Risk of New Entry by Potential Competitors Essay
If buyers have any specific preferences for products of any companies in their consumption of pork, then potential pork producers are deterred from entering the industry. This will enhance profits of incumbent companies already in the pork production industry, such as People’s Food. China is a country where the general concept of brand awareness is relatively low11. This could mean that consumers will be indifferent between the brands of pork available on the market, thus restricting the ability of companies like People’s Food to charge a premium for their products. Further, there are low switching costs for consumers when they can switch to consuming other brands of pork if they find that the prices of a particular brand of pork are too high.
But this does not mean that People’s Food is not going to do well in such an industry. China is a fast developing economy and the increasing standards of living in China is a factor that will contribute to the rising level of brand awareness for consumption products. The low level of brand penetration in the industry means that domestic consumers have no or few pre-occupation with any well-established brands12.
This spells an opportunity for People’s Food to cater
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Further, the pork production industry is a capital-intensive industry where companies need huge amounts of capital for the acquisition of plants and equipment. However, China’s opening up of its markets upon entry into WTO has led to inefficient state-owned companies in the pork production industry being taken over by private companies like People’s Food16. By taking over state-owned meat processing facilities with long-term operational licenses17, People’s Food is thus able to increase production without building expensive plants, nor is there a need to expensively acquire the required licenses, thus giving People’s Food an absolute cost advantages over its competitors, potential or not.
The production facilities of the company in Linyi were also initially leased from the local government18, thus minimizing the company’s capital commitment and risks. In other words, People’s Food is able to grow in a traditionally capital-intensive industry without massive spending of capital. Besides, People’s Food has its own unique yet extensive network of reaching out to its suppliers and customers. This can again provide People’s Food with absolute cost advantages over other companies, as such exclusive dealer and distributor systems are necessary to help penetrate the vast size of the China market.
For example, there were plans for the company to set up a total of 300 pork retail outlets by the end of 2001 from the then current 20 retail shops to further penetrate the market19. Such integration of distribution with production facilities can enable the company to reap economies of scale and improve efficiency as compared to its existing an potential competitors. Also, the trend of deflation in China as mentioned in the country analysis above means the costs of live pigs are lower for People’s Food and the low and stable interest rates in the economy help People’s Food to lower the costs of any borrowings, thus benefiting the company20.
Although there will be a decrease of government regulations in protecting existing companies in the pork production industry from increased foreign competition upon China’s entry into WTO, it will probably take some time for any new entrants to build up a distribution network similar to that of People’s Food to be successful in penetrating China’s market. In fact, while there exists no written regulation to prevent foreign firms from entering distribution of meat products, China’s bureaucratic maze in the banking system and political institutions will lead to difficulties of new entrants establishing a foothold in the industry21. However, People’s Food is a company that has been operating in China for some time and has established good networking relationships with the local market or the government22, thus having an advantage of operating with less difficulties in the China market than any new entrants. The opening up of China’s markets also increases export opportunities for People’s Food, as it would now be able to sell its processed pork products to overseas markets as well.
The entry of China into WTO and recent pork diseases incidents also underscores the trend towards more government regulations in another sense, i.e. the need to meet the increasing hygiene standards in meat processing and preparation. For example, in June 2001, China’s Ministry of Health ordered a nationwide inspection of all meat production and marketing sites after reported cases of the production of unsafe meat products23. Such regulations will serve a purpose of enhancing consumer preferences for higher quality meat products that are processed under more hygienic standards. This is a favorable trend for People’s Food because the many state-owned enterprises existing in the industry previously will be too inefficient to readjust themselves to better cater to the consumers’ needs.
People’s Food, being a well-established brand, will be able to capitalize on its strengths in efficient production and processing and its emphasis on high quality meat, thus being well-positioned to take advantage of such increasing trends for quality and hygiene to benefit its bottom-line. As an example of People’s Food’s high quality standards, it received ISO9002 certification in June 200124. The company is also making the necessary preparations for its plants to be certified for ISO 14000 and compliance with the Hazard Analysis and Critical Control Point (HACCP) system of food safety25. People’s Food has also moved into new higher value-added products such as fresh/chilled pork and low temperature meat (LTMP) products, which are more hygienically prepared. It is believed that the above moves will appeal to consumers’ needs for high quality value-added meat products.
