The Value of Product of USA : Impact of Chinese Acquisition of a US Company on. Consumer Willingness-to-Pay

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1 The Value of Product of USA : Impact of Chinese Acquisition of a US Company on Consumer Willingness-to-Pay Shaosheng Jin a, Yan Zhang b, Yu Yvette Zhang c*, Marco A. Palma c a China Academy for Rural Development, School of Public Affairs, Zhejiang University, Hangzhou, Zhejiang , China. b School of Management, Zhejiang University, Hangzhou, Zhejiang , China. c Department of Agricultural Economics, Texas A&M University, College Station, TX 77843, U.S.A. * Corresponding Author: Yu Yvette Zhang, address: yzhang@tamu.edu Abstract The $4.7 billion acquisition of Smithfield Foods, Inc. by China s Shuanghui International Holdings Ltd. (now WH Group Ltd.) marks the largest Chinese takeover of a U.S. company in history. In this study, we explored how this acquisition affected Chinese consumers willingness-to-pay for meat products by conducting incentive compatible second price auctions, before and after the regulation approval of the acquisition. Our results suggested that Chinese consumers were willing to pay significantly more for US products than similar domestic products, plausibly due to food safety concern. We also found that the Shuanghui-Smithfield acquisition significantly increased Chinese consumers willingness-to-pay for Chinese products, but had negative impacts on US products. The results of our study can be useful for policy makers, producers and businesses in many areas such as international trade, marketing, and production regulations. Keywords: Cross-border acquisitions; Consumer Willingness-to-Pay; Product of USA; Meat products; Food safety; Experimental auctions. JEL codes: D12; D44; G34; Q13 1

2 The Value of Product of USA : Impact of Chinese Acquisition of a US Company on Consumer Willingness-to-Pay 1. Introduction As economic growth is transforming food demand across the globe, the agricultural and food industry has become a leading sector in cross-border mergers and acquisitions (M&As) (Herger et al. 2008). In September 2013, Smithfield Foods Inc., the world s largest hog producer and pork processor, was acquired by Shuanghui International Holdings Ltd. (now WH Group Ltd.), China s largest pork producer. This $4.7 billion acquisition marks the largest Chinese takeover of a U.S. company in history. As the world s second largest food retail market 1, China is now the world s leading pork importer and forecasted to account for over a quarter of global pork trade in Understanding Chinese consumers responses to this significant M&A event is important for policy makers, producers and businesses in many areas such as international trade, marketing, and production regulations. In this study we explored how consumers in China reacted to the Shuanghui-Smithfield acquisition in terms of changes in consumer willingness-to-pay (WTP) measured by bids in second price auctions (SPAs). SPAs are a popular method in marketing research to elicit consumer WTP because bidding one s true value is a weakly dominant strategy in SPAs (Vickrey, 1961). Winners of the auctions in our study paid with actual money to receive the products. This created a monetary incentive for participants to report their true WTP when submitting their bids. Therefore, the revealed-preference approach we took is incentive compatible and more reliable than the stated preferences methods such as contingent valuation surveys or conjoint analysis in eliciting consumer WTP (Breidert et al., 2006). Our study was conducted in the city of Hangzhou, which is one of the most prosperous and wealthiest cities in China 3. The products used in this study were luncheon meats, 1 USDA Foreign Agricultural Service Report, China 2014 Retail Report, December USDA Foreign Agricultural Service Report, Livestock and Poultry: World Markets and Trade, October, USDA Foreign Agricultural Service Report, China Annual Retail Report, February

