Entering Chinas Tea Market

Author Waheed Faiz (280477)

Introduction......................................................3 Purpose and research question.......................3 Delimitation......................................................4 Key words definition........................................4 Tea market in China........................................4 Typhoo Tea Ltd................................................5 Considering the entry mode............................6
WFOE...........................................................................................................................................7 Joint Venture................................................................................................................................8

Conclusion.........................................................8 References.........................................................9
Books............................................................................................................................................9 Articles.........................................................................................................................................9 Websites.......................................................................................................................................9

Introduction
Tea has a special status in most of the Asian countries and among them China is the biggest consumer of tea. Tea is mentioned and described as Chinas national drink. Drinking tea is still an important social ritual among Chinese people. Most of them who have visited China would approve the fact that it is a part of the Chinese culture. When meeting with Chinese counterpart in a friendly or business environment it is common that the meeting begins with drinking tea together. While the drinking custom of tea in China has been there for a long time, the preferences for the kind of tea are changing nowadays. In the urban China consumer preference for instant tea is increasing, especially among young consumers. From a young consumers point of view, the convenience factor of the packaging format is more of a deciding factor than the taste of the product itself. Liptons1 convenient packaging format has increased consumption occasions, for example on-thego consumption for commuters, thus stimulating the desire for repeat purchase.2

Purpose and research question

In this paper I have chosen to focus on the Chinese tea market because it is an area where the choice of entry mode and IPR protection is of vital importance. Further more it has a cultural aspect too. It is interesting to investigate the opportunities and possibilities as well as obstacles and difficulties a European tea producer will have to consider when entering the Chinese tea market. It will be done by considering an average SME based in UK, having a considerable market share in UK and interested in entering the growing Chinese market for instant tea. Exactly the following questions will be answered: Which kind of entry mode is most suitable for the considered firm to enter the Chinese tea market? When answering the above mentioned question it cannot be avoided to touch the IPR (intellectual Property Rights). Therefore the following question will also be answered with relation to the first question: How to make sure that the firms IPR are protected for the chosen entry mode?

1 2

Lipton is a product of Unilever Group which is the market leader in China when referring to the market of instant tea. Euromonitor, Unilever Corporate strategy in the Chinese instant tea market

It must be pointed out that these two questions are interrelated, i.e. by answering one you have to consider which impact it will have on the other. Therefore, I will at the end of the paper answer jointly to both questions.

Delimitation
To advise a firm considering entering the Chinese market it is as much important to determine an exit strategy as entry and stay strategies. This will be a complete business plan which needs a thorough and careful analysis and that is beyond the scope of this paper. Due to the extent of the paper I had to define some limitation. Therefore, I will concentrate my efforts only on the entry strategy which considers entry mode and the protection of IPR in China. Furthermore, due to the scope and limitations of this paper, it is not possible to cooperate with a firm in the real world of business. Therefore I have created a case study. The chosen firm meets all criteria that a firm considering entering Chinese tea market must meet. Typhoo tea Ltd is a UK based international firm bought by an Indian. The firm is facing a saturated market in the UK and is expanding its market presence in India.3 However in this paper, I am going to pretend that Typhoo is considering entering the tea market in China.

Key words definition

Intellectual property rights (IPR) the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time4. Instant tea Instant tea is a form of tea that is derived from brewed tea. Its dried granulated form can be made into a beverage with the addition of cold or hot water. Instant tea is typically lower in antioxidants than traditional tea and comes in a variety of flavours which is packaged in tea bag format.

Tea market in China

Innovation in packaging and tea formats are helping to drive interest in tea, and especially driving a new modern appeal based on convenience, for consumers unconcerned with the traditions and
3 4

http://www.indiavision.com/news/article/business/87200/ 13-11-2010 http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm

