Tetra Pak: Sustainable Initiatives in China
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Jia, et. al. Teaching Case: Tetra Pak: Sustainable Initiatives in China Tetra Pak: Sustainable Initiatives in China Fu Jia, Ph.D., University of Exeter Business School, Streatham Court, Rennes Drive Exeter, UK, EX4 4PU, [email protected], Tel: +44 (0) 1392722125 Zhaohui Wu, Ph.D., College of Business, Oregon State University, Corvallis OR 97331-2603, [email protected], Tel: +(1) 541.908.0720 Prof. Jonathan Gosling, University of Exeter Business School, Streatham Court Rennes Drive, Exeter, UK, EX4 4PU [email protected], Tel: +44 (0) 1392722568 ABSTRACT This case enables students to explore and evaluate the ways in which Multinational Companies (MNCs) implement their sustainability initiatives in China. The case begins with an overview of the Chinese dairy industry, followed by an introduction to Tetra Pak (TP) Global, Tetra Pak China and competition that Tetra Pak faces in China. Then the case introduces the service-based sustainability strategy at Tetra Pak China, with detailed explanation of three initiatives: FSC certification, pasture land management and creating a recycling system. The objective of the case is to show how pressures to improve environmental sustainability are driving new approaches to supply chain management. It provides students with the following frameworks to analyze the dissemination of sustainability initiatives in the supply chain: stakeholder theory, industrial ecology, recycling, and servitization. In addition, this case offers insights into the emerging market of China. The complexity of TP’s initiatives and the innovative resulting supply chain practices (TP is involved in three supply chains: packaging, dairy and recycling) provides rich information for students to analyze. Keywords: Sustainability, operations management, supply chain management, packaging industry INTRODUCTION In July 2008, Hudson Lee, President of Tetra Pak China, was looking over a cliff. The company had invested €65million to expand its packaging plant on Hohhot, the capital city of Inner Mongolia, China, on top of its initial 2004 investment of €50m. The expansion plan was based on the inexorable rise in milk consumption in China – growing from 16 to 23 million tons between 2005 and 2012. This was a market with huge opportunities for growth, and powerful domestic brands to reach out to China’s 1.4 billion consumers. The plant initially designed to produce 20 billion cartons a year now had the capacity to process 60 billion cartons. Then the bottom fell out of the market. Powdered milk, contaminated with melamine, poisoned hundreds of children, 8 died and many others were critically ill. Confidence in 675435-0 Jia, et. al. Teaching Case: Tetra Pak: Sustainable Initiatives in China the domestic brands Yili and Mengnui crashed. These were Tetra Pak China’s main customers, the bedrock of the investment plan. And Tetra Pak’s aseptic packaging clearly hadn’t prevented this contamination. As millions of customers switched to imported brands, it looked as if Tetra Pak’s business was evaporating along with the industry it supplied. There could be no overnight solution: Hudson Lee and his executive team were forced to look beyond their own part in a supply chain, to see what they could do to repair a broken food-production system. Hudson sat in his office in Beijing, looking at a table of display of Tetra Pak milk cartons printed in various languages. Behind these cartons are some photos of early TP managers’ visits to China back in the 1970s. TP had a long history in China and was there ever since the country stepped out of a disastrous cultural revolution and began to open up to western countries. TP’s success had always been building on its positive engagement with the economy and stakeholders in the host country. Hudson began to reconsider the overall business models of TP in China and posed a question: how could TP China handle the milk safety issue and what role should the company play in the milk scandals of its customers? BACKGROUND Since its entry into China in 1972, Tetra Pak has been an influential player in the emerging Chinese dairy industry. Its business operations have expanded successfully together with the consumption of dairy products in China in the last two decades. The company leverages its packaging technology to shape the entire supply chains of various dairy producers and the dairy industry development in China. The company claims that social and environmental sustainability are integral to its business strategy. The objective of this case is to illustrate this integration of Tetra Pak’s sustainability strategy, its implementation in supply chain management, and challenges the company faces in a maturing industry as local competitors become ever more sophisticated in business operations, and in the face of health risks such as that faced in 2008. You may also want to consider how this strategy relates to wider sustainability issues. Students are invited to discuss and address four questions as they analyze the case. 1. How does Tetra Pak incorporate its sustainability strategy into its business operations? 