How to Take a Small U.S.

Agricultural Firms Products to China

Prima Tech USA is a small American manufacturer of animal health equipment and applicator technology. This case study seeks to use Prima Tech as an example of how to successfully take a small U.S. agricultural firms products to the Chinese market.

Xiaoping Liu Yao Hu Lucas Blaustein

A Case Study on Prima Tech USA

Page

How to Take a Small U.S. Agricultural Firms Products to China: A Case Study on Prima Tech USA

Xiaoping Liu Yao Hu And Lucas Blaustein

March 22, 2012

Corresponding Author: Lucas Blaustein Department of Agricultural Economics Texas A&M University College Station, TX 77843-2124 832-661-1809 lucasblaustein@gmail.com

Xiaoping Liu, Yao Hu, and Lucas Blaustein are graduate students in the Master of Agribusiness Program at Texas A&M University. This case study has been written under the Guidance of Professor John Siebert for the Environment of Agribusiness Graduate Seminar, with the permission of Prima Tech USA.

Liu, Hu, Blaustein

Page

Abstract Prima Tech USA is a small American manufacturer of animal health equipment and applicator technology. This case study seeks to use Prima Tech as an example of how to successfully take a small U.S. agricultural firms products to the Chinese market.

The objective of this case study is to help interested parties achieve the following learning outcomes: 1) To discuss whether entering the Chinese market is a viable decision; 2) The issue of the legality of products within China; regulations, tariffs, and other laws that restricts foreign operators and act as barriers to entry; 3) The viable methods of business formation within China; 4) The protection of intellectual property (IP), and the steps foreign companies can take in addressing IP theft; and 5) The steps that foreign operators can take to guarantee payment, and insure the delivery of fees owed for goods or services provided.

Through the use of these five learning objectives and Prima Techs example, interested parties should be able to better understand the steps involved in taking a small U.S. agricultural firms products to China.

Key Words: Barriers to Entry, IP Theft

Liu, Hu, Blaustein

Page

How to Take a Small U.S. Agricultural Firms Products to China: A Case Study on Prima Tech USA

It is March of 2013, and 15,000 dead pigs had been found floating in the Huangpu River near Shanghai. What was the culprit of this mass tragedy? Two simple swine diseases, easily cured, but beyond the technological capabilities of the average Chinese farmer. It was this lack of capability that presented an undeniable business opportunity for a small U.S. agricultural firm; it was the desire to help solve this immense problem that originally brought Prima Tech USA to China over four years ago.

In March of 2008, Lisa Rumsfeld was visiting an agricultural conference in California. As Global Sales Manager at Prima Tech USA, she was actively looking for opportunities to expand Prima Techs international footprint. Already, business operations had been successfully launched in Europe, but Prima Tech had their eyes on Asia. So it was through coincidence and shared interest that she was brought into contact with a large Chinese agricultural distributor called Ovotech.

Ovotech Ltd. is a distributor of syringes and applicator technology that services the animal health industry. They are currently Chinas largest distributor of syringe and animal health products, and the only distributor of Prima Tech products in China. Ovotech focuses primarily on the poultry industry. However, their product lines also cover numerous other forms of livestock, including swine, equine, and cattle. In 2008, the government of Shanxi province was inviting bids on syringe technology in an attempt to improve their animal medical industry. Shanxi accepted Ovotechs bid for Prima Tech applicators. Since that initial contract, Ovotech has sought to increase sales of Prima Techs products through online advertisements on related websites and forums, as well as mailing promotional material to relevant users. They have also engaged in a public relations campaign to help educate farmers on the benefits of vaccinators and related technology by inviting interested parties to observe the use of Prima Techs products at Ovotechs Beijing headquarters.

Liu, Hu, Blaustein

Page
Prima Techs revenue from Chinese sales has been increasing in recent years, but remains below Ovotechs expectations.

The History of Prima Tech

Kim Quinn knew pig farming. He grew up in the heartland of American swine, and had grown accustomed to the problems that raisers commonly faced. So it was through ingenuity, sweat-equity, and a desire to get away from the family farm that Kim set out to solve those problems and in November of 1996 founded VAC-PAC, Inc., launching the companys first line of animal health products. In the beginning, VAC-PAC was run out a spare bedroom and sales were conducted from the trunk of Kims car. But within only a year the company had grown, moved out of the house, and into a one room office in Kenansville, North Carolina.

