The Main Opportunities for Abbott in the Chinese Market - Case Study Example

Abbot’s Marketing Plan for China Introduction Abbott Laboratories is a broad-based global healthcare manufacturing company headquartered in the United States with facilities in all continents. It specializes in major drugs in the areas anesthesia, anti-infectives, cardiovascular, diabetes care, hematology, oncology, pain care, renal care, vascular and virology. The company also manufactures equipment for immunodiagnostics and clinical chemistry (www.abbott.com). Abbott sells a number of its products, including Paclitaxel Injection/Anzatax, Enflurane/Ethrane, Isoflurane/Forane, Sibutramine Hydrochloride Capules/Reductil, Propafenone Hydrochloride Tablets/Rytmonorm, Ademetionine Enteric Coated Tablets/Transmetil, etc. in China. In this paper, I will develop a marketing plan for entry into China’s pharmaceutical market more aggressively, with manufacturing facilities in the country. To begin with, I will describe the macro scenario in China, with special emphasis on the demand and supply of western drugs in the country. Then, I will go into the micro analysis, studying the competitive scenario within industry segments. Finally, I will undertake a SWOT analysis for Abbott Laboratories in China and recommend an marketing plan for the company. Macro Analysis China, world’s most populous country with a 1.31 billion people, began its growth trajectory relatively recently. The country turned from a centrally planned economy to a market-oriented one in the late 1970s. The restructuring of the economies has resulted in fast growth, particularly in the recent years. China recorded growth rate of Gross Domestic Product (GDP) of 9.9 percent in 2004-05. Of the GDP at purchasing power parity of $8.859 trillion in 2004-05, 14.4 percent was contributed by agriculture, 53.1 percent by industries and 32.5 percent by the services. On the other hand, 49 percent of the labor force was occupied in agriculture the same year while 22 percent was engaged in industry and 29 percent services (CIA). Thus, while the population has been predominantly agriculture, China has made great strides in industries, particularly manufacturing industries, so that a greater share of the GDP is contributed by this sector. Despite the high growth in GDP, China has relatively low per capita income, making it a middle-income country in terms of purchasing power parity. Growth in China is concentrated in the coastal areas and about 150 million people continue to live in poverty. The one-child policy in China has resulted in a rapidly ageing population in China, with 50 percent of the population above 35 years of age (Deutsche Bank, 2006). This is one reason why China’s pharmaceutical market remains underdeveloped. Of the 1.31 billion people, 870 million live in rural areas with little access to healthcare facilities (espicom, 2007). The general healthcare facilities in China are as low as in India or in Pakistan. The country has a “2 track” healthcare system in which the urban areas have very sophisticated care facilities while the rural areas are still served by “barefoot” doctors. Yet, due to the sheer number of people in urban areas, the pharmaceutical market in China has the largest potential in Asia. The present drug market in China is estimated at $19.2 bn in 2005 (Price Waterhouse Coopers) although about 75 percent of the healthcare market is catered to by traditional Chinese remedies. About 97 percent of the sales of western drugs are generics or counterfeit products manufactured locally. The local production of OTC market contributes only 10 percent of the pharmaceutical market in China. The OTC market in China is estimated at $2 bn and is expected to grow to $5 bn by 2010. This has induced foreign pharmaceutical companies to enter the OTC market in China while local manufacturers produce most of the off-patent generic drugs. About 97 percent of the drugs manufactured by local companies are generics. Although the Chinese pharmaceutical industry concentrates on manufacturing drugs discovered in the developed world, the increasing presence of multinational companies in China, the low cost production possibilities and the WTO requirements since the country’s accession have put pressure to increase R&D spending and innovate. The most serious problem for pharmaceutical MNCs is intellectual property rights since, despite an array of legislation, enforcement remains difficult (espicom, 2007). Besides, China has a very complex distribution system, which has deterred multinational companies to invest heavily in the country. However, Boston Consulting Group (BCG) estimates that China will become the fifth largest pharmaceutical market in the world by 2010 with revenues of $24bn, triple of what it is now. At present, China ranks seventh in world pharmaceutical markets. The promising markets, driven by growing needs, will be the ethical (or prescription) drugs and the OTC drugs. BCG estimates that ethical drugs will be the fastest growing, generating 70 percent of the revenues while 30 percent will be contributed by innovative drugs. Abbott’s growth strategy in China can be analyzed with the Ansoff (1965) matrix presented below. In this model, risks are lowest when existing players attempt market penetration. Market development by a new player and product development by the existing player lies at the next levels of risks while diversification has the highest risks involved. Typically pharmaceutical companies adopt product development strategies and new players attempt to enter into the market by either tying up with an existing player or capitalizing on synergic products. This is a moderately risky business. Diversification by a new player is the most risky. Abbott is already present in the China market through distribution agents. Hence, it is familiar with the regulatory and marketing framework. Penetration in the OTC