Title: Analysis of the joint venture between Pfizer Inc. and Zhejiang Hisun pharmaceuticals
First off we start by analyzing the deal using Michael E. Porter’s model, the reasons for the joint venture and the involvement of the U.S. and Chinese governments in the deal.
In this segment we look at the competition in the Active Pharmaceutical Ingredients (API) manufacturing industry. Notably, in china there is a shortage of top quality API manufacturing companies. India is a larger base for most leading API manufacturers in the Asian continent. It was therefore prudent for Pfizer and Hisun to close this joint venture to take advantage of this gap in the industry and establish itself as the first leading API manufacturer in China. Moreover Chinese laws and tax code system favor API manufactured in China.
China is a low cost country. The cost of labor and other factors of production are comparatively lower than in the United States of America. As a consequence, setting up operations in Zhejiang province of China would confer Pfizer-Hisun competitive advantage as opposed to Pfizer on its own operating in the US. In Zhejiang China the supply of labor and other factors of production are abundant and the likelihood of suppliers manipulating prices to the disadvantage of the joint venture is unlikely. This seems exactly what Hisun-Pfizer needs to do to stay at the top by producing better products. Taking time to grow your suppliers is also very important (Hales et al. 2015). They further say it’s advantageous to build your best suppliers.
Michael E Porter postulates that where a business is dealing with a few savvy customers then they have power over the business and can dictate terms. They may also easily switch to other rival alternatives for the same goods or services. But where the business is dealing with a large number of customers, its power over customers is increased. China’s ever growing population which stands at not less than 1.3 billion offers the kind of large market base that Pfizer-Hisunwould need in order to have the upper hand when dealing with customers. This must have been a fundamental reason for the pursuit of this joint venture. The power of customers plays a critical role in business and many companies have taken their time to ensure that they provide and create a good customer base while maintaining performance (Schwepker, 2017). This is to create a good customer base which is something that Hisun-Pfizer desperately needs.
Although the pharmaceutical manufacturing is a tightly regulated industry in China, Zhejiang and Pfizer alike had to stay alive to the possibility of a new entrant coming in and posing competition to them. As such it was vital that they pursue the joint venture in order to expand their hold on the market and make it near impossible for another entrant to target the same market. In the business world, it is all about knowing who the right person is to partner with or what can be called strategic alliance (Hawlena, 2012) which is exactly what the Hisun-Pfizer merger deal brings to the table. Hisun-Pfizer is projected to have an aggregate investment of $295 million. When it comes to registered capital, it stands at $250 million. This financial strength effectively locks down this market segment from competition from new entrants
In the face of globalization, (Abidin, 2014) posits that competition is ever-increasing and choosing the best strategy to beat competition is very vital.The power of suppliers is another factor that in turn increases the competition in the sense that others can threaten to reduce their prices to get more customers. In this it’s all about taking time and making sure you use your special qualities to improve your products (Terrero, 2017). Taking time to grow your suppliers is also very important (Hales et al. 2015). They further say it’s advantageous to build your best suppliers.
According to MorningStar Ratings, the financial fortunes of Pfizer Inc. in the period leading up to the signing of the joint venture were not the promising. The net profits of the company stagnated at an average USD 8 million between 2007 and 2010. This shows that the company was hurting from the effects of the economic recession that began in the onset of 2008. As a consequence the firm had to look into ways of finding new markets and stronger partners in order to cushion it from such adverse consequences in the future. Indeed after the completion of the signing of the framework for the joint venture with Hisun, the company’s net income rose to over USD 14570 million. During the same period the Chinese economy was relatively stable: according to the IMF, while most of the world’s leading economies were struggling in the wake of the financial crisis of 2007-09, China accounted for more than half the increase in world GDP andremained almost unshaken, standing out as the engine of growth in the global economybecause of the governments bailout expenditure on Chinese firms and the public sector. This made China a desirable market to venture in for Pfizer.
The involvement of the two governments in the negotiations leading up to the sealing of the deal is yet another factor that facilitated the formation of this joint venture. The Chinese government must have been in support of the joint venture and subsequent setting up of operations in Fuyang, Zhejiang province of china as this would locate production of the generic medicines closer to the Chinese consumers as well as create job opportunities for the people of China.
