International Competitiveness Of Chinese And Indian Tea Economics Essay

Tea as an important drink is very popular throughout the world. More and more people have formed the habit of drinking tea because of its healthy benefits. China and India are the two largest tea countries in the world so far. Tea was first cultivated and brewed in China. It was then spread to other countries and regions worldwide. Tea industry carries great meaning to China in both economic terms and cultural terms. Chinese tea is an important symbol of Chinese culture. Chinese tea industry has dominated in the world for thousands of years. Speaking of tea, westerners naturally relate it to Chinese culture.

The cultivation of tea in India also has a long history. Tea was cultivated and consumed in eastern and northern India for thousands of years, but it is the arrival of the British East India Company that make production of tea in India commercialized. Tea is indigenous to India and is the industry which the country is very much proud of. India has emerged to be the world leader in tea production, consumption and export in the past two centuries. India is one of the largest tea consuming countries with 70% of its tea production consumed by itself.

As the two oldest ancient eastern countries, both China and India have distinguished tea culture and drinking habits. The two peoples have shared the similar habit of drinking green tea which is seen as medicine and has the functions to cure diseases and refresh people. Chinese tea industry and Indian tea industry emerged in a very important historical period, the 1830s. After 1830s, India, which was then British colony and the tea producing base of Great Britain, had learned how to make tea and began to compete with China in world tea market. For historical reasons and other reasons, China began to lose its dominant position in the tea market in mid nineteenth century. From then, China’s tea industry was almost destroyed and lost its dominant position to India.

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The competitiveness of Chinese tea decreased little by little and fell to its lowest point in history in the year 1949, before the People’s Republic of China was founded. After then, China’s tea production and export started to restore. During 1950s, China was producing around 13.6% of world tea, and in 2007 the percentage was increased to 25 percent. However, the share of India during 1950s was 40 percent and declined to about 24 percent during 2007. China was exporting about 5.4 percent of world export during 1950s, while increased its share to around 17.8 percent in the recent two years. On the other side, India’s share in world export declined from 42 percent during 1950s to about 13 percent in the year 2007 (FAOSTATIS). Hence the question arises about what are the factors responsible for the decline of India’s tea production and the share of its export in world tea export.

China is now still the largest tea producing countries in the world. However, it has no such world famous tea brand as Tata in India and the famous tea planting areas like Indian Darjeeling and Assam. Some Indian tea companies have even acquired famous foreign tea brands which include British brands Tetley and Typhoo. Although Chinese tea production has overtaken India in recent years, the international competitiveness of China’s tea lags behind that of Indian tea in some aspects. China indeed has rich resources to plant tea, but has not yet made full use of them. China still competes in world market with low-priced products. Additionally, China has absolute advantage in producing green tea but lack competitiveness in black tea. However, the world tea market is dominated by black tea.

From the review of earlier literature, it can be seen that earlier studies were mainly about China’s own performance in tea or India’s own experience. Few studies have focused on the comparison between Chinese and Indian tea, the two largest typical tea producers in the world, so it is needless and meaningful of further study focusing on this aspect. This paper is specific to probe into the status quo of Chinese tea industry and Indian tea industry, their production, consumption and trade, their international competitiveness in world market, and figure out the advantages and disadvantages of tea industry in both countries and eventually provide a brighter way which could make the two tea producers more competitive in world market.

Chapter 2 Literature Review

2.1 Studies on Classical International Competitiveness

Theory of international competitiveness started as early as mercantilism, according to mercantilists, national wealth of a country is measured by gold and silver. Through exporting, the country can get gold and silver from other countries and thus accumulate wealth. So the country should export the maximum of its product and import the minimum of the product from other countries. Mercantilism dominated the international trade theory till Adam Smith published his master piece The Wealth of Nations (Smith, 1776, cited in Ezeala-Harrison, 1999). Smith viewed trade as positive-sum game instead of zero-sum game in Mercantilism. According to Smith, a country should produce and export the product in which it had absolute advantage and import the product it had no advantage at all.

After Adam Smith, there were many other economists making important contribution to the theory. The most important one is David Ricardo’s competitive advantage theory. Ricardo (1817) put forward his theory by solving a problem in absolute advantage theory, that is, what if the country has absolute advantage in both goods? Ricardo thought that the better country should produce the product which it has greatest advantage in. The other country should specialize where it has the least absolute disadvantage. Even if a country has no advantage in any good, it still can benefit from international trade. After Ricardo, there emerged many theories of international competitiveness, among which the factor endowments theory in early twentieth century by Heckscher and Ohlin had great implication to the international trade. HO model tells us that each country has its well-endowed factors, and it should produce and export the product whose production is intensive in the well-endowed factor (cited in Dong-Sung Cho, Hwy-Chang Moon, 2000). Those classic theories of international trade have great influence on the later economists.