In 2000, the Prima Tech line of vaccinators was introduced and VAC-PAC, Inc. became Prima Tech USA (See Exhibit 1). Prima Tech USA was formed at a time when veterinary medicine was changing dramatically. This new type of injector technology allowed many animals to be inoculated at once, revolutionizing the livestock health industry. Two years after this new technology was introduced, Prima Tech moved its headquarters to a larger distribution warehouse near Kenansville. In 2003, the complete line of Prima Tech vaccinators began to be manufactured in this new facility. To this day, all vaccinators are assembled, tested, and packaged in the Kenansville warehouse.

In August of 2005, a distribution company called KMQ, Inc. and Prima Tech merged, retaining the Prima Tech brand name and expanding the line of available products. This merger allowed Prima Tech to focus on development, manufacturing, and marketing of reliable products for the animal health industry. Since the merger, Prima Tech has gone global, expanding its business abroad into 21 countries and regions. Its international offices are headquartered in Germany and headed by Lisa Rumsfeld.

Liu, Hu, Blaustein

Page
Prima Tech is a small U.S. company, employing fewer than 500 individuals. Their revenue for the year 2012 was approximately 10 million USD. A third of their sales come from exports to foreign markets. In spite of their size, Prima Tech has become a recognized industry leader in the manufacturing and development of animal health products, winning numerous awards from industry organizations for product quality and innovation.

The Chinese Animal Applicator Industry

Animal applicator technology was originally invented to treat livestock through vaccination in the late 19th century; however modern applicator technology was only invented in the last 50 years, finding its way to China within the last two decades.

According to Xiaoqiu Zhang of Ovotech, Ltd., within China purchasers of animal applicator technology are divided into two groups, the vaccine manufacturers who buy [applicators] and deliver [them] with vaccines that are sold to farmers, and [the] farmers themselves. Livestock farmers normally turn to online retailers such as Alibaba.com, HC360.com, and Gongchang.com for known products. For unknown products farmers rely solely on retail stores and establishments in their local communities.

Chinas livestock farmers are found throughout Chinas four main pasturing areas in the Inner Mongolia Plateau, the Qinghai-Tibet Plateau, and the Xinjiang and Ningxia autonomous regions (See Exhibit 2). Chinas livestock industry is immense, and includes the raising of 104,203,000 head of cattle and 474,920,000 swine. However, most Chinese farms are still constrained to small scale agriculture, with Chinas over 300 million farmers raising livestock on an average of an acre and a half of land. Despite the geographical and legal restrictions that bind the Chinese farmer, farmland is continuing to consolidate into the hands of fewer individuals, as the Chinese government puts an emphasis on moving farmers from rural communities to urban areas.

Liu, Hu, Blaustein

Page
As of 2010, there were 82 animal vaccine manufacturers operating in China, scattered across the main animal husbandry provinces of Shandong, Henan, Hebei, Jiangsu, and Sichuan (See Exhibit 3). Production capacity for live vaccines was approximately 140 billion doses and 38 billion milliliters for inactive vaccines. According to Chinas Ministry of Agriculture, animal health drugs mainly included antimicrobial, antiparasitics, disinfectants, antipyretic-analgesic, and anti-inflammatory drugs, with powder, premix, injection, sterile powder for injection and disinfectants (solid) as the major formulations.

Due to the differences in purchasing power between animal vaccine manufacturers and domestic farmers, a large price range for animal applicators exists. The lower margin market sectors are dominated by domestic applicator manufacturers who offer devices on an average of 2 60 USD. The higher margin market sectors are more competitive, with foreign firms offering higher quality products that range from 25 220 USD.

From 2006 to 2009 the Chinese applicator industry experienced 100% growth in sales, totaling around 160,000,000 USD as of year 2009 (See Exhibit 4). There are currently around 20 manufacturers of syringe technologies in China, with Shaoxing Kangdaer, Shaoxing Wanjia Machinery, Yuyao Shennong Machinery, and Yuyao Luting Veterinary Syringe being the most common brands (See Exhibit 5). However, the market is highly segmented; with no one brand dominating the applicator industry.

How to Take a Company to China

Consideration One: Should I enter the Chinese market?
Answering whether or not entering the Chinese market is a viable business option is the first important question when considering expanding into China. Prima Tech has a number of advantages over domestic Chinese applicator

Liu, Hu, Blaustein

Page
manufacturers, including quality and durability (Ovotech). Considering these factors, and with of a cursory examination into the viability of entering the Chinese market, Prima Techs management decided that the rewards justified the risks, and in 2008 contracted with Ovotech to distribute their products in the mainland.