3 which are popular dormitory food for college students in China. We explored important factors that affect consumer WTP including country of production, brand name, and also food safety concern, which has been found to play a significant role in Chinese consumers purchasing decisions (Grunert et al., 2015; Jin & Mu 2012; Ortega et al. 2011; Wang et al. 2013; Wu et al. 2015; Yu et al. 2014). The two brands we studied were Shuanghui (manufactured in China) and Hormel, which is imported and produced by a US company, Hormel Foods Corporation. To our knowledge, no comparable products by Smithfield were available in the Chinese market. Therefore, instead of investigating the direct effect of the Shuanghui-Smithfield acquisition on consumers WTP for Smithfield, we examined the spillover effect of this acquisition on a similar US product by Hormel. Our results showed that Shuanghui-Smithfield acquisition significantly increased Chinese consumers WTP for domestic products, but affected their WTP for US products negatively. There are two novel aspects of this study. First, we implemented multiple information treatments step by step to examine how various factors contribute to consumers WTP. Second, we conducted two-stage experiments at the pre- and postacquisition stages, that is, before and after the Committee on Foreign Investment in the United States (CFIUS) approved the Shuanghui-Smithfield acquisition in September This design allows us to examine the evolution of consumer preferences during the course of this significant acquisition. 2. Experiment Procedures A total of 187 students from Zhejiang University in the City of Hangzhou participated in this study, with 94 students in the pre-acquisition stage conducted in July 2013, and 93 students in the post-acquisition stage conducted in November Each student was paid 50 CNY (1CNY 0.16USD in 2013) to participate in this study. Participants were randomly assigned to two product groups, bidding for a Chinese luncheon meat product (Shuanghui) or a similar US luncheon meat product (Hormel), respectively. Within each product group, participants were further randomly assigned to four sessions of SPA auctions with 11 or 12 bidders in each session. Four information treatments were included in each auction session. Under each information treatment, participants bid 3

4 repeatedly for eight auction rounds, resulting in a total of 32 auction rounds. At the end of each auction round, each participant was informed privately about the auction outcome 4 and then bid for the next auction round. At the end of the experiment, one out of the total 32 auction rounds was selected randomly as the binding round, and the winner in the binding round received the product and paid the second highest bid. In the first (baseline) treatment, all products were wrapped in white paper without revealing the country of production or brand name. Participants were asked to submit their bids only knowing the product was a 340 gram luncheon meat. After bidding eight rounds in the first treatment, participants were then informed about the country of production (Treatment 2) and bid for another eight rounds. In the third treatment, the brand name was revealed to the participants 5. In the last treatment, participants were presented with the information of the Shuanghui-Smithfield acquisition - in the preacquisition stage, participants were informed that Shuanghui had achieved a merger agreement with Smithfield pending the approval from CFIUS; in the post-acquisition stage, participants were informed that Smithfield had been acquired by Shuanghui. 3. Results and Discussion Summary statistics of participants socio-economic data are reported in Table 1 and are similar between product groups both before and after acquisition. The average bids for the Shuanghui and Hormel products, pre- and post-acquisition, are shown in Figure 1. In the baseline treatment, average bids for the Chinese and US products, both before and after acquisition, were not statistically different (around 13 CNY). Upon learning the country of production, participants WTP significantly increased for the US product but not for the Chinese product. In the pre-acquisition stage, consumer WTP for the US product was 62.1% higher than that for the Chinese product (p value < 2e-16); while in the post-acquisition stage, WTP for the US product was only 42% higher than that for the Chinese product (p value < 5e-15). Knowing the brand names further increased consumer 4 The highest bidder in each round was told that he/she was the winner in that round and informed about the second highest bid, and the other bidders were only told that they were not the highest bidder. 5 The orders of the second and third treatments were randomized to avoid order effects. Results did not show significant order effects. 4

5 WTP for both products. After learning the Shuanghui-Smithfield acquisition deal, participants WTP for Shuanghui increased while their WTP for Smithfield decreased. 26 Average Bids (CNY) Shuanghui Pre-Acquisition Hormel Pre-Acquisition Shuanghui Post-Acquisition Hormel Post-Acquisition Baseline Country of Production Brand Acquisition Information Fig. 1. Average Bids across Treatments. Next we use regression analysis to examine how various factors affect participants bids. Random effects model is used to control for individual bidder effects.the first model takes the following form bbbbbb iiiiii = ββ 1 + ββ 2 SS 2 + ββ 3 SS 3 + ββ 4 SS 4 + γγγγ + ZZ ii αα + uu ii + ee iiiiii, where the subscripts i, t, s index individual, rounds of auctions in each treatment, and treatment separately, Zi is a vector of individual characteristics, uu ii is a time invariant individual effect, and ee iiiiii is an error term with zero mean and finite variance, which is i.i.d. across the individuals, rounds and treatment sessions. The effects of different information treatments are captured by the treatment dummies SS 2, SS 3 and SS 4, which are defined as Sj =1 if s j and 0 otherwise, for j=2,3,4. These treatment dummies are defined such that β 2 captures the effect of information of country of production relative to the baseline case of no information, ββ 3 captures the effect of brand information given the information of country of production, and lastly ββ 4 captures the effect of information on the Shuanghui-Smithfield acquisition given the information on country of production and 5