2.2 Porter’s Competitive Advantage of Nations

In the late 20th century Michael Porter of Harvard Business School published the book The Competitive Advantage of Nations that attempts to determine why some nations succeed and others fail in international competition. Porter’s basic thesis is that four broad attributes of a nation shape the environment in which local firms compete, and these attributes are factor endowments, demand conditions, relating and supporting industries, firm strategy, structure and rivalry. These attributes constitute “the diamond” (Porter, 1998).

Factor endowment refers to the factors of production that determine the industry’s comparative advantage in the international market. Basic factors such as the natural resources, climate and location can provide the basic advantages. Demand conditions mean that such industry that can create home demand has comparative advantages. Industries can do this by improving the product and providing superior-quality product or service. The related and supporting industries are regarded as the complementary products of the industry. The close relation and the coordination of related and supporting industries can increase the competitiveness of the specific industry (Porter, 1998).

Porter’s diamond framework combines the comparative advantage of different industries with the theory of competitive strategy. Different industries vary from each other in resources and capabilities, which leads to the advantage and disadvantage in the dynamic environment circumstances. According to Porter, it is the firms rather than the nation that matter. The principal role of the nation is the “home base” of the firms which helps in shaping the identity of the firms, the management features, the availabilities of the resources to the firm. Firm strategy, structure and rivalry are the important factors to determine its competitiveness. For example, the domestic rivalry may cause the pressure on the firm to innovate, lower its costs and improve quality. Thus it can increase the competitive advantage of the industry.

The four factors in the diamond framework are correlated with each other and work together to shape the competitive advantage of the industry over time. Besides, Porter maintains that two additional variables can also influence the national diamond in important ways: chance and government. The role of government is acting as a “catalyst”, encouraging firms to raise their performance and produce high-quality products. Government also works in stimulating local rivalry through establishing anti-trust regulations and limiting monopoly.

Figure 1 Determinants of National Competitive Advantage: Porter’s Diamond

Source: Drawn from Porter M.E. “The Competitive Advantage of Nations”

2.3 Studies on Chinese Tea Industry

Since tea industry is of so great significance to China, many Chinese scholars have contributed to the field of China’s tea. Fuping Huang (2000) compared export price of China’s tea with that of India and Sri Lanka and believed that economic benefits of China’s tea lagged far behind other major tea nations. Changxing Xu (2001) proposed that China’s tea industry enjoyed advantages on natural resources, geography, varieties of tea and technology. He also emphasized that China was the largest green tea producers and exporters in the world and had great potentials in the field. Zhigang Xu (2001) made a research on China’s green tea, tested the comparative advantage of China’s tea from the year 1990 to 2000 by applying cost index method and concluded that China has no comparative advantage in producing tea and thus resource distribution in tea industry would lead to waste and loss. However, he pointed that Shaanxi, Sichuan and Guizhou provinces of China still had some comparative advantage in tea planting.

Zhucheng Su (2001) proposed that China could learn from Japan who had invested in Australia and made use of its resources to produce green tea. Since China had little competitiveness in producing black tea and also confronted great limits when introducing black tea from abroad, it could invest in such countries that had advantages in producing black tea, cooperated with them and took advantage of their resources to produce and market black tea. Su also believed that competitive advantage of China’s tea had for a long time lied in its factor endowment advantages but it was the industry organizing system that had great impact on competitiveness. Thus, he suggested China should optimize the organizing structure of its tea industry.

Zhongyu Chen (2002) analyzed the statistics of tea export volume and also believed that China had great competitive advantage in green tea and oolong tea, while lacked competitive advantage in black tea. However, the markets of green tea and oolong tea were relatively small. What’s worse, Vietnam, India, Sri Lanka and Indonesia began to increase the production of green tea and competed with China in world market. So, he believed that China’s tea industry still has a long way to prosper.

Some foreign experts have also done a lot of research on China’s tea industry. Forster Keith has once researched Chinese tea during the whole 1990s. Forster (1993) pointed out that China’s tea industry had long been subject to varieties of price and production controls by the Chinese government. Since 1980, the production and marketing system of the tea industry have been changed a lot and the state reduced its role in purchase and sales of tea, and tea planters had more freedom to grow and market their tea, which has led to the great development of China’s tea industry.

