Eu Yan Sang was founded in 1879 and specializes in Traditional Chinese Medicine. It evolved from a small shop in Malaya selling traditional Chinese herbal remedies, to a global healthcare company manufacturing and retailing traditional Chinese medicines and herbs. It was listed on SGX in 2000 with operations in Hong Kong, Malaysia, Singapore, Australia, Macau and China, giving it a strong foothold all over the Asia Pacific region.

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Ranked 16th in consumer health in Singapore in 2011 and 7th in herbal/traditional dietary supplements, Eu Yan Sang’s success can be seen from its market presence. Moreover, the company’s overall share price increased steadily over the years due to product expansion and increase in retail outlets. Its market positioning as a middle-market brand, with an emphasis on the traditional fused with “modern and scientific approaches” has promoted widespread customer confidence. The company is also a leader in terms of controlling its entire supply chain, from the sourcing of raw materials to production, distribution and even treatment.

Based on its Annual Report, Eu Yan Sang’s international performance and long-term sustainability looks very encouraging. However, upon closer examination, the reliability of some of the figures in the Annual Report is a cause for concern as the annual report lumps the data of China and Macau with Hong Kong, casting a shadow on the company’s performance in each of the regions. This was further supported by various sources citing poor performances in China, which has led to our topic of focus on Eu Yan Sang in China.

Our project seeks to examine and analyze the applicability of Eu Yan Sang’s successful business model in Singapore and Hong Kong into the Chinese market. We first will identify the operating model in China and analyze challenges it faces in entering the Chinese market. We will also compare the Eu Yan Sang’s China business model with that of other countries, highlighting some of the social, political and economic nuances and differences, before giving our recommendations.

In China, Eu Yan Sang has 19 retail outlets selling only health products and supplements, no drugs. This

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is due to the strict food and drug regulation in China except only recently, they were given a retail pharmacy license by a local food and drug authority of Dongguan, a city in Guangdong province to sell both prescription drugs and Chinese medicine in that city. However, the TCM industry outlook in China is booming, with TCM being the main practice in the country as well as the rising affluence and growing middle class. Prima facie, it may seem very feasible for EYS to tap onto this opportunity, but we have identified three major issues that hinder internationalization of the business into China:

(1) Regulations
A highly regulated pharmaceutical industry is a major concern for Eu Yan Sang, such as the prohibition of imported drugs/medicine (with some exceptions). Companies must manufacture drugs within China to be able to distribute drugs within the country. This binds foreign companies to a long-term business commitment within China, as well as protecting the local producers.

(2) Guanxi and Corruption
Another inevitable aspect of doing business in China is Guanxi. Pharmesis International Ltd is an exact replication of Eu Yan Sang’s business model, however unlike Eu Yan Sang, it is able to manufacture and distribute western and TCM drugs all over China. The major difference might possibly be that Pharmesis has elected a Chinese National to become the CEO of the company despite all other non-executive members to be Singaporean. This issue puts forth a question mark on Guanxi and corruption within businesses in China, which is a significant hurdle for family businesses like Eu Yan Sang to overcome.

(3) ASEAN-China FTA
Last but not least, even with ACFTA full force, trade volumes do not seem appear to add value to the economic cooperation within the two countries. The institutional arrangements and procedures widely differ among the member states and more time, effort and resources have to be invested to improve the present institutions and upgrade the industries to reap the complete benefits associated with ACFTA. Thus even with FTA, Eu Yan Sang has been unable to reap from it.

Moving forward, our recommendations for Eu Yan Sang would be to focus on the OTC drug market in China as well as taking advantage of the preventive mindset of the Chinese can bring about a boost in Eu Yan Sang’s bottom line with the conditions that the above mentioned nuances are tackled and our recommendations are as follow;

(1) Set up an entire supply chain facility that engages in production, distribution and storage of drugs

(2) Propose a collaboration with the Chinese government using the iGATES technology

(3) Obtaining a local partnership through direct hiring of a Chinese national or acquisition of related local companies

INTRODUCTION

The Company
Founded over 130 years ago by Eu Kong, from Southern China. Founder, Eu Kong, sold Chinese herbs and medicine to mining coolies in Perak, Malaysia.