market will not be very difficult, particularly if it ties up with a local distribution company. Micro Analysis Western medicine meets about 50 percent of the demand for healthcare in China. US imported and drugs sold through joint ventures contribute as much as 30 percent of the supply. Since 2004, a number of mergers and acquisitions were undertaken by western pharmaceutical companies as a result of which there are now about 500 companies that have sales revenue of over $6 million (Commerce can). Increasingly, pharmaceutical companies from the US, Switzerland, Germany, France, England and Japan are setting up manufacturing facilities in China to reap the benefits of low cost production opportunities. Besides Abbott Laboratories, the main western pharma companies present in China are Pfizer, Eli Lilly, Merck, Johnson & Johnson, Glaxo Smithkline Beecham, Bayer, Aventis, Novartis, AstraZeneca, Roche, etc. The main competition that the multinational pharma companies face in China is from traditional Chinese medicines. Over 1998 to 2003, pharmaceutical manufacturing in China grew by 8.4 percent per annum. Over the period, while chemical-originating western drug manufacturing rose from 80,000 tons to 350,000 tons, production of Chinese traditional medicine rose from 350,000 tons to 600,000 tons (Commerce can). According to Porter’s (1980) theory, a company has to decide on its winning strategies on the basis of competition in the industry as defined by the five forces: 1) the threat of entry of new competitors (new entrants), 2) the threat of substitutes, 3) the bargaining power of buyers, 4) the bargaining power of suppliers and 5) the degree of rivalry between existing competitors. The business environment depends on the level of industry competition and the intensity of rivalry, which in turn depend on the threat of new entrants into the business and that of substitutes as well as how well the company can manage its buyers and suppliers. The intensity of rivalry between players also depends on the number and size of players, cost structure of the industry, level of product differentiation, customer-switching costs, level of aggression exhibited by players and exit barriers. The threat of new entrants raises the level of competition in the industry. The intensity of competition to a large extent depends on the threat of substitutes. The number of buyers for the product increases the opportunities for the company while its competitiveness vis-à-vis the suppliers of products determine the margins. Abbott is in a strong position to explore the OTC market in China since there is little threat from local competitors. However, there are about 6,000 local drug manufacturers in China, producing and distributing generics at far lower prices than multinational companies. Since the country has had rudimentary modern medical facilities, the government has concentrated on basic medical needs. So, the state-owned pharmaceuticals have focused on anti-infectives (BCG). Demand for western OTC drugs is on the rise as demand is shifting away from home remedies among the affluent population. Besides, the government is promoting the retail distribution of drugs thereby encouraging the entry of multinational drug suppliers. Chinese drug manufacturers have mastered the art of copying western drugs and since patent regulations are weak, as many as 40 knockoffs of a particular generic may be available in the market at extremely low prices. Because of this, multinationals find it difficult to introduce innovative drugs in the Chinese market, where the threat of substitutes is extremely high. However, primarily because of the huge population and growing demand, the number of buyers of the product is high and the suppliers of intermediate products do not pose much of a problem. In China, as many as 100-150 million people carry Hepatitis-B virus and there are rampant cases of neck and head cancer. Besides, chronic conditions of diabetes, high blood pressure, high cholesterol, depression, osteoporosis and arthritis that can be routinely treated in the west are largely untreated in China (BCG). Thus, Abbott’s competitive advantage in the China market stems from the growing demand for basic drugs like anti-infectives and OTC although it is at a disadvantage in the generics. The geographical spread of the pharmaceutical market in China makes it difficult for a multinational company to make a distribution plan in the company. Most companies use the network of 6,000-8,000 national and provincial wholesalers who act as agents to the hospitals and clinics that make up 80 percent of the end users and the dispensaries (Price Waterhouse Coopers). SWOT Analysis Strength – The main strength of Abbott Laboratories in its marketing plan in China is its activities in diabetes control drugs as well as monitoring equipment as well as drugs for cardiovascular disease. Both these diseases are killers in China and there is a huge market in the country. China not only provides a large domestic market but is also the second largest exporter of chemical ingredients in the world, particularly for antibiotics and antiretrovitals. Chinese firms top the world in producing penicillin, Vitamin C, terramycin, doxycycline hydrochloride and cephalosporins (DFID). Weakness - The most serious problem in the pharmaceutical market in China is its non-transparent nature and the high level of corruption. There is lack of transparency between drug prescription and dispensing, especially in the hospitals that distribute 80 percent of the drugs (Price Waterhouse Coopers, 2006). Hospitals usually prefer locally produced generics and there is a large extent of corruption in the prescription mechanism. Usually, drug manufacturers are obliged to pay cutback amounts to the middlemen who sell the drugs to the hospitals in addition to paying incentives to hospital doctors and staff. The Chinese government has recently instituted