Case analysis for Cephalosporin wars in China Essay

Synopsis

This case talks about how the Chinese markets are changing after twenty years of reforms. New Competitors & New markets are changing the way of doing business.

This case follows the Cephalosporin market in China. Cephalosporins have been in China since the past twenty years with more and more advanced versions being introduced.

The market characterizes intense competition between Domestic Players,Foreign Players & JVs.

Almost all the international brand names have a stake in the Chinese Cephalosporin market.

This case depicts the changing nature of the cephalosporin market in china.

Michael Porter’s Five Forces Approach:

(Evaluation of Cephalosporin market for Foreign Producers)

Threat of intense segment rivalry

The segments involved in this industry are:

Domestic

* Adapted Innovative brand building techniques.

These segments though mainly target different customer base, are threat as they are shifting from price competitiveness to innovative advertising schemes.

* Increased Marketing and Distribution Focus.

With the focus on marketing and distribution the local players are creating more opportunities and getting decentralized.

Other Foreign Players

* The other foreign players are the major rival as they have they are into the same market segment in enjoy all the benefits vis a vis its competitor. (Prices for imported drugs are twice the CIF prices.)

* The transition process for introduction of any new drug is as follows: They are first imported by foreign firms; multinationals then establish joint venture production with in China; and then domestic producers get involved.

Threat of new entrants

Entry Barriers:

* Being out of Essential Drug List. This is the most critical point as this leads getting out from the hospitals vendor list for e.g. two popular cephalosporins, cefaclor and cefoperazone are not on the national list.

* Imposition of hospital spending cap.

* Decrease in number of insured people from over two-third of the population to less than one-third of the population. This leads to reduction in profitable customer base. (2% of the population have government-funded public insurance program and 12% have enterprise-based insurance.)

Exit Barriers:

* Foreign-invested enterprises, especially joint ventures face it difficult to exit because of the heavy investment in the joint ventures.

Threat of substitute products

* Indigenously made Cephalosporin. Though it is not a big threat as the market segment of indigenously made Cephalosporin is different.

* Foreign and JV drugs can be anywhere from 20% to 1000% as expensive as generic equivalents.

* Characteristics of a drug that affect new antibiotic usage: What disease it is used for, the risks or side effects, how easy it is to use, and how much it costs compared to its competitors.

Threat of Buyers growing bargaining power

* Doctors: They are the key influencers. The prescription by a doctor determines the sale of a particular drug. The switching cost is minimal for them.

* Hospital Pharmacy: They are decision maker as in what to procure for hospital pharmacy, which is the prime market for the foreign market holders thus holds very high bargaining power.

* (In this case the higher price are favorable for Hospital pharmacy so they are not a threat in actual sense.)

* 85% of the market is from Hospitals

Threat of Supplier’s growing bargaining power

* Government has started its own distribution companies. Due to this, the distributor has more power.

How Attractive is the market?

The market for Cephalosporin is attractive for the foreign producers:

* Drugs constitute 52% of the total health spending.

* Margin for Cephalosporin are as high as 20% to 1000% over the generic equivalent.

* Number of insured people is as high as 50% of the total population. This provides the larger customer base, which is ready to pay higher prices for the drug.

* Hospitals, which constitute the 85% of the drug market, also earn profit with the sales. Thus there is inherent promotion involved.

* Brand value commands premium (People in China have an idea that foreign brand goods are better).

* Due to the Reimbursement Policy, Hospitals push Antibiotics.

Model Suggestion:

(Suitability of Market Entry for a Foreign Multinational Producer)

This model does suggest the means of market entry for a foreign multinational producer that are more favorable.

As per the discussion in above question following can be inferred from the model as means for a favorable entry:

* Target the class of people who are covered under health insurance

This option makes the entry favorable as there is no price constraint and a foreign multinational can enjoy the margin as large as 1000% of what the domestic players are getting.

* Target the hospital market where 85% market lies rather than retail market amounting to 15% of market.

This would lead to increased sales in a profitable market. Thus making the entry more favorable.

* Emphasize on brand building in the Cephalosporin market.

People in China have an idea that foreign brand goods are better. Leveraging on brand building would help the foreign multinational to have large market demand thus increasing their profits.

* Start Joint venture production.

In this era of heightened competition, Multinationals can respond to price competition, through joint venture production, lower prices and producing raw materials in China. For e.g. one foreign firm can lower prices of its third generation product by 20% once its new JV production comes on-stream.

Inherited Wisdoms Regarding Doing Business in China

a) There is no one national market in China. China is not one market but many.

The Chinese market is divided into a number of distinct segments

The urban population that is insured. This comprises of 50% of the population of major cities. They could afford all the costly imported varieties of Cephalosporins on the essential drug list (that was covered by insurance).

The Urban population that was not insured. They used the cheaper varieties of the Cephalosporin. The market was again dominated by the foreign players except for the drug Cefriaxone, which was dominated by joint ventures and domestic producers.

The rural market. This is a strong hold of the domestic players. The consumers are poor and have limited purchasing power and government imposes price ceilings forcing companies to operate on thin margins.

b) Because of the item “a” above, it is not possible to build a national brand in China.

This is false. It may not be possible for the domestic players to build a national brand. This is because of the fact that they operate in the lower end of the market (mostly 1st and 2nd generation Cephalosporin) where the prices were controlled by the government and hence the profits were low. Hence without the product range and the finances to build a brand, this is an impossible task for a domestic player. Joint Ventures with the local companies, they could tap the market for cheaper 2nd generation and 1st generation drugs. Their huge profits and the perception of the Chinese customer that the imported brands are better would enable the foreign companies to build a national brand.

c) Chinese brands have not built or cannot build brands.

Traditionally the Chinese firms competed on the basis of price. But with the opening of the market, and the influx of the foreign companies, they saw how a good brand could command a premium. The example of the changing mentality of the Chinese firms is illustrated by the example of Nanfang. Nanfang marketed its Cefotaxamine under the name Kaidilong and Ceftriaxone under the name of Lousaiqin. They spent time and money to build the brand. When a price war broke out with another domestic company, they did not lower price but they relied on brand recognition and used innovative distribution method to push its products.

d) Chinese firms compete only on the basis of price.

In case of domestic firms supply is greater than demand. Their competitive edge is because of low price .In Rural markets customers are most responsive to discounts and therefore to compete they have to work on their prices. However recently they have started innovative ways of brand building at low cost.

e) Once foreign firms enter the domestic Chinese market, the Chinese firms will not survive.

The Chinese health officials has undertaken various reforms which includes :

– Imposition of hospital spending caps

– Mandatory reduced prices for expensive pharmaceuticals

– Selective lists of drugs

This would work in favor of the domestic firms.Also de-centralization of National distribution gave a new life to local firms in China. Aggressive local promotions are affecting the sales.All this will help the Chinese firms to survive in case foreign firms enter the market.