Today, the organization has grown to become a publicly listed corporation with operations spanning across different regions in Southeast and North Asia. In Singapore, Malaysia and Hong Kong, the organization has become a household name, a brand synonymous with traditional high quality Chinese medicine, with a modern approach.

Operations
Retail and Manufacturing
The group has over 150 flagship products ranging from traditional Chinese
medicine and medicinal herbs, to health supplements and health foods.

Clinic and Services
With over 25 TCM clinics in its operating regions, EYS has been able to increase circulation and awareness of its products through dispensation and prescription.

Supported by highly qualified TCM-trained physicians, with bilingual capabilities to cater to older, non-English speaking patients, and younger, English-speaking ones too. Far from the experience of visiting traditional ‘sinseh’ practitioners, the clinics have adopted the western-healthcare service system.

Science
Research and development has always been the backbone of the organization. The driver of its strategic advantage has been its focus on technology and scientific backing of its products and processes. To assure effectiveness of their products, the group invests largely on research and technology.

The group developed the iGates database which helps identify and breakdown the chemical components in Traditional Chinese medicine. It also documents and fingerprints all known traditional and rare herbs and allows for tracking of these herbs from the extraction stage, all the way to the processing stage in the supply chain. With the help of iGates, many traditional Chinese medicines have become recognized and approved by the WHO.

Critical success factor

Modernized Tradition
Identifying the deep-rootedness of tradition in Chinese medicine, it has maintained a heavy focus on culture. Yet, combined with modern practice and trending globalization, the group has early on embarked on strategic modernization.

The scientific approach has given them a competitive edge, well beyond its competitors. The group’s total supply chain control, right from the sourcing and extraction of raw materials, herbs and ingredients; down to the processing and packaging of their products; and finally retailing; has made it one of the leaders within the industry.

TCM in China

Traditional medicine sales proved the most lucrative for the Chinese OTC pharmaceuticals market in 2010, generating total revenues of $3.2 billion, equivalent to 30.6% of the market’s overall value. In comparison, sales of analgesics generated revenues of $989.5 million in 2010, equating to 9.4% of the market’s aggregate revenues.

Healthcare in china

With a population of more than 1.5 billion, there is a huge patient pool in the nation for which the development and production of new drugs or treatment.

The rise of the middle class and growing affluence of the Chinese, alongside rapid urbanization is a key driver of consumption in the following decades.

The OTC market in China is highly fragmented. The top five companies only hold about 15% of the total market share. With the division of provinces and large number municipalities in China, businesses have to operate in a very ‘local’ manner. Companies need to setup shops in every locality in order to capture a piece of the market.

Trending Shift and Awareness:
Preventive Healthcare and Medicine
The focus of TCM has always been holistic wellness and preventive care. With increased awareness of the numerous wellness benefits of natural remedies, especially among the affluent middle class, EYS has a large and growing consumer base.

A growing number of middle class consumers seek to adopt a healthier lifestyle of preventive care, rather than seeking treatment upon contracting disease. Through taking different supplements and extracts, consumers are believed to be able to better maintain good health.

Operations in China

Unlike Singapore and Hong Kong, The business operates under a totally different business model in China. Due to the strict regulatory requirements of the local Chinese food and drug authorities, there are significant barriers for EYS.

The formulation of a many of EYS’ products are classified as drugs under Chinese regulation, as such, they cannot be sold in shops without the necessary approval and license. All the retail outlets in China sell mainly health food, supplements and products.

Of the seven provinces in which the group has operations in, only in Dongguan, a city in Guangdong, has their stores been able to carry both prescription drugs and medicine. They expect to open an EYS pharmacy within the year.

The group’s CEO, Richard Eu, recognizes the need to locally manufacture their products in China. This would eventually help make registration of these products easier. For now though, the company is focused on building strong branding on their currently available products in their 19 outlets. EYS operates mainly along Southern China.

After looking at the TCM industry and the operations in China, the following sections will be addressing certain issues that may make or break EYS penetration into the China market as a whole new business strategy is required in order for the company to succeed.

