Corruption:
There are rebates at every step of distribution chain. There are also various drugs list which exists at the same time and these lists can be changed by local government which makes it difficult for manufacturers to survive and thus this increases corruption in Chinese economy.
Accounting standards:
China’s accounting standards are different from international standards as they follow their own standards (CAS).
ECONOMIC FACTORS
Growth in GIP: As mentioned by China Association of Pharmaceutical and Commerce (CAPC), Gross Industrial Product (GIP) of China pharmaceutical industry in 2007 was RMB692.78bn, up by 25.1% year-on-year, sales revenue of RMB639.27bn, 24.9% and profit of RMB62.99bn, 55.6%. And its output increased by 18% from 2007 to first half of 2008.
GDP and Contribution to GDP: Although GDP will slow down from 11.9% to 8.2% by 2012 and its domestic demand will remain in 2009-2013. In last 30 years, its economy has grown 10 times with its GDP reaching 3.42 trillion US dollars in 2007. In purchasing power parity GDP, China has biggest economy after US
Also, according to 2005 report, 4.73% of GDP is spent on Total Health Expenditure and 2.26% of GDP is spent of pharmaceutical which is highest among all OECD countries.
Fig: Pharmaceutical expenditure/GDP in OECD countries and China
Impressive economic growth: Pharmaceutical industry notably contributes to China’s economic growth.
16.72% growth was achieved between 1978 and 2003 in this sector, making China World’s fastest growing pharmaceutical market.
Price Inflation
There would be challenge for the government as Consumer Price Inflation would remain persistent because labour shortages push up wages and rapid demand growth tests supply constraints.
Per Capita Income
China’s per capita income is only 2000 US dollars which is quite low but Purchasing Power Parity figure is 7800 US dollars which is considerably better.
FDI: FDI in China has improved last years since it changed its policies. Most US firms and Japanese firms will be shifting their manufacturing departments to China.
Increase in Domestic Demand: Revenue generated from during first half of 2008 was RMB354.54bn which increased considerably from last year. This was because country’s domestic demand is increasing drastically.
Cost pressures: China’s pharmacy industry is facing challenges because of rise in raw material prices and energy supply.
Rise in living standard of Chinese population: There is improvement in medical system and medical insurance, thus, there is huge potential for development in China’s pharmaceutical industry.
The market size is expected to be $24bn y 2010 and $120bn by 2020 making it the World’s largest.
Increase in OTC market: Growth in OTC market of China has made it the fourth largest OTC market in the World.
According to 2003 report, Roche, OTC drug sales were to increase by 50% and reach 1.3bn by 2008.
And China is ranked 57th among 179 corrupted countries.
Export policy
Chinese government has reduced the rebate on exports and the grace period for products have been eliminated according to new export policy
SOCIO-CULTURAL FACTORS
TECHNOLOGICAL FACTORS:
China produces huge amount of medical instruments but it has cost superiority for only small and low end products and imports top-end medical instruments. Thus, government aims at investing good amount of GDP to Research and Development department during their 11th five year plan which would develop the logistics department and formation of medicine production in long term.
UNITED STATES OF AMERICA
PEST Analysis of US
POLITICAL FACTORS
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US is a federal State and in based on the Constitution of 1787. In US the government is liberal and they have highly organized interest groups.
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Congress is known to be pharmacy friendly government. It has always extended help in the Research and Development. Laws governing income taxes are passed by the US congress and they have separate tax and accounting laws. The personal tax rates are low than other industrialised countries. Sales tax varies from state to state and the corporate taxes are on the higher side.
- In USA there is also an organization named PhRMA The pharmaceutical Research and Manufacturers of America. It represents the country’s leading pharmaceutical research and biotechnology companies. The govt. provides subsidies on expensive medicines so that it doesn’t harm the pocket of their citizens.
- Barriers to entry
Any new entrant will have to face a lot of challenges which will be in terms of rules and standardization set up by the established business. Some of the hurdles are
- economies of scale - manufacturing, R&D
- distribution product differentiation - brands and relationships
- capital requirements
- access to distribution channels
- regulatory policy: patents, regulatory standards
- Barriers are very high as some of the firms have significant manufacturing capacities that are hard to replicate. All of them defend their products with large marketing budget
Many firms in this industry have faced liability issues mainly because of inadequate regulatory policies. These liabilities generally result in settlements with large financial resources. For example Merck, a company in US is facing around 22,000 lawsuits; most of them are a result of a pain killer, Vioxx.
ECONOMIC FACTORS
(Source:)
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Recession and GDP: The Current recession in the economy has hit the people very badly worldwide. The growth rate of GDP is expected to be around 0.5% for the year 2009 which is very low. This credit crunch has forced many banks and financial institutions to change their strategies and work accordingly.
The US has the highest level of output in the world, with GDP valued at US$ 13.8trn in 2007, but due to the recent financial crunch there has been an economic downturn. It is expected that it would take until 2010 to absorb all this.
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FDI: About a third of FDI in USA is in manufacturing sectors. European firms account for 70% of foreign direct investment in UK. Total FDI in US was 1.5 trillion on historic cost basis in 2004; today it has a market value of 2.4 trillion.
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Well-developed Infrastructure: The country’s infrastructure is one of the best in the world. Whole of the country is connected nicely with all the three means of transport, land, water and air.
SOCIO CULTURAL FACTORS
Corporate Social Responsibility
Apart from just manufacturing most of these companies have to lay importance on CSR as all the customer’s are aware what is the company doing for society. As a result of it an image is created in the mind of consumer.
Below is the example of Pfizer.
Hofstede’s model
According to the Hofstede’s country score USA has the greatest individualism and is ranked first for it. Being individualistic is good but everything has pros and cons attached to it.
The above table gives us different scores of USA in Hofstede’s model. Individualism and Collectivism explains the interdependency of citizens on each other. Strong vs Weak Uncertainty Avoidance explains wether the society controls the future or just allows it to happen. Masculinity vs. Feminists preference in society for achievement & material success vs. caring for weak in quality of life.
TECHNOLOGICAL FACTORS
United States as a country is very advanced in the kind of technology they use. They are said to have the best technology in the world. They have made world’s most efficient machines. All these things are possible in the county does a lot of Research and development. Between 1990 and 2006 the R&D expense increased by 5 times. In 2006 North America accounted for 47.4% of the total world pharmaceutical sales.
Sales of new medicines from the period 2002-06
North America -66%
Europe-24%
Japan-4%
ROW-6%
(Source: IMS Health MIDAS MAT December 2006)
(Source:Ernst & Young, ‘Beyond Borders, Global Biotechnology Report 2007’ (datarelate only to publicly traded companies))
CHOICE OF COUNTRY
According to Pest Analysis done above of both countries, it is more profitable to put our pharmaceutical company in China because it is a emerging economy, although it has more entry barriers and price regulations but still its has more space for growth than US because of low labour costs and more favourable political, economic, social and technological factors. Also, now looking at the growth of China, all developed nations like Japan are putting their manufacturing parts in China.
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