2.4 Studies on Indian Tea Industry

As early as in 1991, Neelanjana Mitra figured out the problems that Indian tea industry was facing over the period 1960-90. One of the major problems had been the slow growth in tea production compared to the steady rise in domestic consumption. Over the period 1960-90, the annual growth of tea production had been just 2 percent, while the growth of domestic consumption had been about 5 percent. The slow growth in tea production was naturally accompanied by a decline in world market share of Indian tea export. Thus India failed to take the advantage of the expanding world tea market.

In the recent case study of Indian tea sector, Himanshu Dutt (2007) has done a very through analysis of Indian tea industry. According to Dutt, the production and export of Indian tea has been experiencing great downfall in recent years. Domestic consumption has also witnessed decline. Higher labor cost, climate change and more fierce competition from Kenya, Sri Lanka and China are the main reasons. Application of industrial labour laws for welfare and social security has greatly increased the labour cost. Under the free trade agreement of WTO, cheap tea products from other main tea producers began to compete in world market, which has led to the price downturn of tea in world market.

Dr. B.H. Nagoor (2009), a lecturer from Karnatak University, has studied in details the performance of India’s tea export. He pointed out by referring to the data of Indian tea from 1950 to 2004 that India’s share in world export has declined from 42 percent during 1950s to about 22 percent in 1981-90 and further to 13.3 percent during 2001 -04. The trade liberation under WTO has not benefited Indian tea industry. Nagoor suggested that the main factors causing the poor performance of India’s tea export are the rising domestic demand, slow increase in yield, slow expansion of tea planting area, failure to compete with other major tea countries, increase supply of tea in world market and also the loss of traditional market like UK, Russia (Nagoor, 2009). However, the doctor also saw the positive side of Indian tea export and he believed the prospects of Indian tea export was bright since the import of developing countries was increasing and Indian tea should seek new opportunities and find some new markets like Pakistan, Iraq, Kazakhstan and so on.

Dan Robertson (2010) analyzed the state of Indian tea industry by comparing with China. Robertson proposed India tea was lagging and has lost its dominant position to China in both production and export. Many reasons were responsible for the decline. The major one was that few tea estates in India were aggressive in marketing their products. Although India has famous tea like Assam and Darjeeling, foreigners still know little about what Assam tea is and where it comes from. Moreover, Indian tea estates pay little attention to giving their tea a fancy name or package.

However, Jayanta Roy and Kaushik Das (2009) have held the belief that the outlook of Indian tea industry in the short and medium term was positive. From 2008, the domestic demand has increased steadily. Because of the shortfall in production in many other countries, the Indian tea has witnessed an increase in export. The average domestic price has also seen the increase by about 28 percent, which led to the improvement of profits of tea producers. For the Indian tea industry, the main driver of demand lies in the domestic market, so the increase of domestic demand has improved the performance of Indian tea industry as a whole. The main reason for demand increase is the effective marketing strategy taken by the tea players which include the positioning tea as healthy drink. The affluence of Indian people is another reason. In the medium term, the continuous increase in domestic demand and export will keep the price at high lever in the medium term. However, if the industry is unable to maintain the current export level or if the production of other major tea countries restore to high level, the domestic tea price will increase due to the higher supply in domestic market (Jayanta Roy, Kaushik Das, 2009).

2.5 Measuring Parameters of International Competitiveness

There are some important parameters that can reflect the international competitiveness of a product, including world market share rate (WMS), price and cost, normalized trade balance (NTB) and revealed competitive advantage (RCV). World market share rate (WMS) refers to rate of the export value of one product in a particular country to the world total export value of that product, that is WMSi= Xi/Xw. WMSi is the world market share rate of country i, and Xi is the export value of given product of country i, Xw refers to the export value of given product of the world.

Normalized trade balance refers to the rate of net import value or net export value to the total trade value of a particular product. That is, NTBi= (Xi-Mi)/ (Xi+Mi). X is the export value and M is the import value and i refers to product i. If the import value of one product surpasses its export value, the product is import oriented. Otherwise, the product is export oriented. If the rate is very near to 1, it means that that product is highly competitive in the international market. And no matter what the import value and export value are, the rate is between -1 and 1 (P. Lelio Iapadre, 2001).