Anti-Monopoly Law in China

In 2010, Pfizer was forced to sell their swine-vaccine to Harbin Pharmaceutical Group. The reason behind this was that the Chinese Chamber of Commerce felt that Pfizer’s merger with Wyeth will result in the control of ‘nearly’ half the market for certain swine vaccines and this did not sit well with the Chinese.

This anti-competition move could be seen in two ways.

One, if Pfizer was to continue selling its swine-vaccine in China, it might capture such a huge portion of the total Chinese market share of vaccines that it significantly crumbles other Pharmaceutical Group’s business.

Two, the swine-vaccine might simply be taking a significant chunk of the profits out from other domestic pharmaceutical companies and the Chinese regulators felt that they should interfere to protect the domestic companies. In other words the vaccines pose no danger to the livelihood of the Chinese companies, but only pose danger to their profits.

The main difference between the two views lies in the philosophy that guides the business regulating decisions in China. This episode highlights just one hurdle that EYS may continue to face.

A Protectionist Regime?

In China, foreign companies are not allowed to import medicines for distribution unless they are in small quantities and/or with valid reasons. Moreover, the drugs that are allowed to be imported for distribution have to fulfil a large series of requirements and conditions, which include proving the medicine’s efficacy and making the drug as side effect free as possible. This requirement is a very long-winded and arduous process.

Alternatively, to distribute their OTC medicine, The Chinese government requires a production license. This means that OTC drugs could be sold and distributed in China as long as it is produced and manufactured domestically. This however meant that they needed to build a drug manufacturing facility in China, which is long term and large to make.

This was again a potential protectionist policy hidden in plain view. China does not want foreign companies to import foreign drugs and dominate the market and leave. Instead, they require the companies to make a huge long-term investment in the form of a drug manufacturing facility and be committed to the market. They want foreigners to know that they wanted them to be in China for the long time and not just for the “good time”. These findings provided a stark image of the business politics in China. “Guanxi”

OTC drugs involve a high level of specialization and expertise with high upfront investment costs, making the market very difficult to enter as mentioned by Marketline Analysis. As elaborated in the earlier section, it is also difficult to obtain approval for new products from regulatory authorities.

However, upon further research it was found that fellow Singaporean company, Pharmesis International Limited was able to so well in China despite selling similar products to EYS. This finding would prove to be a model that EYS could follow.

Pharmesis International Limited, also known as Kinna in China sells western drugs that are TCM formulated, and distributes them to over 2,000 hospitals throughout China. There are three key executives of this company; Heng Ching Chew, Xuedan Wu and Thiam Keng Chew. Upon further research we found out that Heng Ching Chew is a Singapore Parliamentary Speaker and Thiam Keng Chew is also an established businessman in Singapore who has served on the board of many companies. Most interestingly, Xuedan Wu however used hold office in the Ministry of Communications in China. Mr Wu is now serving as the CEO of Singaporean company Pharmesis International Limited.

We found this relationship very interesting and provoked the possible involvement of Guan Xi. Perhaps the three of them coming together was an act of pure randomness, but on the other hand, it might just mean that Pharmesis knew about the difficulty of entering the market and sought to bring in a Chinese partner to enter the giant market of China. This could perhaps be a possible tool for EYS to replicate, in their mission of successfully penetrating deep into China.

Comparison with Hong Kong

Following the issues of China’s protectionist measures and Guanxi, we further examined the reasons why EYS is not performing in China as compared to Hong Kong. 2012 marked the third year of presence of the business in China. It is also the year where the company grew most from four stores to 16 within the year.

Analyst reports have indicated that the retail stores in China are not yet profitable due to the rapid expansion that incurred large amount of expenses. In contrast, looking at the Hong Kong geographic segment, it has got 56 outlets, two integrative clinics as well as a manufacturing cum research and development facility. This large disparity can be attributed due to factors such as:

Economic Structure Differences
Hong Kong operates through laissez-faire capitalism. It maintains a highly developed capitalist economy; ranked the freest in the world by the Index of Economic Freedom every year since 1995.

