“Let China sleep, for when she wakes she will shake the world”
- Napoleon Bonaparte
Author:
First Supervisor:
Second Supervisor:
Company Supervisors:
Mr. T. Streng Dr. J.A. Neuijen Dr. B.J.W. Pennink Mr. C.D. Schut Mr. K.J. Leeuw University of Groningen
Faculty of Economics and Business
Msc. International Business and Management
Obtaining Optimum Access to the Chinese Market
“A feasibility study of the local production of KNZ salt licks in China”
This study is performed on behalf of Akzo Nobel Salt Specialties (ANSS) and is part of the master thesis program of the Master International Business and Management of the faculty of Economics and Business of the University of Groningen (the Netherlands). The report discusses the feasibility of the local production of KNZ® salt licks in China.
Goal of the research is to advice the management of ANSS whether local production of KNZ salt licks in China is feasible, in order to conclude whether and how to obtain (optimum) access to the Chinese market. The feasibility study is performed by analyzing the market feasibility, legal and cultural constraints, and the technical, organizational and financial feasibility of the project. The final advice comprehends the extent to which the Chinese market can be accessed, whether local production is feasible and how optimum access to the Chinese market should be realized.
This study could not have been performed without the dedication and support of a number of people whom I would like to thank here. First of all, my supervisors at ANSS: Mr. Cees Schut and Mr. Klaas Leeuw. Without their continuous support and trust, this study could not have been performed. I would also like to thank the rest of the organization of ANSS for all advices, resources, support and time that was spent to assist me in preparing and executing this study. Finally, I would like to thank the supervising professors, Dr. Bram Neuijen and Dr. Bartjan Pennink, not only for providing me with critical notes about my progress and final report, but also for creating such a pleasant working climate.
Everybody; thanks a lot for this great opportunity and unbelievable experience that I will remember for the rest of my live.
Tom Streng
Amsterdam, August 2008
FOREWORD
This report discusses the feasibility of the local production of KNZ salt licks in China, in order to conclude whether and how to obtain optimum access to the Chinese market. To come to valid conclusions, analyses were performed regarding the market, legal, cultural, technical, organizational and financial feasibility of the local production of KNZ salt licks are performed.
The market analysis was the starting point of this study. It is concluded that especially the Chinese dairy segment offers a lot of potential for KNZ salt licks, which is driven by changing consumer preferences, a major expansion of China’s dairy herd combined with a geographical concentration of this herd, the need for productivity increases, increased profitability of the sector and strong political support.
It is further concluded that the traditional dairy provinces (i.e. Inner Mongolia and Heilongjiang) as well as the Shanghai region, should not be accessed. Instead, main focus should be on the upcoming and quickly developing dairy provinces of the past few years: Beijing, Hebei, Shandong and Henan.
Important to emphasize is that even in these upcoming regions a lot of effort is needed to develop the market: China can be typified as a push market in which ANSS needs to distinguish itself in its market and marketing approach and its distribution chain.
This means concretely that ANSS should show continuous commitment to the development of the Chinese market, to support and control the distributor and to educate the farmer. Final conclusions regarding the market feasibility of the local production of KNZ salt licks, are that a total of 128,600 heads of cattle can currently be accessed. This accumulates into 2,300 tons salt licks at an end consumer price of 5 per 5kg salt lick.
With respect to the legal feasibility of the local production of KNZ salt licks, it is concluded that the (inter provincial) salt legislation poses the most serious risk to the success of the project. However, this risk cannot be judged properly without entering the market. A trial and error strategy is suggested that uncovers which provinces may or may not be targeted.
Concerning the cultural feasibility analysis it is concluded that a local partner and employee are vital to the success of KNZ salt licks on the Chinese market. Due to China’s business culture a local partner that is needed that has the right guanxi in order to overcome any regulatory restrictions that ANSS may face due to the salt restriction. The final conclusion regarding the cultural feasibility is that negotiated deals are not as decisive as Western firms are used to. As trustworthy relationships are often more important than a negotiated contract, ANSS needs a local employee to control and push the local partner and to build up a sustainable and trustworthy relationship.
The analysis of the technological feasibility was aimed at determining the physical resources (inputs), along with the costs needed to process, package and distribute the product. It is first concluded that salt supplier access is the primary determinant of the technological feasibility. However, as China is the largest salt producer in the world with a segmented salt industry, conclusions are that supplier access should not pose a problem though and that market access should be driving the localization decision. Especially, since the primary KNZ target provinces are major salt producing regions.
In the end it is advised that the optimum KNZ salt lick production location is in Hebei province, west of Beijing, as it allows ANSS to take a central position in the four target provinces as well as guaranteeing proximity to the upcoming region Inner Mongolia and being in the number two salt producing province.
The organizational feasibility analysis discussed the optimum distribution chain when exporting KNZ salt licks to China by looking at the price levels, the costs and the sales per chain. The most important conclusion is that in order to succeed on the Chinese market, ANSS needs to adopt an organizational setup that ensures a local approach as both the farmer and the distributor need to be pushed into respectively buying and selling salt licks. The market will not develop itself and failure will be the result if the market is entered with half efforts.
To enter the market the feed additive suppliers are concluded to be the best suited party to distribute the KNZ salt licks. One of these feed additive suppliers is the company Eastern Bell, which is
MANAGEMENT SUMMARY
recommended as a suitable distributor. However, as ANSS should not rely on just one distributor, it is also advised to distribute the salt licks through Siddair as of their complementary target customers and target regions. By using these two distributors, ANSS can not only effectively cover the dairy industry in the target areas Hebei, Shandong, Henan and Beijing, but it may also realize additional business in the northern provinces of Inner Mongolia and Heilongjiang as well as in the beef segment. Taking the size and the market reach of the two proposed distributors into account, it is concluded that the first year between 300 and 600 tons can be realized through this distribution chain. The second year, it is estimated that this figure should grow to between 1,000 and 1,800 tons and the third year to between 3,500 and 4,500 tons. The CIF selling price is estimated to be at least 300 per ton.
To sum up, the most optimum organizational setup starts with a “China employee” at ANSS, who can guarantee the commitment and support necessary to develop the Chinese market. The next step in the distribution chain is a local Chinese employee. Two (or in a later phase maybe more) wholesalers will subsequently physically distribute the salt licks to the farmers.