culture of tea preparation.5 This is also the case in China, with one difference that this trend applies only to urban areas where the hectic western style life is becoming more common for ordinary Chinese. As a major tea producer country in the world China is also one of the major consumers in the world. While the traditional way of drinking tea is still dominating, the shift in tea-drinking behaviour towards the increasing use of tea bags and soluble instant tea is attracting more and more producers to this segment. Instant tea, a relative newcomer in the category, registered the fastest total volume growth of over 9% in 2009 in China.6 The market share of the instant tea is compared to Chinese brands the European brands, Unilever can be mentioned here, have a privilege of being preferred by Chinese young consumers living in the urban areas. This trend gives many western country tea producers incentives to enter the enormous Chinese tea market. Especially, the success of the Unilever group as the supreme market leader in this segment, with brands like Lipton and Jinghua tea, is encouraging other western firms to consider the opportunities. One of these firms is Typhoo, which has a couple of famous tea brands in the Europe and Asia and wants to promote these brands in the Chinese growing market for instant tea.
category overview of tea market in China 2008

instant tea 28% fruit/herbal tea 2%

other tea 14% black tea 3%

green tea 53%

Source: corporate strategy in the Chinese instant team market, Euromonitor International 2009

Typhoo Tea Ltd

Typhoo has a long and rich heritage, stretching back to 1903 when Birmingham grocer John Sumner developed and sold a blend of tea in his shop. It has since grown to an international firm

5 6

Global Trends in Tea: Identifying Growth Opportunities (July 2010) www.Euromonitor.com Tea China: Country Sector Briefing (June 2010) p. 2 www.Euromonitor.com

with more than 300 employees and revenue of 75 million Euros in 2010. It has a market share of 6 % in the UK tea market being fifth largest firm.

Considering the entry mode

There may be many opportunities in China but it is also a very tough task to enter it and become a success. Business in China is not done as usual. China needs to be studied much closer both politically and culturally in order to not to fail. There are some general procedures that a firm must follow in every country or when entering a market, before deciding what entry mode to use. This is done by acquiring an up to date market and consumer research. One should be careful in analysing this research when it comes to China. The research must be conducted by a reliable international agency with a good reputation because the result obtained by national market research agencies could be biased. In China, unlike western countries, the respondents are tending to give politically safer response when answering to national market and consumer research agencies. In the case of Typhoo we are beyond this stage. The market and consumer research referring to the tea market in China is already conducted and analysed by Euromonitor International.7 The result obtained confirms that there is an opportunity for the Typhoo in the growing instant tea market of China and that the Chinese consumers prefer imported brands. In the Catalogue for the Guidance of Foreign Investment Industries (coming into force as of December 2007) the serial development and production of tea is included in the list.8 The dilemma Typhoo faces now is how to enter the market. They must choose between wholly foreign owned enterprise (WFOE) or joint-venture (JV). In the following table a short list of generally pros and cons of these two are mentioned: Joint Venture vs. WFOE pros and cons. Joint Ventures
Advantages Allowed in more sectors. i.e. insurance, telecoms transport, education, construction, etc. The Chinese partner may have : Useful vital connections Market share Distribution network The Chinese partner may be able to assist in organising loans.

WFOEs
Establishment procedure is quick. Sole management. Sole board control. Better protection of intellectual property rights. Easier to liquidate.

7 8

http://www.euromonitor.com/contact.aspx 15-11-2010 http://www.wfoe.org/doc/Catalogue_for_the_Guidance_of_Foreign_Investment_Industries.pdf downloaded 25-112010

Able to share investment risk with the Chinese partner. Shared (good case) or split (bad case) Have to build up market share by management. itself. Difficulty in finding a suitable May not be legally permitted for partner. certain sectors. Danger to intellectual property. May lack the contact of Chinese Difficult liquidation. partners. Source: China, The Art of Law: Chronicling Deals, Disasters, Greed, Stupidity and Occasional Success in the New China (2007), by Mark E. Schaub Disadvantages

In the Typhoos case the pros and cons mentioned in the table above must be weighed focusing on the IPR protection and the logistics. On the one hand, Typhoo must protect its brand form being copied, and on the other hand, it must find an effective distribution channel for its brands in order to promote them. In the following I will try to look more detailed at the two possibilities to find out which one is more suitable for Typhoo.