anti-corruption laws and foreign companies have to abide by these laws as well as the home country laws. The Chinese government is trying to control the over prescription of drugs, particularly antibiotics. Some hospitals have also introduced electronic prescriptions, which forces the patients to buy at the hospital dispensaries only. Such mechanisms have made the drug distribution process all the more complex (Price Waterhouse Coopers, 2006). Opportunity – The greatest opportunity in the Chinese drug market is in the OTC segment. Typically, the OTC sales are complementary to the sales of traditional Chinese medicines (TCM), particularly those of cough and cold preparations, vitamins, minerals and indigestion preparations and the dispensaries are the main distribution outlets. TCM contributes 50 percent of the OTC market. In many of the OTC and TCM drugs, the differences are merging globally. Many of the traditional medicines for common ailments are being packaged, branded and sold by multinational companies. The dispensaries that sell TCM can be important distribution centers for OTC drugs as well. In fact, many of the larger Chinese dispensers are already selling western OTC drugs and TCMs alike (Price Waterhouse Coopers, 2006). The government too is encouraging OTC drugs and imported OTC drugs enjoy the same status as the locally manufactured ones. The other important opportunity for Abbott in China is investing in research & development. Many multinational pharma companies have invested in R&D facilities in China to take advantage of low costs of local scientists and those involved with testing and bringing drugs to the market. Opportunities for clinical trials are also high in China because there is a large pool of unrelated patients, access to a large data of ethnic population with genetic variations (Price Waterhouse Coopers, 2006). Threat – The biggest threat to multinational drug manufacturers like Abbott Laboratories is the competition from traditional Chinese medicines, off-patent generics and counterfeit drugs manufactured locally. Recommendations for Entry Strategies My personal recommendation for Abbott would be to forge a strategic tie-up with a local drug manufacturer in China. Some of the Chinese generic producers are also looking towards innovative products. For example, North China Pharmaceutical Group is focusing on biotech products, innovation through small molecules, traditional product screening, etc. while many other institutes in China are working towards developing small molecules (DFID). Traditional Chinese medicines may also be marketed abroad since TCM is also being upgraded with biotechnology. Conclusion Abbott Laboratories is a leading player in the global pharmaceutical market, particularly in the areas of diabetes care, cardiovascular care, antibiotics, etc. which have a large market in China. Traditionally, the Chinese pharmaceutical market has remained under-explored by multinational companies because of the lack of regulations and transparency, high level of corruption in the distribution channels, and the lack of enforcement of intellectual property regulations. As much as 50 percent of the market is catered to by the traditional Chinese medicine as 97 percent of the market for western drugs is contributed by counterfeit generic drugs. However, since the accession of China into the World Trade Organization in 2001, the government has been initiating steps to make the industry more transparent, reduce import tariffs, enforce patent laws and curtail the sale of counterfeit generic drugs. The main opportunities for Abbott in the Chinese market is making aggressive inroads in diabetes and cardiovascular drugs and monitoring equipment. Besides, I recommend higher spending in research & development by the company in China since the country provides low cost advantage as well as a high patient pool with genetic variations for clinical research. This will enable the company to produce innovative and ethical drugs for the domestic and overseas markets. Besides, the OTC market in China is growing as the affluent population moves away from traditional home remedies to western OTC products. As a large producer of chemical ingredients, China provides opportunities for innovative drugs as well as biotech upgraded and branded herbal medicines. Despite the huge opportunities that the Chinese market provides, the company needs to consolidate its distribution channels. As of now, the hospitals are the main end users of western drugs in China but this channel is highly corrupted. On the other hand, the company can tie up with large national and provincial wholesalers of medicines without necessarily going through the mesh of middlemen. Works Cited Ansoff, H I., Corporate Strategy: An analytic approach to business policy for growth and expansion, McGraw Hill, New York, 1965 Boston Consulting Group, China’s Growing Drug Market: Will you be a Contender? http://www.forskningsradet.no/CSStorage/Flex_attachment/BiotekBCGChina.pdf Business Week, China and India – A Challenge: A New World Economy, August 22, 2005, http://www.businessweek.com/magazine/content/05_34/b3948401.htm CIA, World Factbook, http://www.cia.gov/cia/publications/factbook/geos/ Commerce Can, Pharmaceutical Industry in China, commercecan.ic.gc.ca/scdt/bizmap/interface2.nsf/vDownload/ISA_3167/$file/X_3201650.DOC Deutsche Bank Research, Building Up India, Outlook For India’s Real Estate Market, May 8, 2006, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000198335.PDF DFID Health Systems Resource Center, 2004 Escipom, The Plarmaceutical Market: China, July 2007, https://www.espicom.com/Prodcat.nsf/Search/00000333?OpenDocument Porter, M.F., 1980. Competitive Strategy, The Free Press, New York, 1980 Price Waterhouse Coopers, Investing in China’s Pharmaceutical Industry, March 2006, http://www.pwchk.com/webmedia/doc/632785588008556096_ts_invest_pharm_mar2006.pdf Read More