In the end any project must generate money to be feasible. The financial feasibility analysis as such concluded whether local production of KNZ salt licks in China is feasible taking market estimations, prices, costs and excess production capacity into account.
Exporting, in stead of local production, turned out to be the most optimum scenario to access the Chinese market during the first three years, to a large extent as of the excess capacity that exists in Hengelo. It is concluded that exporting will generate a negative contribution margin of approximately 60,000 in the first year, but that this figure accumulates to well over 125,000 and 550,000 positive in years 2 and 3.
The business case drastically changes in the subsequent three years. As of the need to invest in extra KNZ production capacity the scenarios of expanding production in Hengelo and setting up local production in China are compared. It is concluded that expanding production in Hengelo is feasible, while setting up local production in China is not. Besides the substantial difference in the initial investment sum, the difference can be explained by the fact that the variable production costs are substantial higher in China and that variable transportation costs do not weigh heavily on the financial feasibility.
To sum up, taking market estimations, prices, costs and excess capacity into account, it can be concluded that the local production of KNZ salt licks in China is not financially feasible. The proposed business case as such is to export the first 3,500 tons during the first three years from Hengelo and to expand production capacity at Hengelo at the beginning of the fourth year.
FOREWORD ... 01
MANAGEMENT SUMMARY... 02
1 INTRODUCTION TO THE RESEARCH ... 06
1.1 OBTAINING OPTIMUM ACCESS TO THE CHINESE MARKET... 06
1.2 COMPANY PROFILE OF AKZO NOBEL SALT SPECIALTIES... 06
1.2.1 AKZONOBEL... 06
1.2.2 AKZONOBEL’S SALT BUSINESS: BASE AND FUNCTIONAL CHEMICALS... 07
1.2.3 AKZONOBEL SALT SPECIALTIES... 07
1.3 THE KNZ SALT LICK BUSINESS... 08
1.3.1 THE USAGE AND ADDED VALUE OF THE KNZ SALT LICK... 08
1.3.2 KNZ SALES AND MARKETS... 09
1.3.3 STAKEHOLDER ANALYSIS... 10
1.4 RESEARCH BACKGROUND... 10
1.4.1 INTERNAL DRIVERS... 11
1.4.2 EXTERNAL DRIVERS... 11
1.4.3 MANAGEMENT PROBLEM... 11
1.4.4 CONCLUDING REMARKS... 11
2 RESEARCH DESIGN ... 12
2.1 PROBLEM STATEMENT... 12
2.1.1 RESEARCH OBJECTIVE, QUESTION AND SUB QUESTIONS... 12
2.1.2 DEFINITIONS... 13
2.1.3 RESEARCH CONDITIONS... 13
2.2 RESEARCH METHODOLOGY... 13
2.2.1 RESEARCH APPROACH... 13
2.2.2 SCOPE OF THE RESEARCH... 14
2.2.3 RESEARCH METHODS... 15
2.2.4 QUALITY OF THE RESEARCH... 17
2.3 LITERATURE REVIEW... 18
2.3.1 DRIVERS OF EXPORTING AND FOREIGN INVESTMENT... 18
2.3.2 CENTRALIZATION, DECENTRALIZATION AND LOCALIZATION... 19
2.3.3 ESTIMATING MARKET POTENTIAL... 21
2.3.4 CONCLUSIONS... 21
2.4 RESEARCH MODEL... 21
3 MARKET FEASIBILITY ... 23
3.1 KNZ MARKET POTENTIAL... 23
3.2 MARKET TRENDS... 24
3.2.1 CHANGING CONSUMER PREFERENCES... 24
3.2.2 HERD EXPANSION... 24
3.2.3 GEOGRAPHICAL CONCENTRATION... 24
3.2.4 PRODUCTIVITY INCREASES... 24
3.2.5 PROFITABILITY OF THE SECTOR... 25
3.2.6 POLITICAL SUPPORT... 26
3.3 REGIONAL MARKET ANALYSIS... 26
3.3.1 BEIJING... 26
3.3.2 INNER MONGOLIA... 27
3.3.3 HEILONGJIANG... 28
3.3.4 SHANDONG... 29
3.3.5 HENAN... 30
3.3.6 SHANGHAI... 31
3.4 THE CHINESE FARMER... 32
3.5 CHINA'S SALT LICK INDUSTRY... 33
3.6 CONCLUSIONS...33 TABLE OF CONTENTS
4 LEGAL FEASIBILITY ... 35
4.1 POLITICAL POLICIES... 35
4.1.1 CHINA'S FOREIGN TRADE POLICIES: EXPORT OF SALT LICKS... 35
4.1.2 CHINA'S FOREIGN INVESTMENT POLICIES: LOCAL PRODUCTION OF SALT LICKS... 35
4.1.3 LOCALIZATION POLICIES: ECONOMIC DEVELOPMENT ZONES... 36
4.2 SALT RESTRICTION... 36
4.3 PRODUCT PROTECTION: COPYRIGHT LEGISLATION... 37
4.4 CONCLUSIONS... 38
5 CULTURAL FEASIBILITY... 39
5.1 CULTURAL INFLUENCES ... 39
5.2 THE CHINESE BUSINESS CULTURE... 39
5.2.1 GUANXI... 39
5.2.2 NEGOTIATIONS... 40
5.3 CONCLUSIONS... 40
6 TECHNOLOGICAL FEASIBILITY... 42
6.1 SALT LICK PRODUCTION ... 42
6.2 SALT AND MINERAL SUPPLY... 42
6.2.1 CHINA'S SALT INDUSTRY... 43
6.2.2 CHINA'S MINERAL INDUSTRY... 44
6.3 COSTS INVOLVED WITH LOCAL PRODUCTION... 45
6.4 AKZO NOBEL PRODUCTION SITES... 45
6.5 CONCLUSIONS... 46
7 ORGANIZATIONAL FEASIBILITY... 48
7.1 THE KNZ DISTRIBUTION CHAIN... 48
7.2 POTENTIAL DISTRIBUTORS... 48
7.2.1 FEED PRODUCERS... 49
7.2.2 DAIRY PROCESSORS... 49
7.2.3 SEMEN SUPPLIERS... 49
7.2.4 FEED ADDITIVE SUPPLIERS... 49
7.2.5 INFORMATION SUPPLIERS... 50
7.3 NEED FOR A LOCAL PARTNER... 50
7.3.1 EASTERN BELL... 50
7.3.2 SIDDAIR... 51
7.4 ORGANIZATIONAL SETUP... 51
7.5 CONCLUSIONS... 52
8 FINANCIAL FEASIBILITY... 54
8.1 THE INVESTMENT SCENARIOS IN DETAIL... 54
8.1.1 THE EXPORT SCENARIO... 54
8.1.2 THE (LOCAL) PRODUCTION SCENARIOS... 56
8.2 BRUTAL REALITIES... 60
8.2.1 SALT LICK SALES... 60
8.2.2 SALT SUPPLY AND RESTRICTION... 61
8.2.3 COMPETITIVE MOVES... 61
8.2.4 INVESTMENT AND COST ESTIMATIONS... 61
8.3 CONCLUSIONS: THE BUSINESS CASE... 62
CONCLUSIONS AND RECOMMENDATIONS ... 63
DISCUSSION & LIMITATIONS ... 67
REFERENCES... 69
APPENDICES ... 74
This chapter provides an introduction to the research enabling the reader to get to know the business principal of the research, the product concerned and the necessity of this research. First however, some introduction to the research is given.
