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The Production And Exports Of Tea Markets Economics Essay

Tea is one of the world’s most consumed drinks after water it is also considered one of the oldest drinks with around 2000 different types of tea from all over the world [1]

The world tea market is dominated by China, India, Kenya, and Sri Lanka as the major producers and exporters While Russia, UK, US, Pakistan and Japan form the markets for these exports. Black tea is by far the most important tea to the international trade market.

The production, consumption and exporting

World tea production rose by more than 3%, reaching an estimated 3.6 million tons in 2006. [2] Record levels of tea production in China India and Vietnam in 2006 offset declines in major tea producing countries. The size of the global tea markets for retail value in 2007 was $23.323 Billion and in terms of volume that equates to 1,765 million kilograms. [3] The tea markets gained a year on year growth of 4.5% for the period 2006/07 in terms of retail value and 3.5% in relation to retail volume. [4] The average global per capita consumption of tea in 2007 was 0.3kg. [5] It is expected the world tea markets will grow by 10% in value and over 13% in volume between 2005 and 2010. [6]

In 2007, China was the largest producer of tea followed by India, Kenya and Sri Lanka.

Graph 1 shows the production volumes of the world’s largest tea producers.

Source: (Indian Tea Statistics,” Tea Board of India. Available online at: http://www.teaboard.gov.in/inner2.asp?param_link_id=)

Tea exports:

In 2007 Kenya was the largest exporter followed by Sri Lanka, China and India the following graph shows the export statistics for the world’s major tea markets

Source: (Indian Tea Statistics,” Tea Board of India. Available online at: http://www.teaboard.gov.in/inner2.asp?param_link_id=)

Tea imports:

In 2007 Russia was the biggest importer of tea followed by the U.K, U.S, Pakistan and Japan. The following graph shows the import statistics for the world’s biggest tea importers. Source: (Indian Tea Statistics,” Tea Board of India. Available online at: http://www.teaboard.gov.in/inner2.asp?param_link_id=)

The influence of individual grower’s on the price of tea.

The international price of tea is highly volatile and is determined by the relationship between the supply and demand factors of the world markets, the tea grower is a price-taker, as the small volume of local output is insufficient to influence prices. Another key issue which will affect tea prices of individual growers of tea is how the tea market is separated into 3 types of grower. There are the growers of perfect competition who are the smaller growers, the oligopoly which are the multinational growers as well as the monopoly grower, which without a doubt is China. Because of this the individual price of tea will vary, the perfect competition sector will not get as much for their tea, where as the oligopolistic and monopolistic sectors will gain a higher price per kg for their tea.

The role of the transnational corporations in the tea market

A transnational, or multinational, corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries. The subsidiaries report to the central headquarters. The growth in the number and size of transnational corporations since the 1950s has generated controversy because of their economic and political power and the mobility and complexity of their operations. Some critics argue that transnational corporations exhibit no loyalty to the countries in which they are incorporated but act solely in their own best interests. Even though the price of tea is affected by supply and demand, transnational corporations have a major impact within the international tea market, in the 90’s around 90% of the western tea market was dominated by transnational corporations and around 85% of world production was sold by these multinationals (Transfair report on Fairtrade, 2005).

Transnational companies having a massive power for purchasing tea and can therefore influence not only the supply but also the price of tea. Leading on from this they play a major part in not only the selling of tea but also the production as they own and control companies from growth to picking to selling as well. However it can be easy to say that the transnational’s May also be tempted to manipulate the other larger companies and the price of their tea.

By far one of the largest of these is Tata Tea Limited, also known as Tata-Tetley, is the world's second largest manufacturer and distributor of tea.[8] Owned by India's Tata Group, the Tata Tea Limited markets tea under the major brands Tata Tea, Tetley, Good Earth Teas and JEMČA. While Tata Tea is the largest tea brand in India, Tetley is the largest tea company in the United Kingdom and Canada and the second largest in the United States by volume. [9]

Q2. Supply and demand factors

The global supply of tea has constantly overwhelmed the demand for it and has therefore had an impact in the price of tea to reflect the overwhelming difference for the supply and demand of tea.

Source: (Indian Tea Statistics,” Tea Board of India. Available online at: http://www.teaboard.gov.in/inner2.asp?param_link_id=)

As you can see above the world has a higher supply of tea compared to demand, as to preliterate my point above, the price will be affected in order to cope with the high supply and low demand of tea.

Supply and demand for tea in India from the years 2005-2008 exceeded its demand for tea, matching up with the fact that the global market for tea also exceeded its demand for tea, is the reason for the current low prices of tea sales in the Indian economy.

