Analysis On International Competitiveness Of China's Dairy Industry By Diamond Model

Since the beginning of the reform and opening-up in 1978, China's dairy industry has developed very quickly. As the economic development and resident's living standards improvement, the demand for dairy products in China is expected to further increase. Based on the development experience of advanced countries and the trend of China's dairy industry, a fundamental conclusion has been got that is the dairy industry will very possibly become one of the pillar industries in the crucial period when China is going through the strategic restructuring of its agricultural sector. For dairy development not only can improve the consumption structure of Chinese residents, but also have an significant influence to increase the income of dairy farmers, so it is necessary for us to analyze development degree of our dairy industry, then find out strengths and weaknesses to help it go to abroad.At the first chapter of this paper, research background and findings by theory analysis is briefly introduced. Chapter two is the full introduction of the status quo of the dairy development both in China and world. Since reform and opening-up, China, from one that was short of milk once, grew into a big dairy country and the total output of raw milk has been raised. During the thirty-year period from 1978 to 2007, the national cow milk output rose from 0.971 to 36.33 million tons. But for China's large population, although its absolute amount of milk production is large, it still was in low level of per capita milk production.In 2006, for instance, per capita production was only 25 kilograms,1/2 of the Asia,1/4 of the world, and just 1/12 of the developed countries. For another aspects, due to its late development and weak industrial infrastructure, China's dairy processing industry has a long way to go in measuring up to international standards in production level, product varieties, and quality. For example, China has a very limited category on processed dairy products. Separate from fluid milk,80% of China's processed dairy products are milk powder. Other types of processed dairy products with high added value, like cheese and butter, are only produced in small quantities due to limitations in technology and demand. By the mid-2000s, the number of China's dairy processing firms had grown to approximately 1600 due to the China dairy's favorable environment and policy, and low barriers to enter. In 2005,90 to 95 percent of the 1600 dairy processing firms operating in China were small-and-medium sized companies, and among them only 9 companies were large companies. The data shows that the concentration of China's dairy processing firms is relatively low. On one hand, this low industrial concentration will result in the productivity of the entire industry low; on the other hand, because of limited technology, equipment, and resources, few of these small enterprises have an effective system on quality control and management. As for consumption,in recent years, along with the growth of farmer's income, the total volume of China's dairy consumption has been climbed up steadily both in rural and urban areas. The per capita dairy consumption volume of urban residents rose from 9.19 kilograms to 22.19 kilograms in 2004; the annual average growth was 19.3%. The per capita expenditure on dairy consumption of residents rose from 11.9 dollar in 1999 to 23.4 dollars in 2004; the annual average growth was 14.5%. Despite the fact that the per capita consumption steadily grows with the whole dairy consumption, China still is the lowest one on per capita milk consumption in the world, averaging just 24.79 kilograms in 2005, far behind the world's, developed countries'and even Asia countries'average level, while the differences with these regions are 100 kilograms, more than 200 kilograms and 40 kilograms respectively. In addition, owning to different income level and diet habit, there is a big difference in consumption of dairy products between urban and rural consumers in China. Urban is the main market for dairy consumption. The per capita consumption of urban residents was nearly 6 kilograms in 1992, and increased to 18 kilograms by 2006. While the data of rural consumers only increased from 1 kilogram to 3 kilograms over the same period. Furthermore, the gap in per capita dairy consumption between urban and rural households seems to be constantly widening. As for international trade of China's dairy industry, it has a rapid growth since 1990, but dairy is not the main trade products in Chinese agricultural. The value of dairy products trade in the whole agricultural products makes up only 1% from 1998 to 2007. Such as China's dairy trade in 2007, the value of import and export was 942.63 million U.S. dollars, accounting for only 1.18%. Another obvious feature is that dairy imports have been far more than exports from 1992 to 2007, while China is a dairy net importing country and the trade deficit of dairy products was enlarged year by year. In addition to this, China's major trading partners in dairy products are located in some major countries, which means that trade concentration is high.For the status quo of dairy industry in the world, dairy production in the world has entered into a steady growth period, while most dairy production produced in developed countries increased rapidly. In 2008, raw milk produced by developed countries accounts for almost 53%, more than the other areas, and among of them, 25 member states of EU together account for 32%, while North American account for 21%. Compared with these areas, the output of developing