1.1 Obtaining Optimum Access to the Chinese Market
AkzoNobel Salt Specialties (ANSS) is part of the multinational AkzoNobel (§1.2.1) and is responsible for the upgrading, packing and trading of salt end products (§1.2.2). One of these salt end products is the KNZ salt lick, a salt and mineral block that is used as a feed additive for primarily cattle (§1.3). For a variety of reasons, the Chinese market appears to have a lot of potential for the KNZ salt lick (chapter 3) and the management of ANSS wishes to access this market in the most optimum manner.
The reason that the research subsequently focuses on the feasibility of the local production of KNZ salt licks is twofold. First because it is expected that the market can be better accessed through local production and second as there is not much production capacity left at the production facility where the KNZ salt licks are currently made (§1.4). It is argued that China might be the optimum place to set up a new production location of KNZ salt licks because of its market and growth potential and resource abundance.
Goal of the research is to advice the management of ANSS whether local production of KNZ salt licks in China is feasible, in order to conclude whether and how to obtain (optimum) access to the Chinese market. The feasibility study is performed by analyzing the market feasibility, legal and cultural constraints, and the technical, organizational and financial feasibility of the project. The final advice comprehends the extent to which the Chinese market can be accessed, whether local production is feasible and how optimum access to the Chinese market should be realized.
Now the research is introduced in broad terms, the company profile of ANSS as well as the business conditions and circumstances currently faced by them are discussed. The chapter also elaborates on the KNZ salt lick by discussing its usage and added value, its markets and the stakeholders involved.
The final paragraph discusses the internal and external drivers of this research in more detail, which accumulate into the management problem. At the end of this chapter, this should lead to a clear understanding of the context and practical relevance of this research.
1.2 Company Profile of Akzo Nobel Salt Specialties 1.2.1 AkzoNobel
ANSS is part of the multinational company AkzoNobel, a Global Fortune 500 company that employs around 60,000 people in more than 80 countries. AkzoNobel’s main business areas are decorative paints, performance coatings and specialty chemicals which are further divided into multiple Business Units (BU’s). The BU’s are subsequently divided into strategic business units (sBU’s). The following figure demonstrates the organizational overview of Akzo Nobel (July 2008).
Figure1 – Organizational Overview AkzoNobel
Source: AkzoNobel Intranet, July 2008
• Pulp & Paper Chemicals
• Base Chemicals sBu Bulk Salt
• Functional Chemicals sBU Salt Specialties
• Surfactants
• Polymer Chemicals Supervisory Board Board of Management
Corporate Staff Departments Business area
Specialty Chemicals Business area
Decorative Paints Business area Performance Coatings
1. INTRODUCTION TO THE RESEARCH
The business areas decorative paints and performance coatings are not relevant for this research and will therefore be left aside. In order to correctly understand the current function and position of ANSS within AkzoNobel and Functional Chemicals, there are a couple of issues and dependencies that need to be clarified. This will be done by discussing the history and the current situation of ANSS and its position in the salt value chain.
1.2.2 AkzoNobel’s Salt Business: Base and Functional Chemicals
AkzoNobel is one of the world’s major chemical concerns with an annual salt production of approximately 5 million tons, for all kinds of applications. As shown in figure 1, the specialty chemicals business area consists of five BU’s of which Base Chemicals and Functional Chemicals are relevant for this study, as AkzoNobel’s salt activities are concentrated in these two BU’s:
- The mining as well as the storage and processing of the (bulk) salt (figure 2) are concentrated in sBU Bulk Salt which is part of BU Base Chemicals (figure 1);
- The upgrading, packing and trading of salt end products like Jozo®, Nezo®, KNZ®, Sanal®, and Broxo® is concentrated in sBU ANSS of BU Functional Chemicals.
To fully understand the business context of ANSS one needs to take a closer look at its position in the chemical industry value chain (figure 2). The value chain of salt starts with the production of the salt which is subsequently stored as base chemicals; then (most often) still a low value bulk product used to supply other businesses or industries with the required raw materials. The bulk salt is subsequently often supplied to players active in the next steps of the value chain such as the chloride-alkali or soda ash industry. Worth emphasizing is that it is BU Base Chemicals (sBU Bulk Salt) that is responsible for the production and selling of bulk salt. Besides supplying the aforementioned chemical industries, Base Chemicals is currently also ANSS’ supplier of bulk salt at all of its current production facilities.
Figure 2 – The Chemical Industry Value Chain
Source: AkzoNobel Intranet, 2008
Within BU Functional Chemicals, there are two sBU’s that produce chemical intermediates (Ethylene Amines and Sulphur Products) and four sBU’s are involved with the next step in the value chain (Cellulosic Specialties, Chelates, Elotex, and Polysulfides). As there are no relevant interdependencies between ANSS and the other sBU’s, these will not be discussed in more detail.
Important to emphasize is that only ANSS is active in the “end products” part of the value chain, through the upgrading, packing and trading of their specialty salt end products.
