Business Report
Based on the sectoral analysis, it is evident that the Julphar Pharmaceutical Company has maintained a strong market position in the United Arab Emirates (UAE) and Africa’s pharmaceutical industry over the past four decades. Notably, a 2007 report by the Prime Group Research Department shows that as of 2008, the company’s revenues had risen to AED 987 million from AED 710 million in 2007, and its growth ranged at 39.1% the same year. In 2015, the company’s annual revenue totaled AED 400 million, with an anticipated income of AED 545 million in 2020 (“Julphar annual report” 2017). These statistics signify the firm’s significant growth in terms of revenue generation and market share in the industry. While the identified growth is remarkable, Julphar Pharmaceuticals would need to expand its international operations further, most notably in China, to enhance its market share in the global arena and boost the growth of its revenue.
This report analyzes the suitability and international business risks associated with China as a location for Julphar’s business expansion. The second section of the report analyses the structure, competitiveness, and strategic group positioning of firms in China’s pharmaceutical industry. An analysis of the strengths of resources and capabilities of Julphar Pharmaceutical and the impact of formal and informal institutions on the company’s entry into the new market is also provided. Finally, the report offers recommendations on the most suitable market entry strategies and competitive dynamic tactics that Julphar corporation should adopt in penetrating China’s pharmaceutical industry.
Justifications of Selecting China
Based on the analysis of Julphar’s current operations and the trends of the global pharmaceutical industry, it is proposed that the firm should expand its production to China. This proposal is based on the fact that the latter has the fastest growing pharmaceutical market that will provide a long-term business opportunity for the company. As the literature suggests, China’s pharmaceutical market was estimated to expand by 18% in 2006 to US$13.8 billion (Prime Group Research, 2007). True to this estimation, China has today grown to be the second-largest pharmaceutical industry globally (Ding et al., 2011). (Ding et al., 2011) Since its reform, the sector has been increasing at an average annual growth ratio of 16.6%. This growth can partially be attributed to the country’s economic boom, which seemingly boosts the pharmaceutical sector. On the other hand, the pharmaceutical market in developed countries such as Canada has significantly shrunk over the past few decades, probably because of industrial saturation. Therefore, China’s growing market has a promising business opportunity for Julphar pharmaceuticals to launch its operations.
Additionally, the ongoing changes in product development and government policies in China’s pharmaceutical industry presents a growth opportunity for Julphar company, thus making the country an ideal location for business expansion. As the literature suggests, China has, for years following the path of pure imitation and importation of pharmaceuticals, to sustain the country’s medication needs (Ding et al., 2011, p.2). Chen et al. (2019) also assert that the country’s pharmaceutical industry has mainly focused on imitating generic drugs patented by foreign enterprises, whose IP rights have expired are about to expire. This strategy has primarily been based on reverse engineering of drugs manufactured by other international companies, probably to avoid the high expenditures of research and development (R&D) in the industry.
However, over the past ten years, China’s government has been reforming its pharmaceutical industry and transitioning it from imitation to innovative drug development. Research shows that this reform has mainly been fostered by national policies that are gradually reshaping the path of China’s drug R&D (Ding et al., 2011, p.2). Furthermore, the federal government has provided financial incentives to motivate domestic firms to participate in drug innovation. As a result of the government policies, by the beginning of 2020, the country held a biologics pipeline of over 700 molecules (“Growth insights on China’s Pharmaceutical,” 2020). The ongoing product development and innovative activities in the field of pharmaceuticals in China provide a conducive environment for Julphar to deliver innovative and affordable healthcare solutions. This mission will be achieved through utilizing the available resources, most notably currently developed biologics molecules, in the production of drugs.