6 brand. We use this design to reflect the cumulative nature of information treatments that once a piece of information is revealed to the participants, its effects may remain in subsequent treatments. Therefore, instead of the common practice of comparing the outcome of each treatment to the baseline case, we compare the outcome under a new information treatment to that of the cumulative information set. This modeling strategy facilitates the interpretation of our regression analysis, where the coefficient of the treatment dummies captures the net effect of new information along the course of the auctions. In our exploratory regression analyses, we control for the effects of many possibly influencing factors such as participants age, gender, socioeconomic background, academic performance, food safety concern (measured by the degree of concern over the Chinese market with regard to food safety), and others. Only one of these variables, the food safety concern, turn out to be statistically significant. Therefore, we drop all other explanatory variables in our analyses. To further explore the effects of food safety concerns, we add interaction terms between the food safety concern and the treatment effects in the regression model, bbbbbb iiiiii = ββ 1 + ββ 2 SS 2 + ββ 3 SS 3 + ββ 4 SS 4 + ααff ii + δδ 2 ff ii SS 2 + δδ 3 ff ii SS 3 + δδ 4 ff ii SS 4 + γγγγ+uu ii + ee iiiiii, where f i is individual i s concern for food safety. The regression results before and after the acquisition are shown in Table 1 and Table 2, respectively. The coefficients on the baseline indicate little systematic difference in consumers WTP across different sessions. The coefficients of auction rounds are also similar across sessions, suggesting that participants bidding behaviors do not vary across sessions. On the other hand, the coefficients of information treatments vary across products, and also seem to evolve overtime between the pre-acquisition and post-acquisition periods. Results before the acquisition (Table 1) show that knowing that a product is produced in the US significantly increased participants WTP by 6.93 CNY (a 56.7% increase) compared to the baseline case, while knowing that a product is produced in China did not change their WTP. Brand name information further increased participants WTP for both products. The information about the then pending Shanghui-Smithfiled acquisition has a 6

7 positive effect of 0.92 CNY on Shuanghui, but no effect on Hormel. The interaction term of food safety concern and country of production has a significantly negative effect of CNY on the Chinese product, suggesting that the food safety concern about domestic product is an important factor that lowers Chinese consumer s WTP for Chinese product. [Table 1 around here] The corresponding results after the acquisition are shown in Table 2. Since the survey at the end of the experiment showed that 40% of the participants have heard of the Shuanghui-Smithfield acquisition prior to the experiments, we separate the participants who had heard of this acquisition and those who had not heard of this acquisition in our regression analysis. Interestingly, for participants who had heard of the acquisition, their WTPs significantly increased by 0.80 CNY after they were informed that the product is produced in China; whereas for participants who had not heard of this acquisition, their WTPs significantly decreased by 0.91 CNY after learning the product is produced in China. This result suggests that the Shuanghui-Smithfield acquisition has possibly boosted Chinese consumers confidence for Chinese products. Nevertheless, participants WTP still significantly increased after learning that the product is produced in the US. However, after learning about the Shuanghui-Smithfield acquisition, participants WTP for Hormel significantly decreased by more than 2 CNY (20%) for participants who had not heard of this acquisition before, suggesting a negative spillover effect. The food safety concern is again shown to be an important factor that decreased participants WTP for the Chinese product, but increased their WTP for the US product. [Table 2 around here] 4. Concluding Remarks The findings of our study indicated that the Shuanghui-Smithfield acquisition benefited Shuanghui and general Chinese products in Chinese markets in terms of increasing Chinese consumer s WTP for domestic products, but had negative impacts on the US products. We showed that Chinese consumers are willing to pay significantly more for the US products compared to domestic products, consistent with previous consumer studies (e.g. Ahmed and d Astous, 2004; Delong et al., 2004; Dickson et al. 2004; Ortega et al. 2009; Tai and Tam, 1997; Wang et al. 2004). However, our results suggested that a 7

