Yet another U.S. company has learned the hard way that doing business in China is too tough — and too unproductive — to bother with the effort.
Generic drugmaker Actavis (ACT) has joined Home Depot (HD), Best Buy (BBY), Walmart (WMT), Revlon (REV), and a handful of other American brands that have decided to partially or wholly leave China, never realizing the success they had hoped for.
Actavis CEO Paul Bisaro decided enough was enough after observing the way the regulatory environment in China seemed to be constantly morphing into something that somehow kept U.S.-based drug companies at a disadvantage. The explanation, however, is a microcosm of a much trickier reality of doing business in China. That reality? China’s love for western brands isn’t an unconditional love.
It raises the question … is there a universal success formula for American companies with a presence in China?
Actavis Sees the Writing on the Wall in China
To be clear, Actavis wasn’t in the crosshairs of China’s regulatory environment. Bisaro had simply watched peer GlaxoSmithKline (GSK) get run through the wringer in China, facing accusations of bribery that ultimately led Glaxo to offer a peace offering in the form of lower drug prices.
As odd as that response was, even odder is that GlaxoSmithKline didn’t appear to do anything particularly uncommon within China’s pharmaceuticals arena. Yet, the row’s ripple effect has made doing business in China difficult for all American drug companies.
How so? Elsevier Business Intelligence development director Joshua Berlin explained one possible way by observing that “Doctors and hospitals are restricting access to sales representatives of other drug companies.” Odds are good that at least some U.S. and European drug companies are going to suffer from this new — not to mention arbitrary and unofficial — policy in a way similar to the way GlaxoSmithKline a quarter ago. The company’s sales in China slumped 61% in the third quarter in the wake of the bribery allegations.
In the meantime, French drugmaker Sanofi SA (SNY) has also become the subject of a bribery investigation in China. The Sanofi investigation is even more surprising, in that the total amount money in play was a mere $274,000 shared among 503 doctors … in 2007.
To be fair, the nation-state’s regulators are scrutinizing all pharmaceutical companies, including Chinese ones. It wouldn’t be a stretch to say it looks like China’s National Development and Reform Commission (the NDRC) is aiming to fulfill its mission of lowering healthcare costs for the country’s 1.3 billion residents by shaking-down U.S. suppliers first. And not only is the NDRC willing to cap drug prices, it has assumed the right to investigate (and even dictate) a corporation’s production costs.
Seeing where it all was going, Bisaro simply decided China “wasn’t worth the aggravation, the frustration or the concern.”
Not Just Pharmaceuticals, Not Just Regulations
As frustrating as China’s National Development and Reform Commission may be for international drug suppliers, it’s not just the U.S. pharmaceutical names that are experiencing regulatory headaches. Take retailing for instance.
Any retail store established in China is ultimately first approved (or denied) by a local government, and the process a foreign shop-owner must use to win that approval is trickier — and longer — than it is for a Chinese shop-owner.
And, even if an international corporation can get a handle on the red tape involved with doing business in China, there’s still the matter of appealing to the average Chinese consumer well enough make it worthwhile.
Best Buy certainly didn’t “get it” when it first ventured into China in 2007. Its aim was to re-create the American consumer experience in China, complete with walls stacked with well-organized merchandise sold by an army of blue-shirt-wearing sales people at the price plainly posted on the shelf or the box. Chinese shoppers wanted little to do with it.
As it turns out, China’s consumer technology buyers would rather rummage through a bin of random electronics, and then haggle with the shop-owner over the price. Best Buy eventually realized the key cultural difference, closing its namesake stores in China and instead focusing on its Five Star brand — a chain of smaller but more numerous electronics stores in China that is more established and looks nothing like the Best Buy that U.S. consumers have come to know.
Home Depot completely misjudged China’s consumer class too. While millions of Americans are do-it-yourselfers, most Chinese prefer to hire professionals to do most home-related projects for them. By late 2012, Home Depot announced it was closing all of its stores in China, never realizing much success there.
Bottom line? Bisaro might be right … China might not be worth the trouble for all U.S. companies, whether it be for cultural or for regulatory reasons. Ultimately, China may not be fruitful for those companies’ shareholders, which means investors should reconsider things if the only reason they like a stock is because of its plans for expansion in the Far East.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.