1.2.3 AkzoNobel Salt Specialties
ANSS is headquartered in Amersfoort (the Netherlands), employs about 300 FTE and has upgrading and packing facilities in Hengelo (the Netherlands) and packing facilities in Mariager (Denmark) and Dordrecht (the Netherlands). The KNZ salt licks are centrally produced in Hengelo and are, as indicated above, linked with the sBU Bulk Salt of Base Chemicals.
Partly due to the history of supplementing iodine to salt from the 1920’s to combat iodine deficiency, AkzoNobel Salt has built up a good reputation in the field. As a consequence, the perception of the AkzoNobel Salt brands has always been valued as high quality. In 1926, AkzoNobel Salt adopted the vacuum evaporation technique to obtain the salt, which enabled ANSS to use vacuum salt as input for their end products – the highest quality and purest salt possible. This is an important distinction from many other (locally produced) salt licks that are produced with lesser quality salt. In the 1930’s when the Twente-Rhine canal was built the plant was moved to Hengelo, in order to take advantage of the waterway connections. The discovery of salt in the northern part of the Netherlands and the facilities for loading sea-going ships there, led to the construction of a salt-producing plant in Delfzijl (the Netherlands) in 1959. Around 1963 salt production was started in Mariager to serve the Scandinavian markets.
Base
Chemicals Chemical
Intermediates Performance / Functional Chemicals Mining
Products
& Crude Oil
End Products
sBU Salt Specialties (BU Functional Chemicals) sBU Bulk Salt
(BU Base Chemicals)
The previously discussed structural distinction between bulk salt and salt specialties has only occurred recently as all salt activities of AkzoNobel used to be organized in one BU “Salt” until 2005. However, as a result of AkzoNobel’s strategic refocusing in 2005, the organization of the former BU Salt was redefined. As of April 1 2005, the production and sales of “Bulk Salt” was integrated as a separate sBU into AkzoNobel’s BU Base Chemicals. ANSS was separated and moved eventually, after an abandoned divestment attempt, as stand-alone business to the BU Functional Chemicals as per October 2006 (figure 3).
Figure3 – Timeline development of ANSS Start salt
production Introduction
vacuum salt Move to
Hengelo Delfzijl salt
production Denmark salt
production Organized
in BU Salt Division bulk
& specialties sBU functional chemicals
---I---I---I---I---I---I---I---I--- 1918 1926 1930’s 1959 1963 1990’s 2005 2006
Source: AkzoNobel Intranet, 2008
When ANSS returned under the flag of Functional Chemicals, a roadmap to profitability and growth was drawn up: through an organizational restructuring and emphasis on preservation of the margins results should be improved. In its market approach ANSS distinguishes six market segments: Retail, Food, Pharma, Agriculture, Water Treatment and Industrial. With respect to strategy, ANSS continued servicing all current market segments, but aims to target the “high-end” market within the quality sensitive segments Retail, Food and Pharma. In the segments Agriculture (i.e. salt licks), Water Treatment and Industrial, which generally include more commodity type of products, the lowest landed cost is the key driver and therefore rigorous cost control is continuously performed.
1.3 The KNZ Salt Lick Business
This paragraph introduces the specialty salt end product that the research is about: the KNZ salt lick. It discusses the usage and the added value of the (KNZ) salt lick and the different markets that the KNZ salt lick is sold on. The chapter ends with an identification of the relevant stakeholders in the KNZ salt lick business.
1.3.1 The usage and added value of the KNZ salt lick
The KNZ salt lick is a densely compressed block of salt (picture 1), which often also contains trace elements, minerals and vitamins1. It is used as a feed additive for cattle, horses, sheep and game.
Cattle lick the 2, 5, 10 or 25 kg blocks in order to assure that they get the right amount of salt, minerals and trace elements. Salt, minerals and trace elements are indispensable for the health of livestock and game.
Picture 1 – KNZ Salt Licks
Source: AkzoNobel Intranet, 2008
Salt contains two vital elements: sodium and chloride. Sodium is essential for the PH balance in the nervous system, for blood regulation, for stress prevention and for the muscular system. Chloride controls the osmotic pressure of the heart and is also a necessary part of the hydrochloric acid produced by the stomach, which is required to digest most feed. Animals deprived of salt will risk grave danger or resort to unusual behaviour to obtain it. Another advantage of the salt lick is that it is a convenient carrier of minerals and trace elements which serve all sorts of health functions (e.g. with respect to metabolism, blood circulation and reproduction). Salt and mineral supplementation is an important part of a nutritionally balanced diet for animals.
1Vitamins are added to a small minority of the salt lick product assortment and will therefore not be specifically referred to anymore.
There are many ways to supplement salt, minerals and trace elements to livestock. Important to understand is that in most mature livestock markets, most, if not all, of the required amount of salt, minerals and trace elements is supplied through the feed of the animals. Research has proven though, that individual animals have different salt needs (Valk, 2001) and therefore need a complementary feed additive to balance the feed. This is caused by the fact that some animals need 110% of the
“normal” amount supplied through the feed while other animals are satisfied with just 90%. Individual differences in salt intake are caused by a variety of causes like for instance the diet, the lactation period, the fertilisation method, the body weight of the animal and animal psychology.
The ability to cope with these differences in individual salt requirement is the added value of the salt lick or other free choice sources of salt (e.g. salt buckets). Because salt is a self-regulating mechanism (i.e. an animal takes as much as it needs), a free choice salt source gives the animal the possibility to self-balance its salt intake. This gives the advantage that the animal will neither get too few nor too much salt. Too little salt can result in an abnormal appetite for salt, the licking of various objects, a decline in appetite, rapid loss of body weight and in the end, reduction of milk yield. A surplus of salt gives the problem that the animal will drink too much which will increase the amount of urine and ammoniac that the farmer needs to deal with – an environmentally unfriendly and costly process.
To sum up, the added value of a salt lick is that the animal can regulate and fine-tune its own salt intake, which leads to the perfect balance in the nutrition of an animal’s diet. A nutritionally balanced diet subsequently leads to a healthier and more productive animal.
1.3.2 KNZ sales and markets
Within the agricultural segment, ANSS occupies especially strong positions in the Netherlands and France, supplying the main players in the animal feed industry. Over the past few years the salt licks sales have been declining on average with 2% per annum, which however has not resulted in excess production capacity as more specialty products are being produced that have less scale advantages.