WFOE
WFOE has gained the status of preferred investment vehicle used by foreign investors over the past ten years. In 2005, the minimum capitalization required to establish a WFOE was reduced from 500.000 RMB to 30.000 RMB. This is not an issue for Typhoo but an example that shows China is willing to open its markets to FDI in all its forms. Typhoo can easily establish its WFOE in China, especially when the serial development and production of tea is on the list of encouraged investment areas.9 Furthermore, Typhoo could enjoy incentives provided by local government authorities in order to establish its WFOE. It will enable Typhoo to implement its strategies easier while not concerned about sharing its production & product development know-how to any part. At the same time WFOE gives Typhoo a greater control and protection of IPR. However, establishing a WFOE is a long and time consuming bureaucratic process in China. Beginning with applying and obtaining approval from the local municipality to recruiting employees could be a daunting task for the Typhoo. One other important matter is the branding of its products. To build a brand for a convenience product like tea, it is essential to have an effective distribution network in order for products to be widely available for the target market.

Refer to footnote 8

Joint Venture
The Chinese government have always encouraged foreign investors to use this form of investment. In fact, there are still sectors where limits are placed on foreign ownership levels or only this form for investment is available. JVs have also witnessed numerous failures when compared to other forms of FDI and at some point it was declining. However in the last 20 years, the loosening restrictions on JVs by Chinese authorities (China: the art of law, p. 39), the great progress in law enforcement and not least the general accustomization of Chinese partners to JVs has raised interest of foreign investors once again. These are good news for Typhoo. It should be mentioned that there are two types of JVs common in China, EJV (equity joint-venture) and CJV (cooperative joint-venture). In the case of Typhoo it is more advantageous to use the first possibility. EJVs are the second most used entry mode for foreign investors and it is also preferred by the Chinese authorities and businesses. By establishing EJV Typhoo could exploit the market knowledge, preferential market treatment, distribution network and guanxi of the Chinese partner. Furthermore Typhoo could enjoy lower taxes levied by Chinese government to JVs, which in return could be used in brand building process. The most serious problem Typhoo could face choosing EJV is the protection of its IPR. But this problem can be prevented when taking below mentioned into consideration at the time of signing a contract (China: Art of Law, p. 44): negotiating the actual transaction in great detail sending its best people to manage and support the JV being closely involved in the daily operation after establishment actively building up a good working relationship with Chinese partner.

Furthermore it is very important to have a detailed latter of content. It must at least contain the business scope, corporate control, foreign exchange, production scale, source of technology, suppliers and markets that will be served.

Conclusion
In this paper I was intended to answer the following question: Which kind of entry mode is most suitable for the considered firm to enter the Chinese tea market? and subquestion How to make sure that the firms IPR are protected for the chosen entry mode? To start with, it is a very complicated issue which has not a definite answer. Decisions made by firms and what they take into consideration, are based on many factors that are different from one

firm to another, one county to another and one situation to another. But there are some general rules or paths that all firms must follow standing in the same situation as Typhoo. Through my investigation I have come with the following conclusion. Typhoo must establish an EJV with its Chinese partner in order to enjoy incentives given by Chinese authorities. It must take as much time as needed in order to find a credible partner with a good distribution network. It could be done by acquiring information from banks which have lent to the chosen Chinese partner. This is the only reliable source of information for a given company in china. The other strong factor which points to EJV is the possibility of acquiring the whole firm in the future if all goes well. The IPR problem which is of major importance could be dealt with when signing the contract. The letter of intent must be as detailed as possible. In other words, every infringement of IPR must be mentioned in the contract in order to avoid it. If those precautions are taken in the contract Typhoo can be sure on the enforcement of law. Chinese authorities are seeking greater enforcement of law, especially in the urban areas.

References
Books
1. China, The Art of Law: Chronicling Deals, Disasters, Greed, Stupidity and Occasional Success in the New China (2007), by Mark E. Schaub 2. Looking for Law in China (2006), by Stanley Lubman

Articles
1. Corporate strategy in the Chinese instant tea market (2009), (Euromonitor international) 2. Global trends in tea: identifying growth opportunities (2010), (Euromonitor Int.) 3. Tea-UK: country sector briefing (2010), (Euromonitor Int.)

Websites
1 http://www.portal.euromonitor.com.www.baser.dk/Portal/radGeographyTree.aspx 2 http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm 3 http://www.indiavision.com/news/article/business/87200/ http://www.euromonitor.com/contact.aspx http://www.wfoe.org/doc/Catalogue_for_the_Guidance_of_Foreign_Investment_Industries.pdf