country such as Asia is less, while the same situation with China is that the trade of dairy products accounts for a very small proportion of total production in the world. Apart from Australia and New Zealand, the developed country is not only the main producers of dairy, but also the important dairy consumption country. Among the major milk producing countries, EU,Australia and New Zealand are the largest exporters, while in contrast, Asia, the middle-East, South America are major dairy importers. In last decades, international dairy trade has been highly distorted because of the various intervention and protection. The objective of these is to guarantee a reasonable level of income for domestic milk farmers, avoid oversupply, maximize exports, but most importantly, prevent the negative effects of international market fluctuations. Realized these, some countries took some measures such as price support, direct payment, input subsidy, supply management, import quota and tariff, import licensing, export subsidies, sanitary and phytosanitary inspection, and quarantine measures. But as the appeal for the globalization and trade liberalization surging upward, each country will weaken its protection, the dairy trade environment will be getting looser.After a full introduction of the dairy industry development situation in China and the world, chapter three will analyze the international competitiveness of China by Porter's Diamond Model. According to this comprehensive analysis, strengths and weaknesses will be found to improve the industry development, and finally to catch up the international standards. Conclusion by analysis has been shown as follow.The first is factor endowments about China's dairy industry. China has absolutely advantages with the large area of agricultural land and grassland, numerous cows, and low cost of labour force, which making our dairy industry has competitive advantage. But limited with the less advanced technology, the efficiency and the quality of dairy productions are still behind the developed country.The second is demand conditions for China's dairy industry. The largest population and the rapid development of economy made the domestic demand steadily rise year by year, which also drive the dairy high speed development. Therefore, despite the total figures stay on top, the important point is that the per capital consumption still lower than the world average and the dairy products are mostly low-tech, which should be further improved.The third is related and supporting industries. None of related and supporting industries of China's dairy have competitive advantage expect for forage, and these undeveloped industries add the cost of dairy production and cut down the profit.The forth is dairy industrial organization. China's dairy industry structure is not reasonable. Due to the scattering brand, low industrial concentration, excessive number of small-scale enterprises, the market performance is below the normal level, which has a negative effect on the competition and further development.The fifth is about chance to develop China industry. In recent years, development situation changing, from developed countries to developing, creates a good opportunity for China.The sixth is the role of government. China's government has paid more attention on dairy industry over the last three decades. Central government has provided the incentives for farmers to increase agricultural and food production, and made favorable policy to support industry development. Moreover local government investments in every level of the dairy product supply chain, which have been critical to the expansion of milk production and the improved quality and variety of processed dairy products. And all these measures truly have substantial increased in the competitiveness of China's dairy industry in the world.Therefore, though there is still a wide gap between traditional advanced dairy countries and China in dairy elements quality, production efficiency, milk quality, organizational structure and industrialization level, with the good development momentum, the huge potential consumer demand, good opportunity for development and government's strong support, growth rate of China's dairy industry will not drop in the near future. But if international competitiveness of China's dairy industry wanting to be further improved, government should play a more active role to increase the infrastructure input, and the dairy companies should learn the advanced experience and technology, changing dairy development model to promote the industry leap from quantity to quality.Based on the analysis, in chapter four, some useful advices will be given also from six factors of Diamond as follow. Firstly, increasing investment on elements of dairy industry, and improving the capacity of resource integration; secondly, stimulating the potential demand. Thirdly, improving the construction of dairy industrial chain, and promoting the parallel developing of primary industries and related and supporting industries. Fourthly, restructuring and merging dairy companies, raising the proportion of large and medium enterprises, supporting the large enterprises development. Fifthly, grasping the opportunity to develop, and introducing foreign advanced experience and technologies. Sixthly, continuing to play an active role with government, attentions paid to the interests of farmers demand, and protecting the basis of the dairy industry. And the last chapter is the conclusion to the whole paper. To sum up, though there is a great achievement gained by China's dairy industry, but a long way for China to catch up with the international.