The geographical dispersion of the salt lick sales is also important in order to understand the relative importance and growth of the different regions. Table 1 shows the different markets and their share in the total sales of KNZ salt licks.
Table1 - Salt lick sales per region Region Sales (tons)
2007 2006 Change (%)
Gross revenue ( ) (1000’s) 2007 2006
Change (%)
A 4,231 4,585 -8% 1,338 1,410 -5%
B 13,522 13,422 +0,7% 3,056 2,966 +3%
C 4,406 5,044 -12,6% 919 988 -8%
D 489 541 -10% 98 103 -5%
E 6,757 6,266 +8% 1,501 1,402 +7%
F 4,724 5,080 -7% 1,537 1,739 -13%
Total 34,129 34,938 -2.3% 8,449 8,608 -1.8%
Source: Business Warehouse ANSS, 2008
At the moment, ANSS exports salt licks (outside Europe) to Thailand, Japan, Vietnam, South Korea and the Middle East. The total market size is approximately 4,700 tons which is about 14% of total volume. The total gross revenue made on these sales is 1.5 million Euros, which is about 18% of the total gross revenue. Important to notice is that most mature dairy markets as well as the export markets show a decline in the number of salt lick sales2. At the moment, ANSS has not deployed business within any of their segments on the Chinese market.
One important difference is that most of the European markets are saturated and characterised by intense competition while most export and emerging markets are just getting used to the salt lick and do not have much quality competition. These emerging countries are mostly at the beginning of the
2Due to the organizational restructuring export sales have been carried out by one instead of the usual two persons – this has an obvious negative effect on the number of sales.
industry lifecycle of the salt lick and often have a large group of non-using farmers. In general, these farmers are easier to convince to start using the KNZ salt licks as there is no need to win them away from existing quality competition. This offers a lot of potential for growth. However, due to the extra costs incurred (e.g. logistics, travel expenses) export is satisfied with a lower percentage contribution margin than the home markets (see chapter 8).
1.3.3 Stakeholder analysis
This paragraph discusses the different stakeholders that (might) have an interest in the KNZ salt lick business and who (might) influence the feasibility of local production in China. Although disputed in literature (e.g. Jensen, 2002), stakeholder analysis is a justified instrument to assure that no incomplete conclusions will be drawn about the feasibility of a project (Freeman e.a., 2003). After all, local production in China is not necessarily feasible when it solely lives up to the interests of the shareholders, i.e. when it generates profits. By going through a wide variety of reports and websites regarding the Chinese agricultural, salt (lick) and faming industry, as well as by interviewing various experts of ANSS, the following stakeholders were identified whose interests and interdependencies should be evaluated will local production not only be economically feasible but also sustainable:
Figure 4 – Relevant stakeholders
1.4 Research Background
Now the principal of the research and the product concerned have been introduced, it is time to discuss the main reasons that ANSS initiated this study in more detail. These underlying reasons cause a discrepancy between the current and ideal situation, which is referred to as the management problem. A (management) problem is defined as a situation of subjective (managerial) discomfort combined with the (managerial) wish to resolve this discomfort (de Leeuw, 2000). In this case the discomfort is felt by ANSS’ management who does not know whether local production of KNZ salt licks in China is feasible. This paragraph starts by explaining what the internal and external drivers of this discomfort are. It finalizes by showing how these drivers accumulate into management problem. It allows the reader to understand the background and causes of this research as well as its practical relevance.
Akzo Nobel China
(Chinese) Salt Producers
Local Government
Agricultural Universities
Farmer / Branch Association
Dairy, meat and wool processors
Current Personnel (Chinese)
Salt Lick Producers Chinese
Dairy, Beef and Sheep Farmers ANSS
Local production
of KNZ in China
1.4.1 Internal drivers
Internal drivers are related to the performance of a firm and often refer to its strengths and weaknesses or other strategically important aspects of the organization. Performance is often measured in terms of profitability and sales but also in terms of product quality, brand association, relative cost and such (Aaker, 2001). In §1.3.2 the relative importance of KNZ salt licks in terms of profitability and sales were discussed. Noteworthy is the fact that salt lick sales show a downward trend in its mature markets, where the salt lick is at the end of its lifecycle (Leeflang & van Rooy, 2002). Furthermore, ANSS has been on the divestment list and is under pressure to improve its results (§1.2.3). These two issues combined drive ANSS internally to look for profitability and growth in emerging markets. The export and business development department is responsible to build up sustainable businesses in these markets and its strategy is to double the revenue in the emerging markets within three years since 2006.
The second internal driver of this research is the production constraint that is expected to emerge in the near future. Management’s discomfort stems from the fact that there is not much excess capacity left in Hengelo (approximately 3,000 tons) and that production capacity needs to be expanded when current sales targets are met. ANSS’ management argues that it makes most business sense to set up new production capacity in those markets where most growth can be realized. As most growth is expected in China, management wonders whether China is a feasible option to expand the production of KNZ salt licks. This is the second internal reason why this research needs to be conducted.
1.4.2 External drivers
Besides being pushed from the inside, there are also drivers external to the organization that “pull”
ANSS towards local production of KNZ salt licks in China. These external drivers often refer to opportunities, threats and strategic choices stemming from the environment or market (Aaker, 2001).
This is also the case for ANSS. The external driver of this research is the opportunity offered by the Chinese market potential, which will be discussed in chapter 3. The problem is that management does not know whether local production guarantees optimum access to this market.
1.4.3 Management problem
The management problem is the starting point of this research. The internal and external drivers just discussed both lead to the same conclusion: management does not know whether local production of KNZ salt licks in China is feasible. It needs to be emphasized that local production serves two goals:
1) to obtain optimum market access and 2) to deal with the future production constraint. Figure 5 demonstrates how the internal and external drivers (i.e. the sources of managerial discomfort) accumulate into the management problem (i.e. the situation of managerial discomfort) and ends in the managerial wish of obtaining optimum market access and a solution to the production constraint, hereby resolving the managerial discomfort.
Figure 5 – The management problem
1.4.4 Concluding remarks
Chapter 1 introduced the principal of the research, the product concerned and the necessity of the research. Through relevant facts about the current situation and the background of ANSS and the KNZ salt lick a clear understanding of the context and practical relevance of this research is provided. One concluding remark can be that the management problem is concerned with the feasibility of local production, but that the underlying values “optimum market access” and “production constraint” are eminent and need to be resolved through this research, in order to come to useful and valid conclusions. The next chapter will further elaborate on the management problem and the research design that was adopted to ‘solve’ the problem.