Source: (Indian Tea Statistics,” Tea Board of India. Available online at: http://www.teaboard.gov.in/inner2.asp?param_link_id=)

The above table relates to the idea that India is over supplying the demand for tea creating a back log, and in order to clear the back log of supply, a lower tea price is needed in order to increase demand.

In India tea has high market dominance and a lot of the market growth in tea has mainly been achieved from tea variants such as flavoured and herbal teas, however this idea has not caught on as it is tradition in India to add milk to tea. The developments in the variants have developed from the recent finding that they are health and wellbeing niche of the market, which is perhaps the new fad of other market growth of thing such as organic food.

In India the retail price is very low, especially compared to that of Russia, in 2007 tea averaged a price of $3.9kg where as Russia was $20.2kg (Ibid).

Q3

Tea is primarily sold by auction; the industry is dominated by a few vertically integrated companies. Climate change is having major implications for tea production, as higher temperatures could threaten bushes, and with drought in the key tea-producing countries in 2008 affected production, causing consumption to run ahead of production. Although the auction system would seem to approximate a 'fair market' in which prices are determined solely by the interplay of supply and demand, the system does not always work well for small-scale producers. Auction prices vary considerably with both the quality and quantity of tea on offer, and the demand for tea at any given time. A small number of companies dominate sales at each auction centre.

A small number of companies dominate the tea industry. They have a presence at almost all stages of the journey of tea from tea bush to tea bag or packet. The companies either grow tea on estates, or buy tea at an early stage of production, and usually carry out the high-value-added blending and packaging which account for 80% of the retail price (I BID) at facilities in the EU and other Western countries. Globally, most tea is grown on plantations. In the African, Caribbean and Pacific Group of States (ACP) small-scale growers are also prominent; in Kenya, they account for about 60% of the country’s tea production. (I BID) Smallholders often grow tea bushes alongside staple crops for their own consumption. Earnings from tea may provide their only cash income. Low prices for tea tend to be passed on to the poorest segments of a country in the form of low wages on plantations. Given that it is easier to cut costs (by reducing labour costs) than raise prices (it is impossible for a producer country to attempt this unilaterally), producing countries have to remain competitive by lowering wages which partially accounts for the rut in which plantation wages are caught. (I BID)

Another key issue to explore in this is Elasticity and demand, if the price increases the demand is elastic and therefore means a decrease in total revenue. Therefore the change in elasticity will counter affect the changes in the worker’s pay and price, however this is only if the demand is more price inelastic, this is because the prices change more in the short run and the consumer are more willing to change their spending habits whereas is demand was elastic and prices change in the short run, the consumer will be less willing to change their spending habits. Thus meaning that because of the recent elasticity of demand for tea, the consumer will not be willing to pay as much as the price increases, therefore having a negative effect on the tea economy meaning that not only the producer will suffer from high supply to demand, the worker will adjectively have to suffer pay cuts and possibly redundancy.

Even though it is thought that a rise in tea prices in the shops indicates a strengthening economy, it has an adverse affect on a slowly recovering market, after the recent downfall, the market economy needs to recover with a steady market price for all products, in context a rise in prices will not mean a rise in wages as the price for the tea will have dipped in order to compete in the “perfect competition” between the tea conglomerates, meaning lower wages rather than higher wages in order to try and keep company turnover with little variance from the previous years.(http://agritrade.cta.int/en/Commodities/Tea-sector.) Accessed 18th November

PART B

Q4. Case Study British airways fuel surcharge price fixing.

In June 2006 the OFT released a press release confirming it was to conduct an investigation in to the possible price fixing of Fuel surcharges between British Airways (B,A) and Virgin Atlantic on long haul flights to and from the United kingdom. This investigation was being carried out under The “Competition Act 1998 and Article 81 of the EC Treaty”. At the same time they also announced they were also conducting criminal investigation under the “Enterprise Act 2002” connected to the same fuel surcharge price fixing. In August 2007 British Airways formally admitted collision with Virgin Atlantic on “long haul fuel surcharges” and was find a record £121.5m the largest fine ever imposed on a UK firm by the OFT which brought an end to close its civil investigation.

BA admitted that between August 2004 and January 2006 it had colluded with Virgin over the fuel charge levied on passengers on both airlines. With the surcharge rising from £5 to £60 per return ticket for a typical long haul flight. The charge was implemented due to the rising oil price.