The first signing of the Memorandum of Understanding to initiate the joint venture between Hisun and Pfizer took place during the visit by a delegation from the Zhejiang Provincial Government to the U.S. in June 2011. This would be followed by the visit by Chinese Vice President, Mr. Xi Jinpingto the U.S. in February 2011 which saw the two companies sign the Framework Agreement. This was done at the Sino-US Economic & Trade Cooperation Forum held in Los Angeles at a ceremony graced by Mr. Xi and U.S. Secretary of Commerce, John Bryson, as well as several other senior officials from China and the U.S. This high level involvement of senior government officials from both countries set the establishment of the joint venture in motion. The U.S. government was driven by market seeking motives and was interested in seeking new market for Pfizer, one of its leading pharmaceutical companies through this deal while China sought an efficient way to produce some of the best generic medicines closer to its people. The U.S. stands to rake in millions in profit from making foreign direct investments in China and Asia by extension through opportunities that are availed by this joint venture.
The business partnership with its associated risks compared to Pfizer Inc.’s partnership with Hospira Inc.
The deal signed between Pfizer Pharmaceuticals and Hisun Zhejiang is a joint venture. Theobjectiveof this joint venture is to enable Hisun-Pfizer to take advantage of the product portfolio enjoyed by Hisun, better utilize the broad market outreach as well as the expertise of Pfizer in research and development and commercialization of branded generic drugs. The joint venture also seeks to gain from Pfizer’s R&D, quality of manufacturing and manufacturing quality management and reap from international market promotion at Pfizer not forgetting its operational capabilities. But therein laysthe risks associated to organizational fit and cultural fit. Marrying the two organizations cultural practices could pose teething problems to the joint venture as is usually witnessed with the take -off of suchventures.in order that employees from the U.S. and China from either organization to begin working as one, reconciliation of organizational cultures to ensure cultural fit is necessary. According to (Shu et al. 2017), joint ventures like Pfizer-Hisun are constantly faced with the risk of “coopetition” (competition between the factions of the joint venture) which is not good for business.
When it comes to share price the companies are almost at par with Hisun at 51% kicking in $295 million, and 75 products as well as knowledge of local market while Pfizer invested $250 million representing 49% and 8 products. Apart from this Pfizer also brought in all of the know-how of a world-leading drug maker to Hisun Pfizer Pharmaceutical.This gives the parties to the joint venture a fair and equal power at decision making in the business which could be a source of stability. The risk of splitting up is that either the companies can continue to act as separate players or otherwise cease to operate in a certain region (Siddiqui&Farooq, 2017). As much as a joint venture sounds like a deal that will bring a lot of profits, there is also the probability of negative consequences in play (Arnold, 2015). There is also the issue of culture in play which offers a very good platform for partnerships and businesses to grow. There has been a growing concern on whether the Chinese culture promotes or deters businesses (He & Jackson, 2015). The challenge posed by this is that it takes time for individuals from different organizational cultures to be able to work in harmony at Hisun-Pfizer.
The joint venture is however different from the deal between the Pfizer Inc. and Hospira in that Pfizer Inc. planned to buy Hospira. The acquisition according to (The Chemical Engineer, 2015)seemed to be a viable deal because it would have eliminated competition by buying off Hospira, one of its major Pfizer’s major competitors in the generic medicines manufacturing sector. This would have givenPfizer a wider market which in turn results to more profits. But the deal was set to cost somewhere between USD 15-17 billion which compared to the joint venture with Zhejiang (where Pfizer put in only USD 250 million) was much more expensive. Although the acquisition of Hospira Inc. would have eliminated the managerial complications that can be brought about by joint ventures, the deal was far too expensive and could have been untenable for Pfizer. At the same time acquisition of a U.S owned firm like Hospira Inc. does not come with the benefits of making foreign direct investments in a low cost country like China which translates to high profit margins
This section is dedicated to analyzing how the national and organizational cultures of the two different countries: U.S. and China could potentially impact on the joint venture. This is with reference to Hosftede’s model of Cultural dimensions. Organizational culture refers to the system of belief and norms created within members of an organization which they hold dear (Lupsa-Tataru, 2016). This means it affects the organization how it works within and without.