Need for prof.
& growth Declining salt
lick sales
China’s market potential Production
constraint
Optimum market access
Solving prod.
Constraint Feasibility of
local prod?
Internal drivers External driver Management problem Management wish
The research design is the basis of any research; it is the plan to be followed to answer the research question and the structure or framework to solve a specific problem. The research design includes the problem statement, the research methodology and it reviews literature that is relevant for this particular study. The research design is the foundation that should ensure valid, reliable and useful conclusions at the end of the study.
2.1 Problem Statement
The problem statement consists of the research objective, main research question and sub questions, which are the building blocks of the final conclusion and form the outline of the report. It is derived from the management problem and research objectives formulated in §1.4. Some important definitions are introduced and the research demarcation shows within which limitations the research has been executed.
2.1.1 Research objective, research question and sub questions
The formulated management problem (§1.3) is translated into the main research objective:
This report can be typified as a feasibility study. There is no ‘one size fits all’ feasibility study as most of the times unique business ideas are the topic of investigation (§2.2.1). In case of this report, the business idea is to set up local production in China in order to overcome the (future) production capacity issue while, most importantly, getting optimum access to the Chinese market.
The research objective can thus be divided into the following deliverables:
- To advice to what extent the Chinese market can be accessed with KNZ salt licks;
- To advice whether local production of KNZ salt licks in China will be feasible;
- To advice how to obtain optimum access to the Chinese market.
To make the research objective operational the main research question is subsequently formulated.
Because of the nature of this research and in consultation with the management of ANSS, it was decided to look at the project’s feasibility from a market, legal, cultural, technical, organizational and financial perspective.
The result is the following main research question:
To answer the main research question the following sub questions have been formulated:
1. Which trends in the market might influence the feasibility of local production of KNZ salt licks?
2. What are the most promising Chinese regions with respect to the market potential of KNZ salt licks and which parts of those markets can be accessed?
3. Which legal and/or cultural issues can influence the feasibility of local production of KNZ salt licks in China?
4. What would be the optimum location for local production of KNZ salt licks in China?
5. What is the optimum distribution chain when exporting (selling) KNZ salt licks to (in) China and what are the price levels, the costs and the sales per chain?
6. Will local production of KNZ salt licks in China be financially feasible taking market estimations, prices, costs and excess production capacity into account?
2. RESEARCH DESIGN
“To advise the management of Akzo Nobel Salt Specialties whether it will be feasible to set up local production of KNZ salt licks in China, in order to conclude whether and how to obtain optimum access to the Chinese market ”
“To what extent is the local production of KNZ salt licks, based on market, legal, cultural, technical, organizational and financial feasibility, the optimum scenario for Akzo Nobel Salt Specialties to access the Chinese market?”
2.1.2 Definitions
KNZ Salt Lick – “Koninklijke Nederlandse Zout” (Royal Dutch Salt) Salt Lick is a salt and mineral block which is used as a feed additive for primarily livestock and is produced by Akzo Nobel Salt Specialties (§1.3).
(Economic) feasibility study – the study performed/an instrument to conclude whether a certain project’s (economic) benefits outweigh its costs.
Optimum market access – the most profitable arrangement for a company’s products, technology, human skills, management or other resources to enter a foreign country.
2.1.3 Research conditions
The demarcation of the research shows which specific limitations this research was subject to. Several requirements that applied to this research are the following:
This study must be delivered within nine months after the beginning of it and obtaining information in China is limited to two months;
There are limited financial resources available;
The field research must be done by myself as ANSS has no presence whatsoever in China;
The study must meet the requirements imposed by the University of Groningen, which means amongst others that it must have scientific depth and that the research is performed according to academic methods and standards.
2.2 Research Methodology
Goal of the study is to conclude whether it is feasible to set up local production in China. Essential to the success of the study is to use a methodology (i.e. a system of methods and principles for doing something) that gives the right guidance and support. This paragraph discusses the research in more depth. It first elaborates on the research approach and continues with the research methods.
Paragraph 2.2.3 then discusses the scope of the research followed by the conceptual design which outlines the structure of the remainder of the report. The final sub paragraph gives some theoretical concepts that guided this study.
2.2.1 Research approach
Before deciding upon the most suitable research approach, it must be understood what kind of research is being performed. As the study produces findings that are useful for ANSS and aims at solving a management problem it can be typified as applied, managerial research. Furthermore, this study is qualitative in its nature. An inductive research approach is used in this study (Gill & Johnson, 2002) as it seeks to find explanations through observations of the empirical world, which is most appropriate for a case study in China. The result of the inductive cycle is the (mini) theory. In this case goal of the research is to develop a theory about local production of KNZ salt licks in China; important to emphasize is that this “theory” just applies to this particular case and does not lead to all conforming and widely applicable theoretical knowledge.
Another determinant of the research approach is the fact is that this project is a feasibility study; i.e. it is the analysis of the viability of an idea. In many cases, as well as in the context of this research, the subject of study is a business idea. In general terms, a business idea is feasible when it will generate adequate cash flows and profits, withstand the risks it will encounter, remain viable in the long-term and meet the goals of the founders. In literature there is no consensus what a feasibility study should exactly consist of or how it should be structured (e.g. Anon, 2008; Hofstrand & Holz-Clause, 2006).
Because a project is only feasible when it lives up to the needs and requirements of the principals or founders, every project is unique in the aspects that determine its feasibility. Therefore, a contingency approach is used that applies useful aspects of the different feasibility schools of thought which are most relevant in the perspective of this research.
Because this study concerns the feasibility of setting up local production in China, it was decided, through mutual agreement between me (the researcher) and the management of ANSS (the ‘business’
principal), that the project was feasible when complying with market, legal, cultural, technical (production), organizational and financial requirements. Within the feasibility study it was decided to take the market as the starting point of the research as no business idea will ever be feasible when it does not generate substantial income (see §2.4). Furthermore, a value chain approach was adopted, hereby focusing on suppliers, farmers, milk processors, competitors and experts (see §2.2.3.2).