While the data seems to agree with their decision, Prima Tech has nonetheless faced numerous hurdles upon entry. The lack of agricultural development, currently lagging over 100 years behind that of the United States, the regulatory environment, the logistical challenges, IP-theft, and the relatively small purchasing power from livestock producers have all hindered growth and provided below-expectation returns.

For any company, there are certain considerations that must be taken into account before entering China. Generally, the Chinese market favors larger firms that are capable of funding the capital intensive projects that are required to establish a foothold in Chinas extremely competitive domestic market. As capital restrictions are changing in China (not all cities have the same investment/capital requirements), China is becoming more attractive for small and medium enterprises (SMEs). As Prima Tech is using a distributor, many of these capital requirements are more manageable.

Other important factors to consider before entering the Chinese market include: 1) your companys background and experience with operating in developing economies; 2) the availability of staff that can negotiate the Chinese market on your behalf; 3) the patience of your owners or shareholders to invest in the long-run; and 4) the opportunity cost of entering the Chinese market and the availability of other alternative markets. These questions are each specific to the company and the industry that one is seeking to enter. In China, as Prima Tech has discovered, flexibility is very important there is no one size fits all approach. (The U.S. Commercial Service has a very useful toolkit to help exporters understand if they are China ready it can be found here: http://export.gov/china/doingbizinchina/index.asp1).

The U.S. Commercial Service is an agency within the U.S. Department of Commerce, International Trade Administration. They focus on aiding U.S. businesses in increasing exports to other nations through various tools.

Liu, Hu, Blaustein

Page Consideration Two: What are the Regulations and Tariffs? Is My Product Legal?
Before Prima Tech could enter the Chinese market, they had to determine if their products were legal to sell in China. If they were, it was important to know what kind of restrictions or tariffs would be imposed.

According to the laws of the Peoples Republic of China (PRC) Prima Techs products are considered veterinary equipment, and thus fall within a restricted industry. In China, veterinary equipment is considered medical material, and medical material may not be sold directly to the Chinese market by any foreign firm. This means that certain business formations are not available to Prima Tech. However, using a distributor such as Ovotech to gain access to the Chinese market is permitted.

Upon entrance into the World Trade Organization (WTO), China declared certain countries most-favorednations, significantly reducing the amount of tariffs levied on imported goods. Normally, the tariffs on veterinary equipment are 17%, but as Prima Tech is a U.S. company, and the United States has most-favored-nation status, tariffs are only 4%.

Numerous industries within China, such as publishing, agriculture, mining, and medicine, among many others are restricted by the Chinese government. Before entering the Chinese market, proper due diligence must be done into what kind of restrictions may apply to the good or service you are attempting to introduce. Chinas government regulation may present hurdles to foreign firms attempting to expand. These barriers to entry can hinder a businesss ability to operate in China effectively, and may result in serious legal implications if the firm is caught in violation of regulations.

Consideration 3: What kind of business formation is right for you?

When Prima Tech entered the Chinese market they chose to do so through the use of a distributor. Not only did this allow them to capitalize on the knowledge of a local business, without having to invest extensively in personnel, but

Liu, Hu, Blaustein

Page
it also gave them nearly immediate access to an established network of supply chain and industry contacts. Such relationships, referred to as guanxi, can be crucial to the success or failure of a firms attempts to enter the Chinese market.

There are a number of options for business formation available to firms seeking to enter the Chinese market, they include: 1) a local agent; 2) a distributor; 3) a trading company (no longer required for U.S. firms, who may forego a trading company for a distributor); 4) a joint venture (JV); 5) a wholly foreign owned enterprise (WFOE); 6) a representative office (RO); and 7) a foreign invested partnership (FIE). Each option has its pros and cons, which may depend on the given industry and firm (See Exhibit 6).

Consideration 4: Protecting Your Intellectual Property

Even before entering the Chinese market Prima Tech faced a common problem there intellectual property (IP) was being stolen. While preparing to enter the Chinese market, Prima Tech did not register their IP within China. While steps are currently being taken to register IP, much damage has already been done in the form of knock-off and below par products that look very similar to Prima Techs applicators. For a small company that relies on its reputation for quality, and invests heavily in research and development losing critical IP can be very harmful.