8 major outbound cross-border M&A event like the Shuanghui-Smithfield acquisition has likely boosted Chinese consumers confidence in domestic products and reduced their WTP gap between domestic products and foreign products. Our study also confirmed the previous findings that the food safety concern plays a significant role in Chinese consumers food purchasing decisions (Grunert et al., 2015; Jin & Mu 2012; Ortega et al. 2011; Wang et al. 2013; Wu et al. 2015; Yu et al. 2014). In particular, we found that the food safety concern is an important factor that lowers the Chinese consumer WTP for domestic meat products and increases their WTP for the US meat products. Funding: This work was supported by the National Natural Science Foundation of China (grant numbers NNSFC , ); the Major Program of the Key Research Institute of Chinese Ministry of Education (grant number 15JJD790032), and Texas A&M University-National Natural Science Foundation of China Collaborative Research Grant Program (grant number ). Acknowledgements: The authors would like to thank research assistants Wenke Bi, Haiyue Guo and Ganlu Du for their hard work. References: Ahmed, S. A., & d'astous, A. (2004). Perceptions of countries as producers of consumer goods: A T-shirt study in China. Journal of Fashion Marketing and Management: An International Journal, 8(2), Breidert, C., Hahsler, M., & Reutterer, T. (2006). A review of methods for measuring willingness-to-pay. Innovative Marketing, 2(4), Delong, M., Bao, M., Wu, J., Chao, H., & Li, M. (2004). Perception of US branded apparel in Shanghai. Journal of Fashion Marketing and Management: An International Journal, 8(2), Dickson, M. A., Lenon, S. J., Montalto, C. P., Shen, D., & Zhang, L. (2004). Chinese consumer market segments for foreign apparel products. Journal of Consumer Marketing, 21, Grunert, K. G., Loose, S. M., Zhou, Y., & Tinggaard, S. (2015). Extrinsic and intrinsic quality cues in Chinese consumers purchase of pork ribs. Food Quality and Preference, 42,

9 Herger, N., Kotsogiannis, C., & McCorriston, S. (2008). Cross-border acquisitions in the global food sector. European Review of Agricultural Economics, 35(4), Jin, Y., and Mu, J. (2012). Avian influenza in China: Consumer perception of AI and their willingness to pay for traceability labeling. In Health and Animal Agriculture in Developing Countries (pp ). Springer New York. Ortega, D. L., Wang, H. H., & Wu, L. (2009). Food safety and demand: Consumer preferences for imported pork in urban China. Journal of Food Distribution Research, 40, Ortega, D. L., Wang, H. H., Wu, L., & Olynk, N. J. (2011). Modeling heterogeneity in consumer preferences for select food safety attributes in China. Food Policy, 36(2), Tai, H.C. and Tam, L.M. (1997), A lifestyle analysis of female consumers in greater China, Psychology and Marketing, 14(3), Vickrey, W. (1961). "Counterspeculation, Auctions, and Competitive Sealed Tenders". The Journal of Finance 16 (1): Wang, C.-L., Siu, N. Y. M., & Hui, A. S. Y. (2004). Consumer decision-making styles on domestic and imported brand clothing. European Journal of Marketing, 38, Wang, H. H., Zhang, X., Ortega, D. L., & Widmar, N. J. O. (2013). Information on food safety, consumer preference and behavior: The case of seafood in the US. Food control, 33(1), Wu, L., Wang, S., Zhu, D., Hu, W., & Wang, H. (2015). Chinese consumers preferences and willingness to pay for traceable food quality and safety attributes: The case of pork. China Economic Review, 35, Yu, X., Gao, Z., & Zeng, Y. (2014). Willingness to pay for the Green Food in China. Food policy, 45,