Thus, the industry structure with regards to the risk of entry by potential competitors may mean low barriers-to-entry because of the lack of brand penetration in the market and low switching costs for consumers. This can constitute a threat for existing companies in the industry as the costs of entry for new companies are low, and such entry can erode profits for existing firms. However, such a viewpoint probably applies more to the inefficient state-owned companies. People’s Food is a company that has well-established production facilities, distribution network and a strong proprietary brand, so it is actually well-poised to take advantage of the changing trends in the China market such as increasing brand awareness and need for higher quality products to reap benefits for its bottom-line. Hence, even if the pork production industry structure permits easy entry by potential competitors, it is unlikely that the growth prospects of People’s Food will be easily damaged by these potential entrants in the near future.
The pork production industry in China is a highly fragmented one, with minimal product differentiation. According to China Food Publisher, there are more than 2000 meat-processing companies in China with about 200 large to medium-sized companies. Even established meat processing companies account for less than 15% of total meat supply for consumption in China26. Usually, a fragmented industry structure will mean that existing companies in the industry are subjected to intense price competition as one company lowers prices in order to appeal to customers, with the price reduction only to be followed by another company.
Such an industry is detrimental to the bottom-line of existing companies because it narrows their profit margins. However, fragmented as the pork production industry in China may be, competition is weak, for the incumbent companies consist mainly of small-scale family run enterprises and state-owned abattoirs27. The former lack resources to fully capitalize on any cost advantages, economies of scale or distribution network to reach out to the end-consumers while the latter suffer from inefficiencies. As a result, such an industry provides good opportunities for People’s Food’s growth prospects, as its established resources and network are strengths it can capitalize to place itself in a more profitable position than any existing companies in the industry.
Despite having a market share of only 0.6%, due to fragmented nature of the industry as mentioned above, People’s Food is the largest industrial producer of fresh/chilled and processed pork products for domestic consumption in China. In addition, demand conditions look favorable for the future. Firstly, China’s pork market is the largest in the world, accounting for approximately 50% of the global28 consumption and production, according to the U.S. Department of Agriculture, Foreign Agricultural Service29. The sheer size of the China market means enormous growth opportunities for companies in the pork production industry, even though there are many players in the fragmented industry.
Secondly, pork is the most popular choice of meat consumed, comprising an average of 68% of all meat consumed in the past 5 years. Again, this contributes to profitable prospects for existing firms in the industry. China’s per capita consumption of pork was over 30kg in 2000, one of the highest in the world with the exception of some European countries. The long term compounded per capita growth in pork consumption is also the highest at 4.5% (1992-2000). Specifically, per capita pork consumption in China is expected to increase between 2% to 7% annually in the next ten years30. Even if the lower end of the estimate is assumed, it will still take about another decade for China to achieve a maturation level of about 42kg per capita. Statistics do show that domestic consumption of other meats such as chicken, beef, mutton etc. is expected to grow at a faster rate compared to the consumption of pork in the longer term but majority of sources show that pork and pork-related products will continue to be the most popular meat consumed in China31.
To put things in a simple perspective, food is an essential item, and pork, being the meat most favored by the Chinese consumers, is a product that will never become obsolete. People’s Food’s earnings are growing and yet it only occupies less than 1% market share in the world’s most massive pork market. In addition, China, being a fast-developing economy, will see trends of growing affluence among the consumers in its major cities, which for example, can be manifested in consumer’s increasing demand for refrigerators. This will lead to a higher demand among consumers for higher value-added pork products, which are prepared in more hygienic ways, such as frozen pork products, and this is one of the areas that People’s Food is moving into. The demand for fresh/chilled and low temperature meat products is therefore favorable for People’s Food.
Although structural changes due to hygiene, sanitation, storage and distribution limitations are forcing the smaller companies into consolidation32, it does not mean a consolidated industry will erode market share from People’s Food. This is because most of the companies that are being consolidated are the inefficient state-owned enterprises and People’s Food is doing its fair share of taking over these companies and restructuring them, so that they would be better equipped in their production or distribution processes, thus adding value and increasing market share for People’s Food. Also, the need for well-established facilities to be able to penetrate successfully into the China market in the industry suggests that the exit barriers for the pork production industry are high. This may deter any companies from entering the industry due to doubts of ability to generate enough cash to cover their original investments in plant and equipment, hence creating more opportunities for People’s Food.
Therefore, the fragmented industry, with weak competition, and favorable demand conditions, present good opportunities for People’s Food to gain a stronger foothold in the pork production industry in China. This contributes to People’s Food’s good growth prospects in the future.