While China has garnered the reputation of being a market that fails to protect intellectual property, change is slowly coming. In the year 2012, China had the worlds largest number of filed patents at 526,412. While the quality of those patents is subject to debate, the message is clear new laws, regulations, and significant encouragement from government ministries are increasing the breadth and number of filings. As Chinas central government seeks to transition the economy away from cheap manufacturing to high-tech service and industry, they are being forced to develop the types of institutions necessary to protect intellectual property. Registering IP in China has never been easier, and while much work still needs to be done to improve Chinas recognition of foreign patents and intellectual property, the onus is now on the companies and businesses that seek to enter the Chinese market to first safeguard their IP.

Liu, Hu, Blaustein

Page
These are the steps that foreign firms can take to help safeguard their IP in China: 1) register trademarks and patents in China; 2) invest in physical and information technology security; 3) educate staff; 4) join lobby groups and industry organizations; 5) share IP protection advice with Chinese distributors, operators, and partners; 6) do not introduce your best products without assured IP protection; and 6) do not be an IP thief (Chris Torrens).

10

Consideration 5: How to Guarantee Payment

Due to Prima Techs custom of insisting on cash advances, ensuring fluid communication, and overall good relations with Ovotech, they have never faced the problem of nonpayment in China. However, as an exporter nonpayment can be a common issue, especially when dealing with Chinese firms therefore, the last point for consideration in how to take a small U.S. firms products to China is how to guarantee payment.

Following four simple steps suggested by Dan Harris of Chinalawblog.com, U.S. companies can better guard themselves against nonpayment from Chinese firms by doing any of the following: 1) securing all payments in advance of delivery; 2) conducting due diligence on the buyer; 3) securing some of the payment in advance; or 4) securing a document letter of credit from a large Chinese bank or a known U.S. bank.

Many Chinese firms will be reluctant to agree to the above terms, and some firms may struggle with local regulations that prevent them from complying. Negotiating such terms in China is a form of art that should not be undertaken lightly. Two highly acclaimed books on Chinas negotiating style that should be thoroughly understood before any negotiation takes place are Lucien Pyes classic Chinese Negotiating Style, and The Secret Art of War: the 36 Stratagems attributed to the historic Chinese military figure Sun Tzu.

Managing the Future

Prima Tech has entered the Chinese market. While their sales remain below expectations, they have continued to grow every year. Their successes in guaranteeing payment and proper business formation, as well as the hurdles

Liu, Hu, Blaustein

Page
they have faced from government restriction to IP theft, act as lessons to individuals interested in learning how to take a small U.S. agricultural business to China.

11

According to Lisa Rumsfeld, Prima Techs future success in the Chinese market will rely immensely on its use of new distributors, the identification of key areas for expansion, and the solving of logistical challenges. Whether Prima Tech can maintain and speed up its growth in China remains to be seen. As a company operating in a restricted industry, certain avenues of business expansion will be unavailable. However, other avenues such as licensing have yet to be investigated. What is unassailable is Prima Techs dedication to the quality of its products, its brand, and the service to its customers. Ultimately, this customer focus may be what provides some of the solutions to Prima Techs problems as they seek to manage the future.

Liu, Hu, Blaustein

Page

12

For Discussion

1. What are the steps involved in considering whether or not your firm is ready for the Chinese market? Did Prima Tech properly address these steps before entering the Chinese market? 2. What kind of regulations or tariffs impacted Prima Tech in China? How does your countrys trade relationship with China impact its exporters? 3. What kind of business formation did Prima Tech pursue? What do you think about the potential advantages and disadvantages of their chosen business formation? 4. Should Prima Tech have registered their intellectual property before entering the Chinese market? What is behind the large number of patents being filed in China, and what impact could this have on foreign firms? 5. How can firms guarantee payment from their Chinese counterparts? How did Prima Tech avoid such problems?