Furthermore, the low market concentration of China’s pharmaceutical industry makes the country an ideal location for Julphar to launch its operations. As the literature suggests, one of the strategies of international market selection is niche marketing, which entails avoiding markets with several dominant competitors (Toften & Hammervoll, 2011, p.284). Therefore, while expanding its operations, Julphar Pharmaceutical should choose a market that has limited dominant competitors. In essence, China’s pharmaceutical industry may appear to be highly saturated due to the existing high numbers of industrial participants, approximately 6807 companies by 2009 (Chen et al., 2019, p.223). Nonetheless, most of these firms are small and medium-sized, which implies that there are few dominant companies in the industry. Research by Chen et al. (2019, p.223) confirms that by 2009, 5787 of the country’s 6807 pharmaceutical companies were small and medium-scale enterprises, with the concentration ratio of the ten biggest companies being 15.10%. These statistics show that market concentration, in terms of large-scale companies in the country, is still relatively low compared to other developed nations, thus making China a suitable location for Julphar to expand its operations.
International Business Risks
Despite the multiple factors that make China an ideal place for Julphar’s business expansion, there are several risks associated with the country that the firm ought to react to, to ensure that its business thrives on the foreign land. Among the most prominent issues in China’s pharmaceutical industry is political risks. Notably, the country’s political climate appears to pose multiple challenges to foreign firms that wish to expand their operations in the nation. For example, Chen et al. (2019, p.219) observes that market regulation of China’s industry has been relatively strict, especially on market entry and price control, thus weakening the power of pharma enterprises. Notably, the Chinese government has been making an effort to protect and boost the competitiveness of its domestic pharmaceutical companies through tightening regulations on market entry. These political factors may pose a risk to Juplhar’s operations, as it may be challenging and costly to penetrate the market amidst many administrative requirements.
Besides the stringent market control, the state-owned hospitals in China have a monopolistic buying position, which may pose a significant problem to Julphar’s operations in terms of reduced margins. Studies reveal that the hospitals in China monopolize drug sales by controlling about 4/5 of the market (Chen et al., 2019, p.231). Notably, this happens because of the existence of hospitals and pharmacies together model in the country, whereby the hospitals own their pharmacies for sale of medicines to patients. Amidst the stringent market control and monopolistic power among hospitals, it may be challenging for the company to record high margins as its sales may primarily depend on its ability to develop a lasting relationship with the local hospitals.
Analysis of China’s Pharmaceutical Industry
Industry Structure and Group Positioning of Firms in China
China’s pharmaceutical industry has a distinct structure comprising of three types of enterprises, state-owned, privately owned, and foreign-funded. Evidence from prior literature reveals that approximately 36%, 35% and 29% of the enterprises are state-owned, private and foreign-funded, respectively (IBP Inc, 2007, p.76). These statistics indicate that a significant fraction of the industrial participants are domestic and funded by the government. Also, the statistics show that a considerable number of multinational companies such as GlaxoSmithKline have a significant market share in the industry. As such, Julphar pharmaceutical has an opportunity to fit the country’s pharmaceutical sector structure, most notably in the foreign-funded enterprises.
Further analysis of the industry structure also shows a region-specific pattern of investment in the pharmaceutical sector. Notably, a significant fraction of multinational pharmaceutical companies is located in key regional and high-end product markets (Chen et al., 2019). The high-end product markets are mainly developed areas in China, such as Shanghai, Beijing, and Wuxi. Arguably, the concentration of multinational companies in these areas could be as a result of the existing incentives that make the regions conducive for foreign investment, and policies that govern the establishment of pharmaceutical plants in the country. Therefore, considering this information, it would be ideal for Julphar pharmaceuticals to launch its operations in the developed areas in the country to take advantage of the incentive policies and keep pace with the already established multinationals in the country.
Competitiveness of the Industry
A market analysis of China’s pharmaceutical industry reveals that the sector is characterized by fierce competition among both domestic and multinational companies. Most notably, competition in the industry is on a cost-basis (Berry, 2017). Consumers of pharmaceutical products in China are mostly inclined to purchase drugs that cost the least; thus, there exists a race-to-the-bottom price war among manufacturers of pharmaceuticals.