2.2.2 Scope of the research
The problem statement defines what is within the scope of a research. However, just as important is to state what is outside the scope. In order to be effective, scientific studies must limit their scope and depth. The goal of the research as well as the conditions under which the research must be executed, determine which scope and depth are required; this is a constant process of mutual consultation between the researcher and the principal(s).
In the end, the goal of this research is twofold: on the one hand it must live up to the expectations and requirements of ANSS, the business principal of the research. On the other hand it must comply with the requirements posed on a master thesis by the University of Groningen, the academic principal of the research. When conjointly defining the required scope and depth of the research, it were the research conditions mentioned in §2.1.3 that are the first determinant. Because of the limited time and financial resources available, the scope of the research cannot be too extensive.
One of the first issues that needed to be resolved regarded the field study phase (§2.2.3.2). There were only 2 months available for data collection so geographical focus was essential. In consultation with management it was decided to focus primarily on the dairy provinces of China (see table 2), as the dairy segment showed the most potential for KNZ salt licks based on a previously performed desk research (Oostendorp & Westerloo, 2006). It was chosen to focus on Beijing (central hub in the region and in the middle of Hebei – see map below), Inner Mongolia, Heilongjiang, Shandong and Shanghai.
Henan was also included because it is one of the fastest growing and upcoming dairy regions.
Table 2 – China’s dairy provinces (2007) Province No. of dairy cattle
(millions)
Relative growth (2007/2006)
A 3.016 22.2% 61%
B 2.245 17.0% 33%
C 2.176 16.0% 24%
D 0.925 6.8% 27%
E 0.512 3.8% 19%
F 0.450 3.3% 50%
G 0.416 3.0% 11%
H 0.330 2.4% 13%
I 0.293 2.2% 34%
J 0.229 1.6% 14%
K 0.161 1.1% 12%
Source: China Dairy Association, 2007
Through narrowing the geographical scope it became possible to execute the field study phase within the time boundaries set. However, even with the limited number of provinces where data would be collected, it would still be difficult to perform in-depth research when the dairy, beef and sheep segment would require full attention. It was therefore decided to focus 90% of the time on the dairy segment and 10% on the beef and sheep segment (horses, game and other animal groups using salt licks are outside the scope of this research). Furthermore, as mentioned in §2.2.1, a market based approach was used in this study so 75% of the focus would be on obtaining a sense of the market feasibility of the local production of KNZ salt licks in China. The other 25%
of the time should be aimed at the legal, cultural, technical, organizational and financial feasibility of the project. It needs to be emphasized that this particular research scope applies to the field study phase, during the other phases of the research (§2.2.3) the focus of the research will equally lie on the other parts of this feasibility study.
Besides narrowing the scope of the number of provinces that were researched, this study will also not include comparisons with other countries. One can imagine that, even though local production of KNZ salt licks is feasible in China, it might be even “more feasible” in other countries. This report deals with
China as a black box (de Leeuw, 2000) which means that opportunity costs related to the possibility of local production in other countries are outside the scope of this research. This implies that the investment scenarios of local production of salt licks in Mariager, Delfzijl (§1.1.2) or any other country are not included in this study. Furthermore, within the current feasibility study any export effects from local production in China to other Southeast Asian countries, is not included as well. In other words, the market feasibility of the local production of KNZ salt licks will be based on the Chinese market only.
With respect to the scope of the research the theoretical concept of internationalisation strategies (e.g.
Buckley & Casson, 1998), needs to be highlighted here. Organizations face the choice between exporting, licensing, joint ventures and wholly owned foreign investment. Because ANSS strongly prefers to keep its knowledge and technology within the company, the only internationalisation strategies that are researched in this study are wholly owned foreign investment and exporting. Joint ventures, licensing or any other type of strategic alliance are outside the scope of this report. To also investigate the feasibility of strategic alliances would not have been possible within the limited timeframe of the research and would diminish the scientific depth obtained by focusing on the other two entry strategies.
2.2.3 Research methods
Research methods give the concrete steps or actions that, in a certain time sequence, need to be fulfilled throughout the research (Jonker & Pennink, 2004). With respect to the time sequence there are three consecutive phases that can be distinguished: the preparation phase, the field study phase and the analysis phase. The three phases are characterized by different methods and techniques of data collection, recording, ordering and analysis.
Using the appropriate research methods often depends on the type of research and the approach followed (§2.2.1). Furthermore, it is also influenced by the context of the research. As this study is characterised by an open research question, more freedom is allowed in applying certain research methods than in case of a closed question. Because of the above and in order to assure the highest level of data quality, different research methods have been used to gather both primary (newly generated) and secondary (existing) data. Because of the qualitative nature of the research, (i.e. the researcher tries to understand reality from the perspective of the persons involved), qualitative research methods and techniques were needed. Generally speaking, this implies that the researcher tries to understand the situation from the inside and tries to fit in naturally with the “researched”
(Jonker & Pennink, 2004).
For this study multi-method validation was used, which means that a combination of multiple qualitative research methods were used, also referred to as triangulation. As of the inductive research approach followed in this study, triangulation has extra value as it allows the researcher to look for new things through multiple ways which (possibly) leads to discrepant, equally valuable findings that are likely to enrich explanations (Gill & Johnson, 2002).
This has resulted in a total of 64 semi-structured interviews, innumerable observations, the attending of 2 seminars, multiple farm visits and many informal discussions with colleagues at ANSS and experts. With respect to secondary data a wide variety of information sources was accessed such as sector reports, statistical databanks, books, agricultural magazines, internet, intranet, scientific articles and numerous publications from branch organizations, Wageningen University, Akzo Nobel, the Dutch and Chinese government, the FAO and newspapers. The following paragraphs will discuss the different methods and techniques that were used throughout the different phases of this research.
2.2.3.1 Preparation phase
Every phase in the research needs to fulfil certain steps or actions before the next phase can be initiated. These phases are to some extent overlapping, but in general one phase needs to be finished before proceeding with the next one; after all, a research plan needs to be finished, before data can be collected in a sound way and subsequently analyzed. One of the main goals of the preparation phase was therefore to assure that the process of data collection in China would run smoothly and, even more important, would lead to the right data.