Due to the OFT’s leniency policy Virgin has been afforded full immunity from prosecution. Under this policy, a company which has been involved in cartel conduct and which is the first to give full details about it to the OFT will qualify for immunity from penalties in relation to that conduct. In addition, any company staff involved in the price fixing disclosed will qualify for immunity from criminal prosecution in relation to that conduct. The OFT investigation was sparked after Virgin offered them the information about the price fixing, BA also co- operated full with the investigation and that is reflected in the fine imposed by the OFT. The OFT has also conducted a criminal investigation into whether any individuals dishonestly fixed the levels of the surcharges - an offence under the Enterprise Act 2000.

Philip Collins, OFT Chairman, said:

“This case, and the substantial penalty imposed, will send an important message to

corporate boards and business leaders about our intention to enforce the law, and serves to remind companies of the substantial risks involved if they are found to engage in such behaviour”. (http://www.oft.gov.uk/news/press/2007/113-07)

The Office of Fair Trading brought this action against British Airways because it had broken the Competition Act 1998 and Article 81 of the EC Treaty which forbids companies from getting together and knowingly collude to “fix the price” of good and or service, which both company had admitted to by simultaneously Setting their fuel surcharges at the same level which lead to the consumer not getting a fair access to good and services.

As a direct result of this In August 2008 four men were charged with “cartel” offences an offence under the Enterprise Act 2000 Martin George, Andrew Crawley, Alan Burnett and Iain Burns are charged with having dishonestly agreed with others to make or implement arrangements which directly or indirectly fixed the price for the supply in the United Kingdom of passenger air transport services by British Airways and Virgin Atlantic Airways. (http://www.oft.gov.uk/news/press/2007/113-07

The case continues.

Q.5

A theory created by Marris (1964) which is known as “the growth maximization model”. According to the model, the core goal of the owners is the growth of the company. His research suggested that there is a similar view that a manager’s salaries and career prospects are all enhanced if they had the responsibility in managing a growing company rather than simply a large firm as growth brings financial rewards, job security, power and responsibility etc. It is assumed that shareholders are also interested in the growth of the firm, as in the long term this will generate the increase in their share value. However, management is faced with a profit constraint whereby future increases in profits depend on supply growth through reducing the risk of loss and new product development. Hornby (1996) argues that the validity of Marris’s model is hard to determine as efficient means are not available for specifying precisely how much profitability or security is regarded by each organisation as being necessary.

The type of market in which Tesco's operates is within a very competitive market, but can be classed as a perfect competition, as there are five major supermarkets which are competing at such high levels. Tesco's have been running as a successful company since 1995 from when they overtook Sainsbury’s who were at the time the strongest supermarket running. Tesco's soon changed that and by 2001 proved that they were the UK’s leading supermarket by taking 15.6% of the grocery market. As stated before Tesco's are now dominating the market by their current market share of over 26% which 12% more than their most competitive rival Asda which is great achievement for Tesco's over the past 10 years. In order for Tesco's to maintain or gain further market share they have introduced new stores and products to attract a wider range of customers as opposed to food orientated products. (http://www.investis.com/tesco/ar/pdfs/TESCO_REVIEW_2000.pdf)

Tesco's have paid more attention into meeting stakeholders interests and its Growth which is A text book example of Marris’s “Theory of the Firm” the one thing that I feel was lacking was the Views and responses from the customers. Although Tesco’s has done very well At creating its brand loyalty in the last couple of years Tesco has seen the lowest levels of growth at around 12% per year this still adds about 3 billion a year but is a far cry from there pervious growth levels. One argument for this slow down is the public’s view of Tesco’s and how its Forceful growth programme now sees a Tesco on almost every High street and pushing out the small local business.

Q.7

SWOT Analysis of GlaxoSmithKline

Key Facts

Head Office

GlaxoSmithKline P.L.C,

980 Great Western Road

Brentford

Middlesex TW8 9GS

Website

www.gsk.com

Revenue / turnover

£ 22,716.00

Employees

103,000

GlaxoSmithKline (GSK) is one of the largest pharmaceutical companies in the world with interests in discovery, development, manufacturing and marketing of pharmaceutical and health related consumer goods. With a large rich early to mid range research and development pipeline (R&D) this is driven by a Centres of Excellence in Drug Discovery (CEDD) structure. They aim to supply promising drugs to push future company and sales expansion. Although expected exposure to generic competition for 2006 through to 2012 will pose a major threat for the company’s sales and growth from its existing products and portfolio. (www.gks.co.uk annual reports) accessed January 2010