One of the factors that drive price competition in the sector is the nature of China’s drug market, which is highly generic. Notably, Berry (2017) observes that the country has a robust generic drug market that creates significant sales barriers based on brand recognition. It is worth noting that like brand name drugs, generic drugs serve the same purpose in treatment. Therefore, considering the similarity in use, firms in the industry can only compete based on price. This information implies that, for Julphar pharmaceutical to expand and succeed in its operations in China, it should adopt operational strategies that lower its drugs’ final costs.
Apart from price competition, the western pharmaceutical industry also faces stiff competition from traditional Chinese Medicine (TCM). According to a PWC report, the TCM has been around for about 300 decades, and it accounts for approximately two-thirds of China’s drug sales (“Investing in China’s Pharmaceutical Industry,” n.d., p.4). The report also indicates that a prior survey showed that Chinese consumers preferred TCM to Western medicine. Hence, traditional drugs remain a considerable threat to the modern pharmaceutical industry. Therefore, Julphar should have the ability to prove that its drugs are of higher quality and more effective compared to TCM to effectively attract a broad consumer base, including those that prefer traditional medicines.
Strengths of Resources and Capabilities of Julphar Pharmaceuticals
Apart from being the largest pharmaceutical company in the Middle East, Julphar company boasts a myriad of manufacturing capabilities, which are likely to boost its success in China’s market. Notably, as is evident from the firm’s annual report, Julphar’s core business activities extend to the manufacturing of branded generics, a key area of focus in China’s pharmaceutical industry (“Julphar annual report” 2017). The company’s early exposure to the production of affordable generic drugs is a capability that will facilitate its success and competitiveness in the new market.
Furthermore, Julphar has multiple resources, both financial and human, that are likely to enhance its chances of succeeding in the new market. Most notably, the firm has some of the most outstanding state-of-the-art pharmaceutical manufacturing facility in Saudi Arabia (“Julphar annual report” 2017). Therefore, the company can borrow technological ideas from its parent firm to construct an advanced facility in China, which will boost its production processes.
Impact of Formal and Informal Institutions
Despite its outstanding resources and capabilities, Julphar’s entry in the new market may still be impacted by formal institutions such as the government through the establishment of policies that regulate the firm’s practices. As the literature suggests, the government plays a vital role in steering corporate social responsibility (CSR) through mandating, facilitating, partnering, and endorsing the practice in business and society (Dentchev, Haezendonck & Balen, 2015, p.4). This role extends to both domestic and multinational companies. As such, Julphar’s entry in China’s pharmaceutical market may be impacted by China’s government CSR policies, as it propels its efforts to ensure that the company adopts sustainable production practices to promote a healthy business environment.
Furthermore, informal institutions such as communities residing in areas in which the firm plans to establish its operations may impact on Julphar’s entry into the new market through setting specific standards of expectations for the company. Like the government, local communities are prominent stakeholders in the business environment, which implies that their actions have a significant impact on the success and failure of a firm. Therefore, the expectations of the local communities, such as Juphar’s participation in ethical business practices and CSR, could have a considerable impact on the firm’s successful entry into the market.
Recommendations
Market Entry Strategy
Based on the analysis of the structure of China’s pharmaceutical industry and associated international business risks, it is proposed that Julphar should adopt a joint venture as its market entry strategy. This industry entry strategy entails the joining of entrepreneurs in the host country for the division of costs and risks in the undertakings (Costa & Figueira, 2017, p.70). Similarly, Julphar corporation should form a joint venture with one of the growing domestic firms in China in attempts to penetrate the country’s pharmaceutical industry.
The selection of a joint venture as a market entry strategy is based on multiple factors, among them availability of information about the market. As the literature suggests, one of the advantages of a joint venture is the availability of knowledge of the local market (Costa & Figueira, 2017, p.70). In this context, Julphar pharmaceuticals may have limited information about the new market in which it plans to expand its operations. Forming a joint venture with a domestic firm will be beneficial as the latter is likely to have adequate information about how the local market operates, and sufficient connections in the industry’s supply chain essential for long-term business success. Consequently, Julphar can utilize the knowledge obtained through this partnership to develop a strategic and operational plan that will boost its long-term success in the new market.