2. How does the company shape the dairy supply chain of its customers? 3. How does Tetra Pak work with its supply chain members and the external stakeholders? 4. What challenges does Tetra Pak face now? What should Tetra Pak do to confront these challenges? CHINESE DAIRY INDUSTRY OVERVIEW Tetra Pak is located in two supply chains: packaging and dairy. The dairy producers are the company’s biggest customers, with products including milk, yogurt, condensed milk, dried milk (milk powder), and icecream, using processes such as chilling, pasterization, and 675435-1 Jia, et. al. Teaching Case: Tetra Pak: Sustainable Initiatives in China homogenization. Typical by-products include buttermilk, whey, and their derivatives. Consumer milk includes Ultra Heat Treatment (UHT)1 milk and pasteurized milk. Tetra Pak concentrates on UHT milk in the China market. Currently, UHT milk accounts for 70% of the consumer milk market, while pasteurized milk has 30% market share in the consumer milk market. Pasteurized milk products have distribution restrictions (e.g. short shelf life and refrigeration requirements), so are produced and sold mostly by city dairies or at most regional players. Yili and Mengniu are the two biggest UHT milk producers; the key pasteurized milk producers include Bright, New Hope, Sanyuan and Yantang. Mengniu, Yili, Bright and Sanyuan are major milk processors nationwide. Mengniu is listed on the Stock Exchange of Hong Kong Ltd., and the other 3 major milk processors are listed in Shanghai Stock Exchange. These four companies accounts for 40-50% of the national market share. Exhibit 1 shows the sales volume for these 4 major milk processors.There are also about 1000 milk processors at the regional and city levels, which only supply to the areas around their plants. According to the Food and Agricultural Organization (FAO), over the past decade, China’s dairy industry has grown at 20% annually, becoming the 4th largest dairy producer globally with a small but growing export industry. This growth has been fueled by a voracious domestic market which has seen urban consumption of milk jump from just short of 5 kilos per capita per annum in 1990 to over 18 kilos in 2006, with only around 3% of demand being met by imports. Touted by many as China success strories, local brands such as Mengniu, Sanyuan, Yili and Bright quickly became industry leaders, contributing to the over RMB 30 billion spent by the dairy industry in advertising in 2008. The rapid growth of dairy products consumption and the dairy industry in China wouldn’t have been possible without the UHT technology introduced by Tetra Pak. Before that, regional players (e.g. the 6th Plant of Shanghai Dairy Products) flourished in the 1980s through to 1990s. The introduction of UHT technology in the late 1990s enabled the emergence of national players (e.g. Yili, Mengniu, Bright and Sanyuan) and changed the landscape of the liquid dairy market completely. Growth of city dairy producers was limited by the rapid expansion of the large national brands, and as consumers turned from powder to liquid products, many small powder players were squeezed out of the industry. After a decade of strong growth, however, the future of China’s dairy industry looked uncertain as the melamine2 milk scandal hit newsstands in September 2008. Dairy sales 1 UHT milk is the sterilization of milk by heating it for an extremely short period, around 1–2 seconds, at a temperature exceeding 135°C (275°F), which is the temperature required to kill spores in milk, giving it a long shelf life of around 9 months. Pasteurization is a process of heating a food, usually liquid, to a specific temperature for a predefined length of time and then immediately cooling it. This process slows spoilage due to microbial growth in the food. Unlike sterilization, pasteurization is not intended to kill all micro-organisms in the food. Instead, it aims to reduce the number of viable pathogens so they are unlikely to cause disease. It has a refrigerated shelf life of two to three weeks. 2 The scandal, also known as the ammonium hydrogen dimmer crisis, caused widespread distrust of all domestic dairy brands including Mengniu and Yili. Facing rapidly growing demand for dairy products in 675435-2 Jia, et. al. Teaching Case: Tetra Pak: Sustainable Initiatives in China fell across China, most notably within the milk powder category at the center of the scare. Although the drop in sales indicated that the response from the majority of shoppers was to stop purchasing dairy altogether, those that did continue to shop within the category tended to favour foreign brands. The industry now faces a number of challenges, such as loose links between the dairy companies and farms, undeveloped market mechanisms and an ineffective management system for raw milk quality.