With such “freedom”, it allows for foreign companies to move in to invest and set up their branches; not to mention, it takes only 3 days to register a company which indicates ease of business setup. This is vastly opposed to China where it takes 33 days to simply register a company, which highlights the main difference in Hong Kong and the mainland.

Demographical and Income Differences
Since EYS’ main business is healthcare, demographics and income level plays a huge role. Generally, the country with a higher life expectancy (HK: 83 years old, China: 73 years old) and a more rapidly growing ageing population will seek for more healthcare services as compared to one that has a lower life expectancy.

Moreover, GDP/Capita (PPP) for Hong Kong is at US$49,137, 5 times more than China’s GDP/Capita (PPP) of US$9,146. The idea of having more disposable income and ability to spend explains for the much higher sales figure in Hong Kong. With more affluent educated citizens, Hong Kong’s market may be more receptive towards health goods such as TCM.

Political Differences
Last but not least, the politics of Hong Kong and China could not be more contrasting. Corruption index for China is 39/100, ranked 80 while Hong Kong is ranked 14 with a score of 77/100. This again reiterates the openness of Hong Kong’s politics vis-a-vis China.

Another difference we have identified would be the ASEAN-China Free Trade Agreement (ACFTA). To date, Hong Kong is not under ACFTA. But what is so puzzling is that the FTA is meant to foster strongerg bilateral trade but it seems otherwise, where EYS is faring much better in Hong Kong.

ASEAN-China FTA

The ASEAN-China FTA is a free trade area among the ten member states of ASEAN and came into effect on 1 January 2010. On top of the reduction of tariffs, benefits include the expansion of bilateral trade and FDI. Despite the optimistic outlook of this FTA, it seems odd that Singaporean companies such as EYS are not able to break through the wall and reap full benefits from ACFTA. Upon further research, we have identified 3 key issues that may provide an explanation of why EYS or many other Singaporean companies are not able to penetrate the China market.

Huge Disparities in Income per Capita
As mentioned earlier, there is a huge difference in terms of income per capita in China as compared to Singapore and Hong Kong. Because of this, many Singaporean companies are unable to shift their businesses over to China especially when they are looking for a new target segment. Although it is cheaper to produce in China, analysts say the consumer market in China is not yet mature enough for some products as it is still a developing economy, apart from the major cities.

Lack of Understanding of ACFTA and Market Information Pertaining to ASEAN Based on a study conducted by the S.Rajaratnam School of International Studies, between January and June 2010, even with ACFTA in full force, its share in China’s exports dipped from 1.4% to 1.2% amid China’s growth in exports. In addition, Singaporean companies still prefer to export their goods to China through Hong Kong and the reason for using Hong Kong as an entry point is because custom officers in some Chinese cities still lack complete understanding of the ACFTA. Thus, going through Hong Kong saves time and effort.

Frequent and direct contacts between chambers of commerce and business associations of the two sides have not yet been established, resulting in lack of mutual comprehension. As a result, many Singaporean companies are relying on Guanxi to expand their business instead of depending on the supposedly economic benefits generated from ACFTA.

Lack of Harmonization of Standards and Technical Requirements The lack of harmonization of standards as well as an absence of mutual recognition arrangements can constitute a barrier to trade and smooth economic cooperation. This can be seen from our case of EYS, where it took 3 years for the company to just get their healthfood and supplements approved by the authorities in China. If EYS was more well-informed about the regulatory standards or there is a mutual standard and technical regulation, it will not have to incur so much regulatory cost or take such a long time before the items are put up for sale.

In addition, research showed that most of the complaints from Singaporean companies pertain to the lack of common standards, conformity assessment, sanitary and phyto-sanitary standards and other technical regulations. Besides, not only do the ASEAN companies not understand the Chinese standards, the Chinese also find it hard to obtain necessary information from ASEAN.

Although it may be argued that in the healthcare sector, it is impossible to have a universal standard or health regulations, but by simply setting a benchmark with ACFTA, can really help businesses move faster. However the effect of the ACFTA has yet to trickle down. Given the difficulty in implementing such control system, we reiterate our proposition that EYS should lean more towards informal relations in order to grow in China.