Revealed competitive advantage is an index used in international economics for calculating the relative advantage or disadvantage of a certain country in a certain class of goods or services as evidenced by trade flows. It is based on the comparative advantage concept of David Richard. It most commonly refers to an index introduced by Balassa. The Balassa index basically measures normalized export shares, with respect to the exports of the same industry in a group of reference countries. The Revealed Comparative Advantage (RCA) index is measured by this formula: RCAi = (Eij / Eit) / (Enj / Ent), where i is country index, j is commodity index, n refers to a set of countries and t is a set of commodities. If RCAi ¼ž1, it means that the country has revealed advantage in commodity j; If RCAi ¼œ1, the country has no revealed advantage in this commodity. The bigger RCA is, the more competitive the country is in the particular commodity (Balassa, 1989). In the working paper Revealed Comparative Advantage, an Analysis for India and China, Amita Batra and Zeba Khan (2005) firstly applies the Balassa index to evaluate the revealed comparative advantage for India and China in the global market, which provides an important resource for researchers to do comparative analysis between China and India.

Chapter 3 Historical Development of Chinese & Indian Tea Industries

Chinese and Indian tea industries both enjoy very old history of tea. Chinese tea industry has got international reputation and scale economy at times as early as Tang Dynasty, while the development of India tea industry started much later. It was the arrival of East India Company in1820s that made India tea into the world stage. It can be said that the decline of Chinese tea industry since 1840 had accompanied with the rise of India tea industry. Today the two countries stand together as the two largest tea countries, but the producing, operating and marketing systems of Chinese and Indian tea industries are different from each other.

3.1 Historical Development of Chinese Tea Industries

According to Lu Yu, writer of the book Tea Classics during the Tang Dynasty, Chinese tea has enjoyed a history of more than 4000 years. In the West Zhou Period in ancient China, tea was used as religious offerings. Since the Jin Dynasty (265-420 AD), tea drinking had spread to all parts of the country. The new drink made tea into a major commodity. Tea as a drink prospered during the Tang Dynasty (618-907 AD), and tea became popular among common people. Tea became an important crop during the Song Dynasty (960-1279 AD). Tea farms covered more than 200 counties. Tea planted in Zhejiang and Fujian provinces were used as expensive tribute tea, some of which was even exported to Southeast Asian and the Arab countries (Tea history, 2010).

In the Ming (1368-1643 AD) and Qing Dynasty (1643-1910 AD), tea trade began to play an important role in the government’s economic plans and the “Tea and Horse Bureau” was set up to supervise the tea trade. In the Song Dynasty, Arabic merchants exported tea from Fujian Province, China. In the Ming Dynasty, tea was sold to Southeast Asian and South African countries. In the year 1610 tea went to Europe via Macau in a Dutch merchant ship. Tea then became an international drink. From Tang Dynasty to the nineteenth century, China was the only large country that exported tea in world market (Tea history, 2010).

After 1830s, India, which was then British colony and the tea producing base of Great Britain, had learned how to make tea and began to compete with China in world tea market. For historical reasons and other reasons, China began to lose its dominant position in the tea market till the Opium War in mid nineteenth century. From then, China’s tea industry was almost destroyed and lost its dominant position to India. The competitiveness of Chinese tea decreased little by little and fell to its lowest point in history in the year 1949, before the People’s Republic of China was founded. After then, China’s tea export started to restore and increase its share in world market.

China now is largest producers of tea in the world, followed by India, Sri Lanka and Kenya. China’s tea industry has enjoyed great advantages on natural resources, geography, varieties of tea and technology. Besides, China is the largest green tea producers and exporters in the world and has great potentials in the field. However, China has less competitive advantage in black tea. Since the world market has very low demand for green tea and oolong tea and higher demand of black tea, it is urgent for China to put more resources to increase the international competitiveness of black tea. Moreover, in China’s tea industry, small-scale farmers still account a larger part in tea planting, which leads to the low productivity of tea. It is difficult to realize industrialized production. China’s lack of big tea brands is the main barrier of its tea industry.

3.2 Historical Development of Indian Tea Industry

The production of tea in India also has a long history. The consumption of tea in India can be traced back to 700-500 BC, in the Ramayana. It is proved that tea was cultivated in eastern and northern India for thousands of years. However, it is the arrival of the British East India Company in the early 1820s that made tea production in India commercialized. In the early 1820s, British East India Company began to produce tea in Assam of India in a larger scale. In the year 1837, the first English tea garden was established in Upper Assam. The Assam Tea Company began the commercial production of tea in the region in 1840. From the beginning of 1850s, Indian tea industry rapidly expanded. Assam has also become the leading tea planting area in the world (Adivasis in Assam, 2008).