Hofstede’s Cultural Dimension
This refers to the inequalities that exist in the distribution of power and responsibilities and are accepted by the people of a country. In a high PDI country like China, where people generally have accepted the disparities between those with power and without, employees are less likely to initiate tasks and are in fact likely to wait to be guided in order to complete tasks. This could be a source of conflict for smooth operations at Hisun-Pfizer since U.S. is a high DPI country.
This makes references to the ties that people have to others in the community. A country like China which is communist is a collectivist society where individuals are likely to take responsibilities for others in the team. However the U.S citizens could find this strange while working with the Chinese since the U.S. is a high IDV country where individualism is exalted. There is also the issue that the organization may seem to be unified with its organizational culture yet the people who make up the organization are incoherent (Ellinas et al. 2017). This presents a challenge as some of the employees may not accept or conform to the company’s culture making it hard to perform to their best.
This makes reference to the distribution of roles between males and females in the society. In patriarchal society like China, the roles of men and women rarely overlap. On the contrary, the U.S employees at Hisun-Pfizer are accustomed to a system where men and women tend to take on almost similar responsibilities. Hisun-Pfizer will have to find a balance between these two so that their employees work smoothly.
In this regard, Hofstede’s Model highlights the extent to which individuals need to understand the inexplicable. It is inherently tied to nationalism and religion. The U.S tends to have a normative approach where short term goals are exalted, no wonder they prepare statements of accounts quarterly for instance. Chinese nationals are more pragmatic and tend to be thriftier and long term oriented. These are aspects that would need to be understood by the leadership and management of Hisun-Pfizer in order to ensure smooth operations (Pilav&Jatic, 2017). Hisun-Pfizer needs to look at this considering the fact that these companies belong to countries which are competing for world dominance which may lead to culture superiority issues. For businesses to improve in performance, they have to ensure that they take time and invest on developing better organizational culture (Latif&Ullah, 2016)
The Hisun-Pfizer deal and exchange rates
This paper proposes hedging as in (Dohring, 2008) as an avenue that Hisun-Pfizer can employ domestic-currency invoicing and hedging in order to reduce itsvulnerability to variations in exchange rate firstly with regard to transaction risk i.e. the risk of changes in of the value of committed future cash flows). The same is still suitable for cushioning the joint venture against the variations inthe value of assets and liabilities denominated in foreigncurrency. This poses a risk called translationrisk. In order to take care of the broader economic risk, which entails the impact of variations and competitiveness of exchange rate variations, Hisun-Pfizer can pursue hedging (neutralization)using the following foreign exchange derivatives.
Forward Contract
Quite similar to futures contract, a forward contract is a slightly different agreement that allows the business to buy or sell whatever amount of a currency at a price which is pre-established on a particular date set in the future (Madura, 2008).As opposed to a futures contract, however, profits and losses that accrue on a forward contract are only payable upon expiry of the contract. Forward contracts are bought and on an over-the-counter basis between the buyer and seller. But unlike futures contracts, forwards are not regularly traded on exchanges. This allows the company like Hisun-Pfizer to trade on exchange without the risk of running into losses.
With a currency option, the investor has the right, but is not the obligated, to buy or sell a quantity of currency at a pre-established price by the date of expiry of the option. “Call option” refers to the right of the investor to sell the currency while and the right to buy is referred to as a “put option.” The Options approach allows investors to take advantage of more favorable prices in the event that market conditions vary after the purchase of the option is made.
Buying a call option, can be used for instance as insurance against the risk of a rising exchange rate, while at the same time the investor can use the “put option” to cushion against the risks associated with a falling exchange rate. Both of these can be used by Hisun-Pfizer in order to insulate the joint venture from adverse effects in the face of dwindling exchange rates.
According to a study conducted in the new Asian markets when stock market volatility increases then the exchange rates improve (Lee et al. 2011). Another study conducted in France reveals some very interesting facts: the real exchange rate decreased which was not in line with the traded stocks (Mitra, 2017). This makes you ask whether an appreciation of stock market will accrue for Hisun-Pfizer thanks to the joint venture and will lead to a decrease in the exchange rates. Maybe this is unlikely since the author acknowledges that this is particularly rampant in France.
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