Liu, Hu, Blaustein

Page References
1. "About Us." Ovotech. N.p.. Web. 21 Mar 2013. <http://www.ovotech.com.cn/http/chinese/chinese.htm>. 2. Chinese Academy of Sciences . Chinese Agricultural Modernization Lagging. 2012. Web. <http://english.cas.cn/Ne/CASE/201205/t20120515_85406.shtml>. 3. "Chinese veterinary syringe 2011-2012 Industry Analysis and Forecast Report." China Market Research Center. N.p.. Web. 22 Mar 2013. 4. Goodman, Sam. Where East Eats West. 1st. Charleston: BookSurge Publishing, 2008. Print. 5. Harris , Dan. "The Basics Of Getting Paid When Selling To China." China Law Blog. Harris & Moore, pllc, 12 Aug 2010. Web. Web. 21 Mar. 2013. <http://www.chinalawblog.com/2010/08/how_to_get_paid_when_selling_to_china.html>. 6. Manthey, Ewa. "Pig ignorance is the biggest concern and it wont wash off." Global Times [Beijing] 21 March 2013, n. pag. Web. 21 Mar. 2013. <http://www.globaltimes.cn/content/769706.shtml>. 7. McGregor, James. One Billion Customers: Lessons from the Front Lines of Doing Business in China. New York: Free Press, 2005. Print. 8. "Northwest Pastoral Areas." Iask. N.p.. Web. 22 Mar 2013. <http://iask.sina.com.cn/b/19073870.html>. 9. "Our Promise." Prima Tech USA. N.p.. Web. 21 Mar 2013. <http://www.primatechusa.com/ourpromise.php>. 10. People's Republic of China. Ministry of Agriculture. MOA Chief Veterinary Officereffective measures taken to handle dead pigs in Huangpu River. 2013. Print. <http://english.agri.gov.cn/hottopics/ah/201304/t20130403_11999.htm>. 11. People's Republic of China. Ministry of Agriculture Bureau of Veterinary Medicine. Animal Health in China. 2010. Print. <http://english.agri.gov.cn/Topics/Animal/201112/t20111230_3848.htm>. 12. People's Republic of China. National Development and Reform Commission . Catalogue for the Guidance of Foreign Investment Industries (2011 Revision) Encourage foreign investment industry directory. 2011. Print. <http://www.ndrc.gov.cn/zcfb/zcfbl/2011ling/W020111229379511927834.pdf>. 13. Torrens, Chris. Doing Business in China: a guide to the risks and the rewards. Great Britain : The Economist Newspaper Ltd, 2010. Print. 14. United States of America. Library of Congress. China: Revision of Catalog of Industries for Foreign Investment. 2012. Print. <http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205402998_text>. 15. United States of America. U.S. Department of Commerce U.S. Commercial Service. China Business Handbook 2013. Beijing: U.S. Commercial Service , 2013. Print. <http://export.gov/china/build/groups/public/@eg_cn/documents/webcontent/eg_cn_055956.pdf>.

13

Liu, Hu, Blaustein

Page References Continued

16. World Intellectual Property Organization. 2012 World Intellectual Property Indicators. Geneva: World Intellectual Property Organization, 2012. Web. <http://www.wipo.int/export/sites/www/freepublications/en/intproperty/941/wipo_pub_941_2012.pdf>. 17. Zhang, Xiaoqiu. Ovotech. E-mail Interview. 29 January 2013.

14

Liu, Hu, Blaustein

Page Exhibit 1: Prima Tech Bottle Mount Vaccinator (BMV)

15

Operation of Prima Tech BMV injector

Vaccine bottle clips within mount

Tension Knob Needle Mount Plunger Squeeze trigger to inject vaccine

Knob adjusts the plunger, controlling the vaccine amount

Source: Prima Tech website <primatechusa.com>

Liu, Hu, Blaustein

Page

16

Exhibit 2: Map of Four Main Pasturing Areas in China

Source: Map of Northwest Pastoral Areas http://iask.sina.com.cn/b/19073870.html

Page

17 17

Exhibit 3: Map of Main Animal Husbandry Provinces

Source: Animal Health in China <http://english.agri.gov.cn/Topics/Animal/201112/t20111230_3848.htm

Liu, Hu, Blaustein

Page Exhibit 4: Graph of Growth in Sales of Veterinary Syringes in China

18 18

1 USD = 6.34 RMB

Source: Chinese veterinary syringe 2011-2012 Industry Analysis and Forecast Report

Exhibit 5: Graph of Growth in Veterinary Syringe Manufacturers in China

Source: Chinese veterinary syringe 2011-2012 Industry Analysis and Forecast Report

Page Exhibit 6: Chart of Pros and Cons for Types of Business Formation Available in China

19 19

Source: China Business Handbook 2013 <http://export.gov/china/build/groups/public/@eg_cn/documents/webcontent/eg_cn_055956.pdf>