To ensure that the right data is collected in China, it was foremost important to get familiar with the business, the organization and especially the management problem. To achieve this goal 2 farms
were visited, 1 guided tour through the factory was held and 1 seminar was attended and many informal discussions were held with different colleagues at ANSS. Furthermore, 16 semi-structured interviews were performed. Some face to face with colleagues directly involved with the research (7) as well as with experts from the University of Groningen (2) and some by phone with experts from Wageningen University (1), PUM (4), Meko (1) and the China Dairy Association (1). Besides the fact that these actions made me familiar with the business, the organization and the management problem, it also enabled me to build up a network in China and to plan the first meetings for the field study phase.
One of the other research techniques used in the preparation phase was the review of secondary information sources such as books, agricultural magazines, branch organization and sector reports, scientific articles, newspapers and many internet and intranet articles. This allowed me to understand some sensitizing (theoretical) concepts about the reality that was going to be explored and which was used to guide the data collection during the field study phase. Another research step taken during the preparation phase, which supported and structured the process of data collection was the stakeholder analysis (§1.2.4).
The preparation phase took three months after which a thorough understanding of ANSS and the salt and salt lick business was obtained. Furthermore, through my constant presence in the organization I got a day-by-day better understanding of the nature of the management problem and consequently the nature of my research. This led to the construction of interview guides (appendix 2) and conceptual models (§2.4) which structure and guide the research in the field study phase. Having the first meetings as well as my logistics and such in China planned, I was confident that the field study phase would run smoothly and would deliver the data required for valid, useful and reliable conclusions.
2.2.3.2 Field study phase
On January 3 2008 the 2 months lasting field study phase began with my arrival in Beijing, the capital of China. The goal of the field study phase was to collect primary, qualitative (and a bit secondary) data with emphasis on the market analysis. Reason hereof is that feeling with the market is required in order to get beyond the number of cows as indicator of market potential. Furthermore, the market is the main determinant of the feasibility of both local production and exporting.
In order to get a clear picture of the development and attractiveness of the different target provinces (§2.2.2) a value chain approach was used (§2.2.1). This means that all parties that are active in the dairy value chain were interviewed and/or observed (figure 6). The relevant parties in the value chain were identified during the stakeholder analysis (§1.2.4). The result was that during the field study phase a total of 48 semi-structured interviews were held, which were divided over suppliers (12), farmers (19), dairy processors (4), competitors (2) and experts (11). Experts are seen as information suppliers in the form of knowledge, regulations and such and are persons from either agricultural universities or governmental institutions like animal husbandry bureaus and dairy associations.
Competitors are salt lick producers who sell licks either directly to farms or through other suppliers.
Figure 6 – Dairy Value Chain
Source: Poon, 2007
The concept of the dairy value chain is important to grasp as it already indicates that it is hard to reach the small backyard farms; the dotted lines namely reflect the fact that these farmers in most cases do not have any substantial suppliers. This can determine which region has most market potential (sub question 2) and what the optimum distribution chain looks like (sub question 6).
Feed Milk collection
stations
State-owned farms Large-scale private farms Small backyard
farms Semen
Suppliers
Additives
Dairy processor
Information
Producers Buyers
Besides the 48 interviews there were also many observations that contributed to the process of data collection. By driving through the countryside and observing the surroundings, I was able to get a good impression of the development of the agricultural and livestock sector in a particular region.
Furthermore, due to my physical presence in China I was able to informally discuss my research with many expatriate people who often were residing in China for a long time and could advice me on numerous business and general issues related to local production in China (e.g. when I attended a social get-together of the Bencham in Beijing). The final data that was collected during the field study phase was a variety of secondary information sources that were given to me by the interviewees.
2.2.3.3 Analyzing phase
The final process of this research was the analyzing phase. Through analysis and interpretation of all the data and information obtained in the previous phases, the research questions subsequently needed to be answered. As the collected data is qualitative in nature, qualitative analyzing methods should be applied to prevent any misunderstanding of the data and to come to reliable, valid and objective conclusions. In this respect it was important to categorize the data from the interviews and to detect any deviations, similarities or other patterns in order to come to the best representation of
“reality”. The grounded theory approach as advocated in Jonker and Pennink (2004) has been used to categorize the interviews.
2.2.4 Quality of the research
Because of the applied, managerial nature of this research, the usability of the produced findings is of eminent importance to the quality of the study. The usability of the findings depends on its relevance and its soundness (De Leeuw, 2000). Findings are relevant when they relate to the practical problem situation, are understandable respectively manageable and are timely available. Sound findings are correct, controllable, precise and consistent and the limitations and range of the findings should be included.
This study is practically relevant when it enables the management of ANSS to conclude whether and how it can obtain optimum access to the Chinese market with KNZ salt licks. It does so when it gives detailed insight into the Chinese market, analyzes any legal or cultural constraints and gives the technical and organizational requirements as well as the financial details of the project. With respect to timing it is obviously necessary that management gets the findings before entering the market. The soundness of the findings of this report is to a large extent determined by the reliability and validity of the data which is discussed below. As the study focuses on a unique project in China which naturally involves unique country circumstances, the findings are limited to China and this project alone. Of course, some findings (e.g. with respect to the market analysis) might be used as input for other projects, but ultimately the conclusions of this report apply to China and this single project alone.
As mentioned, two issues are important with respect to data quality: reliability and validity (Baarda &
Goede de, 2001). Reliability means that the results depend as few as possible on coincidence, which is inherently embedded in the situation, the interviewer, the observer, the interviewee and such. In other words, reliable findings are those that are obtained when the data collection process is performed another time (under different circumstances) and still produces the same findings. Validity means measuring what you intent to measure.
Throughout the study, three research methods were used (semi-structured interviews, observations and secondary data analysis), which all have their limitations with respect to validity and reliability.
With respect to semi-structured interviews the most common problem is the inherently subjective nature of interviews which naturally influences the reliability of the findings. To improve reliability interview guides were drawn up (appendix 2), which guided the interviews during the field study phase. This restricted my own bias towards certain answers to some extent, but even with the control questions stated in these interview guides it is impossible to rule out all subjectivity and misconception.
These limitations, which are subject to any interview, are even more present because most of the interviews were done through an interpreter, which results in a double interpretation gap. Both the interpreter and the interviewee can misunderstand the questions, which affects the validity. To overcome this problem, time was spent with each single interpreter before the interviews, to go through the interview guides and to explain what was meant with every question. Furthermore, all interview guides were already translated in Chinese, so if some of the agricultural terms were
