Exporting Similac Formula From USA To China

Introduction

Similac formula is a product in the infant food manufacturing industry with content specifications geared towards improving the lives of young children. Abbott Nutrition being one of the major producers and marketers of Similac based formulas, produces one of the most common iron fortified Similac formula that is geared towards helping older babies of between 9-24 months bridge the Nutritional gap that comes with weaning. (Abbot, 2009, p.9)

Existing literature over the years has shown that a number of Similac formulas produced in the United States have an optimum level of nutritional content that is needed by babies, for instance the formulas contain over twenty five important vitamins and minerals that are prime to eye and brain development as well as calcium absorption, in babies. Based on the success of this product in the USA, there is need to  venture into more promising markets like China where the industry of milk based products is not very much developed. (Abbot, 2009, p.9)

Reasons for the export of Similac formula to China from the USA

As a general fact the world population has been projected to be on the increase culminating to an increased market for infant formulas. This increase in populations has developed demand for the product globally. Most of the growth in terms of population has been experienced in Asia with specific reference to China where 16 million babies are born each year and has been projected to grow at the rate of 20% translating to a whopping $10.22 billion market for infant formulas in 2008. (Shangai star, 2005, p.1)

In sharp contrast the Western European countries and the USA Markets are basically saturated with the product, and an increase in population does not necessarily expand the market significantly. This state of affair basically explains the need for exporting the Infant formula product to China, in order to exploit new markets that have got good growth potentials and less competition.

Why China needs Similac formula

Due to the emergent cases of repacked and counterfeit Infant formulas in the Chinese market, more Chinese are now moving into purchasing more premium bands that they can trust its quality like Similac milk based formula that has been in place for many years and succeeded in the US market. Further research shows that this trend of purchasing high end foreign brands of infant formulas resulted to a sales increase of 16% in the year 2004, 18% in 2005 before dropping to 15% in 2006 and rising again to 17% in 2007.Infact the total sales growth per annum of all the infant formula market is estimated to be between 25% to 28%. (Hiller, 2009, p.1)

 Basing on this positive trend, China as a country basically provides a good market potential for export of Similac formula given that the market cherishes foreign infant food brands especially from the USA. Equally as the Chinese economy expands and grows in different facets, more and more people are now capable of living a better life than before due to the improved personal income, this facilitates the desire/crave for a better form of nutrition that may not be available locally in china basing on the fact that the country has a poor dairy sector, hence the need to import Similac formula that is more nutritious. (Abbot, 2009, p.4)

It’s also important to note that most parents-mothers in china have got a poor breastfeeding culture. This is more vehement in Chinas urban centers like Guangzhou where the mothers especially those that are in professional careers have got very little time to continue breast feeding their babies through into the weaning period and thus an effective infant formula like Similac would be more appropriate. (Hiller, 2009, p.1)

Industry Analysis

The Infant food manufacturing industry in china is basically composed of many players in the market and in order to get a clear understanding of the market forces I will adopt the Michael Porter’s model to analyze the Infant food manufacturing Industry micro environment in China. The five forces basically include the so called Horizontal competition forces: Threat of competitors; threat of substitute goods in the market as well as threat of new firms that are eying the market. On the other hand the Vertical competition forces include the buyer’s power to influence the companies offering as well as the suppliers bargaining power. (Porter, 1979, p.5)

Threat of competitors:

The infant food manufacturing industry in china is made up of many players but there are a few companies that controls a major share of the market, namely Yili industries, Wanda Shan and San Lu that literary holds approximately 27% of the market. The other 40% basically held by multinationals like Nestle, Mead Johnson, Wyeth as well as INC and other smaller local companies that offer cheaper products largely for the rural china where they make much of their sales. Since the recall of the tainted formula in china the demand in the urban market is now tilting towards foreign brands like Similac, that they can trust their quality since the Dairy sector in China is widely uncontrolled. (Shangai star, 2005, p.1)

Threat of substitutes:

In my opinion Cheaper Substitute products that can be used in place of the milk based formulas do exist but this may not affect Similac market share since the product would be targeting the premium infant formula market.

Threat of new entrants:

Due to the projected market growth of 20% to 25%, the threat of new players entering the industry is actually unavoidable especially for foreign multinationals that are out to exploit the market due to the inability of the local industry to deliver on quality. In fact, existing multinationals like the International Nutrition Company (INC) of Denmark are gearing to up their market presence in the middle and premium infant formula market in china. (Shangai star, 2005, p.1)

Buyer power:

The ability of the buyers to put the companies in this industry under pressure in terms of product pricing and product quality is considerably high. Now than before, more and more customers-Parents are now scrutinizing the contents of the infant formulas before consumption by their babies. In the rural areas consumers are equally price sensitive as opposed to the urban areas and this can be taken care of by geographical pricing. (Shangai star, 2005, p.1)

Supplier power:

The bargaining power of the suppliers would be more intense for multinationals that import their milk from their mother countries like Mead Johnson that produces the Ross Similac, imports its milk from the USA. For local outsourcing of materials (suppliers) it would be less intensive as the supply out does the demand. (Shangai star, 2005, p.1)

Reference

Abbott (2009) Abbott annual Report, Illinois USA, [Retrieved on 5^th April 2009] from

http://www.abbott.com/static/content/microsite/annual_report/2008/support_files/ABT_AR_08_onlinefull.pdf

Hiller, A (2009) Emerging markets Drive Growth in Infant Formula Market, Reuters. p.1

Porter, M.E (1979) “How competitive forces shape strategy”, Harvard Business

Review, p.5

Shangai star (2005) Infant formula market expands. [Retrieved on 5^th April 2009] from

http://app1.chinadaily.com.cn/star/2005/0203/b312-2.html