FIG: 1 swot box

STRENGTHS

WEAKNESSES

Robust sales growth forecast from launch

portfolio over period 2006–12

Extensive early to mid stage R&D pipeline,

driven by CEDD (Centres of Excellence in

Drug Discovery) structure

Vast sales and marketing force (via merger),

coupled with expertise in effective lifecycle

management strategies

A mature and aging portfolio of marketed

products which is heavily exposed to

generic competition

Failure to strengthen portfolio significantly

since merger in 2000, compounded by lack of blockbuster product launches

High dependence on low growth respiratory

and CNS therapy markets, coupled with low

biologics capability

Impact of safety concerns surrounding Avandia

OPPORTUNITIES

THREATS

Retained potential for CEDDs to deliver

substantial sales growth post 2012, as

demonstrated by forecast robust launch portfolio growth

Innovative product launches Tykerb and

Cervarix point to increased presence in high

growth oncology market Innovative product launches Tykerb and

Cervarix point to increased presence in high

growth oncology market

Forecast robust sales growth from vaccine

portfolio will support performance of non-vaccine prescription pharmaceutical products Scope to implement cost cutting initiatives

Anticipated high exposure to generic

competition over the period 2006–12 and beyond (Seretide/Advair faces patent expiry at very end of Datamonitor’s forecast period)

Forecast negative sales growth

performance over 2006–12 will drive investor pressure to change GSK business

model.

Could hamper development already underway within CEDD structure Company could be tempted into further

large scale M&A activity which should be avoided

Source: (www.gks.co.uk annual reports) accessed January 2010

Strengths

GSK anticipate a hearty sales growth from its launch portfolio 2006–12. The launch portfolio is expected to deliver annual sales growth of +$7,223 million (I BID) from 2006 to 2012. Also GSK hold and extensive pipeline for R&D and with the dominating sales and marketing force which was brought about by the merger. GSK plans on bringing promising new products to the market, which will help the company retains its extremely strong sales and marketing capability.

Weaknesses

In contrast to the launch portfolio, GSK’s ageing and mature portfolio of already to market products is under enormous generic competition. This brings a negative sales forecast out till 2010 due to the company’s patents. GSK is forecast to deliver significant sales growth from its launch portfolio over the period 2006–12, and the company’s ‘expiry drag’ (the sales decline caused by exposure to generic competition) will more than counter this growth (hence a forecast sales CAGR of -2.1% over 2006–12).(Data monitor accesses Jan 2010).

With GSK failing to strengthen its core marketed products portfolio and combing the effects of its exposure to generic competition, were the late stage pipeline not forecast to deliver a robust sales expansion the company would face a much more severe sales decline over 2006–12. (Data monitor accesses Jan 2010).

GSK became further weakened in 2007 when it’s second best selling product—the diabetes treatment “Avandia” became embroiled in a patient safety scare. Prior to May 2007,

Avandia had been anticipated to act as one of the company’s key sales growth drivers until 2012 when patent expiry is expected to occur. However, a meta-analysis of Avandia clinical trial data has suggested an increased cardiovascular risk among short term users of the product, with this data proving significant enough to prompt the addition of a black-box warning relating to cardiovascular risk.

GSK’s Competitor product Actos (pioglitazone) which currently unaffected by these cardiovascular-related side effect issues and a raft of new diabetes products set to reach the market out to 2012; patients seeking to switch from Avandia are not short of options.(Data monitor accesses Jan 2010).

Opportunity

Even with its negative sales forecast upto 2012 GSK’s CEDD structure should still be able to show substantial growth after 2012. CEDDs remain a long-term growth opportunity, and they represent a key opportunity for GSK.

A major area of sales growth to 2012 is expected to come from 2 new products, the Her2 positive breast cancer therapy Tykerb and the cervical cancer vaccine Cervarix. These will be two of the most innovated drugs to come to market and help put GSK back up there as a product innovator.

Trough a planned restructuring GSK are looking to save upto £700 million from its SG&A (sales, general and administrative costs) COGS (costs of goods sold) R&D (research and development) departments by the end of 2010.

THREATS

The biggest threat to GSK over the 2006 to 2012 period is patent expiry. During that time frame the company will be experiencing an elevated number of patent expiries. This will cause GSK to be exposed to generic competition.

With generic competition underpinned by the mature portfolio and a major lack of any runaway success launches since 2000 is prime factor in GSK’s 2006 to 2012 Compound Annual Growth Rate (CAGR) forecast of -2.1%(Data monitor accesses Jan 2010).

This forecast is sure to increase shareholder pressure on GSK if it status as one of the worlds leaders is brought into doubt.

With the negative forecast of sales growth this could lead to the investor to apply pressure on GSK to change its business model which could in turn damage development already under way with the CEDD structure.


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