SME shall not be devised with the supply of the materials and it has a huge number of alternatives to compare the costs of the suppliers (Nunan and Di Domenico, 2013). But it can be a problem if the suppliers get merged themselves. So, the SME should maintain a good relationship to sustain in the market.
5. Buyer Power: In China, the SME may find a threat with the buyer power (Musiolik, 2012). As there are a lot of customers for milk and they have a huge number of alternatives, they can affect the SME regarding costs, quality, availability, consistency etc. The buyers can cause to drive the prices down for the products (Krugman, Obstfeld and Melitz, 2014). Being a huge market, the SME needs to fulfill the needs of the customer by so they can gather more and more customers in that competitive market.

1.2 Two Major Business Drivers for The UK SME in China:

1. Neo-mercantilism: China has perused neo-mercantilism theory with progressive exports. Neo-mercantilism refers emphasizing on exports and the discouragement of imports with trade restriction (Nunan and Di Domenico, 2013). For his reason, they have increased restrictions in import facilities with a higher tariff rate of 15.5% (Spartak, 2018). As the labour cost of China is lower than the UK, the UK SME can boost the production with low cost in China and sell them in their home country with a lower tariff cost of 1.82% in UK.
2. International Product Life Cycle Theory: This can be a good driver for the UK SME to do business in the Chinese market. A product has four stages of its lifetime (Sofiani, 2013). Here, Milk other dairy products are in the maturity stage that leads the UK SME to the benefit of lower costs of research and promotion. A new firm in china with a new product have to give effort to research and promotion to let the customer know about the product (Trudgen and Freeman, 2014). But the UK SME has that maturity of their product in the Chinese market having the cost advantage.

2. Trade Barriers for The UK SME Entering the Chinese Market:

2.1 Three Trade Barriers for The UK SME:

There are so many barriers to enter the foreign market like China. Among them, three barriers are discussed below:

1. Ethical Issues: Corporate social responsibilities are necessary for UK SME’s efforts to improve society in some way (Daniels, Radebaugh and Sullivan, 2017). The SME can create and implement environmentally-friendly policies in the Chinese market. Dairy consumption has experienced an uprising trend in the recent years in China, and the impact of dairy safety incidents has been lasting for a few years. In China, the Dairy food consumers in the low-income group are more sensitive to safety risk than those in the high-income group (Nenadyshina, 2019). So it should be a prime concern for the UK SME.
2. Regulations: The UK SME is habituated with the rules and regulations of the UK government. But the Chinese rules is different. China has removed the requirements of licensing and quota from the major number of the import items (Nunan and Di Domenico, 2013). Now a limited number of products are having the advantage to come in the market smoothly. The UK SME have to label their products in Chinese language that create an extra cost for them (Trudgen and Freeman, 2014).
3. Tariffs and Quotas: The significant barrier for the UK SME in China that the government is charging tariff for dairy products at 15.6%. The VAT on UHT milk has been declared at 5%. As a result, all dairy products will be taxed at 5%. Including all of them (Spartak, 2018), the final price of the product may increase very high. So, their main focus should be to minimize the production and labour cost of the products to alternate the extra cost of tariffs and quotas (Feenstra, 2015).

2.2 Possible Consequences Ignoring Such Things by The UK SME:

If the UK SME does not consider those barriers, the main risk of brand failure will arise (Kotler and Armstrong, 2017). They will lose the Chinese market. If they get a negative impact in the Chinese market, rarely they will be able to back in business again. A huge market is an advantage. But it can be a problem also. If somehow the tariff charges are increased from 15%, it will impact on the cost of the product for the SME. Every country has particular rules to be followed. To sustain legally in the market, the firm needs to maintain Chinese laws like foreign investments law, Gender discrimination law, secrecy agreements to employee trade, employment contracts etc. (Chadwick, 2018). without maintain these laws their brand can be banned from the Chinese market.

2.3 Uncertainties and Opportunities Created by Trade Policies:

1. Changes of government policies: If the Chinese government changes any trade policies which is harmful to the UK SME like increasing tariff rates in exporting for foreign traders (Cateora, 2016), the UK SME has to face an extra costs barriers compared to other brands. On the other hand, a decrease in tariff rates will give extra profit for the firm. New regulations also will affect the firm like changing in VAT and Tax policies in the products (Feenstra and Taylor, 2016). It will cause high price for both local and foreign firms. Changing policies for late night and overtime working policies may also affect the firm’s profitability and organizational policies (Krugman, Obstfeld and Melitz, 2014).
2. Changes of Competitors: If the SME can get merged with more than two or three companies (Spartak, 2018), the firm will get a shared investment and resources that will bring a long term profit because of turning their competitors as their partners. A shared profit will give benefit to all of them (Chapman and Feit, 2015). Because of having a lot of brands in the market, one or two of them may fall due to poor competitive advantage. Then the competition will decrease than before. It will bring a good impact for the UK SME also.
3. Commencement of wars between UK and China: If two countries come up with a war, then the UK SMEs will lose the Chinese market (Musiolik, 2012). Then both countries will be affected for the consequences of the war. Job cuts, recessions, economic falls will appear to destroy the green picture of these countries (Osorio, Fernandez, Palacios and Carmen, 2016).