10 Table 1: Summary Statistics of Participants Socioeconomic Characteristics Pre-Acquisition Post-Acquisition Product Groups Shuanghui (N=47) Hormel (N=47) Shanghui (N=47) Hormel (N=46) Age (Mean) Gender (%) Male 45% 51% 45% 50% Female 55% 49% 55% 50% Monthly Income * (Mean in CNY) Years in College (Mean) Knowledge of this Acquisition (%) Had never heard of 68% 66% 53% 58% Had heard of 32% 34% 47% 42% Concern about market food safety (%) Yes 57% 63% 60% 57% No 43% 37% 40% 43% Note: * - Income from jobs, part-time jobs, family support, and any sources of economic support. 10

11 Table 2: Regression Results for Bids in the Pre-Acquisition Stage Variable Shuanghui Hormel Shuanghui Hormel Baseline 11.87*** 12.24*** 11.06*** 12.43*** Country of Production (0.1481) 6.93*** 0.26 (0.5417) 6.68*** Brand Name 0.52* (0.0566) 3.15*** 1.02** (0.0185) 2.67*** (0.0014) Acquisition Information 0.92*** (0.0008) (0.2161) 0.53 (0.2176) (0.7101) Round 0.33*** 0.40*** 0.33*** 0.40*** Food Safety Concern 1.33 (0.5031) Safety * Country -1.08** (0.0514) Safety * Brand (0.1376) Safety * Acquisition 0.63 (0.2544) (0.9348) 0.44 (0.6892) 0.82 (0.4549) (0.5767) σσ u σσ e ICC Note: p-value are presented in parentheses; *,**,***: Statistically significant at the levels of 0.10, 0.05 and 0.01 respectively. σσ u and σσ e are the standard deviations of the intercept and residual respectively. ICC is the Intraclass Correlation Coefficient that indicates the proportion of variances accounted by the individual effects. 11

12 Table 3: Regression Results for Bids in the Post-Acquisition Stage Shuanghui Hormel Shuanghui Hormel Didn t know Knew before Didn t know Knew before Didn t know Knew before Didn t know Knew before Baseline 10.73*** 11.15*** 8.97*** 10.86*** 13.75*** 10.75*** 9.69*** (0.0003) 9.58*** Country of Production -0.91** (0.0210) 0.80* (0.0746) 5.18*** 6.85*** -1.36** (0.0121) 1.70*** (0.0040) 4.06*** 5.32*** Brand Name 0.76* (0.0537) 0.67 (0.1331) 1.94*** 2.03*** 0.33 (0.5433) 0.81 (0.1651) 2.06*** (0.0001) 2.18*** Acquisition Information 0.28 (0.4713) 0.27 (0.5407) -1.59*** -1.34*** (0.0022) (0.2715) 1.13* (0.0537) -2.04*** (0.0001) -0.99* (0.0593) Round 0.44*** 0.33*** 0.47*** 0.43*** 0.44*** 0.33*** 0.47*** 0.43*** Food Safety Concern -6.05** (0.0483) 0.88 (0.7938) (0.7325) 3.52 (0.1530) Safety * Country 0.91 (0.2359) -1.98** (0.0230) 1.91*** (0.0053) 4.21*** Safety * Brand 0.86 (0.2604) (0.7152) (0.7735) (0.6347) Safety * Acquisition 1.76** (0.0201) -1.89** (0.0299) 0.76 (0.2661) (0.2703) σσ u σσ e ICC Note: Didn t know Participants who had never heard of the Shuanghui-Smithfield acquisition; Knew before Participants who had heard of the Shuanghui-Smithfield acquisition. p-value are presented in parentheses; *,**,***: Statistically significant at the levels of 0.10, 0.05 and 0.01 respectively. σσ u and σσ e are the standard deviations of the intercept and residual respectively. ICC is the Intraclass Correlation Coefficient that indicates the proportion of variances accounted by the individual effects. 12