Furthermore, the nature of costs and risks associated with a joint venture is also a significant rationale for the proposition of its use as an entry strategy in the market. Scholars opine that joint ventures are advantageous because they enable the involved parties to share in the costs and risks associated with industries (Costa & Figueira, 2017, p.70). Therefore, by embracing the proposed market entry strategy, Julphar’s expansion decision would more likely succeed as the firm would mitigate the risks and huge costs associated with the establishment of operations in a new market by sharing all the expenditures with the joint-venture partner.
Apart from the need for risk and cost-sharing, a joint venture is proposed as an ideal market entry strategy to avoid the political risks associated with international business. As noted, the political climate in China seemingly favors domestic pharmaceutical firms over multinational companies. Therefore, Julphar should partner with a local firm to eliminate the barriers to market entry and avoid the stringent regulatory policies governing foreign firms in the country.
Competitive Dynamic Strategy
Based on the assessment of the nature of competition in China’s pharmaceutical industry, it is proposed that Julphar should pursue a cost-leadership competitive dynamic strategy. Notably, it is evident from the market analysis that price is the most critical element that defines sales in the industry, given the robustness of the generic drug industry in the country. As such, the firm should focus on operational strategies that lower the final prices of its drugs to remain competitive in the industry.
Reference List
‘Growth insights on China’s pharmaceutical industry (2020 to 2025) – Key market trends supporting the expansion of the Chinese Pharmaceutical industry’, (2020). Business Wire, 10 February [online]. Available at: https://www.businesswire.com/news/home/20200210005340/en/Growth-Insights-Chinas-Pharmaceutical-Industry-2020-2025. Accessed 20 June 2020.
‘Investing in China’s Pharmaceutical Industry-2nd edition’ (n.d.). PWC [online]. Available at: https://www.pwc.com/gx/en/pharma-life-sciences/assets/en-pharma_03-26-small.pdf. Accessed 20 June 2020.
‘Julphar annual report,’ (2017). Julphar [online]. Available at: http://www.julphar.net/uploads/investors_reports_documents/pdf_file/01_E_Julphar_Anuual_Report_RPP.pdf. Accessed 20 June 2020.
Berry, E. (2017). ‘Domestic competition in the Chinese pharmaceutical industry’, UWO, 6 March [online]. Available at: https://www.democracylab.uwo.ca/Archives/2016__2017_research_/pharma_in_china/domestic_competition_in_the_chinese_pharmaceutical_industry.html. Accessed 20 June 2020.
Chen, X., Xue, S., Lv, M., & Wang, R. (2019). ‘Innovation, Economic development, and intellectual property in India and China’, Berlin, Germany: Springer Nature.
Costa, L.P.D.S., & Figueira, A.C.R. (2017). ‘Political risk and internationalization of enterprises: A literature review’, Scielo, 15(1), p63-87.
Dentchev, N.A., Haezendonck, E., & Balen, M. (2015). ‘The role of governments in the business and society debate’, Business & Society, 56(4), p1-18. doi: 10.1177/0007650315586179
Ding, J., Xue, Y., Liang, H., Shao, R., Chen, Y. (2011). ‘From imitation to innovation: A study of China’s drug R&D and relevant national policies’, Journal of Technology Management & Innovation, 6(2), p1-13.
IBP Inc. (2007). ‘China medical and pharmaceutical industry business intelligence report volume 1 strategic information, regulations, contacts’, Lulu.com.
Prime Group Research (2007). ‘Julphar pharmaceutical sector: Value in growth’, Amazon [online]. Available at: http://content.argaam.com.s3-eu-west-1.amazonaws.com/d6331dea-cc61-4e42-8607-c364e428af24.pdf. Accessed 20 June 2020.
Toften, K., & Hammervoll, T. (2011). ‘International market selection and growth strategies for niche firms’, International Journal of Entrepreneurship and Innovation Management, 13(3/4), p282-295.
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