3. Ethical and Social Issues to Be Considered by The UK SME:

Importance of corporate social responsibility when operating internationally for the UK SME in China.

1. Access to clean environment: Milk is full of nutrients like phosphorus, calcium, B vitamins, potassium and vitamin D (Weston, 2019). So, the UK SME should be concerned about the clean environment of the production area of milk. Otherwise, a product with full of nutrition will turn into a product with full of Bacterium. The UK SME should be ethical with the expectations of the customer (Corporate Finance Institute, 2019). As the Chinese are so much responsive with their decisions. They like to live in clean environment and atmosphere (Barringer and Ireland, 2015). So, it is a responsibility of the UK SME to provide a healthy product for their responsive customers who will never back in business if once they are gone because of producing products in an unhealthy environment.
2. Company Standards: The UK SME needs to maintain their standards to sustain in the market (Daniels, Radebaugh and Sullivan, 2017). Having a huge market with huge competitors, the SME should not adopt unfair means reduce the cost of the product to get the market. Sometimes companies mix up their products with unhealthy ingredients to decrease cost and price. But this is harmful for the consumers. Many Chinese consumers are having a disease of lactose intolerant (Weston, 2019). So, most of them avoid purchasing milk products. Here the UK SME should confirm quality of their products which is beneficial to the health of the customers.in this case, Chinese domestic companies are ruling in UHT dairy products market providing good quality. As well as many other multinational company has been trying to get success providing UHT dairy products in China (Infoseekchina.com, 2019). So, it is a big challenge for the UK SME to competitively sustain with products in an ethical way.
3. Improving the Company’s Brand: SME can make some CSR campaigns to let them introduce with the customers. The customers will be unaware of the brand without being introduced with the brand (Kotler and Armstrong, 2017). But CSR programs will be helpful to introduce the brand with a positive impression. If the UK SME is able to create such impression, the firm will be able to create a long term relation with the customers that will improve the brand image of the firm (Kardes, Cronley and Cline, 2015). As the Chinese are so much collectivist oriented, if the firm is able to get one customer, the others will come automatically. So, the firm should go with an ethical and a responsible way to be engaged with the customers.
4. Engaging Customers: CSR programs are also necessary to be close to the customers in China market (Feenstra and Taylor, 2016). The closer to the customer the firm will be the better the firm will understand the needs of the customers. They are mostly family oriented. They have a great importance of being engaged in family and society. So, the UK SME have to remember to be engaged with the Chinese to grab the market more and more (Musiolik, 2012). But the UK SME should also know and identify their actual customer of UHT milks. As they are mostly children aging 3 to 11 years, the UK SME can arrange campaign’s for specially children.
5. Helping Companies Stand out from the Competition: CSR programs will make those UK SME firms closer to the customer (Kotler and Armstrong, 2017). The customers in China will be more attractive if the firm comes with new products. The customers will not search twice for getting information about ethical and labour practices of the firms as other firms are letting the customers know about their terms with CSR activities. So, it is the firm’s duty to engage with CSR activities and do ethical practices for a better trade internationally (Nenadyshina, 2019).

4. Cultural Preferences to Be Considered by The Business:

The significance of culture within various activities associated with international business in the Chinese market:

1. Network & Interaction: The Chinese build a strong relationship among them. In China, the UK SME needs to remember that Network and interaction is a vital element for their business. By building networks and interactions which is referred as Guanxi, the UK SME can minimize risks, setbacks and failures of their products (Kardes, Cronley and Cline, 2015). The Chinese want to deal with individuals who they know and can trust. So, the UK SME should establish an interpersonal relationship among their partners, before starting to work together. The UK SME should know that the Chinese believe more on individual relationship rather than company relationship (Musiolik, 2012). the easier it will address issues in business. So, the UK SME should engage with the Chinese about their family, hobbies and their life inspirations to address their products among the customers.
2. Confucianism: Confucianism affects business practice a lot: all relationships are deemed to be unequal. The UK SME should know about the necessity showing the respect to seniority, age or educational background. In China, the UK SME will need to follow management style in a directive way which is a basic concept of Confucian in the nature of hierarchical in a society (Nunan and Di Domenico, 2013). The superiors of UK SME in China cannot disrespect the decision of the subordinates. To sustain in the business, UK SME managers need to be loyal and obedient to the colleagues (Osorio, Fernandez, Palacios and Carmen, 2016).
3. Face: the UK SME should remember the Chinese belief that the face is important for business interaction. This concept is referred as Mianzi. Here face refers the reputations of individuals (Kardes, Cronley and Cline, 2015). So, the UK SME with a reputed person will be able to create extra value in a contract or dealing. In other words, creating a face of their brand with a pride, reputation and dignity, the UK SME will get success. But a slight mistake of their product can make the loss of the face. So, the strong maintenance of the face of their products is very important to sustain in the market (Kotler and Armstrong, 2017). Having the face, the UK SME will be respected by the customers and the customers will hardly switch to other brands rather they will give compliments to make the products better according to their needs.
4. Collectivism: The UK SME have to consider the collectivist culture in China (Feenstra, 2015). The Chinese like to work in groups rather than being individual. They believe that team work results in consensual decisions and is beneficial share information more obediently. Here, the UK SME can make people feel obliged to others for doing their work properly with the involvement of the group decision. The UK SME has a benefit that the Chinese are so much cooperative among them so to increase the productivity (Barringer and Ireland, 2015).
5. Meetings & Greetings: while having a meeting with a Chinese businessman, it is necessary for the UK SME to show sincerity, respect and honor to him (Chadwick, 2018). While greeting someone in China, the UK SME should remember to not to look forward in the eyes rather they should lower the eyes slightly. The Chinese businessman prefer a light handshake and a business card having both Chinese and English text. The UK SME should consider that the cards should be taken with both hands otherwise it will be determined as disrespect to the person (Daniels, Radebaugh and Sullivan, 2017). This is a sign of deference and respect. It is a matter of fact that the Chinese often makes their meeting so long to build relationship. All of the terms should be followed by the UK SME.
6. Giving gifts: the UK SME have to build a habit of giving gifts to the individuals for running strong relationships (Cateora, 2016). But the UK SME should also remember not to give gifts without any good reason. Otherwise it may create a different stereotype to person (Nenadyshina, 2019). The Chinese give gifts to create friendship and to symbolize hopes for good future business.

5. Expansion Methods of the UK SME

The methods described below can be potential ways of expanding the UK SME’s business in China.

1. Exporting: The UK SME can produce the product in their home country and can sell them in the Chinese market for better business (Daniels, Radebaugh and Sullivan, 2017). They can contract a Chinese buyer without having any extra investment for plants, building, machinery, labour in China (Krugman, Obstfeld and Melitz, 2014). But they may face the export regulations for 15.6% tariff on dairy products. They may face other transportation and clearing barriers while entering with products in China.
2. Franchising: The SME can give franchise of his asset to any other existing SME in China. By so, the local firm will sell and promote UK SME’s product the brand name and trademark (Feenstra and Taylor, 2016). They will just earn profit doing business by others. The SME will assist that firm in China how to deal with their dairy products. They will confirm the standard of their product for the Chinese SME. Thus the UK SME can expand their business in China (Nenadyshina, 2019). But the matter of fact is that the standards of the product of UK SME may not be followed by the local SME. This can damage the image of the product of UK SME.
3. Licensing: To maintain standards strongly, the UK SME can provide their well-equipped machinery for maintaining quality of their product, other assets, expertise, trademark and patents to do business in Chinese market (Chapman and Feit, 2015). The UK SME can also assist the local SME how the products should be made and supplied to the customer (Trudgen and Freeman, 2014). The firm can take control over the local one. But though the UK SME tries to maintain their image, the local one will not be able to do so as per required scale. Some lacking will occur in the local area.
4. Joint venture: The UK SME can make a deal with another SME or company in the local market in China. Both of them can share their resources, returns and risks, ideas, expertise to rule the market as a whole (Spartak, 2018). In this case both firm will be benefited. But there is a question of ethical and trust issues. If both firm can make deal with trust and ethics, it is ok to advance otherwise the UK SME can be separated (Corporate Finance Institute, 2019).
5. Strategic Alliances: The UK SME can make an agreement with a Chinese firm for a particular time or project (Daniels, Radebaugh and Sullivan, 2017). Thus the UK SME will have an idea how to deal with customers in Chinese market and the needs of the customers. The UK SME can use the unique resources of the local firm. Their investments will be shared between them to reduce risks that is a benefit for UK SME as a new firm in China. However, the UK SME will need time to adjust with the Chinese culture and social values to sustain in business (Kardes, Cronley and Cline, 2015).

After the evaluation of all the expansion methods, it can be said that the UK SME can make a strategic alliance with a local firm in China. It is considered that the UK SME may not have that much investments and resources to compete with other multinational companies existing in the market, so sharing investments and business resources with a local firm may reduce the risks of the brand failure having cost advantage that will also be beneficial to the local firm also.

Conclusion

In the above discussion we got that the UK SME has a huge potentiality to get the market. A lots of opportunities like cheap costs, merging with other firms, poor supplier power, potential positive outcomes from the rivals and so on. But the significant point is the tariff rate which is much more high than the other countries (Feenstra, 2015). But the other costs are low than the tariff rate. So, if the UK SME enters once, it will be able to cover its tariff cost with the production cost. But as a SME, it will be tough to enter the Chinese market due to lack of resources and investments (Krugman, Obstfeld and Melitz, 2014). So, finally we can say if the UK SME shares their resource with the local firm or firms, there will be chances to sustain in the Chinese market. Otherwise it is not favorable to the UK SME to enter the market.

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