Moving Forward

Positive Outlook for OTC Market in China
Despite the difficulties that EYS faces in penetrating the China pharmaceutical market, there is still, by and large a positive outlook and a huge incentive for EYS to enter this market. The reasons for this positivity are as follows:

Shifting Consumer Preference towards  Traditional Chinese Medicine Increasingly, the trend has been shifting towards TCM, more so than Western medicine. This is especially in light of the rising costs of Western medicine and also a “modernization” of Chinese medicine by companies such as EYS which now elevates the status of Chinese medicine.

“Prevention is Better than Cure” Mindset
The Chinese believe in a prevention is better than cure mindset and this is the basic selling point of TCM. Furthermore, the Chinese do tend to be more superstitious with regard to health. For example, some have the belief that if they were to enter hospitals, they would come out dead. Hence, all these social factors point in favour of a bourgeoning TCM industry in China as TCM is hardly invasive and focuses more on prevention as opposed to Western medicine which is viewed as invasive.

Large OTC Prescription and  Medication Market in China The main driver of the opportunities for EYS in China has to do with China’s massive population. Not only is there a large demand pool, it is also a growing demand pool where the Chinese are increasingly migrating to the city centres from the rural villages and there is a rising middle class which is a main market segment for EYS’ products.

Overall, these main factors give great incentive for EYS to continue in its quest to penetrate the China OTC and medication market, especially if it is able to grasp and leverage on some of these factors.

Recommendations
In order for EYS to effectively penetrate the China market in OTC drugs and medication, we propose a 3 pronged approach that it can undertake. Firstly, it should set up a full supply chain in China which includes a factory, warehouse and distribution. Secondly, it should leverage on its exsiting technology, through which it can collaborate with the Chinese government. Third, it has to engage to local community through hiring and acquisition in order to gain a foothold in China, otherwise known as Guanxi.

Supply Chain and Factory
As mentioned earlier in the report, what is stopping EYS from being able to sell and promote their medication and OTC drugs is the fact that they are not producing in China. Hence, the only way for them forward would be indeed to set up an entire distribution network in China. While it involves heavy costs and has a long time horizon, it would not only allow them to be present in China but also put them in good stead for the future. A local distribution system would lead to higher economies of scale, allowing them to further grow and develop. We therefore see this as an essential step that EYS has to undertake in order for it to penetrate the market in China, despite its high initial costs and long process.

Technology: iGATES and GAP
iGates is an initiative by EYS to fingerprint and track all the Chinese medicine and herbs on its database. It is regulated and approved by the World Health Organization (WHO) and legitimizes all the drugs that are concocted by EYS.

The fact that this database is regulated by WHO is a great advantage to EYS as it can use it as a strong bargaining chip with the Chinese authorities in its plan to expand into China. This is because EYS can share this database with the Chinese companies who could then use this in order to market their products overseas, which at the moment they are not able to.

Local Engagement
The inevitable concept of “Guanxi” cannot be ignored when doing business in China, and EYS is no exception. Our last recommendation for EYS would be for it to follow the example of Pharmesis Ltd. and ensure links with the Chinese political elite. They could go down the same route by hiring a board member with strong political links, or it could acquire smaller TCM firms in China on which it can leverage. Having such links would greatly accelerate its ability to penetrate the China market and also eliminate unnecessary red tape. Conclusion

Based on our findings in the report, it is evident and undeniable that while China is a very attractive prospect for EYS to expand into, there are many significant challenges and hurdles that it has to overcome. It is imperative that EYS is able to understand and appreciate these if it were to be successful in China.

Our recommendation is that EYS take its involvement in China step further through our 3-pronged approach as outlined in the report. However, it has to ensure that it has a concrete and thorough plan as its investment in China will not reap immediate dividends. It is an investment that requires much time and effort in order to cultivate, especially since China already has many existing TCM service providers. EYS has to leverage on its global brand name and its advanced technologies. This, combined with an acute understanding of the various nuances in China, would make EYS an almost unstoppable force not only in China, but the entire region.

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