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Feihe Dairy Investing In Canada Case Solution
The issue that is faced by Feihe Dairy Company, a Chinese milk brand, is that it is considering to enter into Canada. However, Feihe Dairy was unsure about the entry strategy. Its other competitors in China did not consider investing in Canada but in other countries like New Zealand and Australia, which is another reason why Fiehe Dairy should make an informed decision towards its strategy of internationalization. The urgent issue is the formulation of entry strategy into Canada considering the favorable relations between the two countries- Canada and China, and the interest of the Canadian Government to attract direct investment from China.
Following questions are answered in this case study solution
Issue faced by the Feihe Dairy
Analysis of causes and effects
Opportunities and limitations
International Expansion Alternatives
Decision Criteria and Selected Alternative
Case Analysis for Feihe Dairy Investing In Canada
2. Analysis of causes and effects
China's milk formula market had been damaged after a milk scandal, where the adulterated milk formula killed six infants and left around 300,000 infants seriously sick (Chan, Griffiths, & Chan, 2008). Since this incident, customers in China lost confidence in domestic processors. China's market conditions improved in a few years, but customers now demanded imported milk formula for the health and safety of their children. Chinese customers' lack of trust on domestic milk formula processors necessitated the need for Feihi Dairy to consider international expansion.
Furthermore, some factors made imported goods less expensive as compared to domestically produced goods. Production costs of domestically produced milk products were higher than imported ones due to limitation of agriculture land and cattle resources in China. Moreover, Chinese consumers' habits were being affected by the e-commerce boom, where the purchase of imported goods and cross-border procurement became common. Also, due to trust in foreign brands, local producers had registered their brands internationally, and were producing locally, which made the market complicated (Qiao, Guo, & Klein, 2010). All this resulted in domestic milk formula being expensive than an imported one and led to the import percentage of dairy products increasing from 5.2 percent in 2008 to 13.3% in 2010 and 27.7% in 2014. This became another reason that necessitated international expansion of Feihi to another country so that Feihi Dairy could expand its sales as shown in Exhibit 2.
3. Opportunities and limitations
Due to recent events, Feihi Dairy got many opportunities for business growth and expansion both locally and internationally. Firstly, the one-child policy was relaxed, which increased demand for milk formula and other dairy products. In China, retail sales value increased from CNY 63.7 billion in 2012 to CNY 84.4 billion in 2016, which was evidence of the demand increase resulting from relaxation of policy. Secondly, many infants in China were lactose intolerant, which left them an option of goat milk products (Zhang, Yun, Sun, Menghe, & Zhang, 2008). Parents of such infants were ready to pay a premium price for goat milk products, which meant that Feihi Dairy had an opportunity of developing a new product. Thirdly, the Chinese government introduced a new regulation that made it mandatory for domestic milk formula processors to list their ingredients and get them registered from the government (Veil & Yang, 2012). This policy would potentially remove small players from the market as shown in Exhibit 3, and leave only the large and famous brands. The new policy worked in Feihi Dairy’s favor and it resulted in decreased competition for the Company.
Moreover, it faced opportunities in foreign countries too. The key milestone for expansion in Canada was the meeting of Chinese and Canadian prime ministers. They met and announced that Canada and China would encourage foreign direct investments in both countries, and gave positive vibes to the businesses located in each of the countries. Further, Ontario had 82% of Canada’s dairy business, which was the place where Feihi was planning to set up. The limitations for Feihi were the same as discussed above, that prices of domestic products were higher than imported ones, and customer confidence in domestic milk products had fallen after the incident of adulterated milk formula.
4. International Expansion Alternatives
The first option for Feihi was to stay and expand within China. With the recent developments in the political and regulatory environment of China, Feihi had potential opportunities to make money and develop its brands further. Feihi could introduce a high-end goat milk formula and dairy products that would target parents of lactose-intolerant infants. As goat milk was a feasible option for such infants (and perhaps the only option), parents were willing to pay higher prices for these products. Feihi could develop a goat milk product that would target this market segment and would sell at a premium price as well and add the goat milk product to its high revenue-generating high end products as highlighted in Exhibit 1 (Sun, Wei, Su, Zou, & Wang, 2018). Further, the change in regulation was likely to result in a decrease in competition, which would increase Feihi's market share and its additional customer base. The Chinese government also decreased the prices for inputs / raw materials and promised to provide support to domestic producers, which would help domestic players and give them an edge over foreign competitors (Zhou, Tian, W.M., & Zhou, 2002). This made foreign businesses angry but was a plus point for Feihi.
The second alternative for Feihi was to expand to Canada. The recent meeting of government officials had provided an opportunity for expansion, as both governments were encouraging foreign direct investment in the countries. Further, the business would be set up in Ontario, where approximately 80% of Canada’s dairy products were being manufactured (Kissinger, 2012). No Chinese firm had expanded to Canada, and Feihi would be the first one. Within this alternative, Feihi had three options for expansion.
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