Indian tea production is concentrated in rural hills and backward areas of South India and North India, and tea production in North India accounts 75% of the total tea output. In Northern India, Assam Tea Company and Sikkim are the leading tea bands and are famous for its high-quality tea throughout the world. In Southern India, Dilgiri, Kerala and Karnataka are the main tea producers. One of the distinctive characteristic of India’s tea production is its high level of industrial concentration. 88% tea gardens cover 8 hectares in area and the percentage of tea gardens which cover more than 400 hectares is 2.5%. In Assam alone there are 740 tea gardens, and each has 303 hectares in area and separate processing factory, packing factory and export branch. India mainly produces black tea, but in recent years, its production of green tea has also witnessed a rise. The varieties of tea planted in India range from the original Orthodox to CTC to Green tea, from the Darjeeling tea to the strong Assam and Nilgiri Tea. Orthodox tea is produced for exporting. Production of green tea in India is relatively small.

Indian tea has long been the most important foreign exchange earner for the country. UK has been the main buyer for Indian tea. Russia is also the main consumer of Indian tea. However, because of the competition from China, Kenya and Sri Lanka, export of Indian tea to UK and Russia has declined in recent years. China is the major country to produce green tea, while Kenya and Sri Lanka competes with India in orthodox varieties of tea.

In the past one and half century, India was the largest producer of tea, but recently, China has regained its dominant position in tea production due to the increased land availability. Despite of this, India has establishes some very famous tea brand in the world like Tata Tea Group of India, which appears to be the largest tea brand in India and also the world’s second largest manufacturer and distributor of tea (Tata Tea Company Profile, 2010). The company owns more than 50 tea estates in India, especially in Assam and Darjeeling. Tata Tea Group is one of the first Indian multinational companies. Tata Tea has achieved great success in the global market. In 2000, Tata Tea acquired Tetley Group based in the United Kingdom. That was an important event in Tata’s history because Tetley was the second largest tea company in the world, only second to Unilever’s Lipton. The acquisition prompted greatly the development of Tata Tea Group in the world tea market.

Chapter 4 Methodology

The objectives of this project are to identify the status quo and international competitiveness of Chinese tea industry and Indian tea industry, why the Indian tea production and export declined in the past five decades and why Chinese tea industry has not establishes its tea brands in world market, and what aspects the two countries can learn from each other. In order to meet the objectives, this part provides mainly the secondary research method by which the researcher refers to the existed literature and statistics. Based on the second data from various resources, the author mainly applies Porter’s diamond framework to analyze the factors that influence the international competitiveness of Chinese tea industry and Indian tea industry. Then the author will make a through comparison between the tea industries of the two countries.

4.1 Secondary Research Approach

Secondary research is a very important source to get useful information. Secondary information refers to the source of data and other information collected by others people and archived in some form, including government reports, archived data, industry studies, traditional books and journals. The obvious advantage of secondary research is convenience and accessibility to get the secondary information (David, Michael, 1993).

The study is based on time series data during the period 2000-2008. Data is got from FAOSTATS, WTO, Tea Board of India and China. To examine the international competitiveness of Chinese tea and Indian tea, some measuring parameters of international competitiveness are applied including world market share rate (WMS), price and cost, normalized trade balance (NTB) and revealed competitive advantage (RCA). WMS and NTB can be computed from the data in FAOSTATS. The price refers to the average price of the exported tea, which is the ratio of the export volume in dollars and the export volume in tons. As to RCA, an earlier paper, Revealed Competitive Advantage: an Analysis for India and China has already covered this and acted as a detailed reference for this paper.

4.2 Comparative analysis

Business dictionary defines comparative analysis approach as item by item comparison of two or more comparable alternatives, process, products, systems and so on (Business Dictionary, 2010). As the two largest tea countries in the world both with a long history, China and India share both similarities and differences in tea production, consumption and operation modes. The paper compares China with India in tea production, export and some other important indexes to measure their international competitiveness. Besides China and India also compares with itself in different periods. As to the factors that determine the international competitiveness of tea industry, the paper pays much attention to analyzing the factors included in Porter’s Diamond that have influence on the competitiveness of Chinese and Indian tea industry.